漢威聯合 (HON) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's fourth-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.

Thank you, Zach.

Good morning, and welcome to Honeywell's fourth-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 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 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 fourth-quarter and full-year 2013, as well as share with you our guidance for the first-quarter and full-year 2014.

Finally, as always, we will leave time for your questions.

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

Thanks, Elena.

Good morning, everyone.

As I'm sure you've seen by now, Honeywell delivered another excellent quarter, capping off a terrific 2013.

We are benefiting from our diverse portfolio, and that continued focus on new products and geographic expansion, plus our ability to effectively manage in what continues to be a slow growth macro environment.

The importance of that balanced portfolio was evident last year, as it helped us to offset some of the headwinds we faced in defense and space, and advanced materials, over the course of the year.

Most importantly, the businesses all executed very well, delivering margin expansion in every business last year.

As for the fourth quarter, it's very encouraging to see sales grow 8%, up 5% organically, with organic growth better than expected across all four businesses.

We continue to drive margin expansion, up 50 basis points year over year, or an impressive 70 basis points when you exclude M&A.

We delivered pro forma earnings per share of $1.24, $0.02 above the high end of our range.

So, we are starting this year with positive momentum, short-cycle order rates continue to get better, and there are pockets of acceleration in the commercial aftermarket, ESS, advanced materials, and turbo, all suggesting a modest improvement in end-market conditions overall.

We are also seeing order momentum out of our long-cycle businesses building on the robust backlog.

This positioned us well heading into this year, with ACS solutions orders up strong double digits, and our defense backlog up about 20% year over year due to strong international wins.

We are also increasingly confident in our outlook because of the smart gain deployment actions we took in the fourth quarter.

As you saw from our press release, we were able to proactively fund restructuring and other actions, fully deploying the $195 million pre-tax, or $0.16 EPS, gain from the sale of B/E Aerospace shares in the fourth quarter.

You'll recall we received about 6 million shares as part of the consumable solutions business sale in 2008, and we sold 2.6 million of those shares in that fourth quarter.

We also sold an incremental 1.5 million shares in this first quarter, and that will yield about a $0.10 gain that we'll similarly deploy with repositioning and other actions.

So, in total, a pre-tax gain of approximately $300 million, $200 million in the fourth quarter, and $100 million in the first quarter, with some more remaining in the bank.

Restructuring benefits have been an important driver of our productivity engine, and they'll continue to drive benefits in 2014 and beyond.

Dave will take you through some of the details in a moment, but the projects funded in the fourth quarter alone are estimated to yield about $50 million of benefits in 2015, with a full run-rate savings of over $100 million.

We are being proactive about keeping that pipeline full, and as such, we are planning to fund additional projects in the first quarter with the gain that we will have from those B/E share sales.

We think these actions position us well for further margin expansion over the next five years.

In the fourth quarter, we took the opportunity to accelerate a $50-million charge related to environmental matters at Lake Onondaga in upstate New York, minimizing future environmental headwinds from this site by proactively seeking agreements for the completion of both dredging and capping activities, based on our ability to complete the dredging portion a year early, and reducing the overall cost of the project.

We think this sets us up very well over the coming five years, as we'll begin to show a moderation in ongoing environmental charges in the out years.

We also offset the loss on the sale of friction materials due to the deployment of that B/E share gain.

As you saw earlier this month, we agreed to sell Friction Materials, which we expect to close sometime in the second half of the year.

We think this transaction will help our turbo business focus on their differentiated technologies and long-term growth outlook.

While we think it's prudent to remain cautious on the overall macro environment, we are also increasingly confident in our 2014 outlook, based on the momentum we saw in the fourth quarter.

So, for the year, more of what you've come to expect: strong sales conversion and double-digit earnings growth, and strong cash flow.

We're going to continue to remain flexible, and while managing our cost is important, we are also focused on supporting sales growth and investing in high-ROI capacity in PMT, new products and technologies, and high-growth regions.

Our strong backlog and new product pipeline is setting us up for a multi-year cycle of outperformance.

For example, Honeywell's Wi-Fi Smart Thermostat With Voice Control won the Envisioneering Innovation and Design Award for 2014 at the International Consumer Electronics Show.

This latest connected home innovation employs new voice technology, allowing people to simply say, hello thermostat, to activate and control their home's temperature.

I've got to say this is pretty cool.

I've got them in my own house.

And it's pretty neat because if nobody else is listening, at least your thermostat does what you ask it to.

As everyone in Honeywell knows, I am extremely optimistic about where we can take our proprietary cloud-based voice-control solutions.

We are focused on providing a more productive and enhanced customer experience, and our guys keep getting better and smarter with a bunch of new stuff in the pipeline.

You can expect to see lots of cool innovations at the March Investor Day, where each of the businesses will highlight a number of new products and road maps for future growth and productivity.

We are focused on delivering 2014, but we will also be issuing new five-year targets through 2018 that we think will continue to differentiate Honeywell.

Our seed planting for the future, great positions in good industries, our strength of execution, and the power of One Honeywell will allow us to deliver on those targets, and continue to outperform again.

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

Thanks, Dave.

Good morning, everybody.

Thanks for participating in this morning's call.

Let me start on slide number 4, the 4Q 2013 results.

As you can see from the numbers, we delivered at or above guidance on every metric in the quarter.

Sales came in at $10.4 billion, above the high end of our guidance range.

They grew an impressive 8% on a reported basis, 5% on an organic basis.

The strength we saw at the year end was broad based, as Dave said, with better-than-expected results, really across each of the segments.

