Honeywell International, Inc. (HON)
March 06, 2013 10:00 am ET
David M. Cote - Chairman and Chief Executive Officer
Roger Fradin - Chief Executive Officer of Automation and Control Solutions and President of Automation & Control Solutions
Andreas C. Kramvis - Chief Executive Officer of Performance Materials & Technologies and President of Performance Materials & Technologies
Alexandre Ismail - Chief Executive Officer of Honeywell Transportation Systems and President of Honeywell Transportation Systems
Timothy O. Mahoney - Chief Executive Officer of Aerospace Segment and President of Aerospace Segment
S. Shane Tedjarati - Chief Executive Officer of Honeywell China and India
David James Anderson - Chief Financial Officer and Senior Vice President
Deane M. Dray - Citigroup Inc, Research Division
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Scott R. Davis - Barclays Capital, Research Division
John G. Inch - BofA Merrill Lynch, Research Division
Jeffrey T. Sprague - Vertical Research Partners, LLC
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division
Nigel Coe - Morgan Stanley, Research Division
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
Peter J. Arment - Sterne Agee & Leach Inc., Research Division
Howard A. Rubel - Jefferies & Company, Inc., Research Division
Jeffrey T. Sprague - Citigroup Inc, Research Division
Clifford Ransom - Ransom Research, Inc.
Ladies and gentlemen, please welcome, Honeywell's Vice President of Investor Relations, Elena Doom.
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So quickly, just some housekeeping items. You'll note today's agenda with Q&A scheduled after each of our business presidents. So lots of time for your questions. And of course, I need to remind you that today's presentations do contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Note that these elements can change the reasons that we cite in our 10-K and other SEC filings.
All right, on to the fun stuff. The theme for today, Innovation and Execution, Delivering 2014 and Beyond. You're going to hear us talk a lot about the Honeywell performance track record. And while that's important, what's more important is we're going to talk a lot about the opportunity that still lies ahead. Dave Cote will kick us of with an overview of Honeywell's evolution into a company that can outperform in any market environment. He'll take us through the Honeywell business model, applied with the One Honeywell performance culture across the entire company with a relentless focus on improving our internal processes and driving sustainable and profitable growth. Dave Anderson will bookend our day, adding a lot of color around our 2013 outlook and our continued investments for growth in the future. And looking ahead to 2014, as we are closer to achieving those targets that we set in February of 2010, the focus is at the Honeywell level. But with that in mind, Dave is going to update you on the progress and talk about the key growth drivers for the company over the next 5 years.
You'll also hear from each of our business presidents as they provide additional detail on the specific strategies for their growth, update you on their key end markets and discuss their long-term competitive differentiator. Shane Tedjarati is also here with us today, along with a number of our new High Growth Region presidents, and he's going to talk about the evolution of the HGR strategy. I would also like to point out, for those of you who didn't recognize our HGR or any of the other acronyms that we will use today, there's a full list of acronyms at the end of your binder, in the Appendix.
Now you're going to hear us talk a lot about growth. But the Honeywell clock doesn't end with 2014. There's no metric around it, but investing for growth, as Dave likes to say, seed planting for our future, is as critical an element for the 2014 targets as sales and segment margins.
So to conclude, we think we have a lot of runway ahead of us. We built in a tailwind for growth with our Great Positions in Good Industries. Both of those, you'll note, are aerospace references, but I have just one more for you today. For your giveaways attached to the USB drive, you'll see this tag that says, "Remove before flight." These tags were used to identify protective cover for aircraft instrumentation. We pulled these off all of our wins, in 2012. They're not needed anymore because those planes are busy flying.
So with that, I'd like to introduce Honeywell Chairman and CEO, Dave Cote.
David M. Cote
Well, that's pretty much our story. So any questions? I actually think Elena summarized it pretty well, so the rest of this is just going to be color commentary for the day.
We've tried to keep this really simple, so it's really just 2 simple messages. The first is that we have outperformed. And I know most of you know that, but we can't wait to show you again. And then 80% -- in fact more than that. I'd say 90% of that pitch is devoted to why that's going to continue. This is not kind of a onetime phenomenon or "Boy, it was great to own it at this time and see what happens." But rather, what we've done is set up something up that I think you'll end up agreeing creates a sustainable path for sales, earnings and cash growth that I think you'll like.
So this is what you're going to hear today, that first we have a great growth trajectory as a company and that seed planting that Elena talked about, we do get everywhere. Some of it pays off the next year, some of it 3 years from now, some 10 years from now. But we're constantly thinking about the future. And for both process and product, how do we make sure we do that right seed planting?
We'll spend a lot of time on robust capital allocation. It's not something we ever get a question about, but I thought you might want to know something about it. I know, very bad joke. You all want to know what's going to happen with the cash. Here is the way to think about it.
First thing is-high-ROI-growth investment. And you'll see that with the CapEx spend, a Big part of it driven by PMT and I think you'll like the stuff that Andreas tells you about. We like to pay a competitive dividend. Dave will take you through how that's changed over the last 10 years and what the growth rate has been. And we're big believers that you want to think through "How do you message about the future at the same time that you're doing that."
