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Honeywell International, Inc. (HON)
March 07, 2012 10:30 am ET
Elena Doom -
David M. Cote - Chairman and Chief Executive Officer
Roger Fradin - Chief Executive Officer of Automation and Control Solutions and President of Automation & Control Solutions
Anne H. Madden -
Mark Levy - President
Andreas C. Kramvis - Chief Executive Officer of Specialty Materials and President of Specialty Materials
Ian Shankland -
Alexandre Ismail - Chief Executive Officer of Honeywell Transportation Systems and President of Honeywell Transportation Systems
Pasquale Abruzzese -
Mike Owens -
Timothy O. Mahoney - Chief Executive Officer of Aerospace Segment and President of Aerospace Segment
Shane Tedjarati - Chief Executive Officer of Honeywell China and India
David James Anderson - Chief Financial Officer and Senior Vice President
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Jeffrey T. Sprague - Citigroup Inc, Research Division
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
John G. Inch - BofA Merrill Lynch, Research Division
Jeffrey T. Sprague - Vertical Research Partners Inc.
Christopher Glynn - Oppenheimer & Co. Inc., Research Division
Ladies and gentlemen, please welcome to the stage Vice President of Investor Relations, Elena Doom.
Previous Statements by HON
» Honeywell International's CEO Discusses Q4 2011 Results - Earnings Call Transcript
» Honeywell International's Management Discusses 2012 Outlook - Conference Call Transcript
» Honeywell International's CEO Presents at BofA Merrill Lynch Global Industries Conference - Event Transcript
Now among the materials that you have in front of you today, including today's presentation booklet, you'll also find today's agenda and of course, our forward-looking statement. In front of you, we've also provided you an updated 2012 investor fact sheet, which you'll recall from last year, provides a lot of information regarding our key products and technologies, as well as our end market exposures. And finally, there's a copy of our very first edition of the quarterly investor newsletter. And again, this can all be found online at honeywell.com.
Now as many of you know, last month marked Dave Cote's 10-year anniversary with Honeywell. So the theme of today's discussions center around this milestone, which is significant not just for Dave, but for all of Honeywell. You'll hear about our transformation as a company over the last 10 years, as well as the continued evolution that we expect from Honeywell going forward. And obviously, that's a future that we're very excited about.
In addition to Dave, you'll also hear from each of the Presidents of our businesses as they discuss their key technologies, strategies and end markets, as well as their competitive differentiators. And we'll also provide you an assessment in terms of how they're progressing towards their 2014 targets. Now building on the transformation theme, we also have a special group of functional and business leaders here with us today to discuss the role that they played in Honeywell's progression over the last 10 years, from M&A and R&D and the effectiveness, to the Honeywell Operating System and geographic expansion. We'll then close the day with Dave Anderson taking us through the financial overview, walking through the strong financial track record that the company has built over the last 10 years, as well as provide you insights in terms of our compelling outlook going forward. And then of course, we'll close the day with comments from Dave Cote.
Now before I introduce Dave Cote, who will again kick us off, as well as introduce today's other presenters, I want to remind you that we have a number of our senior management here with us today. They're all wearing Honeywell nametags, so I highly encourage that you seek them out during the breaks. They're also here to discuss their new wins and leading technologies. We have many of them on display in the South Ballroom. So again, I encourage you to take the time to go through each one of the displays for each of the businesses. So with that, it is now my pleasure to introduce Chairman and CEO, Dave Cote.
David M. Cote
Well, as Elena mentioned, today's story is one of evolution. And you've probably heard me talk about evolution before, but it's something that we talk a lot about in the company. Because the point that we always make is that Darwin's point was not survival of the fittest, it was survival of the most flexible, the most adaptable. And the more flexible and adaptable you can make yourself, the better off you're going to do. Evolution doesn't just apply to the company, there's also been an evolution of investor expectations, as you can see. And the 10-year change has been significant from, can Honeywell even operate as a single company given we were 3 companies brought together. We got to the point where it was just, "Dave, are you going to blow the cash. Are you going to blow the money?"
