漢威聯合 (HON) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to Honeywell's second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

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

Please go ahead.

Thanks, Tracy.

Good morning, and welcome to Honeywell's second-quarter 2016 earnings conference call.

With me here today, as always, our Chairman and CEO, Dave Cote; and Senior Vice President and Chief Financial Officer, Tom Szlosek.

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

Note that elements to 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 principal risks and uncertainties that affect our performance in our Form 10-K and other SEC filings.

This morning, we'll review our financial results for the second quarter and share with you our guidance for the third quarter and full-year 2016, and as always, we'll leave time for your questions at the end.

With that, I'll call over to Chairman and CEO Dave Cote.

Good morning, everyone.

As I'm sure you've seen by now, Honeywell delivered another quarter of double-digit earnings growth, capping off a strong first half to the year in a challenging global economy.

Earnings per share of $1.66 increased 10%, coming in at the high end of our guidance range.

Sales of $10 billion were up 2% on a reported basis and down 2% on a core organic basis, in line with our guidance for the quarter.

We saw good growth in Commercial Aviation Aftermarket and Transportation Systems; in our Residential, Commercial, and China businesses within ACS; and in Process Solutions and Flooring Products in PMT.

Segment margin expanded 10 basis points to 18.5%.

On an operational basis, this was 110 basis points of improvement as we continue our focus on commercial excellence, execution on previously funded restructuring actions, and maintaining disciplined cost controls.

We are again raising the low end of our 2016 full-year earnings guidance to a new range of $6.60 to $6.70, or up 8% to 10% year over year, given our first-half performance.

During the second quarter, we had several announcements that I'd like to highlight this morning.

We announced that Darius Adamczyk will be our next CEO, effective March 31, 2017, and I will serve as Executive Chairman through April 2018.

This announcement is the next step in ensuring a seamless leadership transition, which will position Honeywell for continued outperformance in 2017 and beyond.

Darius is the right person to lead the Company into a new era, where we will need to keep evolving to become even more global, to become more of a software company, and to become more nimble.

He has the growth mindset, global acumen, and software expertise to be a highly successful CEO for Honeywell.

The Board and I are confident that Darius will be a great leader in executing our strategic plans and driving organic growth.

My leadership team and I remain as focused as ever in delivering on our commitments while ensuring a smooth leadership transition.

In addition, this morning we announced that we will realign ACS into two new segments: Home and Building Technologies, and Safety and Productivity Solutions.

We'll begin reporting results on this basis in the third quarter.

Tom will speak more about this later, but we think this is the right time to separate ACS into two smaller, more nimble businesses that will operate more efficiently and adapt more quickly to change in global markets.

We have two fantastic leaders in Terrence Hahn and John Waldron to lead the new segments.

And we're excited about the growth opportunities in each portfolio as we look ahead to 2017.

Alex Ismail, who served as President and CEO of Automation and Control Solutions for the past two years, will leave the Company.

Alex had a very successful career in Honeywell in Aerospace Transportation Systems, and most recently, ACS, where he delivered strong operating margin expansion and improved operational excellence; completed several acquisitions in new strategic adjacencies, like smart meters; accelerated growth in high-growth regions; and built a strong pipeline of new products: IoT solutions and software for home building and worker applications.

Alex is very supportive of the change.

He's a well-liked and respected leader, and we wish him the best in his next endeavor.

We remain very active on the capital deployment front also.

Earlier this month, we announced the acquisition of Intelligrated for $1.5 billion.

Intelligrated serves the high-growth e-commerce industry, offering complete warehouse automation solutions, software, and services.

Intelligrated has a large and growing installed base of customers that align well with our new Safety and Productivity Solutions business, and they serve a highly attractive market that is forecasted to grow 8% to 10% a year.

We also announced the spinoff of our Resins and Chemicals business into an independent public company called AdvanSix.

The spinoff of AdvanSix is progressing well, and we expect completion this year.

These portfolio changes continue to move our growth profile upward and build on our great positions in good industries.

In June, Shane Tedjarati and his team hosted approximately 20 investors and analysts in China to learn more about Honeywell's tremendous growth opportunities in high-growth regions.

The trip covered four cities in five days and included meetings with Chinese government officials, local economists and CEOs, visits to innovation centers and high-tech incubators, site tours of Honeywell's turbo factory in Wuhan and S&PS factory in Suzhou, as well as an in-depth HGR business review.

This trip served as an excellent venue for our shareholders and analysts to better understand our HGR strategies, including becoming the Chinese competitor, east for east, and east for [est].

And how our experience in China has delivered our strategic thinking and provided a foundation for further growth in other high-growth regions.

High-growth regions have driven approximately 50% of our growth over the last 10 years, and we expect it to continue to be a key growth engine for Honeywell going forward.

And our focus on software continues with the announcement of our new digital transformation business, part of Honeywell Process Solutions.

This business will help industrial companies harness the power of the industrial Internet of Things to make their operations more reliable, more efficient, and safer.

The Industrial Internet of Things was the key topic at our 41st Annual Honeywell User Group Conference in San Antonio, where we introduced our new Uniformance Suite.

This Suite is our analytics platform that provides real-time digital intelligence to turn plant data into actionable information.

At the User Group Conference, more than 1,000 people gathered to discuss IIoT's tremendous potential to solve the toughest challenges facing industrial companies today.

Honeywell's portfolio of technologies, advanced analytics, and deep domain knowledge position us well to utilize data to help customers operate their plants more safely and efficiently, and reduce unplanned downtime.

We're also monitoring the macro environment in light of Britain's recently-announced exit from the European Union.

And we expect minimal near-term impact.

Tom will take you through some of the actions we've taken to mitigate potential risk, but it's important to note that our planning framework hasn't changed.

We'll be cautious in our sales planning and continue to plan our costs and spending conservatively, ensuring we remain flexible as a Company.

And we'll maintain our seed planting for the future, supported by a robust pipeline of funded restructuring projects.

We'll continue to support growth, focusing on winning in high-growth regions, advancing our superior software capabilities, and effectively using HOS Gold to drive break-through initiatives and deliver high-quality products to our customers globally.

With that, I'll turn it over to Tom.

Thanks, Dave.

Good morning.

I'm now on slide 3, which shows the second quarter results.

Reported sales of $10 billion increased 2%, reflecting impact of acquisitions, and declined 2% on a core organic basis.

We saw continued growth in our Commercial Aviation Aftermarket, Security and Fire Process Solutions, and Transportation Systems, which I'll talk more about on the business slides.

The continued declines in our oil and gas businesses in UOP and difficult comps in S&PS were largely as we expected.

