漢威聯合 (HON) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Honeywell's fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, and I would now like to introduce your host for today's conference, Mr. Mark Macaluso, Vice President of Investor Relations.

Thank you, Lisa. Good morning and welcome to Honeywell's fourth-quarter 2014 earnings conference call. With me here today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Tom Szlosek. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.Honeywell.com/investor.

Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, and we ask that you interpret them in that light. We identify the principle 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 2014, and share with you our guidance for the first quarter and full year of 2015.

Finally, as always, we will leave time for your questions at the end. With that, I will turn the call over to Chairman and CEO, Dave Cote.

Thanks, Mark. Good morning, everyone. We delivered another excellent quarter, capping off a terrific 2014. In this fourth quarter, we delivered better-than-expected operational performance in each of our key metrics -- that's sales, margin, earnings and cash -- meeting or exceeding our guidance across the board.

We delivered 4% organic sales growth following 5% growth in the third quarter. And we continue to drive margin expansion up 130 basis points excluding the impact of the fourth-quarter 2014 Aerospace OEMs incentives which we discussed in detail last month. We delivered earnings per share of $1.43, up 15% year-over-year or up 11% normalized for tax. So another quarter of double-digit earnings growth and $0.01 above the high end of our guidance range with strong execution across the portfolio.

For the full year, we increased sales on an organic basis 3% while continuing our seed planning with investments in new products and technologies, high-ROI CapEx and expansion of our global footprint. We achieved significant margin expansion with benefits from our key process and productivity initiatives, and we've been able to achieve all this in what continues to be a slow-growth macro environment.

The momentum we saw in the second half gives us confidence in this year. Our short-cycle businesses continue to improve with good organic growth in the Commercial Aftermarket business, ESS, Advanced Materials, and Transportation Systems, all suggesting a modest improvement in end market conditions overall. We're also seeing good momentum out of our long-cycle businesses building on a robust backlog. We believe the portfolio is well-positioned to deliver this year and beyond, enhanced by the smart game deployment actions we've taken over the past years.

While I believe the global economy could be a bit better this year than economists are forecasting currently, we will as always plan conservatively in our outlook and remain flexible. As you will hear in a moment, we continue to plan for a slow- to no-growth environment in Europe. We've hedged over 80% of our P&L exposure related to Europe, and we remain focused on controlling our spend.

As Tom previewed in December, we sold the final 1.9 million shares of B/E Aerospace stock this quarter. To remind you, we originally received 6 million shares as part of the consideration for the sale of our Aero Consumable Solutions business in 2008. At that time, those shares were worth about $150 million. We sold all those shares over the course of the last five quarters for a total of about $500 million. We've deployed the resulting gains from restructuring and other actions to proactively position the Company for future growth and profitability. The actions in the fourth quarter will significantly benefit Aerospace over our five-year plan, and we believe we are well-positioned for future success with our Commercial OE customers as a result.

There continue to be a lot of exciting things happening across the portfolio that drive those results, and to highlight a few, Honeywell Scanning & Mobility delivered another quarter of double-digit organic sales growth, benefiting from new customer wins. Following the success we've had with Intermec, HSM announced in December the acquisition of Datamax-O'Neil, a global manufacturer of fixed and mobile printers used in a variety of retail, warehousing distribution and healthcare applications. This acquisition positions HSM to expand in the $1.5 billion global bar code printing segment that builds on their existing printing capabilities acquired at Intermec.

The team is really excited about this acquisition, which extends our global reach and provides scale and significant synergy opportunities. Transaction's expected to close this quarter. While our deal activity in this past year was modest, the M&A pipeline remains robust. We intend to maintain our disciplined process and extend our strong track record.

We've also talked a lot about our Solstice line of refrigerants, insulation materials, aerosols and solvents that have ozone depletion of zero, and a global warming potential lower than CO2, and that's 1,000 times better than what it replaces. Earlier this month, we announced that our flooring products business has started full-scale commercial production in our Baton Rouge, Louisiana facility as the newest Solstice product, HFO-1234ze. Now, that is one impressive, catchy name, so I think we're going to probably stick with Solstice. We're seeing increasing demand for our entire Solstice suite of low-GWP materials. The lifetime value of signed agreements in 2014 exceeds $2.3 billion, and we have an additional $1 billion-plus under negotiation.

Process Solutions has also been a bright spot as we close out the year. Organic sales growth accelerated in the second half of the year, and orders were up double-digit in the fourth quarter, supporting continued growth this year. HPS is transforming project execution with LEAP -- that is lean execution of automation projects -- and is innovating to win in the market with automation offerings across control and safety systems, field devices, plant optimization software and services. We're also excited about the growth synergies from the work HPS and UOP are doing together.

Our ability to match UOP process and operating knowledge with HPS control and advanced software solutions will enable unmatched operating excellence for our refining petrochemical and gas processing customers. You can expect to see more of our innovation on display at the March Investor Day where each of the businesses will highlight a number of QE-influenced new products and roadmaps for future growth and productivity. We also plan to share with you how HOS Gold is evolving throughout the organization, which we believe is a key differentiator. We held our annual senior leadership meeting earlier this month, and I can tell you that each of the businesses are hard at work finding new and innovative breakthrough objectives to drive growth and margin expansion.

Having successfully performed against the five-year targets we set for 2010 to 2014, we're now focused on delivering 2015 and the five-year targets we issued last March for 2014 to 2018. 2014 was a strong start. Our business model works. Having a strong portfolio with great positions and good industries, making sure the machinery works better every day for our customers, suppliers and employees, and a culture that focuses on One Honeywell and evolving our capability and technologies. From our culture, we get sustainability results.

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

Thanks, Dave. Good morning. Let's begin on slide 4, which recaps our fourth-quarter results compared with the guidance we gave you last month at the December outlook call.