We will take you through those details in just a moment.

On a regional basis, organic sales were up 5% in the US, up 4% in Europe, and we had organic growth of 13% in the fourth quarter in China.

Segment profit growth and margin expansion were both strong.

Segment profit increased 12%; margins expanded 50 basis points to 16.1%.

If you exclude M&A, which of course, was largely the impact of Intermec, segment margins expanded 70 basis points, with growth in all four of the businesses.

Productivity continues to be a key driver, of course, offsetting inflation, and also offsetting the continued investments that we make for growth.

When you move below the line, which we are going to detail further on the next slide, you will see that our gain from the B/E share was fully deployed through higher restructuring, environmental charges, as well as the recognized loss on the sale of Friction.

Pro forma earnings per share, which excludes the impact of the fourth-quarter mark-to-market adjustment, was $1.24, an increase of 13% on a year-over-year basis.

The fourth-quarter reported EPS of $1.19, up $0.32 from last year, which you recall included roughly last year a $1-billion pre-tax mark-to-market.

This year, in the US, we ended up with no MTM adjustment, as the potential gain that we would have occurred -- which would have occurred, was offset by the proactive adoption of the latest pension mortality tables, specifically the latest 2013 BB projection scale, for those technical pension experts out there.

So, what remained was an adjustment in our international plans, primarily due to lower interest rates in Germany, or about $50 million pre-tax or $0.05 earnings per share.

In the US, we ended the year with a discount rate of 4.89%, a return on assets of 23.1%, which contributed to 100% funded status globally in our pension plans at year end.

Now, for the full-year 2014, we are now expecting about $130 million pension income lift in 2014 compared to 2013, based on those better-than-expected return on assets.

We expect this lift to generally be offset with higher OPEB and reposition expenses over the course of the year.

So, that's the same as we guided when we spoke to you in December.

Finally, free cash flow in the quarter at $1.4 billion represented 142% free cash flow conversion, and brought the full-year conversion to just under 100%.

So, with that, let's go to the one-time gains and deployment, slide 5, give you a little bit more detailed view of the deployment of the B/E share gain.

Now, as you can see, and as we've said, the 16%-per-share gain from the sale of 2.6 million shares in the fourth quarter equals the amount recognized for restructuring actions, corrective environmental remedies, and the sale of Friction.

Restructuring represented about half of the gain deployment.

And building on some of the themes you've heard from us before, and you'll hear more about it in March at our Investor Day, these restructuring actions really support our future performance.

On average, the projects included in the fourth quarter have a little longer paybacks than our historic average, but still very good ROI.

They will provide a modest tailwind for 2014 earnings, really, again, supporting the confidence that we have in our guidance range.

But that benefit will roughly double to approximately $50 million of PBT or EBIT in 2015, with further benefits in 2016, as we realize run-rate savings from these actions of approximately $110 million per year.

Next, you can see the incremental environmental charge Dave referenced earlier.

I'm not going to go into detail in this.

Again, it's the proactive agreement that we sought on the ongoing Lake Onondaga remediation.

We are now likely to complete, as he said, dredging activities a year earlier.

As a result, we've got better visibility on the cost profile going forward.

That supports both production and cost efficiencies that lead to moderation in our out-year expenses over the next five years.

Finally, the recently announced sale of Friction Materials to Federal Mogul, which results in a $0.04 book loss in the quarter: The transaction is expected to close, as we said, in the second half of the year.

Until then, of course, the Friction business will remain part of our full-year 2014 outlook.

Finally, based on the roughly 1.5 million B/E shares we sold in the first quarter, so quarter to date, we expect an additional $0.10-per-share gain that we intend to deploy further to restructuring and other actions similar to what we had in the fourth quarter.

So overall, these actions, again, will help position the Company very well for future earnings growth.

Let's go now to slide 6 and talk a little bit about the full-year results, 2013.

Sales up 4%, 2% organic to $39.1 billion.

Of course, the reported sales reflect the favorable impact of our acquisitions, primarily Thomas Russell, Intermec, and also RAE Systems.

Segment profit for the year up 8%, double the growth in sales, demonstrating again impressive conversion, translating to 70 basis points of margin expansion to 16.3% -- really terrific, terrific performance in continuing that track record at Honeywell.

All of this resulted in pro forma earnings per share of $4.97, up 11% over 2012.

Again, another year of double-digit growth.

You recall we set the bar high for 2013, and we delivered again, above the high end of the range.

Again, our reported EPS for the year reflects a $0.05 mark-to-market adjustment related to the international plans, as I discussed with you earlier.

Finally, for the full year, free cash flow at $3.8 billion was slightly above our guidance, driven by the strong finish to the year, despite an increase in CapEx in 2013.

A lot of that, of course, going to the initial stages of capacity expansion for PMT, and more about that later as we talk about 2014.

So now, let's go through the highlights for the fourth quarter and the full year for each of the segments, starting on slide 7 with aerospace.

Sales growth turned positive, as you can see for aero in the quarter, up 3% organic, at the high end of our guidance range.

I'd like to take a minute just before we get into each of the components of aero, just to walk you through some one-time items that netted within the quarter within the aero segment.

Aero recognized a significant IP litigation settlement, which resulted in a royalty gain in the fourth quarter of $63 million pre-tax.

We had line of sight to the timing of this in the quarter, and we proactively ensured timing was aligned with roughly $68 million of BGA OE payments.

Both of these items impacted sales and segment profit.