In our high-growth regions, India grew nearly 30%, while in China, Aero and ACS continued the momentum from the first quarter, partially offset by moderating declines in PMT.

All of our recent acquisitions are performing at or above the deal financial models, and the sales from our seven recent acquisitions collectively grew in the high single-digit basis on a core organic basis this quarter.

Segment margin was up 10 basis points versus the prior year, at the high end of our guidance range; or up 50 basis points, excluding the dilutive impact of acquisitions.

As Dave mentioned, on an operational basis -- so that's further excluding the impacts of foreign exchange, the Aerospace OEM incentives, and raw material pass-through pricing in resins and chemicals -- segment margin improved 110 basis points.

We expect the overall margin expansion will continue to improve in the second half.

Earnings per share of $1.66 were up 10%, coming in at the high end of our guidance range.

Also, we funded $97 million of restructuring projects -- that's $53 million net of reversals -- largely offsetting the benefit from higher pension income in the quarter, as expected.

On share count, we repurchased another 500 million of shares at attractive prices.

On a full-year basis, we expect the fully-diluted weighted average share count to be approximately 774 million shares.

We have been and will continue to deploy capital to appropriate opportunities that will create the greatest value for our shareholders.

Free cash flow in the quarter: $1.3 billion improved sequentially and was up 8%, as compared to the second quarter of 2015, representing approximately 100% free cash flow conversion.

The increase year over year was driven primarily by improving net income.

Even with the increase in free cash flow, we were able to fund at 16% more in capital expenditures, or approximately $280 million in the quarter.

These are principally the high-ROI projects that we've discussed in the past.

As you can see, we continue to generate strong results in a relatively slow-growth environment.

Slide 4 provides a quick recap of our year-to-date growth in the portfolio.

Roughly 70% of the Honeywell portfolio is growing at a 5% core organic rate, led by Fluorine Products, Security and Fire, Process Solutions, and Transportation Systems, as well as the five other businesses shown here.

We have good visibility to continued outperformance based on our orders and backlog, stable end markets, and new wins.

And this outperformance includes overcoming the significant Aero OEM incentives we face in our Commercial Aviation Business.

So a good sign as we head into the second half of 2016.

For the other 30% of the portfolio, core organic sales growth year to date has declined 13%, due to the known headwinds that we discussed previously.

We've highlighted the market headwinds in our oil and gas businesses and UOP, which bottoms out in 2016; also, the tough comps from the completion of the US Postal Service win in S&PS; and the softness in our Services and International Business within Defense and Space, as well as the market pricing headwinds in Resins and Chemicals.

These headwinds are largely expected to subside in the second half of 2016 and into 2017.

We think the slide illustrates the diversity of opportunity within the Honeywell portfolio.

There is not one business that will make or break us.

We continue to be confident about the portfolio and the positions we have as we look to the second half of 2016 and to 2017.

Slide 5 provides more detail on our earnings per share for the quarter.

Our operating initiatives, led by the deployment of HOS, continue to drive segment profit growth.

On an operational basis, segment profit accounted for $0.16 of EPS growth in the quarter.

We generated 110 basis points of operational improvement in segment margin, which compares well with the100-plus basis point improvement we saw for the full year of 2015.

Each of the segments are contributing.

We have differentiated technologies with the software focus, and Honeywell User Experience is driving a development of new products at higher margins.

Our factories and sourcing organizations continue to mature.

Our functional transformation is improving the quality of our back office while reducing its costs, and we continue to manage our indirect spend stringently, in addition to previously funded restructuring, as well as new restructuring actions, have enabled us to continue improving our overall cost position.

The other impacts you see on the slide combine for a $0.01 decline in earnings for the quarter.

First, the M&A-related charges stemming from the 8 deals in the last 12 months resulted in $0.05 in year-over-year dilution, primarily due to acquisition accounting and pay-as-you-go cost, with Elster having the largest impact.

The incremental amortization from the deals will be a margin headwind for the rest of the year, as we anticipated, but the net results from all acquisitions should improve in the second half as we lapse some of the large one-time costs.

Each of our acquisitions are performing well, and are at or above our deal models.

And as I mentioned, the organic growth embedded in these portfolios that we acquired, which is not included in our overall organic growth numbers, has been outstanding.

Second, foreign currency represented a $0.04 headwind in the quarter and should be roughly $0.15 for the full year.

You'll recall that our hedging approach resulted in a euro rate of 1.24 for 2015, versus 1.10 for 2016.

Third, Aerospace OEM incentives reflect our continued investment in developing and growing our install base on the right platforms in the commercial aviation industry.

We now anticipate the full-year 2016 year-over-year impact from OEM incentives to be more than $200 million, and the Q2 impact was approximately $0.03.

Lastly, below the line items, in share count we're net positive year over year by $0.07 and $0.04, respectively, as we previewed.

On share count, our repurchases through the end of the second quarter were an average price of $106 per share.

So overall, strong earnings results while overcoming significant headwinds in what continues to be an uncertain macro environment.

Let's move to slide 6. As Dave said, we announced the acquisition of Intelligrated earlier this month, building on the $6 billion-plus of acquisitions we've completed since the beginning of 2015.

Intelligrated designs, manufactures, integrates, and installs complete warehouse automation solutions -- software and services that result in smarter distribution and fulfillment operations.

Its supply chain and warehouse solutions drive improved productivity and lower costs for retailers, manufacturers, and logistic providers around the world.

The company's offerings include conveyor, sortation, palletizers, and robotics, as well as automated storage and retrieval systems, all managed by advanced machine controls and software.

Intelligrated's software offers warehouse execution systems, a scalable suite of software that manages the entire fulfillment process, including equipment, labor, and business intelligence, integrated with voice- and light-directed picking and putting technologies.

Intelligrated's mission-critical warehouse execution systems and software are fantastic complements to the scanning, mobile computer, and voice automation technologies in S&PS.

They have a large and growing install base, which includes 30 of the top 50 US retailers and 50 of the top 100 Internet retailers.

They also maintain a strong leadership position in the approximately $20 billion warehouse automation segment.

About 90% of the business today is in the US, so there are significant opportunities to expand globally through Honeywell's footprint and customer diversification.

Intelligrated is at the intersection of several key global mega-trends, namely e-commerce, software, and automation, with distinguished sales growth in a market that is forecast to grow 8% to 10% a year.

S&PS was built initially through acquisitions, which we've continually expanded through strong organic growth and operational improvements -- a good testament to our rigorous and proven M&A approach and the benefits of being patient with our capital deployment.

We expect this transaction to close by the end of the third quarter, and we're excited about the opportunities this acquisition has to offer.