We've been through our strategies, are they going to change in the downturn, which of course they didn't. And now we've gotten to a point where it's a case of will we achieve those 2014 targets. And of course, I think you'll come away from today saying, "Yes, by God, I think they're going to." And I think in that evolution, it gets us to the point where we say we're at that stage where everybody should be saying does Honeywell deserve a premium based on how they've been able to perform if things changed enough and can we count on the evolution into the future so that they deserve a premium. So here's what we would say, and this will be the bulk of the story.
Our track record is terrific. And at every stage of the game, we've done what we said we would and we'll show you the data of course because it is good. Strategies stay consistent. We take a look at the last 10 years, we're not the guys who have a strategy, change it 2 years later, pursue it, change it 2 years later. We actually been pretty consistent in the strategy we've pursued because it's worked. Then the evolution is going to continue and we'll break out the stuff that stays the same and the stuff that changes over time. But the whole point of evolution is important because you have to keep adapting. You have to keep getting better. And it's never a case where you can be static about here's the way we do something and it's just going to be this way forever. You constantly have to be adapting and getting better. And I think you'll see that theme throughout the day.
The last 10 years have been great. Our sales, even with 2 recessions are up 72%. The sales outside the U.S., our globalization, up 13% and both EPS and free cash flow are double what they were before. And it's shown up in shareowner returns. Now we picked February 19, given that, that was my first day starting with Honeywell 10 years ago. So it seemed like a nice kind of start point. And during that 10-year period, the S&P is up 26%, we're up 84%. And for any of you who remember 10 years ago, this is not what anybody's expectation was. And when you think back to where we started versus a lot of others, I think it gives you a sense for how that evolution has really transformed us. And the same thing applies on the dividend side. The S&P dividend was up about 78%. Ours was up 98% during that time. And again, remember, we weren't starting from such a good base when you go back to that time.
So we think we've provided a great return to shareowners. And this really has been a decade of transformation. You can see on the left-hand side, year-by-year, how things have changed -- what were some of the big items that we addressed. And on the right-hand side, I think it's important to point out that in the early days, many of you probably heard me say use this phrase where I would say, "Past is not prologue." Just because prior to 2002, we did horribly, it doesn't mean we'll do horribly forever. It's time to think differently about Honeywell given everything that we're doing. Well, after 10 years, now I'm telling you a different story. And it's that you can expect that 10 years to continue based on the evolution that we're going to continue to drive. So we're at a point now where past is prologue. The way we've been able to perform for 10 years is the way we're going to perform for the next 10. And the phrase that I use a lot is, "The best is yet to come for us." We're building on a much better foundation than we had before.
So when you think about this evolution, there are things that'll stay the same in terms of how we actually conduct our business. So you think about execution fundamentals, we've always been very big on just focusing on the basics. And you heard me use this phrase, some of you thought it was kind of a joke in the beginning but it really is true, is, "Go slow to go fast." It means whenever you have an initiative of any kind or some big thing you're trying to get done, is make sure you have it right before you start going 100 miles an hour. And I think we've done a pretty good job to doing that, whether it's rolling out HOS or any of our initiatives.
Second one is, "Making sure the machinery works". It sounds like a very simple phrase. But especially when you get into the top jobs, like the people who'll be presenting today, it's one thing to just be smart. It's another thing to make sure that you are -- you have the right people in your organization and you have the right processes that enable them to be able to do their jobs effectively. So being smart is not enough. It's important to always make sure that the machinery works. We continue to do what we say we're going to, and you've heard me talk about this next one on being able to do 2 seemingly conflicting things at the same time, which people always want you to pick one or the other. Do you want good short-term results or do you want good long-term results? Do you want people empowered or do you want good controls to make sure nothing bad happens? Do you want low inventory, do you want good customer delivery? The answer, of course, is always you want both. And the trick to being successful is figuring out how to do both. We don't ever lose sight of that theme.