[They were contemplated] when we gave our outlook for aerospace in December, so they net, and literally have no de minimis impact in terms of the reported numbers, in terms of the segment profit, and segment margin numbers for aero in the quarter.

With that background, turning to the commercial businesses, commercial OE sales were flat in the quarter, however, up 12% if you exclude the impact of the OE payments that I mentioned earlier.

We saw the continued benefit of higher OE build rates in large air transport, and strong sales to high-value business jet platforms.

That would include Gulfstream and Dassault, which both had good double-digit numbers.

Commercial aftermarket sales were up 5% in the quarter, supported by favorable flight-hour trends, both in ATR and also robust repairs, modifications and updates, or RMU, sales in BGA, partially offset by fewer engine maintenance events in the quarter.

Notable in the quarter was the improvement in ATR spares, which we expect to continue in terms of a run rate in 2014.

Now, in defense and space, sales were up 2%, but down 3% excluding the royalty gain in the quarter that I mentioned earlier.

Defense continues to be impacted by planned program ramp downs and delays in the US, partially offset by growth in the international markets.

However, on the positive side, as Dave referenced, the backlog for defense was up significantly in 2013, so a positive sign as we look forward to the next five years.

In turning to segment profit, note that the higher royalties in defense and space were offset by -- again, by the BGA OE payments.

Aerospace margins expanded 60 basis points to 20.5% -- it's really, really good performance, primarily due to productivity net of inflation, and partially offset by investments for growth.

Now, Tim's going to talk more about this in March at the Investor Day, but the investments we're making in quality pursuits are resulting in big platform wins and growth for the future.

Let's turn now to ACS on slide 8, automation and control.

ACS sales were up 10% in the quarter, up 4% organic.

They finished the year very strong with continued acceleration in the products businesses, combined with strong orders in the solutions businesses.

Let's just go through a little bit of a color for the major components of ACS.

For ESS -- for energy, safety, and security -- the sales were up 18% reported, 5% organic.

Good growth in security, life safety, and ECC as a result of the US residential and retail chain strength I mentioned earlier.

That's been a theme, obviously.

New product introductions, and also continued good geographic expansion at ACS.

Process solutions sales were up 1% in the quarter organic with continued good services growth more than offsetting large project completions.

However, organic orders in the quarter grew double digits, driving further backlog expansion at HPS and a robust project pipeline ahead.

As we saw throughout 2013, HPS had strong sales conversion as a result of higher-margin backlog and the benefits of prior-period repositioning actions.

Finally, for the building solutions and distribution business, BSD, sales were up 4% organic, driven by higher sales in our Americas security distribution business.

And like process solutions, BSD order rates grew double digits in the quarter, primarily driven by a large energy win.

Moving to the margins, ACS was down as expected, 20 basis points to 15.3% in the quarter, again, consistent with our planning assumption, primarily driven by the dilutive impact of the Intermec acquisition and also the investments that ACS is making for growth, partially offset by productivity net of inflation, as well as ongoing repositioning benefits.

Now, let's go to slide 9 -- look at performance materials and technologies, PMT.

You can see sales for PMT were $1.7 billion in the quarter, up 12% reported, up 9% organic, and above the high end of our range -- our guidance range -- driven primarily by strong results both in UOP as well as in fluorine products.

This was also reflected in terrific segment product growth of 30% in the quarter for PMT.

Just a couple details, starting with UOP.

Sales were up 24%, up 17% organic, driven by the addition of Thomas Russell, and increased catalyst and gas-processing sales.

Again, reflecting continued strong refining, petrochemical, and gas end markets.

The advanced materials sales were up 4% versus the prior year, reflecting improved production volumes in residence and chemicals, as well as fluorine products resuming production in Metropolis.

Margins for PMT were up 210 basis points, primarily due to the strong volumes, but also productivity.

Again, partially offset by continued investments for growth.

Obviously, another good year for PMT, strength in UOP more than offsetting the challenging year that we had in advanced materials.

Of course, again, a reminder: We are investing in new capacity in UOP, and also transitioning our existing footprint to support new technologies in advanced materials.

Then, just a couple highlights on transportation systems on slide 10.

A strong finish for TS.

Sales growth accelerated, up 15% organically in the fourth quarter, driven by new launches, and also higher global turbo gas penetration.

Over the course of the year, we've seen Europe stabilize with modest improvement as we exited the year with high EU light vehicle production, up about 3% in the fourth quarter, versus a very challenging fourth-quarter 2012, you recall, when sales were down 8% organically.

We also benefited from an uptick in China commercial vehicle demand, driven partially by Euro 3 pre-buy activity in anticipation of the new emissions standards in 2014.

Segment margins for TS expanded 250 basis points to 13.6%, primarily due to the strong material productivity and also volume leverage in turbo.

Now, let's turn to slide 11, and give you a little bit -- just an update, and again, a preview of 2014.

We continue to expect sales in the $40.3 billion to $40.7 billion range for the full year, up 3% to 4% reported, and approximately 3% organic.

Again, this range is still predicated on a euro rate of roughly $1.30 at the midpoint, with a high end of the range closer to $1.35.

We also continue to expect segment margin expansion, 30 to 60 basis points up, or 50 to 80 basis points excluding M&A.

Now, embedded in that guidance includes roughly $25 million of additional repositioning benefits spread across the portfolio in 2014 from the actions that we took in the fourth quarter of 2013 -- those that we just reviewed with you.

We are increasingly confident, as Dave said, in our EPS framework, the $5.35 to $5.55, representing 8% to 12% growth over 2013.