Let's turn to page 7. We wanted to spend a moment addressing Honeywell's proactive positioning ahead of Britain's recently-announced exit from the European Union.

You're all familiar with the developments and uncertainties, and we've received a lot of questions about the impact on Honeywell.

The process of actually exiting the EU will take some time, and thus may cause greater uncertainty in the short term, in addition to potentially slower UK and EU economic growth longer-term.

We will continue to monitor our European short cycle businesses for any signs of change, but as a reference point, our core organic sales in the EU region have held up nicely year to date.

We will continue to be cautious in sales planning and stay conservative in terms of our cost structure and investments in the region.

In addition to the ongoing productivity initiatives in our supply chain and functions, we're also prepared to leverage the flexibility we have to quickly adjust cost levels as the need arises.

As it relates to currency, we've continued our foreign currency hedging approach.

We've hedged approximately 75% of our 2017 euro P&L exposure at $1.15, and roughly 50% of our 2017 British P&L exposure at $1.44.

So while there may continue to be volatility on the sales line, our euro- and pound-based earnings are protected, similar to the approach we took for 2016.

We will continue to actively monitor the situation as we head into 2017.

Let's move to slide 8 and discuss the Aerospace results.

Sales declined 1%, or 2% on a core organic basis, below our expectations, primarily driven by weaker-than-expected sales in Defense and Space, which I'll explain further in a moment.

The Commercial Aviation OE sales decreased by 8% on a core organic basis, as higher volumes with OEMs and Air Transport and Regional were more than offset by a seven point headwind from higher OEM incentives and lower engine shipments in Business and General Aviation.

The BGA OE business, in particular, faced a difficult prior year comparison, which, as a reminder, grew north of 20% in the second quarter of 2015.

And as we highlighted last month, the demand environment in business jets overall is slower.

Commercial Aviation aftermarket sales continued to be robust, growing 6% on a core organic basis.

On the spares side, we saw an increase in airline and BGA spares, driven by strong mechanical demand and higher GX aviation sales, including Satcom and software upgrades.

Repair or overhaul activities increased in line with flight hours, which remained strong in the second quarter as well.

Defense and Space sales declined 10% on a core organic basis, driven primarily by difficult prior-year comparisons in the international business, as larger projects were completed, as well as lower sales to key channel partners.

Our US Services and Space Businesses declined year over year, due to unexpected program delays and completions of other programs.

But we continue to perform well in our US aftermarket business, with increased spares and retrofit sales.

In addition, our commercial helicopter business continues to be impacted by declines in the oil and gas markets.

Reported sales reflect the impact of Com Dev, of the satellite communications acquisition, which has performed well this year.

Transportation system sales increased 3% on a core organic basis, due to new platform launches and continued volume growth in both gas and diesel light vehicle applications.

We continue to grow in our light vehicle diesel business in Europe, which was up single digit in the quarter.

The growth in light vehicle gas was also most prominent in Europe and China.

Aerospace segment margin expanded 60 basis points, or 80 basis points excluding the dilutive impact of acquisitions.

This was driven by productivity, net of inflation, and commercial excellence, partially offset by continued investments for growth, including higher OEM incentives, and the unfavorable impact of foreign currency.

Let's turn to the ACS results on slide 9. ACS sales increased 9%, reflecting the favorable impact from acquisitions, primarily Elster.

On a core organic basis, sales were down minus 1% in the second quarter, in line with our guidance.

The segment margin expansion improved to 50 basis points in the quarter, excluding the impact of M&A, a big improvement from the 10 basis points expansion in the first quarter.

And we expect ongoing acceleration in the second half of the year.

Sales in Energy, Safety and Security for the Products businesses were down 2% on a core organic basis in the second quarter.

The momentum continued in Security and Fire globally, with strong growth rates in both residential and commercial markets, coupled with the benefit from new product introductions and further penetration in high-growth regions.

Our China business overall in ESS drew high single-digit in the quarter, and we saw double-digit growth in India.

We've continued to outperform in our high-growth regions, driven by our connected ACS China strategy and the benefits from our ongoing investments for growth.

These improvements were offset by lower volume in S&PS, primarily from the 2015 completion of the US Postal Service contract.

We expect S&PS to return to growth in the fourth quarter.

Building Solutions and Distribution sales were up 3% on a core organic basis in the quarter.

We experienced continued strength on the distribution side, with strong growth in North America and EMEA across our Video Access and Intrusion product line.

In Building Solutions, we saw modest growth, reflecting strength and services, partially offset by softness in the Project Installation business.

Orders growth in the Services and Energy Retrofit businesses was more than offset by declines in the Project Businesses, but we remain encouraged by the solid improvements we've seen in our energy portfolio in HBS.

Orders have doubled in that portfolio through the first half of 2016.

This is been driven by sales excellence and a differentiated offering that is leading to multiple awards.

The Building Solutions backlog and Service Bank increased low single digit in the quarter, on an organic basis.

Segment margins: ACS continues to benefit from productivity initiatives.

The favorable impacts from restructuring and commercial excellence while maintaining investments for growth in our connected product offerings and in high-growth regions.

Mix was slightly better than the last quarter, and we expect this to continue in the second half.

On page 10 -- I'm now on page 10 -- this morning we highlighted that ACS would be split into two newly created business groups.

I want to share a little bit more information on that with you.

The first, Home and Building Technologies, will be roughly a $9 billion enterprise, which comprises our legacy Environmental and Energy Solutions, including Elster; Security and Fire; and Building Solution and Distribution Businesses.

E&ES' Industrial, Combustion, and Thermal business will be reclassified to PMT.

The HBT business will be led by Terrence Hahn, who previously ran our Transportation Systems Unit for the past three years, and has been with Honeywell for over nine years.

The second segment, Safety and Productivity Solutions, will be roughly a $5 billion business, comprising the former Sensing and Productivity Solutions and Industrial Safety businesses, including the recent acquisition of Intelligrated.

The new SPS will be led by John Waldron, who is currently President of our Sensing and Productivity Solutions business unit and previously was President of Scanning and Mobility.

Today's announcement represents yet another step in the evolution of the Honeywell portfolio.

We're constantly looking at ways to improve our organic growth profile, and we think a smaller, more focused segment structure will allow us to accelerate breakthrough growth and new product introduction by being closer to our customers.

Also, fewer layers and structures will lead to faster decision-making and a more efficient organization.

This announcement builds on the momentum in ACS and across the entire portfolio following the acquisitions of Elster, Xtralis, Intelligrated, and five other acquisitions since July of last year.