We have a great M&A pipeline, and our discipline has not dissipated in the 10 or 11 years that we've been doing this and we're not going to lose our minds and do something silly. We started buybacks last year, and you've -- we'll give you an update on that.
And I think importantly is that any kind of pension contribution over the next 3 years is highly unlikely. You can always come up with a scenario that creates a problem. But if you take the -- all the most likely scenarios, we're actually in very good position here. And Dave will show you in his chat about how we're in a much better position than most of our peers because of the work that we already have done and we've taken our hits early.
As Elena mentioned, innovation is something that we're going to -- is -- you'll throughout everybody's presentations with the new products and the new process work we're doing.
Specifically turning to each of the businesses. I'd ask you to just focus on this and think about it. Some confusion sometimes about ACS just being a bunch of businesses and how they all come together. Really the way to think about it is there's 3 fundamental business models, and Roger's going to take you through each of them, the first one to think of is the product side, where really we focus on multichannel, multi-brand discipline where we can differentiate with technology. And you'll see that even when we're acquiring, it's consistent with that business model in those businesses. Then the Process Solutions business model and then the services business model, which think of as like channel to market. So Roger is going to spend some time explaining how he looks at those 3 business models. A lot of margin runway still left for us in ACS.
In PMT, same thing. Three fundamental business models there that Andreas will take you through. He has done it before, but I think you'll see even more color commentary this time on how that works. And we have really 2 sets of great businesses here: UOP, which everybody focuses on; but Advanced Materials, which is fundamentally 3 businesses, terrific. And when you see the backlog that Andreas and his team have been able to build there, just some great stuff.
Aerospace is winning big in the market. Now you don't always see the impact of that on sales right away, so there's a lot of this to come. But I think you'd be pretty excited about the stuff that he is able to talk about. And the neat thing about it is on the electrical and mechanical stuff, if you take a look at all the aerospace companies out there, we're the only ones who have a big electrical or avionics presence along with a big mechanical presence. As result of that, there's an interaction that we can get between the 2 that no one else can do. And if you want a good example, electric taxi, which he has talked to you about before. But I'm really impressed with what I've seen Tim do in aerospace and how the fundamental change, he has just been relentless about it, and it's really creating a united business that's going to grow very well.
Transportation Systems. What I'd like you to start thinking about is that Turbos are a technology business. They are a Honeywell technology, high-margin, high-growth business. And we need to think about it that way. Turbo is really going to be just tremendous, and there's going to be opportunity for just explosive growth in our Turbo business. Now you're not going to hear me argue that for Friction Materials. Now at the end of the day, though, you need to recognize Friction is about an $800 million business on a $40 billion base. And while it always generates questions, at the end of the day, that's not what drives the value. We're in a transformation process. It's going quite well. And as result of that, it gives you alternatives that we did not have before. And one of those could those alternatives be -- could turn to a very good business like we did with Resins & Chemicals when we transformed that one 8 or 9 years ago. So we have to wait and see what transpires at Friction. But the big thing is, the transformation has begun and it's going to be a heck of a lot better and provides a tailwind for 2014 and beyond. So as far as we're concerned, this is just a great time for Honeywell.
Now I thought about what's the best way to convey "How does all this go together?" So as [ph] I told you these things in the past, but I thought putting it together this way might be helpful. But the way I've looked at it is, we've created a One Honeywell culture. And I know amongst the analysts, culture and that kind of that soft stuff isn't quite as good as being able to put numbers in your model and see what it yields for a discounted value. That was a semi-joke also because I do believe that. But at the end of the day, that culture makes a huge difference.
And when you think melding 3 cultures and creating what we have, focus on these 5 initiatives and 12 behaviors, management resource review, we spend a lot of time on. We do it 3 times a year, and it encompasses discussion of strategy, operations and people. So it's not just focused on people, and you got to talk about it in the context of strategy and operations at the same time. And as a reminder, I personally interview, along with our HR leader, every single person who goes into those top 200 jobs, even if I already know them, because it allows imprinting, quality control and it's messaging to the person about how significant their job is.
We use this phrase a lot, but it really is important. The trick is in the doing. The machinery have to work. And think of it this way, and I've used this phrase before, but there's a huge difference between compliance with words and compliance with intent. There's a big difference between making sure everybody gets an appraisal because you can measure that and making sure they get a good, candid appraisal. There's a big difference between saying you need to talk to 10 customers when you do your Voice of the Customer or VOC work and saying, "gee, I'm actually going to go visit 5 of them, I'm going to watch what they do, and I'm going to change my plan based upon what I learn." So this whole idea of the trick is in the doing means a lot because if you go from company to company, if you were to compare our manual with other companies' for new product introduction, management resource review, commitment to customer service, it's all pretty much the same stuff. We all know this stuff. The real issue is how well you do it. And that gets us to those foundational tools because we need to make sure that everybody has the right kind of training up front to be able to work that way. And then we're going to stay relentless in that seed planting.