On the left-hand side, we've outlined the guidance we shared with you in December, and on the right, you can see our results for the quarter as reported. I'm not going to walk through each line item here, but you can see based on the checkmarks that we delivered or exceeded our guidance on each line item including the top and bottom line. The incremental sales and segment profits enabled us to beat the higher end of our EPS guidance range and also to fund incremental restructuring and other actions in the quarter.

There are a couple of transactions that occurred in the fourth quarter that are worth reminding you of, and again, they unfolded exactly as we forecasted in December. First, we completed the sale of the remaining BEAV shares as Dave said, resulting in a $114 million gain -- $0.14 per share on an after-tax basis. The timing of the sale was important from a tax perspective as we noted in December. The timing allowed us to offset that gain with other items and therefore incur every little income tax on the transaction.

Also in the quarter, our Aerospace business recognized the cost of certain Commercial OEM incentives that became due when our customer achieved contractual development milestones on platforms which will include Honeywell avionics and our mechanical content. The cost was $184 million or $114 million on an after-tax basis. That's $0.14 per share. As you know, we've won significant content in the air transport and business aviation sectors, and such up-front incentives are part of the business model.

And as you're also aware, accounting for these incentives is quite conservative. Many others in the industry defer these types of costs on their balance sheet and expense them over the life of the platform. We believe charging the incentives upfront gives greater transparency to our OEM profitability in the segment. Also, the OEM incentives position us well on the platforms already won, but also to win new business on the content to be selected in the future.

I'm now on slide 5, which shows the fourth-quarter results without the Aero OEM incentives or the BEAV gain. Sales of $10.5 billion increased 1% or 4% on an organic basis. The absence of Friction Materials and the strengthening of the US dollar were headwinds to reported sales growth in the quarter. You will recall we divested Friction Materials in the third quarter, so they will continue to be unfavorable sales headwinds throughout the first half of 2015.

We are encouraged with the growth and momentum that is beginning to emerge. We achieved 4% organic sales growth in the second half of 2014 compared with 2% for the first half and 2% for all 2013. The growth we saw in the fourth quarter was broad-based and resulted in better-than-expected performance across the portfolio. I will provide more color as we review the business groups in a moment.

You can see the segment profit increased 9% with segment margin expanding 130 basis points. Our efforts to drive commercial excellence supported by differentiated technology continued to produce results. In addition, productivity remains a key driver of margin expand, offsetting inflation and our continued investments for growth. EPS was $1.43, up 15%.

Consistent with our historical practice, this excludes the annual mark-to-market adjustment for our defined-benefit pension plan. In the fourth quarter, this mark-to-market adjustment was approximately $249 million or $0.23 per share, principally driven by lower discount rates in our German and Dutch plants. So the fourth-quarter reported EPS was $1.20, and for reference purposes, the mark-to-market adjustment of 2013 was $51 million or about $0.05 a share.

Finally, free cash flow in the quarter of $1.3 billion representing conversion of 119% and an increase of 6% from 2013. So overall, we generated very strong results in a relatively slow growth environment, and we increased our annual dividend in the fourth quarter by 15% to $2.07 a share, continuing our commitment to growing the dividend faster than the earnings rate growth and a trend you can expect will continue.

On slide 6, the same fourth-quarter results we're presenting on a reported basis. So as you can see, our reported sales decreased 1%, and that was driven by the Aero OEM incentives. No change to the 4% organic sales growth in the quarter that I showed on the previous page. So on a reported basis, segment profit decreased 2% with margins contracting 20 basis points to 15.9% in the quarter. Again, the only difference from the previous slide on segment margins is the inclusion of that $184 million charge for the Aero OEM incentives.

Moving to net income, the BEAV gain and the OEM incentives fully offset one another on a net of tax basis. And normalized for tax, EPS in the quarter increased 11% year-over-year. The rest of the figures on this slide are identical to the prior fourth quarter slide.

I'm now on slide 7 to recap the full-year 2014 results, again without the impact of the Aero OEM incentives or the BEAV gain. Full-year sales of $40.5 billion, up 4% for 3% on an organic basis. The primary difference between the reported and organic rates is the Intermec acquisition net of the impact of the Friction Materials divestiture. We saw good organic growth across the portfolio, including in Scanning & Mobility, the Fire and Industrial Safety businesses, Transportation Systems and UOP.

Segment profit increased 8%, demonstrating strong sales conversion and resulted in a 70 basis point improvement in the second margin rate to 17%. All this resulted in earnings per share excluding pension mark-to-market adjustment of $5.56 a share, up 12% over 2013, representing our a fifth consecutive year of double-digit earnings growth, and EPS $0.01 above the high end of our December guidance range. Our reported EPS of $5.33 for the year again reflects the $0.23 mark-to-market adjustment that I mentioned for the fourth quarter. So finally, free cash flow was $3.9 billion, in our line with our guidance. Free cash flow increased 16% year-over-year despite an approximate 16% increase in CapEx investments in the growth areas we've previously shared with you, mostly in PMT.

So let's move to slide 8 to show the full-year 2014 results including the impacts of the Aero OEM incentives and the BEAV gain. To quickly recap, 2014 sales were up 3% on both the reported and organic basis to $40.3 billion. Segment profit was up 5%, resulting in the 30 basis point margin expansion to 16.6%. So the Aero OEM incentives reduced the growth -- the reported growth from 4% to 3% and reduces margin expansion from 70 to 30 basis points. The rest of the page again remains the same as the previous slide.

And now I want to move on to slide 9 and discuss the businesses starting with Aerospace. This first slide highlights the fourth-quarter reported and organic sales growth rates for Aerospace. As a reminder, in the fourth quarter of 2013, Aerospace recognized an IP litigation settlement resulting in a one-time royalty gain of $63 million in Defense & Space that was offset at the time by OEM incentives in BGA. Both of these items were included and therefore netted out in sales and segment profit at the Aerospace level in 2013.