The change further positions these businesses to invest in growth and execute the strategic plans best suited to each portfolio, and we have the right leaders in place to drive these actions.

We expect to begin reporting under the new segment structure effective with our third-quarter 2016 results and expect to provide comparative financial information at that time.

So more to come on this in the coming months.

Let's move to slide 11 to discuss the PMT results.

PMT sales declined 4% on a core organic basis, in line with our guidance in what continues to be a challenging market environment for oil and gas.

Our orders and backlog have remained resilient, and the leadership team has been unrelenting in its focus to overcome these headwinds.

So starting with UOP, sales were down as expected, driven by lower gas processing, licensing, and equipment sales.

The rate of sales decline improved significantly from the first quarter.

In gas processing, we secured five new domestic wins in the first half; however that market remains a bit sluggish.

On the catalyst side, overall demand remains strong, and we expect an acceleration of growth in the second half of the year.

UOP orders were modestly higher in the quarter, including a strong double-digit increase in the catalyst business, and the UOP backlog was close to 10% higher than the second quarter of 2015.

Process solution continues to outperform its peers in a challenging environment.

We have a unique combination of automation technology, field instrumentation products, and aftermarket offerings, including software solutions.

Core organic sales increased 8% in the quarter, driven by double-digit growth in our Projects business and higher Software and Service sales.

Conversion of the global mega-project backlog, where we served as the main contractor providing control and safety solutions for large installations, remained strong in the second quarter, and we expect this trend to continue throughout the rest of the year.

Through the recent mega-project wins, HPS continues to build out its massive install base, which will benefit our Services and Aftermarket business in future periods.

Reported sales were higher in the quarter due to the impact from the Elster acquisition.

Advanced Materials sales were down 2% on a core organic basis, driven by challenging pricing conditions in Resins and Chemicals, partially offset by continued strong demand, and more than 20% growth for Solstice Low Global Warming products.

We presently have roughly $3.5 billion of signed agreements for Solstice and are building out production capacity to meet the increased global customer demand.

As expected, PMT segment margins were down 20 basis points to 21.1%, primarily due to the impact of lower volumes overall and continued growth investments, partially offset by benefits from previous restructuring actions and commercial excellence.

So overall, market conditions continue to be tough, but our businesses and PMT are doing well, and we expect an even better second half.

I'm now on slide 12, with a preview of the third quarter.

You'll note that the guidance reflects the ACS structure prior to this morning's announcement.

We'll be updating the reporting for the new structure starting in the third quarter, as I mentioned.

So for total Honeywell, we're planning for sales of $10 billion to $10.2 billion -- that's up 4% to 6% reported -- or flat- to- up 1% on a core organic basis.

The sales guidance for the quarter does not reflect the impact of the Intelligrated acquisition, as we expect the transaction to close near quarter end.

Segment margins are expected to be down 10 basis points to up 10 basis points, excluding M&A; or down 40 basis points to 60 basis points on a reported basis.

Finally, EPS is expected to be in range of $1.67 to $1.72, up 6% to 10%, normalized for income tax at 26.5% in both years.

Starting with Aerospace, sales are expected to be down 1% to up 1% on a core organic basis.

In Commercial Aviation OE, we're expecting sales to be down double digit, driven by the impact of OEM incentives, and continued declines in business and general aviation, partially offset by a ramp-up on key platforms in air transport and regional.

Excluding the OEM incentives, Commercial Aviation OE is expected to be down mid single digit.

Commercial Aviation aftermarket sales are expected to grow mid single digit again, with strength in both airline and business jet spare sales, including higher Satcom and other software upgrades.

Defense and Space sales are expected to improve sequentially, but be modestly down on a year-over-year basis, as higher product sales to the US government are more than offset by challenging prior-year comparisons in the international business, the impact of large project wind-downs, and continued softness in US Services.

In Transportation Systems, sales are expected to be up low single digit, with continued strong growth in light vehicle gas applications, partially offset by slower growth in diesel, based on the timing of new launches.

As for Aerospace margin rates, we expect to be down 30 to 50 basis points excluding M&A, driven by higher OEM incentives, the unfavorable impact of foreign currency, and the unfavorable impact on margin of higher OE shipments to air transport and regional customers.

This will be partially offset by productivity and commercial excellence.

Moving to ACS, sales are expected to be flat to up 1% on a core organic basis, or up 11% to 12% on a reported basis, driven by acquisitions.

We expect ESS sales growth to be similar to the second quarter on a core organic basis, led by continued momentum in our Security and Fire businesses and in our high-growth regions, but more than offset by the declines we've highlighted in S&PS.

In BSD, we're expecting low to mid single-digit core organic growth, driven primarily by continued strength in Americas distribution business in both residential and commercial end markets.

Excluding the dilutive impact from M&A, ACS margin rate is expected to improve 90 to 110 basis points, driven by commercial excellence, continued productivity, and the benefits of restructuring.

ACS' reported segment margin rate in the third quarter is expected to be up 10 to 30 basis points.

In PMT, sales are expected to be flat to up 2% on a core organic basis, or up 2% to 4% reported.

The UOP sales declines are expected to moderate in the third-quarter, but still be down double digits on a year-over-year basis, driven primarily by continued declines in licensing equipment and gas processing, partially offset by strength in the Catalyst business.

Based our growing UOP backlog, we expect the Catalyst sales growth rates to improve in the second half of the year, particularly in the fourth quarter.

HPS sales are expected to be up mid single digits on a core organic basis, driven by continued conversion of global mega-projects as I mentioned earlier, as well as higher Software and Service sales.

Advanced Materials sales are expected to be up low to mid single digits on a core organic basis driven by strength in Flooring products, Solstice sales, and improving specialty products volumes, benefiting from new product introductions.

PMT reported segment margin rate is expected to be down 100 to 120 basis points and down 70 to 90 basis points, excluding the dilutive impact of M&A, driven by lower volumes, the unfavorable impact of lower UOP licensing sales, market pricing headwinds in Resins and Chemicals, and continued investments for growth, partially offset by productivity net of inflation.

Slide 13 provides our full-year [2016] expectations by business, compared to the initial guidance we provided back in December.

While there are a number of puts and takes within the overall portfolio, we're tracking to what our initial full-year core organic sales guidance for Honeywell.

In Aerospace, Commercial OE continues to see improvement in ATR with a rampup of key platforms like A350 and A320, as well as Boeing 737 and 787.

However, as we saw this quarter, the demand environment in business jets is slower than we anticipated, and we expect this trend to continue in the second half.

Meanwhile, our commercial aftermarket business is coming better than anticipated, as we build on the 6% core organic growth achieved year to date, driven by stronger flight hours and continued spares growth and repair and overhaul activities.

