Honeywell International Inc. (HON)

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Honeywell International, Inc. (HON)

2014 Outlook Conference

December 17, 2013 9:00 am ET


Elena Doom

David James Anderson - Chief Financial Officer and Senior Vice President

Thomas A. Szlosek - Vice President of Corporate Finance


Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

Jeffrey T. Sprague - Citigroup Inc, Research Division

Nigel Coe - Morgan Stanley, Research Division

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Howard A. Rubel - Jefferies LLC, Research Division

Andrew Obin - BofA Merrill Lynch, Research Division

Deane M. Dray - Citigroup Inc, Research Division

John G. Inch - Deutsche Bank AG, Research Division

Joseph Ritchie - Goldman Sachs Group Inc., Research Division



Good day, ladies and gentlemen, and welcome to Honeywell's 2014 Outlook Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Elena Doom

Thank you, Zach, and good morning. Welcome to Honeywell's 2014 Outlook Conference Call. Here with me today is Senior Vice President and CFO, Dave Anderson; and Vice President of Corporate Finance, Tom Szlosek.

Today's call and webcast, including any non-GAAP reconciliations, are available on our website at

Note that elements of today's presentation do contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change and we ask that you would 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 expectations for the remainder of 2013 and discuss our 2014 planning, building on the framework we gave you back in October, and of course, allow time for your questions.

With that, I'll turn the call over to Dave Anderson.

David James Anderson

Thanks, Elena, and good morning, everyone. Thank you for participating in this morning's call.

Let's begin on Slide 3. And here, we're confirming the fourth quarter, which is advancing as expected with about 2 weeks left in the year. Order rates continue positive in the short-cycle businesses, specifically Turbo, as well as the Energy, Safety and Security businesses of ACS. And our long-cycle businesses are maintaining their healthy backlogs.

As a result, we're reaffirming our full year 2013 estimate for sales of $38.8 billion to $39 billion; and earnings per share of $4.90 to $4.95, up 9% to 11% on a pro forma basis and consistent with what we gave you back in October. And lastly, we're also expecting free cash flow of approximately $3.7 billion for the year. Of course, those numbers are prior to any NARCO-related cash outflows and any cash pension contributions.

So 2013 is certainly shaping up as a good reminder of the importance of Honeywell's portfolio, the balance that we have, which is helping us offset some of the headwinds that we've experienced over the course of 2013, specifically in Defense and also in the Advanced Materials business of PMT. And the businesses, importantly, all executed very well this year, delivering margin expansion in every SBG in each business in 2013.

Now the key -- some of the keys are obviously new products, geographic expansion, traction on process initiatives. All of these are contributing to growth in each of our end markets, enabling pricing power and delivering further margin expansion. Another important driver is, of course, the productivity we've seen this year, which continues to be partially benefited from previously funded restructuring or repositioning actions.

We continue to be proactive about maintaining a robust pipeline of repositioning projects and we think this is critical to supporting our sustained margin growth in 2014 and beyond.

And of course, the continued focus on top line. We're investing in new products and technologies, investing in expansion in high-growth regions and we're also investing in high ROI capacity to build the growth momentum in our businesses.

We're expecting another year of modest macro growth in 2014 to serve as continuation, I guess, you could say, of the slow climb upwards that we've all experienced. But we're going to have pockets of short-cycle positives and we've got encouraging order pipelines.

I'm going to take you through a bottom-up portfolio view today and also an end market build building that 2004 (sic) [ 2014 ] outlook. And we're going to keep utilizing, of course, the playbook that you've all become familiar with, with Honeywell, focusing on investing for the future, delivering productivity enhancements and staying flexible, which has allowed us to leverage upside in any market conditions as they occur.

Turning to Slide 4. I just want to briefly recap 2013. On the left side of the page, what you can see is sales up roughly 1% to 2% organic or 3% to 4% reported, again, consistent with our guidance. If you exclude Defense & Space where the challenges are well known and the declines, of course, over '13 exceeded initial expectations, organic growth would have been more than 1 point better. So in other words, in the 2% to 3% range for the year with improving trends as we exit the year. We're going to take you through those improving trends in just a moment.

if you move to the middle of Slide 4. Segment margins is 16.2% to 16.3%, up 60 to 70 basis points, and of course, above the high end of the guidance that we set 1 year ago. And we're achieving slightly above the low end of the 2014 segment margin targets. We're achieving that a year early. And again, those targets are the ones we set back in 2010. Tom is going to take you through the highlights of that performance a little bit later this morning.

And then finally, on the right side of the slide, EPS up 9% to 11% for 2013, another year at roughly double-digit EPS growth and right at the high end of the guidance range that we set for you this time last year.

So 2013 clearly shaping up to be another successful year for Honeywell. And while certainly not done yet, we feel very good about how we're exiting the year and the implications for 2014.

Building on that theme, let's turn to Slide 5. Now the title of the slide is obviously 2013 performance and we wanted to spend a moment here because of what it implies and sort of sets up for our 2014 discussion.

On the left-hand side of the chart, you can see the quarterly growth rates for total Honeywell in the blue bars, as well as the cut of the portfolio, which we've shown you before that breaks out our short-cycle businesses, again comprised of ESS, the Energy, Safety and Security of ACS; Advanced Materials of PMT; and all of Transportation Systems. Also shown, the long-cycle ex Defense, which would include the commercial Aero OE, Process and Building Solutions and UOP and the commercial Aero aftermarket and Defense & Space businesses.

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