The full-year growth linearity remains in line with our prior-year results, and the range also continues to be based on a full-year tax rate of 26.5%.

Now, we are expecting $3.8 billion to $4 billion of free cash flow, up low- to mid-single digits, reflecting approximately $300 million of increased capital spending in 2014 compared to 2013.

Now, before we turn to the first quarter on the next slide, I just want to take a couple minutes and talk about some of the bullet points on the bottom of this slide, and talk about some of the key planning assumptions for the year.

As you can see, we are expecting roughly flat margins to start the year, driven by two things.

The acquisition dilution associated with the Intermec acquisition, and also, lower high-margin Parex petrochemical catalyst shipments in UOP in the first quarter 2014 versus the very record shipments, the tremendous record shipments that we had and we enjoyed in the first quarter of 2013.

As we discussed earlier, we will have about a $0.10 gain reflecting the B/E shares sold in the first quarter, which will be deployed to restructuring and other actions.

So, no net income or EPS impact anticipated from those actions.

As a result, and as a reminder, although we announced the divestiture of Friction Materials, it remains in our full-year sales and margin outlook for now, and we will update you accordingly upon the close of the transaction with no significant impact to full-year 2014 earnings guidance.

With that background on the full year, let's talk about the first quarter -- a little more details on the guide that I just referenced.

We are expecting -- this is on slide 12 -- we are expecting sales to be in the range of $9.6 billion to $9.8 billion, up 3% to 5% reported, or 2% to 4% on an organic basis.

Segment margins are expected to be, ex-M&A, up in the range of 20 to 40 basis points.

Let's look now at just highlights of each of the businesses, starting with aero for the first quarter.

We are expecting sales for aero to be flat to slightly down, with mid-single-digit growth in commercial, offset by mid-single-digit decline in defense.

On the commercial OE, we expect lower regional sales to be a drag on ATR OE in Q1, as well as for the year, offset by healthy demand for mid- to large-cabin business aircraft in BGA OE.

On the aftermarket, we are expecting ATR spares growth to be ahead of flight hours in the first quarter, and the continued positive story in terms of BGA RMUs to benefit the quarter, as well as the full year.

As for margins, we expect a slight decline year over year in the first quarter for aero, primarily due to higher initial OE shipments due to new platform wins and higher mechanical OE sales in the quarter.

Aero margins are expected to pick up pace over the remainder of the year.

For the first quarter, ACS sales are expected to be up 6% to 8%, 2% to 4% organically, with low-single-digit organic growth across each of the three businesses.

Now, the macro environment is obviously looking moderately better as we start 2014 for ACS, and we continue to see residential strength, as well as modest improvement in the non-resi markets.

Our strong orders growth we saw at the end of 2013 for ACS, both in the short and the long cycle, gives us, obviously, increasing confidence.

Due to the acquisition dilution, the ACS margin rate in the first quarter is expected to be flattish, with margins again improving over the course of the year, driven by good growth, as well as productivity.

PMT is expecting sales in the first quarter to be up 4% to 6%, building on a terrific first-quarter 2013, as well as obviously the strong performance we had in 2011 and 2012 in PMT.

We are expecting another quarter of sales growth in UOP, but as I referenced, the mix of shipments for UOP in the quarter will result in a headwind for the margin rate for PMT.

And on advanced materials, we are expecting flattish sales, primarily driven by unfavorable price [raw] spreads in RNC and lower R22 pricing in fluorines, which is why our new Solstice product suite is so important as it ramps up over the coming years.

As you know, PMT is also continuing to run at full capacity levels at many of its plants, and will start to benefit from increased capacity in 2015, but particularly pick up in 2016 on that front.

In transportation systems, expecting more of the same, with sales in the first quarter up 5% to 7%, driven by new platform launches, continued turbo gas and diesel penetration, and also increased European light vehicle production rates on a year-over-year basis.

We expect TS margins to be up approximately 250 basis points, primarily from volume leverage in turbo, as well as productivity gains.

EPS for Honeywell first quarter, we expect to be in the range of $1.23 to $1.27, up 6% to 10% year over year, when you normalize for the effective tax rate using our full-year expected rate of 26.5%.

Again, consistent with our normal EPS linearity profile.

Now, let's go to slide 13 and just summarize before turning it back over to Elena for Q&A.

So, obviously, 2013 behind us.

We've demonstrated, once again, we can deliver on our commitments despite limited help from the macro environment.

It's a big reminder of the value of the diversified and balanced portfolio, the strength of the positioning in that portfolio, as well as the strength of the Honeywell play book.

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

All of the businesses, as Dave said, executed well, with margins expanding in every business in 2013.

We achieved this while maintaining our focus in investment for the future, doing the smart things that are going to deliver value for years to come.

As we've said before, we are planning for more of the same in 2014.

Modest top-line growth, but strong margin expansion.

We feel more confident in our outlook based on the signs of stability and the pockets of improvement in both a number of short- and long-cycle businesses.

But nothing, as Dave said, again, at this time suggests anything less than conservative planning is prudent.

The play book is working, our operating initiatives are having many more innings in terms of results they are yielding, setting up discernible multi-year tailwinds.

Seed planting and repositioning benefits -- they've become a hallmark of our execution story.

We are investing in more profitable growth, as well as asset efficiency.

As you can see, now, we have significant restructuring savings in the bank for 2015.

So in summary, we are excited about what the year 2014 entails.

We are near the finish line of the last five-year plan, set back in 2010.

We've got a lot of momentum across the portfolio leading up to our March 5 Investor Day.

We will be updating you there on our framework for 2014 -- unveiling our new five-year targets out to 2018.