Defense and Space will remain challenged throughout the year, as the US Services and Space businesses anticipate further program delays in the second half, and as oil and gas market declines continue to adversely impact the commercial helicopter market.

In total, ACS is performing largely as we expected.

The Products businesses are coming in slightly lower, largely due to lower volumes in our Sensing and Productivity Solutions businesses due to some channel headwinds, while Building Solutions and Distribution is coming in much better, driven by double-digit, core organic growth performance in this first quarter and continued strength in Americas distribution as we move into the second half.

In PMT, our Process Solutions Business continues to outperform, driven by the strong conversion of the global mega-project backlog.

Our Software Solutions are generating strong demand, and we anticipate this to continue through the remainder of the year.

In UOP, activity continues to be soft, given the slowdowns in orders and our gas processing, licensing, and equipment businesses; but as I indicated, we expect a very strong second-half for UOP's Catalyst business.

So on balance, no change to our core organic sales outlook in total, but we continue to monitor the businesses closely.

I'm moving to slide 14.

As Dave mentioned, we're raising the low end of our full-year EPS guidance by $0.05 with a new range of $6.60 to $6.70.

That's up 8% to 10% from 2015.

The new range reflects the outperformance in the first half of the year.

There are some puts and takes among the segments from the guidance we provided in April, but overall very strong year expected for Honeywell in 2016 once again.

In total, we now expect core organic sales growth of approximately 1%, and total sales to be between $40 billion and $40.6 billion, so up 4% to 5% reported.

The revised guidance reflects the incremental headwinds we've seen in Aerospace, particularly in our BGA and Defense and Space businesses.

This guidance does not reflect the Intelligrated acquisition or the planned spinoff of Resins and Chemicals.

Segment margin expansion is still expected to be up 10 to 50 basis points, or 80 to 110 basis points, excluding including the dilutive impact of M&A, driven by commercial excellence, restructuring benefits, and continued proactive cost management.

We expect the full-year income tax rate to be approximately 26.5%, and our share count to be approximately 774 million shares, or approximately 2% lower than the 2015 weighted average share count of 789 million.

Finally, we continue to expect free cash flow in the range of $4.6 billion to $4.8 billion, up 5% to 10% from 2015, with CapEx investments roughly flat to 2015 at approximately $1.1 billion.

This will drive free cash flow conversion of approximately 90% for the full year.

Let me move to slide 15 for a quick summary before turning it back to Mark for Q&A.

We had a solid first half, adding to our strong performance track record and generating momentum for the rest of the year.

Once again, we've demonstrated that we can deliver at the high end of our aggressive earnings commitments, even with limited help from the macro environment: a big reminder of the value of our diversified and balanced portfolio and the strength of the Honeywell Operating Systems.

And we again put to work a sizable amount of shareowner capital in the quarter, including $1.5 billion in additional acquisitions, and $0.5 billion in share repurchases, which will pave the way for future earnings and cash growth.

The uncertainty in the macro environment is not new for us.

We have and will continue to plan conservatively.

We continue to focus on executing sustainable productivity actions, including delivering on the strong restructuring pipeline, where we have roughly $300 million of actions to be carried out.

We're making smart bets on innovation and breakthrough initiatives that continue our investments to further penetrate high-growth regions and expand capacity.

We're in the process of planning for 2017, and our management team is focused on execution.

We feel confident that our balanced portfolio mix aligned to favorable macro trends and focused cost discipline will continue to outperform.

Are you going to make it, Tom?

(laughter)

I'm on my last leg here.

Without further ado, let's move to Q&A.

If you could please now open the line for questioning.

(Operator Instructions)

Scott Davis, Barclays.

I hope you don't mind, we just got the EMTs in here for Tom.

I was going to say maybe a shot of whiskey might help out a little bit, or if Cote would give you a day off once in a while, you might be able to stay healthy.

Anyway.

Dave, I love it when management teams use words like strong 2Q with a negative 2% core growth rates, so I am going to call you out a little bit.

The only time we've seen negative core growth at Honeywell, Dave, is when we've actually been in a recession.

So what's different, what's going on out there that, that gives you the confidence that we're not walking into an even tougher back half of the year, because the first half of this year's been pretty tough, and some of your peers reported pretty tough numbers too, so it's not just you guys.

But negative core growth is something we don't normally see in an expansion time period, right, so I guess I'm asking a general question on what you think about the world.

I don't think we've ever referred to this environment as being expansionary, and the way I would describe the overall performance and why we say strong, if you take a look at the cash we generated, if you take a look at the operational margin rate improvement of 110 basis points, which is consistent with what we were doing last year -- it's just all the stuff to the right of the chart -- was moving in the right direction.

This year, it's not.

If you take a look at the EPS growth, we've been able to deliver on that.

And the chart Tom showed that said about $0.15 or $0.16 of the total $0.14 increase or $0.15 increase came from operations.

That's pretty strong operational performance.

Now you could say, okay, it is 2% negative core organic, that's true.

It's also consistent with what we had forecasted, was our guidance range, so it's not like it came as a surprise.

And the headwinds are no different than what we've talked about in the past.

That's why Tom tried to show that 70% of the portfolio is actually growing 5%.

We've just got these unusual headwinds, most of which, well, all of which dissipate this year.

If you take a look at UOP, you know what's happening on the oil and gas side.

And we've always said our diversity of opportunity will offset that, and we do believe that in 2016, that ends.

This is the bottom for that sector.

If we take a look at Sensing and Productivity Solutions business, and think of this as a lot driven by Scanning and Mobility, where we had this huge US Postal Service order last year that were, in terms of a comp, it's just going to be negative.

It just is.

It would've been impossible to make that up.

Our Resins and Chemicals pricing, which you're familiar with, really has no effect on the bottom line; does affect growth, when we look at the overall number.

And then some in Defense and Space, where there's just been delays in orders, and the commercial helo market, largely driven by oil and gas, has been difficult.

Those headwinds stop.

It's just a matter of dealing with them as they are today, and 70% of the portfolio is growing 5%.

So I think it's pretty darn good overall, and yes, I understand the point about minus 2, but we also forecasted it.

It's not like it came as a surprise.

The other thing I'd add to that, Dave, is the Aerospace incentives, which come off the top line as well.

Those are significant.

The Aerospace incentives are a huge increase year-to-year, and they show up as a reduction of the sales and income.

And those are about flat year-to-year 2016, 2017 and they decline.

So again, it's a headwind that ends, and isn't a growth headwind for next year by much.

In fact, it helps us.

