Honeywell International Inc. (HON)

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Honeywell International Inc. (HON)

Q4 2013 Earnings Conference Call

January 24, 2014, 9:00 am ET

Executives

Elena Doom - Vice President of Investor Relations

David Cote - Chairman of the Board, Chief Executive Officer

David Anderson - Chief Financial Officer, Senior Vice President

Analysts

Scott Davis - Barclays

Steven Winoker - Sanford Bernstein

Steve Tusa - JPMorgan

Jeff Sprague - Vertical Research

Howard Rubel - Jefferies

John Inch - Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Honeywell's fourth quarter 2013 earnings conference call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. (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, Zack. Welcome to Honeywell's fourth quarter 2013 earnings conference call. Here with me today are Chairman and CEO, Dave Cote and Senior Vice President and CFO, Dave Anderson. This call and webcast including any non-GAAP reconciliations are available on our website at honeywell.com/investor.

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 would ask that you interpret them in that light. We do identify the principal risks and uncertainties that affect our performance in our Form 10-K and other SEC filings.

This morning we will review our financial results for the fourth quarter and full year 2013, as well as share with you our guidance for the fourth and full year 2014. Finally as always, we will leave time for your questions.

With that, I will turn the call over to Dave Cote.

David Cote

Thanks, Elena. Good morning, everyone. As I am sure you have seen by now, Honeywell delivered another good quarter capping off a terrific 2013. We are benefiting from our diverse portfolio and that continued focus on new products and geographic expansion plus our ability to effectively manage and what continues to be slow growth macro environment.

The importance of a balanced portfolio was evident last year as it helped us to offset some of the headwinds we faced in Defense and Space and Advanced Materials over the course of the year. Most importantly, the businesses, all executed very well, delivering margin expansion in every business last year

As for the fourth quarter, it's very encouraging to see sales growth 8%, up 5% organically, with organic growth better than expected across all four businesses. We continue to drive margin expansion, up 50 basis points year-over-year, for an impressive 70 basis points when you exclude M&A, and we delivered pro forma earnings per share with all of $1.24, $0.02 above the high-end of our range, so we are starting this year with positive momentum struck by order rates continue to get better and there were pockets of acceleration in the commercial aftermarket ESS, Advanced Materials and Turbo, all suggesting a modest improvement in end market conditions overall.

We are also seeing order momentum out of our long-cycle businesses, building on the robust backlog has positioned us well heading into this year, with ACS solutions orders up strong double digits, and our defense backlog up about 20% year-over-year due to strong international wins.

We are also increasingly confident in our outlook because of the smart gain deployment actions we took in the fourth quarter. As you saw from our press release, we are able to proactively fund restructuring and other actions fully deploying the $195 million pre-tax or $0.16 EPS gain from the sale of B/E Aerospace shares in the fourth quarter.

You will recall, we received about 6 million shares prior to the Consumable Solutions business sale in 2008, and we sold 2.6 million of those shares in that fourth quarter. We also sold an incremental 1.5 million shares in this first quarter, and that will yield about a $0.10 gain that we will similarly deploy with repositioning and other actions.

So in total, a pretax gain of approximately $300 million; $200 million in the fourth quarter and $100 million in the first quarter with some more remaining in the bank. Restructuring benefits have been an important driver of our productivity engine, as it will continue to drive benefits in 2014 and beyond.

Dave will take you through some of the details in a moment, but the projects funded in the fourth quarter alone are estimated to yield about $50 million of benefits in 2015, with a full run rate savings of over $100 million. We are being proactive about keeping that pipeline full, and as such, we are planning to fund additional projects in the first quarter with the gain that we will have from those B/E share sales.

We think these actions position us well for further margin expansion over the next five years. In the fourth quarter, we took the opportunity to accelerate a $50 million charge related to environmental matters at Lake Onondaga in upstate, New York. Minimizing future environmental headwinds from this site by proactively seeking agreements for the completion of both dredging and capping activities based on our ability to complete the dredging portion a year early and reducing the overall cost of the project.

We think this sets us up very well over the coming five years as we will begin to show moderation in ongoing environmental charges in the out years. We also offset the loss on sale of Friction Materials due to deployment of that B/E share gain. As you saw earlier this month, we agreed to sell Friction Materials, which we expect to close sometime in the second half of the year.

We think this transaction will help our Turbo business focus on their differentiated technologies and long-term growth outlook. While we think it's prudent to remain cautious on the overall macro environment, we are also increasingly confident in our 2014 outlook based on the momentum we saw in the fourth quarter. So for the year, more of what you have come to expect, strong sales conversion and double-digit earnings growth and strong cash flow.

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