Also, providing road maps by business on how each SPG President plans to drive for more profitable growth through more innovation and execution.

With that summary, Elena, let's go to you for Q&A.

Great.

Zach, if you can open up the line, we will take our first question.

Great.

Zach, if you can open up the line, we will take our first question.

(Operator Instructions)

Scott Davis with Barclays.

Guys, one of the numbers that you gave, China up 13%, I think is the best quarter you've had in China, gosh, I think it's been quite a while.

Can you give us some granularity?

I mean, it's -- I don't think many of your competitors are going to see anything close to that.

So, what's working for you in China?

What's the visibility?

Is there a turn there in the business as you are selling into?

Or is this more short term?

Actually, things feel pretty good for us in China, Scott.

We did pretty well, if you take a look at the total year and the fourth quarter.

When we take a look at our short cycle order rates, they are also looking pretty robust.

It's pretty much across the board, across all the businesses.

I really think it has a lot to do with the focus we have on becoming the Chinese competitor, just makes us a lot more local in everything we do.

I think it's an economy that is going to continue to grow and grow for a long time.

We've just been working very hard at positioning ourselves there to be successful.

So, I guess the natural follow-up to that, is this more Honeywell specific?

Or do think you see an actual turn in the overall industrial macro in China?

I guess I'd break it into the two pieces.

I'm not sure, always how reliable all the statistics are when you see industrial production and that kind of thing out of China.

So, whether it's really good are really bad on the statistics, I don't know.

I'd that take some of that with a bit of grain of salt.

Overall, though, I would say we still see it growing.

Within that, we are growing better.

So, I would say it's the combination of the two.

Fair enough.

Then, guys, let's talk a little bit about Turbo.

It's always been a great business.

You've grown above market, I think something in the neighborhood of call it 7% or something over production vehicle numbers.

We hit an inflection point here where you can outgrow those historic levels just because the CAFE Standards and such, globally, are all taking up to such aggressive numbers pretty quickly?

Can we start to think about Turbo as being a higher growth than 7% plus global SAR?

Or is this what you saw in the quarter more of a short term temporary?

I'm not sure what number I would put on the overall growth cap.

I would say, as we said in last year's investor presentation, there is explosive growth possible in our Turbo business, for a number of reasons.

One is exactly what you said about the increasing standards around the world.

The second is that a turbo is one of the easiest, least technologically difficult things for any OEM to do in order to achieve those standards.

There's a lot more complex stuff they can do, but turbos are pretty well-known, pretty well understood.

I think that penetration rate is going to continue and we are uniquely advantaged within that space because we have a jet engine business.

That jet engine business allows just stuff like material science, air flow handling, to be shared with the turbocharger because a turbo is really just a small jet engine.

Again, I'd say it's the combination of the two.

That market is going to continue to grow very well, but we will also grow very well within that market because of our capability.

Fair enough.

Okay.

I will pass it on.

Congrats on a good year, guys.

Thank you.

Steven Winoker with Sanford Bernstein.

Nice close to 2013.

Thank you.

Let me start with the growth investments that you referenced in most up of the business units.

Can you give us any kind of -- excluding the repositioning to see operating expense impact, maybe in total or some sense for sizing how big they were this quarter?

I can't get it off the top of my head.

It's a decent size number.

Yes.

If you look at it across the business, and we are really talking about, Steve, obviously we are talking about growth in investments, so you put the investment part of that in quotes so it's really P&L.

It's really building for the future.

It's a combination of R&D, new products, the whole new product process, new introduction process.

CapEx and the flow-through of depreciation related to that CapEx.

It's the expansion, feet on the street in terms of high growth region as well as just as you know just the over continued investment we're making in terms of sales and marketing capabilities and engineering capabilities.

It's about 50 basis points.

When you think about the total of that.

Okay.

That's helpful.

I suppose, in March, we will get a more detail, not just anecdotes around traction of the -- as you mentioned, you have been making these investments for years now, on a relative performance versus direct competitors and peers.

I think that would be helpful.

It's often something we hear about.

The second one is on the repositioning projects themselves.

Maybe give us a little sense for where you are directing this.

I take it is no longer Friction Materials.

Where is it going and what kind of things are you doing?

Is it Intermec?

Is it M&A oriented?

Where -- investors are often wondering is it the end of it from Honeywell, from a positioning standpoint, maybe give us a little flavor for what you're finding.

First I'd say if you notice, it's really spread across the businesses where we've done a lot of this.

The nice thing I like about it is, we still see lots of opportunity to be able to improve our operations.

As you know, our margin rates are still lower than our high margin rate peers.

That's all upside for us as we continue to make the Company more efficient.

The restructuring is pretty much spread amongst the businesses.

I think, Dave, I'd just like to add to that.

Steve, we've talked about this.

You are aware of this.

The whole ideation, if you will, the development of projects and the pipeline of projects is something that we take very, very seriously.

It's something -- it's not a stop/start.

This is a continual good process, in terms of really looking for those opportunities, to really set a new bar, if you will, in terms of the performance of the businesses.

The other thing is it's really consistent with -- and we've talked about -- is just the continued expansion and the growth of the global footprint of the Company, really realizing the opportunity that exists in terms of the GDP and the GDP growth, globally.

All of that functional transformation makes amazing the things that we continue to do in terms of really a rethinking our model for support in both the service levels, the quality levels, and the cost levels in FT.

Just this past year with working with Dave and the functions, it's amazing the amount of things that you can consider to be still sort of breakthrough.