If we're building install base, and it drives the future service business for that business.

So I look at all that - - I feel pretty good about this, especially in what's not an easy environment.

Yes.

I get it.

If you go back to your guidance two quarters ago, negative 2 would've been off the table, but yes, I think you performed about as good as you can do with that kind of growth environment.

I'm not busting your chops on that.

Just lastly, UOP Catalyst coming back, returning in the back half of the year, and my understanding is it's always been a very high-margin business.

Is this-- is your guidance of little bit conservative on the back half PMT?

Based on that.

I mean we'll never say it was conservative; we'll say that we think it's what were going to achieve but - -

As you can --

You've got a tailwind there is pretty material, I would imagine.

You appreciate the lumpiness we've had.

That comes with being in that business.

But we have very good visibility to the second half ramp, Scott.

In fact, when you look at the third quarter, more than 3/4 of the Catalyst sales that we foresee are in backlog and ready to go, and in the fourth quarter we're near the same position that we been in the past, in terms of the percentage of backlog that we have.

So there's a little bit more wood to chop for the fourth quarter, but we have good line of sight and good visibility, and yes there is a step- up but, the team is confident in being able to execute on it.

Got it.

Okay.

Good luck, guys.

Thank you.

Andrew Obin, Bank of America.

Just a question on Aerospace.

There's a headline that American Airlines is deferring their 22 A350s.

And if you looked at the press, at the local press in Arizona, it was writing about big layoffs and furloughs in your Aerospace business back in May.

I understand that a lot of the stuff was temporary, but can you just talk more about the Aerospace cycle, why such big, sort of unusual furloughs in the Aerospace business.

Are you worried about the direction of the commercial Aerospace cycle?

Just connect the dots for us.

Thank you.

On the volume side, ATR actually feels fine.

The biz jet industry is struggling a little bit, and we expect that will continue.

That will be offset by all the new platforms we've been on.

When you look at the layoffs and furloughs that you're referencing, a lot of that is being driven by just better and better efficiency within our Aerospace business.

Tim has been doing a remarkable job of just making all our processes work better, whether it's how we engineer, how we manufacture, how we run our staff functions.

It's really just being driven by doing a better job overall, which is a good sign.

That certainly puts us in a much better position to grow.

And just a follow-up on Defense and Space.

International orders was supposed to be a big area of growth, you talk about deferrals.

How much visibility do you have into 2017 and 2018 on these delays?

Thank you.

Yes, I mean, the backlogs are holding up.

As far as Defense and Space goes, the challenges for us were more in, I'd say, the commercial helicopter market, and a lot of the other defense companies that have commercial helicopter businesses separate those out.

We've got ours right in the Defense segment.

With the number of used aircraft available, as well as the declines in the drilling activity, you've seen a reduction in spare parts and services, and that is impacting our portfolio there.

Your guess is as good as ours in terms of where oil prices are going and when the volumes will turn, but we feel pretty confident that we're at or close to bottom in UOP, and we expect that to kind of prevail through the rest of our portfolio as well.

So we expect to see this improve.

The technology that we have in commercial helos is outstanding, top-notch, and we serve all the big helicopter manufacturers and have a very strong aftermarket business as well.

So it should turn for us, Andy.

Thank you, and I'll echo Scott's remarks on good performance in tough markets.

Thank you.

Thank you.

We appreciate it, Andrew.

Steve Tusa, J.P. Morgan.

Can you just talk about the moving parts with a little more detail on ACS in the second half?

Maybe just give us a little bit of color?

It looks like, obviously, pretty back-end loaded.

You know type of trajectory, and I guess there's some acquisition snap back in there.

Maybe just to give us some color there.

Yes, I mean when you look at the second half for - - if you look at the third quarter for ACS, we're calling flat to minus, or sorry, at flat to up 1% fourth-quarter, in that same region, down 1% to flat.

So it's a little bit more conservative, actually, than what we've seen quarter- to- date.

We had a very strong first quarter, as you remember Steve, up by think 5% or 6%.

A little more modest in the second quarter, so I think we've actually built the second half fairly conservatively in ACS.

We'll get some improvement in S&PS, particularly in the fourth quarter, to help us get that growth rate.

What are the margins in the acquisitions going to do specifically?

I know you guys were they were very low single digits, in the big bucket of deal, they were very low single digits in kind of the first half here.

What you expect out of those in the second half?

I mean you saw the dilution in the margin rate overall for ACS, it was on order of 50 basis points to 70 basis points.

That will moderate as we get into the third quarter and fourth quarter.

So overall, it'll be a margin improvement for us, and by the time we get to the fourth-quarter, we'll have very strong, 100 basis points- type conversion in ACS, or 100 basis points improvement in ACS on an organic basis.

Then one last question, just on the-- Dave, he talked about at the Investor the 4% to 5% or whatever it was revenue guidance for next year.

How did that stand today?

How do you feel about that today after reducing the expectation for the second half?

Well, the conditions that generate a 4% to 5% increase are still there.

We'll see what the numbers actually look like as we get on further through the year, but all the basics are still there.

When you take a look at Aerospace, it's still a case where you don't have this big increase in incentives that hurt you on the growth side year- to- year.

The biz jet applications even in a tougher market still help you.

UOP does bottom out this year.

Some of the CapEx expansions that we were talking about in PMT are still there for us next year-- are still there for us next year, when you look at fluorine's in particular, and what we've been able to achieve with some of the acquisitions.

When you look at ACS, we still expect that to be a good performer for us again next year, although, of course, split into two pieces.

So the conditions are all still there.

What the macro environment looks like as we get into that year, I guess we'll have to assess as it moves on, but all the conditions that we talked about are still present.

Okay.

Thanks a lot.

Nigel Coe, Morgan Stanley.

I hope, Tom, you've recovered from your seizure.

The EMT's got him on the machine; he's doing fine now.

Oh, that's what I can hear the background, okay, good.

Obviously, the trends in UOP backlog have been really encouraging.

I think you mentioned 10% growth in the backlog year- over- year.

You're also calling for an inflection second-half on Catalysts.

Just wondering how much of that backlog right now speaks to 2017 and does it allow you to make any judgments about 2017.

I hear the comments about UOP troughing this year, but I'm just wondering if the backlogs speaks to 2017 in any informed way.

To me the visibility is stronger, obviously, Nigel, for the second half of the year.

But in terms of our planning for 2017, we certainly are expecting significant improvement overall in UOP on the equipment site as well as in Catalyst.

Remember, we were down 35% in the first quarter, and something like 17% to 18% this quarter.

That's going to start to improve in the second half with that building of the backlog.