Total reported Aerospace sales were down 6% in the fourth quarter of 2014, driven by thee items: the $184 million OEM incentives that we discussed in our outlook call back in December; two, the Friction Materials divestiture which closed in the third quarter; and three, the unfavorable impact of foreign exchange on reported results. However on an organic basis, fourth-quarter sales in Aero were up 4%, driven by strong execution across the portfolio, and each of the three legacy Aero businesses accelerated growth in the fourth quarter compared with the first three quarters. And Transportation Systems continued its mid-single-digits growth performance. Organic sales growth at Aero has accelerated throughout 2014 like Honeywell. So if you recall, Aero was up 1% in both the first and second quarters, 3% in the third quarter now 4% to close out the year in the fourth quarter.

If I look at the individual pieces of Aerospace starting with the Commercial OE, sales decreased 14% on an organic basis -- on a reported basis driven by the net unfavorable impact of the OEM incentives. However, on an organic basis, sales grew 7%, and that was principally the result of robust engine shipments and business and general aviation for the Bombardier Challenger 350 and Embraer Legacy 500.

Moving to Commercial Aftermarket, as you can see, 4% sales growth on both the reported and organic basis. ATR spares growth was balanced across both mechanical and electrical product lines offsetting moderation in BGA RMUs, that retrofit modifications and upgrades. Both airline and business jet Repair & Overhaul activity improved in the quarter as well. Defense & Space sales declined 3% on a reported basis, driven by the absence of the prior year licensing royalty gain I just mentioned. However, on an organic basis, sales were up 2% in the quarter.

International programs continue to drive growth with double-digit sales increases offsetting modest declines in our US DoD and government service businesses in the third quarter -- I'm sorry, in the fourth quarter. Finally, Transportation Systems sales declined 16% on a reported basis, reflecting the third quarter Friction Materials divestiture and foreign exchange headwinds.

On an organic basis, TS sales increased 4% in the quarter as we once again saw strong volume growth in light vehicle gas applications where we continue to see increased global penetration. We also continue to see our European commercial vehicle volumes grow as we benefit from new programs following the implementation of Euro 6 emission regulations in the region. As you can see, the underlying business growth trends across the Aero portfolio remain positive, consistent with the outlook we provided you December.

So now I'm on slide 10. Continuing with Aerospace, the fourth-quarter sales results and commentary are consistent with what I just discussed. So for the full year, Aerospace sales declined 1% on a reported basis driven by the Friction Materials divestiture and the impact of the OEM incentives. However, on an organic basis, sales increased 2%.

Aerospace margins contracted by 160 basis points in the quarter, driven by the OEM incentives. But excluding the $184 million charge for the OEM incentives, segment margins in the fourth quarter were actually up 210 basis points, driven by productivity net of inflation, where material productivity continued to be a significant driver. Also commercial excellence and the favorable impact of the Friction Materials divestiture. And for the full year, you can see that Aero segment margins expanded 140 basis points again excluding the OEM incentives.

Let's turn to ACS results on slide 11. ACS sales were up 6% on an organic basis in the quarter excluding an approximate 3% headwind from FX. The growth came in above our guidance with both ESS and BSD finishing the year strong. ESS sales for the products businesses were up 7% on an organic basis in the quarter, continuing the trend of progressively stronger growth noted in each quarter of 2014. Scanning & Mobility continues to perform well, driven by new product introductions and large program wins such as the US Postal Service program we highlighted last quarter.

In addition, we continue to realize integration benefits from Intermec, supporting the strong growth we've seen from the combination of the two businesses. The pending acquisition that Dave mentioned of Datamax-O'Neil complements our existing portfolio in the attractive barcode printing space acquired with Intermec. As for the rest of ESS, growth was driven by new product introductions, further penetration in high-growth regions, higher residential sales which benefited both ECC and Security, and improvements in the non-resi market, which benefited our Fire and Industrial Safety businesses.

Building Solutions & Distribution sales were up 4% on an organic basis in the fourth quarter with continued strength in the Americas fire and security distribution businesses and acceleration in Building Solutions. Particularly within Building Solutions, we saw a good growth in the Americas as well as an increase in higher margin service businesses. Both the Building Solutions backlog and service banks were up mid to high-single-digits on an organic basis, supporting our outlook and confidence for sales acceleration in 2015.

ACS margins expanded 70 basis points to 15.9% in the quarter, the business continues to benefit from good conversion on higher volumes and productivity net of inflation, supported by our HOS initiatives offset by continued investments for growth. In addition, we continue to realize incremental synergy benefits from the combination of Intermec with HSM. So overall, very good growth and execution in ACS, and a lot more to come as the team continues to coordinate the individual businesses more and more through connected ACS, which is an initiative to drive and enhanced degree of integration across the businesses and in particular in the supply chain and product developments and in the marketing areas. Alex will talk more about this at our Investor Day in March.

So moving to slide 12 for Performance Materials and Technologies, PMT sales in the quarter were up 2 points -- or $2.6 billion, up 3% on an organic basis or approximately flat on a reported basis, driven by foreign exchange headwinds. We will address the impact of lower oil prices on the PMT businesses in a moment, but there was very little impact on PMT results in the quarter. For the fourth quarter, UOP sales decreased 1% on an organic basis, and as a reminder, UOP had exceptional organic growth in the fourth quarter of 2014. You will recall they were up 17% last year, driven primarily by increased catalyst sales, so a very difficult comparison year-on-year.

UOP executed very well, reflecting strong licensing revenue which partially offset the lower catalyst sales. We also continue to see strong order trends in gas processing, potentially at UOP Russell, giving us confidence as we head into 2015. And we anticipate further sales growth in 2016 and 2017 for the new capacity additions across UOP and also to Advanced Materials, which come online in 2015.

In Process Solutions, organic sales growth continues to accelerate. HPS was up 6% in the quarter while on a reported basis, sales were flat as the organic -- or the strong organic international growth was offset by foreign exchange headwinds. HPS saw strong volume growth driven by the Advanced Solution Software business and the HPS service business in all regions. Orders, backlog and service bank growth also continued at a strong pace, up double-digits on an organic basis in the quarter. And this orders growth increased steadily throughout 2014, which sets Process Solutions up nicely for accelerated sales growth in 2015 and beyond.