Those all represent repositioning opportunities.

We view this very, very possibly where we are obviously strategic in our thinking and then very good we think in terms of execution of actually delivering on those results.

We take that very seriously, as well, in terms of the ongoing tracking and management of these projects.

It's something you ought to count on from us.

Right.

In light of the volume growth that we are starting to talk about, I assume your capacity utilization levels are low enough, at this point, that there's not a lot of CapEx coming other than what we just talked about for UOP and specific projects on that front.

It's largely a PMT issue, to your point.

Not much of an issue in the other businesses.

Okay.

Great.

I will pass it on.

Thanks.

Steve Tusa with JPMorgan.

Maybe you could program the thermostat to say great quarter so I don't have to say it every conference call here.

(laughter)

I don't mind.

On the fluorine side, you mentioned it's an incremental headwind in the first quarter.

It's not a huge part of your business.

I think pricing is kind of stabilized there.

In fact, I think one of your main competitors talked about raising price earlier this year.

Maybe, could you talk about with the volatility and price there, even though it's small, what kind of impact it's had on you in the last year?

What kind of impact you think that's going to have, maybe quantify it in the first quarter?

And, am I right in viewing the second half as just a much easier kind of price comp on fluorine?

Or does it get worse from here?

Well, obviously I don't want to comment on anything anybody else is saying about it.

I would say, though, that we did see a degradation in the course of last, largely because of patent related product.

This is a game where you've got to be able to have really unique stuff.

That's the advantage we have.

Once we are able to start producing that and introducing it, then we will be in that much better a shape.

I don't know that we actually said quarter by quarter how much this is going to -- how much it affects us.

We did feel most of that affect last year.

I don't expect to see a huge decrement again this year.

It is just to add, Dave, to what you said, it is and Steve as we've referenced, a meaningful headwind for us in the first quarter.

It's measurable in terms of that impact.

That is something that's going to moderate in terms of the headwind in the first quarter.

It happens to be paired, timing wise, with also the headwind that we've got on UOP in terms of Parex shipments.

When we really had --.

For the first quarter.

For the first quarter, yes, sir.

We really had just a blowout year first quarter 2013.

By the way, that first quarter 2013 is a reference when I went through my remarks, was also on top of a very strong first quarter 2011 and a first quarter 2012.

So in 2014, we have a little bit of, sort of the confluence of events with both UOP, fluorines, a little bit in resins and chemicals.

It is related to the phenomena, Steve, that you mentioned.

Basically, that moderates then over the course of 2014.

So, is it an R22 or a 410A issue?

It's largely R22.

Okay.

So this is really the volatility.

You had a spike in the price so and that should normalize.

Is it about a third of the year-over-year comp, the down 150 in March?

(laughter) In terms of the headwind that we are going to have from PMT in the first quarter, due to the phenomena I just mentioned.

By the way, the other headwind we have as I talked about was ACS, which is well known in terms of the acquisition, in terms of just margin rate.

I'm just talking margin rate now.

It's about, say, about a third of the impact in terms of the PMT phenomena.

Okay.

That's great.

One last question before the March meeting here.

You guys are kind of putting up the low double-digit, low teens growth.

You are kind of managing pretty well to that number.

It seems like you guys are a little more optimistic on the economy, which would suggest that maybe at the end of the day, that 12% to 13% consistent EPS growth is not really going to be that much of a stand out performance?

I mean, at what point do you kind of look up in a better economy see peers growing maybe 15% plus and think about maybe doing something a little more to get that growth rate up?

Or, do we still have kind of the mentality that look, we are just going to click away and do we think over a five-year period and above average type of growth rate?

Is there any discussion as to that high-level approach to the business model?

I would say, Steve, there is always obviously a big difference between actual and forecast.

When you are trying to forecast out for five years, it's one thing to just put a really bullish economic scenario behind it.

It's another to say, okay, we want to make sure that we can do whatever it is that we say that we are going to do.

I would rely, though, that if we take a look at how we've done on actual, historically, we've always done very well when it came to actuals, especially versus our forecast.

If we say, okay, we've got a plan to grow a certain percent over the next five years, and the economy is significantly better than what we expect, I certainly won't be holding ourselves to that as a maximum.

Rather, we are going to continue to be focused on how do we outperform our peers every quarter, every year, just like we have in the past.

So, I wouldn't get too hung up on our forecast of how bullish is the macro forecast for the economy.

I'm certainly hopeful that it ends up better than what I tend to think it's going to be.

But it is showing signs of some life now.

I don't know that we are going to see a really robust economy over the next five years, but you just don't know.

No matter what happens, it will be our intent to outperform on the actuals.

Okay.

Thanks a lot.

Jeff Sprague with Vertical Research.

Dave, one way to get at that question is it kind of looks like the cabbage patch is really filling up.

(laughter) We've got a lot of seed planting.

There's a lot of cabbage to be picked up.

I agree with you.

So, obviously you are not going to announce deals here today or anything but how active is the M&A pipeline?

Where is your head at on share repurchase?

Obviously, you've got $5 billion authorization you put out there.

It's not clear that you are going to really aggressively move against that, though.

Well, I think harking back to the comment Dave just made on restructuring and how we keep a pretty full pipeline, we do the same thing when it comes to M&A, looking at what's available, what's possible, how do we continue to do what we call our milk runs and just calling on companies.

You've heard me liken it to being in a retail business, where you sit there and from 10 to 2, nobody shows up and then at 2:00 for some reason, seven people come in at the same time and you wonder why it wasn't spread out during the day.