You know, the team is very confident, in terms of both the second half and their ability to generate orders to support 2017.

Full visibility of the full-year obviously isn't there, but in terms of what the leaders in the business see, and we just went through the five-year planning exercise, which had a heavy focus on the earlier years.

There is optimism in terms of what the market conditions are going to hold for us in 2017.

Just building on that, just the absence of a decline will be a significant benefit.

All right.

Yes, I absolutely agree with that.

The decline has been pretty significant.

I mean that chart showing the divergence between the portfolio is really helpful.

A quick one on the ACS re-segmentation.

With Alex leaving, and the re-segmentation, what does that mean for the Connected ACS initiative?

Is it the same initiative, just in two pieces now?

And do you think that both of those segments can be 20%- plus margin segments?

I didn't quite get the last part of that, Nigel.

You talked about ACS being a 20%- type margin.

Do think both of those can be 20%?

Starting with the last one first.

We'll have to see how that plays out on the Homes and Building side, because now all Distribution and Building Solutions business are in there, and they tend to be lower margin.

So haven't gotten far enough on that one yet to be able to say that can be 20%.

But the overall putting the two together.

Yes.

That can still get to 20%.

So how that will shake out by business will take some time for us to sort out.

On the connected ACS, yes.

That potential is still there.

And will continue to be there.

It's just going to be into two pieces, so think of it as connected Homes and Buildings technologies, and connected Safety and Productivity solutions.

That's still going to exist.

There's just terrific opportunity for us in these two more focused enterprises, so think of it as one is more Commercial and Industrial, and the other is Homes and Buildings.

It just allows us to be a lot closer to our markets than we have in the past, with that same connected ACS approach.

Which I think is going to really speak well for us and allow us to do a lot better in those markets that we even have in the past.

Okay, that's great.

Thank you.

Steven Winoker, Bernstein.

Dave, that Intelligrated acquisition is great, but you know thinking about the $25 billion or so you talk about in M&A, should we expect more like that now, and how are you looking at the pipeline?

What are your thoughts on M&A playing out from here?

Well, the story doesn't really change from anything we said in the past, Steve, that we've got a lot of money to deploy.

And that give us a lot of flexibility, and you've seen us do it in different ways: M&A, repurchases, and we thought it made sense.

And M&A pipeline still looks really good.

We have at least 100 companies we're looking at any one point in time, from small ones to big ones.

Tough to predict when they're going to become available, or when we can do something.

And it's not like it comes in a steady dose.

Sometimes you get three or four right away, sometimes you go a year and a half, two years with not much of anything.

I can just promise you it's top of mind for all of us, and we've got a pretty strong, good effort working on it to constantly look for stuff that will make sense and to generate returns for our, good returns for our shareowners.

We're still - - money's not burning a hole in our pocket; it never will.

It's important for us to be smart about how we deploy that money.

In the meantime, we're going to focus on making sure we generate a lot of it.

And this quarter was a nice indication of that.

Okay, great.

And how do you see the construction cycle playing out and risk to that, in I guess I'll call it HBT now.

Construction cycle still looks fine, whether it's commercial or residential, it still looks okay.

It's not like it's a boom.

But by the same token, it still seems to be coming back pretty steady.

Tom, I don't - -

Yes, I guess I would say that in ACS, that was the strongest vertical force in the quarter, it has been for the last couple years.

Mid- single- digit growth at least in the businesses that serve the commercial segments.

That's baked into your 2017 assumption that continues right?

That 4% to 5% you've talked about?

For the most part.

Pretty much.

We've pretty much assumed that continues, just the way it is, so slow, steady growth, not a boom, but not a decline, either.

If I could just one more.

Dave, with the announcement for Darius, and you're not exactly hands-off.

What you plan to focus on as executive chairman versus CEO, once we get past that March?

How should we think about the role that is effectively a new role, and still a transition, I'm sure, over that following year for you?

Well, I've built a special closet to keep Darius in the entire time.

This is part - - I think if you take a look at our history, when it comes to transitions and how we do things, I think we tend to do things pretty well and think them through.

And, yes, I am very hands-on.

Darius is very hands-on.

He wouldn't have gotten the job unless he was.

He's an independent thinker.

He's going to be important for the evolution of the Company.

And yes, it's going to be important for me to recognize the difference between my job and Darius'.

We get along really well, or at least at this point, Darius says we get along really well.

So it feels that way.

But at the end of the day, I don't foresee a real issue doing this.

We can manage it, and we want a great transition, because I still own a lot of shares.

Darius owns a lot of shares.

We want this thing to work well.

I don't foresee it being a real issue.

No, I didn't think there was an issue, it's more just about what do you see doing in the role than anything?

It'll be more advisory than anything else, because there has to be one guy running the place.

Otherwise it's just chaos.

And until March 31, I run it.

Starting in April, Darius runs it.

And that's going to be-- we've made that very clear to everybody around here.

Okay.

Perfect.

Thanks, a lot guys.

John Inch, Deutsche Bank.

Tom, in the deferred fourth quarter, as part of your third-quarter walk, I know the first quarter you had some extra selling days, and I realize you're not like a daily sales- type of company, but it does come out of the fourth quarter, does that have any sort of discernible bearing, I guess, on growth in the quarter or anything else?

I would say it's reflected in the full-year guidance that we've given.

We fully contemplated those factors, John.

Okay.

So there's nothing discernible.

I didn't think there would be, but I just wanted to double- check.

David, I want to pick up on Steve Winoker's question.

You know, you had a incredible run, and I guess many of us sort of thought that you would be sticking around a little bit longer, and so now you're sort of doing a big ACS restructuring, which I understand the logic; it all seems pretty positive.

What is sort of the implications of perhaps you leaving or stepping aside a little bit sooner?

Is it that there's a lot of, say, growth initiatives the Company has been looking to do, and that you sort of decided that maybe Darius should be assuming this on his own?

Or perhaps there's M&A implications, or I'm just curious it's almost a personal question, if there's something you could share with us.

You mean am I running out of gas so I need a younger guy to keep the level of the Company up?

(laughter)

We're all running out of gas, but I didn't mean it that way.

It's more the implication of strategic initiatives for the Corporation and next steps and all that sort of stuff.

You shouldn't be reading any big implications into any of this.

This is just a case where I am 64.

At some point investors start to look at it and say, hey, we like you, Dave, but like what's next year, and how we make sure this continues?

We've got a really good guy in Darius and he's ready now.

There's no reason to wait.

And better off, you know, like Belichick I guess would say, better leave a year too early than a year too late, and I think it's important to get the timing right.

We agree on the initiatives that we want for the Company.