Advanced Materials sales increased 4% on an organic basis, driven by double-digit sales and orders growth in flooring products as demand for our new low global warming potential suite of Solstice products continues to grow. This was partially offset by a decline in Resins and Chemical sales in the low single digit range, driven principally by the market-based pricing model whereby selling prices are closely tied to the market price of raw materials -- most notably benzene, which is highly correlated to the price of oil. While sales can be volatile, the pricing model largely protects the profit dollars in Resins and Chemicals, even on lower sales.

PMT segment margins were up 90 basis points to 16.5%, which exceeded our guidance, driven by higher volume and productivity net of inflation, partly offset by continued investments for growth. In UOP, the higher mix of licensing revenue in the quarter resulted in a tailwind to margin. HPS also converted particularly well, continuing with successful business transformation and benefiting from the growth I mentioned in the higher-margin Advanced Solution Software and Service businesses.

I'm now on slide 13, labeled 2015 Planning Update. An similar to what we did in December, related to the impact of oil price declines on the portfolio, I wanted to address some of the major global trends affecting our portfolio and explain how each of these items are impacting our plans for 2015. Let me start with oil price declines. Overall we continue to view the impact from lower oil prices as being net neutral to UOP and HPS.

The upstream exploration and production parts in the value chain continue to represent a relatively small portion of our portfolio, roughly 10% to 15%, of the combined UOP and HPS businesses. And our upstream backlogs have held firm. We are beginning to see some delays further downstream in countries that are net oil producers, such as Russia and the Middle East as refining and petrochemical project decisions are deferred.

On the other hand, in countries that are big importers of oil, most notably China, India, and the Southeast Asia region, as we had anticipated, the lower oil price has stimulated more discretionary mid and downstream spending, where we are well-positioned. This is being borne out, for example, in Process Solutions where orders and backlog grew roughly double-digits on an organic basis in the quarter as I highlighted earlier. So again, we think oil prices are neutral to the UOP and HPS businesses at this time; however, we continue to monitor this activity closely as we look ahead.

Sales in Resins and Chemicals will be negatively impacted by lower prices -- lower oil prices for the reasons I mentioned earlier. While sales can be volatile, the pricing model again largely protects our profit dollars in this business even on the lower sales. Finally, we anticipate we will begin to see the favorable effects of lower oil prices on our cost structure, in particular in our indirect spend, and we believe this will accelerate throughout 2015. Of course, it remains to be seen how oil prices will impact the global economy, should prices stay below $50 long-term. However, we continue this will be a net positive for the economy and Honeywell over the planning horizon.

Turning to currency fluctuation, we've obviously seen a continued weakening of the euro. As we highlighted in December, our 2015 plan is based on a euro exchange rate of $1.20 midpoint. We have hedges in place of approximately 80% of our euro P&L exposure, so while there will continue to be pressure on the sales line, our euro-based earnings are protected. We also continue to see volatility across our other currency exposures, which again are likely to result in headwinds to the top line. However, similar to the hedging we've done for the euro, the actions we've taken largely protect our 2015 earnings outlook for these other currencies as well. We will continue to actively monitor the situation.

The outlook for the US economy continues to improve, and we're expecting a positive uptick in our US businesses as a result. But we also remain focused on increasing our presence in high-growth regions. As a reminder, HGRs now represent almost a quarter of our total business and are expected to drive 50% of the sales growth over the course of our five-year plan. The population growth urbanization and infrastructure development continue to create attractive opportunities across our entire portfolio.

In China, we anticipate high-single-digit growth in 2015, after a year of roughly mid-single-digit growth in 2014. Our initiative on becoming the Chinese competitor continues to accelerate and bear fruit. Investments in local sales and marketing resources are targeted to the higher growth cities in China, where local economies are growing much faster than the overall China GDP.

Also, our One Honeywell approach, specifically in ACS, continues to drive cross selling opportunities across multiple channels. In addition, we're building a robust pipeline of new products geared toward the macro trends in the region, namely air purification, energy efficiency and security. All these factors give us confidence in accelerated growth for Honeywell in China in 2015.

In India, after the investments across the region slowed in the first half of the year while the elections unfolded, the second half of 2014 was very strong for Honeywell. We anticipate growth will be roughly high-single-digits in 2015, driven by our International Defense & Space business, new launches in Transportation Systems, new product introductions in ESS across each of our major verticals, and growth in BSD from infrastructure projects and services.

In Russia where our exposure is limited, we have less than about $500 million in annual sales there. We continue to have a strong backlog in our long cycle businesses. We expect Russia to continue focusing their available capital on energy, so oil and gas, and renewal of their aerospace sector, two areas where our portfolio is well-positioned to grow. Our short cycle businesses in Russia have been impacted, particularly as it relates to currency devaluation. But again, the exposure there is relatively small. While our Management team is paying close attention to the issues facing the country, we're also continuing to look for opportunities to enhance our business in the region.

In the Middle East, we expect continued double-digit sales growth in 2015 after approximately 20% growth in 2014. And this is driven by big wins in both the short and long cycle businesses as infrastructure investments continue. Our portfolio is well-positioned to benefit from an even outpace in some cases the attractive growth rate in these markets.

Turning to the nonresidential sector, we're encouraged by the expected acceleration of commercial construction spending, forecast to be up approximately 4.5% in 2015, and the continued solid growth on the industrial side in 2015. So as a reminder, roughly 75% of the ACS portfolio serves the commercial industrial markets, and our balanced portfolio is well-positioned to capitalize on improvements in these areas. More specifically on the Commercial products side, after modest growth through the first three quarters of 2014, we saw some acceleration in the fourth quarter, with strong growth in the US. We expect the US to continue to drive further Commercial products growth in 2015, as well as acceleration in our high-growth regions with strength in our ECC and Fire Systems businesses in particular.

