Honeywell International Inc. (HON)

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Honeywell International (HON)

Presentation at Electrical Products Group Conference

May 20, 2013 7:30 a.m. ET


Dave Cote - President and CEO


Martin Sankey - Neuberger Berman


Dave Cote

Well, in the first and most important news, totally unrelated to anything at Honeywell, but I was at the University of Virginia yesterday, Charlottesville, the Darden School, where my youngest son graduated with his MBA in the top 10% of his class, so I’m wearing my colors today. That has nothing to do with anything, I’m just too proud. I can’t stand it.

So for those of you who have been listening to a number of the Honeywell presentations over time, you’ll notice there’s not a lot new here. However, I think that consistency of message is important and consistency of strategy. And you’ve heard me say before that if you have a good strategy and you just execute against it day by day, quarter by quarter, it’s amazing where you get to in a few years. And I think that’s what we’ve been able to do.

Messages for today, we’ve outperformed, and hopefully you’ll end up seeing from some of the things that we discuss with you, that’s going to continue. This is the business model. I don’t think I’ve done a great job in the past of explaining this, and that’s why we spent more time on it at investor day.

But think of it as three pieces. The first is having a good portfolio, and that’s why you hear me talk about having great positions in good industries, for example, and why we work at globalizing.

The second is to do a great job with your internal processes. You’ll hear me talk about this. It’s making sure the machinery works. And especially if you’ve got 130,000 people. There’s tremendous value in just making sure the machinery works, so that every day, people are making the right decisions because they know what it is you’re trying to do.

The third piece of this is having a superb culture. And I know culture isn’t the most financially sexy thing to be talking about, but it really does work. If you build a good culture, and you apply it to a good portfolio and drive your internal processes, it really helps you to perform over time. So that’s the business model. We apply this to everything.

And you can see this works. Sales over the last 10 years have done very well, growing to about over $38 billion this year. Expanding margins, done very well, and we’ve done a great job returning value to share owners. Versus our peers, you can see that growth rate has accelerated on the sales and EPS side.

And this is one that I point to when anybody asks questions about when does the margin expansion stop. And it almost sounds like you guys are at a peak now. And the fact is, yeah, we’ve done better that we have historically, but historically we also didn’t do all that well. And if you take a look at where some of our high margin rate peers are, we’re still 300 basis points away. The slope of our line is better, but we still have plenty of room to go here. It’s not like this is untrod ground.

If we take a look at how our growth rate has accelerated from that awful beginning that we had, that many of you remember as well as I do, things have changed a lot as we got into this second eight years.

And when it comes to great positions in good industries, the first thing is to try to align yourself with good macro trends, and those are the macro trends we see, so that yeah, things can go up or down in a year, but over a long course of time, those macro trends are going to stay.

And then when you’re trying to pick what’s a great position, we always try differentiating with technology. In fact we've learnt that that’s what we do very well, and you’ve seen us divest businesses that we don’t - not want to be in businesses where technology changes so fast that someone’s new introduction two years from now totally supplants your business. But rather something where you can get something patentable. You hang on to it. It’s tough to design around it.

Very defensible positions, whether it’s with brand channels or just the technology we have. We stay away from stuff that has heavy government subsidy, that’s heavily reliant. You never saw us invest a lot, for example, in wind or solar, because whenever you’re having to rely on 30-60% tax credits, what the government gives, the government can take away. And it just always made me uncomfortable. In our acquisitions, we tend to do more bolt-ons and smaller deals.

This kind of displays our end markets. You can see there’s a real variety. We shared this chart at investor day. The point of it’s always to support diversity of opportunity. And what I mean by that is whether it’s macro trends, countries, businesses, products, there’s never any one thing that we’re so dependent upon that if it takes off, the company does great.

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