We both agree on the need to outperform and how do we do that.

I think if you were to talk to Darius, he'd talk about the need for HOS Gold and the breakthrough initiatives, the need to develop our software capability even further.

What we're doing in high-growth regions ends up continuing to be important.

All that being said, all this stuff is going to evolve.

It's never a case-- I've never felt that way, where a strategy was permanently correct.

Rather, you needed to keep adjusting, you needed to keep evolving, whether you were a person, a company, a country, you've got to keep evolving.

And we've done a lot of evolving over15 years, and I think you can expect Darius to keep it evolving for the next 15.

I appreciate the comments, Dave, thanks very much.

Howard Rubel, Jefferies.

I have two questions.

Dave, you've done a nice job over time, and in ACS with doing a lot of product line extensions, or what I'll call business extensions.

How do you think about-- I mean I know with this separation of the two companies, how do you think about where you go from here with the opportunities?

I think both are going to be extremely good.

And you take a look at what's possible in the Homes and Buildings sector, especially with our installed base and the increasing need for software- capable products and services.

It's quite entrancing with what can happen there.

And having a more intense focus on it, I think is going to be very good for us.

On the commercial and industrial side with John Waldron, we're going to see the exact same thing, and the push that we've made with Intelligrated is going to help greatly there.

Warehouse space we feel is going to be tremendous for a long time to come, especially with development of the e-economy, and that's going to play very well for us, especially as you look at what we do with barcode scanning and how that fits.

I'm really quite entranced with what can happen there.

You bring a little bit of-- I mean, I guess you've said before, sort of the power of a big company, but the challenge of being an entrepreneurial one at the same time.

That's exactly the point of HOS Gold, and what we're trying to do.

You combine that with the breakthrough goals that Darius has been a big supporter of, and I think has improved significantly, just in the three months that he's been doing this.

Puts us in really good position.

There's a lot of good for us to come out of the two businesses.

To turn to Aerospace and growth for a moment.

You have a fairly substantial connectivity initiative, and also there's a fairly significant change in the avionics market with the demand for ADSB.

Could you first for a moment talk about the progress you've made with the connectivity initiative, and then again it looks like the pent-up demand for ADSB remains, and at some point, how are you going to convert that into satisfying it?

Yes, on the connectivity side, things are going very well there.

This really is a far superior product.

The thing that's been going on right now is while it exists, every airframer needs to get it certified, so that it can be put on the aircraft.

Demand is very good.

We just need to be able to get the certifications done with the airframers so that we can get it out there.

I'm pretty well convinced that when consumers actually start to feel the difference between existing services and what we're able to provide with JetWave, they're going to be quite impressed, and it is going to get to a point where consumers ask for it, and it's going to be a differentiating item for airlines.

For their consumers.

Interestingly, some of the surveys that have been done show that on a three-hour flight or less, passengers prefer strong Wi-Fi to access to a bathroom.

Quite significant when you look at it that way.

So we're really hot on what this connectivity initiative is going to be able to do for us.

And on ADSB, it's typical with any mandate, is that it seems to all be back-end loaded as customers wait, and we'll be prepared for it.

Thank you very much.

Joe Ritchie, Goldman Sachs.

I think I'll shoot with and go for the bathroom instead of the Wi-Fi but - -

Just don't sit next to somebody who chose Wi-Fi.

Exactly.

Maybe just a broader question, Dave, we've been spoiled for so long in the quarters you guys have just continued to beat on the segment EBIT line.

And recently, really, the last couple quarters you just in digesting a lot, whether it's UTX, the leadership transition, M& A.

How do you respond to maybe some of the concerns that are out there right now, that perhaps like management capacity has been strapped, the focus hasn't been as rigid as it had been historically?

Maybe some thoughts around that would be helpful.

Guess I think this is one where you have to look at the record, and for simplicity, just compare last year to this year.

Sales growth was tough last year, also.

It was a difficult environment last year.

And we kept breaking out the margin rate improvement chart to show here's the operational stuff.

And here's all the other stuff that just goes on top of it, and focus on the operational piece, because the rest of this stuff can disappear.

Well, this year, it's just gone the other way.

The operational improvement is still pretty darn good.

And consistent with last year.

And if you look over on the right-hand side, in this continued slow growth environment just like last year, it's just going the other way, is all.

But at the end of the day, the operational performance continues to be very good in a slow- growth environment.

That part is not changing, and we are the same Company that we were before, and what we're trying to do is just highlight these kind of swing items and say don't focus on these.

We're not asking for credit when it goes our way, and you shouldn't be dinging us when it goes the other way, because the fundamentals of the Company are still there, are still good and portends for a very good future for Honeywell shareowners.

Joe, I would add to that, and I would say that in addition to the operational improvement that's in the triple digits, I mean when you look at the items that brought us back to a recorded margin rate that was lower than that 110 basis points, there are either items that will turn for us, or that are of an investment nature.

So, for example, if you look at foreign exchange, we're going from a FX rate of $1.24 last year to $1.10 this quarter.

I talked about 2017 and some of the hedging we've done, so that will be an actual in our tails next year.

When I look at the OEM incentives that we're making.

This was the year that we've always flagged as having to deal with over $200 million of P&L impact from the increased incentives.

Those level off next year, and actually help us to build an installed base for service opportunities, and in the longer- term, those decrease.

So it'll be another tailwind for us.

Then third, you've got a lot of M&A going on.

We've done eight acquisitions in the last year.

There was a lot of focus on that, but when you're doing acquisitions, especially the size and the ones that we've done, you do get some headwinds in the earlier quarters, from the purchase accounting step- up, the integration team cost, and the like.

And those will all turn for us as well and really be a nice margin driver for us in the future.

We're really happy with the acquisitions, and as I said, we don't include the organic growth that we're experiencing in those acquisitions in the minus 2% organic growth rate that we talk about, but those acquisitions grew 8% to 9% on their own if you compared how they did under prior ownership to how they did with Honeywell.

So pretty strong performance.

So we're really actually excited about these various factors, because they're going to turn and have a positive influence for next year.

Couldn't agree more.

Sounds good.

Thanks, guys.

That concludes today's question-and-answer session.

At this time, I would like to turn the conference back to Mr. Dave Cote for any additional or closing remarks.

In a difficult environment, we continue to outperform for our investors.

That's not going to change.

The fundamentals for us remain as good as you saw in this quarter, with our performance and our confidence in again raising our guidance for the year, this time to 8% to 10% growth.

Rest assured, we're going to continue to deliver.

And we hope you all get to enjoy a great summer.

Thanks.

Thank you.

This does conclude today's teleconference.

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