In the Industrial products markets, we expect higher sales of Industrial Safety equipment, particularly in the Americas which represents about half of our exposure. As for Building Solutions, the backlog from our projects businesses and the service bank grew mid- and high-single-digit respectively on an organic basis this quarter, and we continue to expect energy efficiency projects to support global acceleration in 2015.

With regard to our pension plan, the net effects of higher investment returns and lower discount rate will drive a $125 million increase to pension income for 2015. Now, we intend to fully offset that increase with restructuring over the course of the year. In total, our international pension plans represents approximately 25% of our worldwide defined-benefit obligations. In the US, we ended the year with a discounted rate of 4.08% and return on assets of 8%, which resulted in US funded status of approximately 95%. Globally, the funded status is about 94%. We do not anticipate any 2015 cash contributions related to our US plan.

Let me turn to slide 14 to summarize our outlook for 2015. Our full-year guidance is identical with what we shared with you in December. We continue to expect sales in the range of $40.5 billion to $41.1 billion, up 1% to 2% on a reported basis and up approximately 4% on an organic basis. Reported sales growth is expected to be lower than organic, primarily due to the impact of Friction Materials divestiture and foreign-exchange headwinds. We're planning segment margin expansion of 100 to 130 basis points, or up 60 to 90 basis points excluding the fourth-quarter OEM incentives.

We are projecting EPS -- this excludes the pension mark-to-market adjustment of $5.95 to $6.15, representing 7% to 11% growth versus 2014. The quarterly growth trends remain in line with our prior-year results, and this range also continues to be based on a full-year income tax rate assumption of 26.5% and share account held roughly flat to 2014 levels. Free cash flow is expected to be in the range of $4.2 billion to $4.3 billion, up 8% to 10% from 2014, with CapEx investments peaking at roughly 2 times the depreciation. At a more normalized rate of CapEx investments, so around 1.25 times depreciation, we expect free cash flow conversion to be at roughly at 100%.

So now on slide 15 with a preview of the first quarter. For total Honeywell, we're expecting sales of $9.4 billion to $9.6 billion. That's down 1% to 2% reported but up 3% to 4% on an organic basis. Segment margins are expected to be up approximately 110 basis points, and EPS is expected to be in the range of $1.36 to $1.41, up 6% to 10% versus 2014. Starting with Aerospace, sales are expected to be up 3% to 4% on an organic basis or down 2% to 4% on a reported basis, reflecting the year-over-year absence of Friction Materials as well as foreign exchange headwinds. We're expecting positive organic sales growth from each of the four businesses in the quarter.

In Commercial OE, we're expecting sales up low- to mid-single-digits driven primarily by new platform wins and BGA. The growth is driven by favorable demand trends for high-value business jet platforms where we have significant new engine content. In Commercial Aftermarket, we're expecting sales to be up low-single-digits with continued Repair & Overhaul growth as well as ATR spares growth in the quarter, driven by higher demand for both mechanical and electrical products, partially offset by a decline in BGA RMUs against the challenging prior-year comparison. Defense & Space sales are expected to be up low- to mid-single-digits in the quarter, driven by continued strength in international businesses.

In Transportation Systems, sales are expected to be up mid-single-digits on an organic basis, but down significantly on a reported basis, driven by the absence of Friction and the foreign-exchange headwinds I mentioned. On an organic basis, the growth in TS is primarily driven by new launches and strong light vehicle gas demand in each of our three key regions: the US, Europe, and China. As for Aerospace margins, we expect an increase of 100 to 120 basis points, driven by commercial excellence, significant productivity improvements across the portfolio, along with a favorable impact on the margin rate from the Friction Materials divestiture.

Turning to ACS, sales are expected to be up 4% to 5% organically, or flat to up 2% on a reported basis with continued mid-single-digit organic growth in both ESS and BSD. The difference between our reported organic rates reflects the foreign-exchange headwinds in the quarter. The end markets where we primarily participate -- residential, commercial, and industrial -- are all looking moderately better as we start 2015. And we continue to benefit from new product introductions and high-growth region penetration. Also the strong orders growth we saw at the end of 2014 in both the short and long cycle businesses, gives us increasing confidence in our outlook for 2015.

ACS margins are expected to be up 100 to 120 basis points with continued benefits and commercial excellence and productivity net of inflation, while accelerating investments for growth and new product areas such as connected homes and in high-growth regions. Further, we expect to realize synergies from integration of the Datamax-O'Neil acquisitions after the transaction closes as we did with Intermec throughout 2014.

In PMT, sales are expected to be approximately flat on an organic basis and down approximately 1% to 3% reported, driven by foreign exchange headwinds and the impact of lower oil prices on Resins and Chemicals, a point I made earlier. Excluding these factors, PMT sales are expected to be up approximately 4% in the quarter. We're expecting UOP to be up low-single-digits with gas processing sales expected to drive the majority of the growth. In HPS, we're expecting organic sales up mid-single-digits. The favorable orders and backlog growth we saw in 2014 will support the sales acceleration in 2015.

On the Advanced Materials side, we're expecting a low- to mid-single-digit organic sales decline, principally driven by a double-digit decline in Resins and Chemicals due to the factors I mentioned earlier. These declines are offset by continued strength in our Flooring products business, which is benefiting from increased demand relating to the new products, principally the Solstice products suites. Also PMT segment margins in the quarter are expected to be up 100 to 120 basis points versus 2014, driven by higher volumes and productivity as well as the favorable margin rate impact of the market-based pricing model in Resins and Chemicals.

Let me move to slide 16 for a quick wrap-up. In 2014, we demonstrated once again that Honeywell can deliver on its commitments in a relatively slow growth economy and emit some very volatile global trends. Reminded once again of the value of our diversified and balanced portfolio, the Management team focused on execution and the strength of the Honeywell playbook and [P&A] lists. Combined, these enabled us to add to our performance track record as we exceeded guidance on sales, achieved significant growth in segment margin and delivered on double-digit EPS growth we originally laid out last December.