Disciplined M&A, I'll show you some charts later on. I think you'll get a sense for how well we've done and Anne Madden is going to take you through a little more detail. And I use of this phrase a lot, "That the trick really is in the doing". All of us, my guess is if you compared new product introduction manuals, Management Resource Review manuals, everybody's stuff looks the same. Everybody in every company knows all these stuff. It's a matter of how well you actually do it. Can you actually execute? And I think we've excelled there. We'll continue our seed planting for a robust future. And we're always looking beyond this quarter. You've heard me say, "I don't want to make just next quarter, I want to make next quarter 2 years from now, 5 years from now, 10 years from now." So we need to be seed planting. Cash generation is going to continue to stay important to us, and that conservative bookkeeping that we do helps us because we just have very high-quality earnings.
So for example, if you take a look at R&D going on the balance sheet, we're not the guys who'd do that. We expense almost all of our R&D because I just think it's a bad practice. If you take a look at -- when you have to give free merchandise for commercial reasons, we expense all of that. None of that goes on to the balance sheet. And I think that's an important difference between us and some of the other companies that you look at, because I just think that makes management just think very differently about things when they go to make business decisions.
We've got a great portfolio. You've heard me talk before about I like a diversity of opportunity. That's not going to change. Now that diversity opportunity applies to geographies, businesses, the products you're in. I never want a product or a business that if it takes off, we will do extremely well. Because by the same token, if it doesn't, you can do extremely poorly. So I like having a lot of bets in a lot of places, and we're not going to change that. We like businesses where technology is a differentiator, and I think you'll see a lot of that today. And there are places that we avoid. Any place that has rapidly changing technology or places that are heavily reliant, for example, on tax subsidies or government policy, not a good place to be. So we've tended to avoid all of that. The things you can count on us continuing to do, we're going to continue to be hungry, we're going to stay smart and disciplined about how we do things and that whole point on flexibility, adaptability, so that no matter how things go, how markets move, we can respond. And none of that is going to change.
Now the things that will change, that will continue to evolve and still have the opportunity to get better, Great Positions in Good Industries, which we talk a lot about and you'll see some more. And big change here is divestitures are a lot less critical to us in these next 10 years than they were in the last 10. One Honeywell, I think most people would be surprised at how quickly we were able to meld 3 cultures into a single Honeywell culture. Our 5 initiatives, which we still talk about 10 years later. And at the end of the day, in all these areas, we still have a lot more runway. There is still a lot more opportunity for us. And the takeaway then is because of all of this, investor returns are going to continue.
Building on each of those 3 items that I just mentioned, starting with Great Positions in Good Industries. You've heard us talk about these macro trends on the left. These are the kind of global macro trends that just put you in a position to be in a good industry. And I like being in a good industry because that gives us a tailwind for growth. Having a great position means we have critical mass in things like feet on the street, R&D, backroom office so that we can grow share. And as a result of those 2, grow sales faster than the industry. And you'll see with what we've been able to do in the portfolio on both divestitures and acquisitions, we've managed to change the overall growth profile of the company to put us in that higher growth businesses, a nice place to be. These are just a bunch of examples for Great Positions in Good Industries. You probably figured out that acronym by now. Each of the guys will be talking more about each of these, so I don't think there's any need for us to go through it. But you'll be hearing a lot more about it today.
And just to give you a sense of the portfolio transformation, if we go back in time, about 79% of our portfolio was what we would call core businesses. Today, it's 98%. We've had 70 acquisitions, 50 divestitures. The net impact of those 2 were about a $4 billion add to sales. But you can see, we've really been able to change the growth profile of the company as a result of that. And this is just some of the details of it. You can see on the left-hand side, Novar was a big one, UOP was a very good one as Andreas will point out.
With the acquisitions of First Technology and Zellweger, we established a gas detection presence. With handheld Metrologic and EMS, we've established a great presence in bar code scanning. With Norcross and Sperian, a great position in personal protection equipment. So we've really been able to change, again, the growth profile, the growth outlook of the company.
We've also done a lot of divestitures. Not all of them were reds, some of them were yellows. Where, okay, it was a great position in an okay industry or it was a great position in a good industry but we weren't -- couldn't grow so well like in security monitoring because we'd be competing with our customers. So we ended up extracting ourselves from a number of these places. And as a result of that, we've been able to put ourselves in a much better position to grow then we were, say, 10 years ago.