So having that kind of a culture that thinks that way, we then apply it to our portfolio, making sure we have just a terrific portfolio, and driving our internal processes. And for anybody who read my Shareholders' letter this year, we've spent a lot of time talking about this, that on the portfolio, Great Positions in Good Industries sounds simple, important to execute. And when we think about acquisitions, while we never say never on anything big, we've tended to stay incremental and make sure that it's a bolt-on -- so something we are already doing -- or, I just mentioned in some of the stuff that we've done in ACS, is consistent with an existing business model. It's something we already know how to do because when you think about acquiring into an adjacency, as I said many times to my own guys, if your business is here, there's adjacencies that are here, and there's adjacencies that are over here. And knowing that difference is big. There's a big difference between what really is an adjacency and what looks like an adjacency.
The good balance, you've heard us talk before about the long versus short cycle. So were about 45% long, 55% short. But you'll see something later on showing how we felt that I did pretty good job also blending early-, mid- and late-cycle businesses to give us something that can perform over a cycle. And in all of our business, there's a globalization opportunity that you'll see more about later on. And we take that same kind of culture and apply it to our big processes.
If you look at any company, there's really 2 big cross-company, cross-functional processes: the first one, orders to delivery; the second one, new product introduction. If you can do those really well, better than your competition, you will do extremely well. And if you take a look at any business, it's just a pile of processes. Everything is a process. But these are the really 2 big ones that cross everybody. We pay a lot of attention to them. We're starting to get payoff on functional transformation, which is really just think of it as HOS but for staff functions. And then you'll see how well organization effectiveness has worked for us over the years. So we have this consistent business model that applies to every single one of our businesses. And any place that you've ever seen us acquire or divest, it's because this business model applies, in the case of acquisitions, or doesn't when we look at divestitures.
And okay, the trick is in the doing. This shows we've actually done pretty well. Sales up 6% a year, expanding margins at 55 basis points a year, about 500 basis points over that time. And you could see the share owner return. And for those of you who have owned for the 10 years, congratulations. You should all feel pretty good. And as I've told a number of you, it's our intent to make all of you look like geniuses in your companies. So we recognize that's the way we do that.
So look at growth versus our peers. Taking out the last 3 or 4 years, we've grown well on sales. If you go to the far right, we've grown even better on EPS. And importantly, focus on that up margin, the up portion at the middle chart, because you could see our growth rate on margins has expanded at a greater rate. But here's the thing that I focus on, is because we sometimes get the question about, "So, what inning are you in, when does this stop," and "How can you keep growing margin rates?" And my point is, if you take a look at our peer margin rates, they're higher than us. So it's not like we're going to onto on untrod ground. All we're doing is getting to where others already are. Now someday, when we're at 20 and you ask me, so Dave, how are you going to get to 25, that'll be a different question. And I could promise you we'll be prepared when the time comes. But right now, right -- we -- this is not untrod ground. So we know how to get there. We can make this happen.
I like this chart also because it shows how our growth profile has changed organically and what we've been able to do with acquisitions. 2001 to 2004, you've heard me say before about the empty pipeline. We had a new product. The globalization effort where we'd already laid off thousands -- not thousands but hundreds of people in China because that's when we had to meet the headcount target at the time. A lot of silly stuff was done that really just depleted our entire base for growth, so we had to build that up. But if you take a look at what's happened since 2004 compared again with that World Industrial Production Index, our organic growth has outperformed and so has our reported growth.
Getting back to Great Positions in Good Industries, how do we think about it? Starting on the right-hand side, I always want to be in a good industry. And you've heard us talk about macro trends for a long time now, and they haven't really changed. The only thing I might do is along with globalization, I'd add urbanization because as world GDP grows, GDP per capita grows, what you find is more accumulation in cities, and that urbanization trend is important for us. The safety, security and everything, whether you're in the sky, on the ground, personally, at home, in a building, safety and security is a theme. Energy efficiency, 50% of our products generate energy efficiency of some kind. And if the U.S., and Europe for that matter, just aggressively use existing Honeywell products and technologies, you could save about 15% to 10% of the energy bill.
So the follow-on question should be, so how come everybody is not doing it. And that's where you get into governments and my favorite topic. So that's another one to come, and I think you will see more progress in that in the future. Energy generation has been great for us, and our focus on improving our customers' productivity has yielded great benefits.
So now, what do I look at as a great position? The first one is, we're very good with technology, and focusing on places where technology makes a difference. Where our knowledge of technology makes a difference is huge. But we're very careful about not buying into markets where a rapid technology change just wipes you out. So if you take a look at it, we can differentiate with a technology and do very well going forward and it's really difficult for people to follow or come up with something that's better. There's a lot of markets where you differentiate with technology, but 3 years later, somebody else can come up with something that's a hell of a lot better. And all of a sudden, your market share goes from 30% to 12% in the space of a year. We steadfastly avoid all of those places.