We're going to continue investing in our future with a focus on profitable sales growth. This will continue to mean investments in high-ROI CapEx in new product development and in sales and marketing resources, particularly in high-growth regions. The investments are paying off, and you can see it in our results. As we turn our attention to 2015, we recognize the uncertainty in the macro environment, but this is not new for us. We have and will continue to plan conservatively, and we're confident that our portfolio is well-positioned for continued outperformance.

Our order trends both short and long cycle point to accelerated sales growth for next year that should enable continued strong improvement in our profitability. We're forecasting strong organic growth in 2015 and over 100 basis point improvement in our margins as our HOS Gold initiatives are deployed across the portfolio. In addition, we have significant restructuring savings in the bank for 2015.

So will continue to execute in 2015 and beyond. We're very excited about the upcoming year, and have a lot of momentum across the portfolio as we head into year two of our five-year plan. We look forward to telling you more at our March 4 Investor Day. So with that, Mark, let's go to the Q&A.

Thank you.

(Operator Instructions)

Steve Winoker, Bernstein.

Hey. Good morning, all. After last quarter's multitude of congratulations, I am hesitant to say it again, Dave. But I will say nice quarter. And I guess I will get blamed by all my colleagues out there for doing this.

It's a shame to be nice. You wouldn't want to do something like that.

I'm trying to be very cautious on that front. It's one of my development needs. So anyway, listen.

On the outlook call, we spent a lot of time -- you guys provided a great amount of detail for thinking through the oil price -- declining oil price impact across all your businesses. And I'm trying to compare that to what Tom just walked us through, but the thing that really is of maybe concern to me is the midstream downstream commentary where in December you really talked about that it was a net positive in terms of refined product demand investment downstream, and other areas.

I'd just like to get a little more color on that, particularly around the impact of maybe narrowing oil and gas spreads on some of those investments that are happening out there. Just some more color on why we shouldn't be worried about this for you guys and why it's actually a good thing.

Well I will start with my perspective on it, and then turn it over to Tom for even more color commentary. There's a difference between the upstream and the mid and downstream segments as you know. And the mid-and downstream, my view, are going to be driven more by overall economic activity.

The demand for that is going to be driven more by overall economic activity than whatever oil prices are. As a result of that, I'm expecting to see increased demand for refined goods and products which is going to cause a greater demand on the mid and downstream side.

Offsetting that, at least in the short term, is probably going to be some of the investments in places like Russia and the Middle East perhaps some in Brazil, but they already slowed significantly that will be more than offset by what everybody has to crank up everywhere else around the world. So that's the overview that I see for it, and as you probably know for the first time in five years, I'm actually a little more bullish on where the global economy is going than economic forecasters are.

The last four years have been more negative generally, and so ar that's been a good call, this time I think it could be more positive than what they think because that impact to lower oil prices is causing this major redistribution from oil producers to oil using economies, and those oil using economies are quite large. So overall, I think this is a good phenomenon is going to help drive more of that mid and downstream investment. Tom?

Yes. Again, what I would reiterate is the portion of our HPS and UOP business that's in the mid and downstream, number one. Number two, the backlogs really backed up by the strong second half particularly in HPS are really strong. If you look at HPS, the backlog on a constant currency basis is up about 12% year-over-year.

And the UOP backlog is also -- I'm sorry, the UOP backlog is relatively flat, zero to 1%, but when I look at UOP, it continues to be a lumpy business. Fourth quarter was a difficult comparison as I said.

We had 17% growth in the fourth quarter 2013, but the backlog is strong as it's ever been. It's holding up, and our growth rate in 2015 that we forecasted for UOP is mid-single-digit growth. So we're confident with all the indicators.

And UOP is lumpy but with a very positive trend.

And Tom, you're not seeing any backlog price renegotiations? There's a lot of chatter about that in the market.

No. Not at all. We've probed and probed and probed as you might imagine. And the only development I would say is deferrals on new orders where the multi-billion-dollar investments where decisions are being thought through carefully in the regions that Dave mentioned. But by and large, that's about the only impact we've seen so far.

Okay, I will hand it off. Thanks.

Scott Davis, Barclays.

Hi, good morning guys. I'm glad to see you guys are bullish. We haven't had a lot of positive conversations in the last couple of months, but maybe you can -- I think your view on oil is pretty clear, Dave, but give us a sense of your view on currency.

And really the angle I'm looking for is we've had such a violent move that how does it change the competitive landscape? Do you see guys who can come in from Japan or other high-cost regions like in Europe that can now suddenly compete against you in areas where they couldn't compete against you before? Is that real or not real?

Well, the -- as you know, the Japan phenomenon has been a currency phenomenon that's been a couple of years in the making, and I can't say that we ever saw much of an impact from any of that. I guess it remains to be seen on what happens with European competitors, but again, not seeing much of anything happening there.

When it comes to the overall currency, we've assumed the US dollar would strengthen for a while now, and we're a little surprised actually it didn't happen sooner than it has. So I would say it's one of those things that we've been counting on happening, and as you know, this is the first time in -- well, this is going into my 14th year.

This is the first time we've ever hedged the euro translation, and it was solely because it seemed like that was 70% bet at this point. Who knows, things have a way of changing in ways that you never predict, but I think that the prospect of a $1.10 euro this year is entirely possible.

The other thing I'd add, Dave, is our cost space. We do benefit in some cases from the decline in currency. Scott, as you're fully aware, we have significant production capacity in China and Mexico and other parts of Eastern Europe. So we do feel like our position from a supply chain perspective and a cost space perspective does enable us to continue to compete with the likes of the creditors you refer to.

I think that's a good point Tom just made, Scott. The presence in Europe already. We have a big base there, about 30,000 employees, so we have a base to compete from.