The same thing happens with M&A deals.

Sometimes they come in a bunch, like they did 9 or 10 months ago.

Sometimes, you go a year and a half without much happening.

It's tough to predict.

If you are focused on making smart deals, like we continue to do, then it's probably going to keep coming in bunches.

I never say, okay, we've got to deploy $2 billion a year or anything like that.

I want to make sure that we continue to stay smart about this.

That being said, there's still a lot of opportunity for us when it comes to M&A.

It's a big world out there and we look at the possibilities for great positions and good industries building off the portfolio we have.

There is still a lot of good stuff out there.

So, we are going to continue looking.

When it comes to repurchases, yes, I want that in our quiver as things that we look at doing.

We're going to continue to at least hold share count flat; it's my intent to do that.

I want to make sure that we're a little more opportunistic when it comes to it.

I'm always fearful of falling into that 80% that buys at the wrong time.

I'd like to make sure that we fall into the 20% that looks like, wow, that was a really smart thing to do.

I think timing does make a difference there and we will continue to think about it that way.

I still see a lot of M&A potential, and I think we've proven over the years that we're reasonably good at it.

I think another thing to add.

If you just look at 2013, and this is another, I think, kudo for the Company.

Look at 2013.

We had $1.1 billion in terms of share buyback.

We had roughly the same number in terms of M&A.

Dividend, we paid out $1.4 billion, round, $1.375 billion roughly, $1.4 billion.

This is very strong performance.

I think, if you look at the track record of Honeywell and what we've been able to deliver, not only operationally, but in terms of smart, as Dave said, smart capital deployment.

Smart deals we've done.

You go back to 2005, the Novar transaction, the UOP transaction.

Go forward in terms of what we've done in terms of building out a position, gap detection, our safety products business, the growth now in AIDC, scanning and mobility.

These are all very, very smart adds that lend themselves to further both organic and inorganic growth, the Thomas Russell add to UOP.

As Dave said, Jeff, the pipeline is rich.

There's always the distance between the cup and the lip in M&A.

It's very tough to move from concept to actually close.

But what we've done has been very successful.

The track record, as well, of balance in our capital deployment.

50% of our cash over the last 10 years deployed to build the business, either through CapEx or M&A, 50% back to shareholders, either in the form of dividend or share buyback.

We are just going to continue to be smart about it.

We think that disciplined approach pays out over time, together with the operating discipline and the operating performance.

Jeff, I like everything Dave just said with one exception.

I might modify and correct his pronunciation of the word smart.

(laughter)

Jeff, you think I would learn after all these years, wouldn't you?

When you are smart in China --.

(laughter) Thanks, Jeff.

Dave, I also just asked that question on the context of the situation where it looks like you maybe could be net cash out at the end of this year.

You are going to lay out a new five-year target, right?

I doubt if you are modeling the recession.

Perhaps you are.

But if you grow earnings tenfold, 15% the next five years, that's going to be a lot higher when you get in front of that.

Really?

Jeff, I'm well aware of the cash that we have on the balance sheet.

(technical difficulty) Just finally, Dave Anderson said he'd share and you would lay out targets for more profitable growth.

Clearly, you are going to project higher margins across each of the four segments.

Are there any particular areas that actually that stand out as being more target rich from margin standpoint?

What do you think, Dave?

I think really it's across the board.

We see upside in every single one of the businesses, Jeff.

All right.

The pattern of that, Jeff, will vary just like the pattern varies by quarter in 2014, vary by business, by year based upon their individual growth outlooks, and just, if you will, the make up, a long cycle, a short cycle, all of those factors are going to influence it.

When you look at the overall five-year numbers, as Dave said, we think they're very positive for us, all of the businesses.

By the way, Jeff, just a complement for you.

We were amused by your phrase a pretty typical street forecasting error.

Well done.

23% every year, right?

(laughter) Have a good day.

We will talk to you later.

Thanks.

Howard Rubel with Jefferies.

A couple things.

One is, on Thomas Russell, it looks like the numbers were sequentially about the same.

How is it doing?

Can you kind of provide an update for us, please?

On Thomas Russell?

It's doing well.

It's doing well.

I would say between their capability and ours, extremely complementary in market, technology, and sales outreach, and even manufacturing.

So, quite good.

Year over year, are you still like in the high, what I would call a 20% to 30% growth rate?

I don't know that we disclosed that, did we?

No.

I think that that's --.

Nice try, Howard.

It's not at that level, Howard.

You can see part of it below the line, Dave.

It's fully integrated now, Howard.

All right.

I will leave that.

You are correct.

It's doing well.

Then, in terms of Aerospace new products, I think there's been a number of them in terms of synthetic vision and in terms of some other things, in terms of integrating the cockpit.

Might you talk about them and sort of what you are finding as you test market them?

I'm not sure what you are looking for specifically there, Howard.

Yes, we do have a pile of new products coming out of the Aero business, some of which they've talked about, some of which they haven't.

So far so good.

Things are going well.

One, of course, is all the connectivity things that you've got.

Maybe you can provide an update on some of that.

That's more where I was going to.

Okay.

You can expect us to talk more about that on Investor Day.

You are correct.

We think that's a place that we excel and that we see continuing to increase.

Okay.

Thank you very much.

You are welcome, Howard.

We have time for one more question.

John Inch with Deutsche Bank.

Commercial aftermarket.

Just wondering what the trend and cadence of the business is?

You've had pretty robust results from competitors and sort of chatter about some inventory restock.

You guys are going to be rolling into -- you actually had easier compares this quarter.