One Honeywell. This theme we talk about throughout the company and there's a lot of ways we go through to try to reinforce it. But it all comes back to that glue building. Because there's a number of ways you can organize a business or a company, functionally, by geography, by business, by customer group, by process, if you wanted to, I suppose. But you can only pick one, maybe matrix in another. You still have to do all the other ones. And the only way you get that done is by people knowing each other. And we spend a lot of time making sure that happens, that we have the right people in the job, so there's robust MRR. And again, we get the fundamentals right.
When you think about something as simple as getting people's goals for the next year, before the year begins. You check with most companies, goal deployment is usually done sometime in March. Three months are already gone in the year before people actually know what their goals are. It doesn't make any sense. Ours is done in December. Everybody gets an appraisal before March 31, and we know that, because if people don't get an appraisal, their manager doesn't get a raise. So we found all kinds of ways to reinforce this including salary and bonus differentiation curves to make sure people focus on getting those fundamentals right. Because at the end of the day, we've got 130,000 people and all of them need to be engaged, all of them need to be involved.
Turning to the 5 initiatives, starting with growth. Big change from where we were. You've heard me say that coming into 2002, the cupboards were bare when it came to new products. We really didn't have much of anything. And as one of our business leaders said, "Back then, I learned how to starve a business, now I've learned how to grow a business." And that's what you get when you have full cupboards, when you look at the kind of launches we've had. The global expansion change, 41% outside the U.S., now 54% and growing. And our exposure to high growth regions, Shane will be telling you more about that today, just terrific. Our strategy has worked and we're going to continue to deploy it further.
Pile of new programs. A lot of money available to us here. You'll be hearing more about these from each of the business leaders today. But great new product programs coming. This R&D chart is important. Starting at the upper left, R&D is up in total. You can see the numbers in the patents. Even though patents, I would say, are kind of a loose correlation. At the end of the day, it is a metric. But most importantly, is the right-hand side of the page, because while R&D spend is up 60%, the actual census supplied is up 75%. In other words, the number of engineers actually working on projects is up 75%. So we're getting much bigger leverage from those R&D dollars. And then the bottom right is also important, because there's no real way of measuring in the financials how effective is your R&D. And we've spent a lot of time over the last 10 years making this a lot better. So the Velocity Product Development effort that we have, the push that we have on software, for example, more than 50% of our engineers are doing software. So we're proceeding with getting to CMMI Level 5 across the company, knowing where all our software operations are. And we also are focusing our attention on how do you make sure you're working on the right stuff. Just because you're spending money, doesn't mean you're spending it smartly. And I think you'll see from, again, the pictures from all the guys today, that we've really done a pretty good job focusing on the right thing.
This one's important also because we're on the side of the angels with a lot of our products and services that we offer. So it's important for us to actually be following our own message. If you take a look at our safety statistics, we're 70% lower than the industries in which we participate. Energy intensity has improved by 35% over the last 7 years, and greenhouse gas is down by more than 1/2. It's important for us to do that just because we're in those markets. But at the same time, it helps us grow. Because if you look at what were able to do on the safety side and now we're able to -- with personal protection equipment and our safety services model. On energy and greenhouse gases, as we look at applying our utility partnerships and Building Solutions, this is a great way for us to actually be our own reference accounts as we start to go to other companies.
Getting to second initiative, productivity. We haven't shared this one with you in the past, but I think it's a good one. Because we really start focusing on real estate also about 7 or 8 years ago. Starting on the left, you could see our rooftops were about 1,250. We did a bunch of acquisitions and divestitures that added 600. And we've taken out about 550 locations overall. So we have about the same number. And as a result of that, our sales per structure, if you will, are up 35%, done on a square footage basis. You could see that developed market square footage is up minimally, and you can see that sales per square foot up a bunch. In the emerging markets, we've managed to double our floor space out there and it's still growing. So this has been a great project for us to drive One Honeywell and to improve costs.