Okay, fair enough. Guys, give us -- I was encouraged by what you said about non-res, and our forecast was actually a little bit higher than your forecast. So I hope we're right and you're not, right? But either way directionally it's the right answer.

But can you walk around the world a bit on that? And it's really tough for us to get a feel for is we've got great data in the US on non-res and things we can track, and once we get outside the US, it starts to get a bit more difficult. So can you walk us around the world and more in context of your order book or backlog or how you see it playing out in different regions?

Sure. It would be pretty consistent with how we're seeing the economies. The US would say -- I hope you're right also -- we're a little lower in our estimations, but we think that continues to rise upward.

It's still a reflection of the great recession, and you heard us say at the time about V-shape in, V-shape out -- slow in, slow out -- and non-res construction is more of a slow-in, slow-out. We think it's a nice steady gain, and it just continues. You could argue there's some offset to that with oil and gas CapEx, but that has a really minimal effect on our non-res construction business.

In Europe, consistent with the economy, is going to be very slow. China probably going to continue to be a mix, and interesting phenomenon there because the tier 1 cities that are experiencing more of the economic slowdown, they still could use more housing. And in some of the tier 2, 3, 4 cities where GDP will be growing faster may have been over built a little bit. So that one's still to be figured out, but overall we think it's still a net positive on non-res construction.

India, there could be an awakening in India. I've never seen such excitement in the business community in the 20 plus years that I've been going there.

I'm actually pretty encouraged about what they could be doing, and in fact I am going there tomorrow to be there for the president's visit as part of his US/India CEO forum. And I really think there could be a take off there that we've all really been waiting for for at least 10 or 12 years now, and that one could turn out to be quite a good positive.

The thing I would add to that, Dave, is Scott, to answer your question on the non-resi, I look at our exposure in the products businesses in ACS, principally in fire and in some of the commercial businesses in ECC. As I said in my comments, the growth rate has been very nice mid-single digits, approaching double digits in some cases, so good trends there.

And then in building solutions, where we have, we provide both the projects and services in that same space. The overall rates and backlogs have been good.

If you look at the backlog overall for the business, it's up about mid-single digits over last year. And it's across all the regions.

It's actually double digits in Europe, but that comes off a lower comparison, but overall each of the regions are in that range. So we feel like it's headed in our direction.

That's encouraging. Well, have a safe trip to India, Dave, and give the president my best.

Okay.

Jeffrey Sprague, Vertical Research Partners.

Thank you, good morning. Just a couple of things, back to energy exposures and the like. On UOP in particular and the capacity that you put in place, do you guys have people contractually locked up there? Is there any take or pay, or if the system does unexpectedly take a sharper turn for the worse, you're exposed there?

Yes. Exposure's not that great, and it helps that we get upfront payments on the technology licensing. So yes if there was a severe downturn, of course we'd feel it, but I'm not that worried about it right now.

All right, we are seeing a few refinery cancellations in the US just two this week alone. I was also just wondering on hedges. Tom, how those work. Was there a Pl&L expense in 2014 to prep yourself here for 2015, or is that running through on the balance sheet somehow?

Good question, Jeff. All of the hedges qualify for mark-to-market accounting. I'm sorry -- qualify for not doing mark-to-market accounting.

So they would -- the impact of the hedge instruments when they settle would be recognized at the same time the underlying items that are being hedge are recognized. There's nothing unusual, it's just the extent of the currency that we've gone out and hedged.

Okay. And I'm just wondering if you could give a little more specific color on aero spares. You spoke to aftermarket generally and all-in with RNO, but what's going on in spares trends? Are you seeing, more activity, older airplanes that might be fuel costs related or anything that stands out?

I'd say on the -- it's a little bit of a dichotomy between ATR and BGA, but real strong growth on the ATR site. And mid-single-digit growth on the spares.

It's growing on BGA side as well, but not as significantly. But we do expect those -- that to improve and the ATR trends to continue for 2015.

Okay. Great. Thank you guys.

You're welcome.

(Operator Instructions)

Steven Tusa, JPMorgan.

Hello guys. Morning. Mediocre quarter, but it's good enough these days.

So just on UOP, just remind us how much of that business is new projects, and if you were to see an air pocket in new projects, what backlog do you have today to give you a little bit of leeway to take action? So for example in the first quarter, if you saw that number go down 30%, when would that hit you revenue wise? Is that even a 2016 issue is that more like a 2017 issue? Or is it a 2015 issue?

I guess I would consider the proposition that UOP backlog, Steve, to answer that question. As I said, the backlog has held up very well.

Actually I have a tough time seeing that. Even in the recession, I don't think it's that bad.

I think on the capital side, where we come in on these capital projects is the middle or the end. And so most of the capital is spent in the ground, and we come in and sell the systems in the technology.

So the backlog is holding up. I would also say that if you look at the composition of the backlog, it's in the catalyst, it's in equipment, and it's in gas.

And in all three places, it's holding up, and there's really not any material difference from what we seen. So like Dave said, I haven't heard or seen anything in terms of potential decline.

Right. I'm just trying to understand what kind of visibility and timing dynamics planned your ability to take action if you do see something like that.

We'd have time to react not just there but around the company.

Right. And your orders and backlog in UOP and the orders in the fourth quarter, and what your backlog in the year is at.

I don't know whether we disclose that.

Wasn't it like $2.8 billion at the end of the third quarter? I know you guys gave a number at your HPS day in November, I believe. No?

Not off the top of my head, but we can get back to you on that one.

And I guess just one other question on capital allocation. Any change in philosophy around buybacks versus deals here or anything getting a little more attractive in the market bumps around?

I wouldn't say our philosophy has changed, and that's why you saw us increase the dividend greater than the earnings rate this year because that's consistent with our five-year plan of raising the payout ratio over this five-year period. But that's going to continue to be a priority for us.

And I'd say on the M&A pipeline, I'm actually feeling better about that than I had in these past few months. I always felt so good about it. But I would say the work Roger is doing and the businesses are doing is improving that overall pipeline.