You seem to have easier compares in the segment as the course of the year unfolds.

What are your thoughts there toward the cadence of that business?

I assume we are talking about Aero, John?

Yes.

I'm sorry.

Commercial aerospace aftermarket.

We think that's something that starts to get a little bit better this year than it was last year, overall.

Specifically, John, to put some perspective on it, we had something shifting, numbers.

If you look back at the fourth quarter 2012, we did start to see the impact of aircraft dismantling and asset pooling and that really pulled down in the developed economies, our spare sales.

For example, US spares and support for 2012 were down over 20%.

Obviously, this is partially offset by what we talked about a year ago, a bit of a pull forward in buying behavior out of China.

So in the fourth quarter of 2012, our China spares were up over 40.

Now, if you fast forward to 2013, in the fourth quarter we did see a return of more normal buying behavior across most all of the geographies.

In particular, you see the US rebounding nicely, up over 20% while China spare sales increased the sequentially, though they are still facing a difficult comp and I think down about 10% within the quarter.

Moving forward to 2014, we do expect the ATR aftermarket spares to grow in the first quarter in excess of flight hours, as a result of some easier comps and obviously more normal buying behavior.

And this obviously portends to prospectively better margins in the segment as the year unfolds, if I am reading that right.

I think that's right and maybe a way to summarize all of that is to say that the guidance is the same which is we're looking at mid-single-digit growth in the commercial aftermarket for Aerospace in 2014.

For the year.

Can I ask about transportation?

I think European light vehicle in the first quarter was down in terms of production, down double digits.

Why is the number -- I realize there's a little bit of currency headwind but given the strength of Transportation in the fourth quarter, sort of the momentum you seem to have, why is your guide still kind of where it is?

Why three to five?

Why isn't it up a little bit higher for 2014?

You are talking about TS in total?

Yes, correct.

I guess the moderating effect of friction plus there's -- I would say a conservatism on our part when it comes to what's going to happen in Europe.

So we think it's bottomed at this point and that's why we are starting to see increases as the new launches more than offset the slight declines.

But it's just more a case of just wanting to not get too far up front on this one.

Currency also has a big impact, Dave.

The assumption that we make we are using, as you recall, John, we are using a $1.30 of euro to dollar.

That has a little bit of a headwind effect too and TS is a largely non-US today business.

That does have an influence, as well.

Is there any sort of rate to your assumption that perhaps maybe the rebound you are seeing in light vehicle consumption in Europe is perhaps a little bit short term duration?

Or is there something else?

I'm just trying -- is this anything more that conservatism, I guess is kind of what I'm going after.

John, I would point out that in the fourth quarter, we did see very strong buying behavior in China, as Dave referenced in his opening comments.

There is some pre-buy ahead of some potential regulation changes on emissions that certainly boded very well for the TS sales in China in the quarter.

So, we are not anticipating that repeats.

I am also hopeful that it's conservatism on our part.

(laughter)

I get it.

I'm just making sure there's nothing else in the mix that we haven't thought of.

There's nothing bad, no.

One more quick one, then.

It's a little bit of back to the M&A question.

Dave Anderson had said $1 billion placeholder for this year.

It kind of makes sense as a placeholder.

I just want to know, Dave Cote, how are you thinking about, perhaps, the prospects, given the strength of your balance sheet toward if the opportunity came along, doing a say a meteor deal in ACS or something that could sort of build off the success of Intermec and some of these other deals you've done?

Or, do you really sort of see 2014 at this juncture still kind of a pretty much a bolt-on year?

Again, John, to go back to what I said earlier.

It's tough enough.

We look at small stuff; we look at bigger stuff.

You just never know when something is going to all of a sudden become actionable.

I don't want to ever commit a certain amount every year because that's not necessarily the way deals come in.

But, I can tell you we are very interested in M&A because I think we've proven we are good at it.

We are as focused on doing a good job with it today as we were 10 years ago because it's not an area where we ever want to make a mistake.

So, who knows?

I would just say that I have our predilection for doing M&A.

I think we are good at it and it's a way for us to really add value.

Right.

I understand.

Dave, do you personally -- would you prefer to do a bigger deal if the opportunity arose because of the success you've had?

Or do you think the smaller bolt-on framework is really still the play book we should think about?

Well, I guess it depends on how we define bigger deal.

I'm not favoring one or the other.

At the end of the day, I just want to do good deals.

I'd rather do 10, $200 million really good deals than to do a $2 billion average deal.

By the same token, if there's a $2 billion really good deal, I'm certainly not going to sit here going, well, that's too big.

I don't want to do that.

It's going to be on a case-by-case basis.

The thing I can promise you is, no matter how this ends up evolving or developing, I will be able to make a strong case to you on why we can make good money on this, focused on cost synergies, not counting on sales synergies, and it will be a great position in a good industry.

Thanks very much.

See you in March.

All right, Dave, you have any final comments?

But of course.

We certainly like what we've accomplished.

Not just in this quarter, of course.

While that does feel good, what feels even better is what we can see coming as we continue to outperform.

I've got to say, it's been very fulfilling to complete our first five-year plan with panache, even in a weaker than expected macro economy.

That being said, as I say a lot, and my team has heard me say a lot, yesterday's press clippings wrap today's fish.

We intend to continue outperforming for a long time and the seed planting that we've done for several years now puts us in a great position to make that happen.

We continue to look forward, and we look forward to sharing our next five-year plan with you at our March Investor Day.

Thanks for listening.

Thank you.

This does conclude today's teleconference.

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