It doesn't mean anything is going to happen soon, but I can say I feel better about it. I think there's some increasingly let's say good properties that would be a very good fit with Honeywell if we could make them happen.

Got you. Great. Thanks a lot.

You're welcome.

Nigel Coe, Morgan Stanley.

Thanks, good morning. Dave, you mentioned you're feeling more bullish on the consensus for first time in five years, and as prices come in somewhat, sounds like you might be about to deploy the balance sheet. Is that a fair comment? You mentioned the backlog is looking pretty fertile, but this conceptually, is that correct?

Just to make sure I understood, are you saying a, I getting ready to do something?

Well just given multiples have come down a little bit and you've got a more bullish view on the economy than most competitors.

Yes, I would never of course anything one way or another Nigel. I'm just say I'm encouraged by the work the guys are doing on the pipeline and the stuff I'm seeing. And we've got the capability, and we're just going to continue to be smart about it.

Okay. That's fair. And the commentary around building solutions is really encouraging, and obviously we've seen a pickup in general construction activity, but I am wondering the performance contracting energy-saving part of that portfolio, are you seeing similar trends there? And there is a bit of a debate that low energy prices means that some of this will get pushed out. Do you agree with that thought process?

Well, I guess you'd have to say yes, it's possible, but we're not seeing that. It's not like $50 oil is cheap. It wasn't that long ago that we were concerned that it could be a recession if it hit $35.

So $50 is not cheap. It's cheaper than it was, but is not cheap.

Okay, are you seeing similar trends in the performance contracting side?

Yes. Orders are good there.

Okay, and then just a quick one on the hedge accounting [film], so the way that works is you take the full impact on the top line, and then the mitigation is through the COGS line?

Well actually the items that we're hedging, and we could get into a complicated accounting lesson here, but the items that we're hedging are actually cost items, and we're doing it selectively throughout the portfolio. As you can appreciate, we have a global supply chain and a lot of currencies moving across borders, but what we do is focus on hedging the expense items.

And you let -- that enables you to protect the overall P&L, but what that leaves is open up the top line. And so the top line is in a lot of cases exposed to currency movement.

Right. And I just quickly think you mentioned your hedge was down to [$110 million], is that correct Tom.

No. I said our plan was based on [$120 million], and we've hedged at a rate that I think protects that pretty well.

Okay, thanks.

Joe Ritchie, Goldman Sachs.

Thank you, good morning everyone. Dave, since the last time I saw you, I have to say congratulations to your Pats, the floodgate notwithstanding.

Just reading the post and the news, they're having a ball, so to speak, with this.

Indeed they are, and they probably should. But moving on to maybe a question on capital allocation, I just want to ask Nigel's question slightly differently.

Evaluations have come down especially in oil and gas. Has your priority in terms of where you're looking for the next target, has that changed all just given clearly there are more attractive valuations on the oil and gas side today?

I would say -- I'd back up on it I guess and say great positions in good industries are still going to become the fundamental for us. And secondly, pricing makes a difference.

So there's a lot of stuff that we'd like in a lot of different segments, many of which we've outlined for you in the past, and we're going to continue to look at does pricing makes sense, does it make sense today versus further into the future. And we tend to try to be pretty careful about timing when it goes into even picking off a great position in a good industry.

Okay. That makes sense. And I guess given this month that you just got back from your top 300 meeting, I'd be curious to hear how you feel about the progress that you guys are making in terms of pivoting the Company really to do an organic growth story. The margin story is there, but really pivoting to organic and improving your cash flow conversion over the next few years.

Maybe the best way to say it is that coming out of that meeting, we had 300 unbelievably energized people. Even more so than I've seen in the past.

And everybody's really pretty bullish not just about what we've done, but about where things are going. And HOS Gold and what we are doing to develop and fund the breakthrough initiatives for the 76 Enterprises is really energizing everybody around the world. It's just wonderful to see.

Okay. All right. So pretty confident in the outlook there. And then maybe one last follow-up question on TS, Tom, you mentioned that the growth has been really good, your exposure is predominantly to Europe and you've got auto builds that are expected to moderate in 2015. You mentioned in your prepared comments that there's been increasing improvement in the light vehicle gas application. Is your portfolio positioned well for that opportunity, and maybe just a little bit of color there.

Well first of all, what I'm referring to is the increased penetration turbos on the gas combustion engines on light vehicles. That's just a trend that we're seeing in the US, China, India, everywhere.

And we are well-positioned to take advantage of that, we've got not just manufacturing capacity in each of those places, but also local product development capacity and engineering teams that work with the OEMs in those regions. So I feel like were pretty well-positioned, and the growth rates support that.

Okay. Thanks guys, I will get back in queue.

Christopher Glynn, Oppenheimer.

Thank you, good morning. A lot of detail already. Just drilling into ACS a little bit, it was nice to see a 6% organic number against the 5% organic comp, the year ago in particular. Just wondering, how you guys are parsing attribution here in terms of markets first, execution against VPD and HUE and things like that.

Pretty well overall. I think some of the businesses are doing extremely well within so. The scanning and mobility for example, we'd have to highlight, the gas detection business is done extremely well with it. And then I'd say everybody else's in the middle of progress, but progress is good everywhere. It's really working well.

Okay. Thanks, that was all.

You're welcome.

I would now like to turn the conference back over to Mr. Mark Macaluso for any additional or closing remarks.

Thanks, Lisa. With that, I'd like to hand the call back over to Dave for final remarks.

Well, we're proud of what we've done, but even more important, we're excited about where we're going. Our business model really does work. And while I believe that lower oil prices will lead to a slightly better global economy than what's forecasted currently, we will plan conservatively as always to ensure that we do deliver on our commitments to you.

We believe we are well positioned to deliver on our five-year commitment to you, and we look forward to seeing many of you at our March investor day where we will share more about how and why we will get there. And in the meantime, the next -- the following Sunday, in a very American sport, I hope we can all be Patriots. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.