Honeywell International Inc. (HON)

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Honeywell International (HON)

Q4 2012 Earnings Call

January 25, 2013 9:00 am ET

Executives

Elena Doom

David M. Cote - Chairman and Chief Executive Officer

David James Anderson - Chief Financial Officer and Senior Vice President

Analysts

Scott R. Davis - Barclays Capital, Research Division

Nigel Coe - Morgan Stanley, Research Division

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

Jeffrey T. Sprague - Vertical Research Partners, LLC

Howard A. Rubel - Jefferies & Company, Inc., Research Division

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

John G. Inch - Deutsche Bank AG, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Honeywell's Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Elena Doom

Thank you, Kevin. Good morning, and welcome to Honeywell's Fourth Quarter 2012 Earnings Conference Call. Here with me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson. This call and the webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor.

Please note that elements of today's presentation 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 also identified 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 the full year 2012, as well as share with you our guidance for the first quarter and full year 2013. And finally, we'll leave time for your questions.

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

David M. Cote

Thanks, Elena. Good morning, everyone. You can see Honeywell delivered another excellent quarter despite a still challenging macro environment. As we've said before, our goal is to be known as a company that outperforms and delivers in both good times and bad, and I think our performance and track record really shows that. We had modest sales growth in the quarter. It was up about 1% on an organic basis, yet we still continued to drive margin expansion, up 50 basis points to 15.6%, as well as pro forma EPS growth of 9% on an adjusted basis. And that's using the same tax rate in both periods.

So we're starting 2013 with some positive momentum. First, the short-cycle order rates are improving slightly overall with stabilization in key developed regions and some pockets of growth, particularly in China -- and other high-growth regions. And that suggests a modest improvement in end market conditions. Second, pension is expected to generate income of $50 million to $75 million this year, and that reflects the proactive funding we've done to date, coupled with a higher-than-expected return on assets last year. And third, the euro exchange rate is a bit better. Our outlook assumes an average euro dollar rate of $1.25. We're tracking above those levels today, but who knows what's going to happen with 11 months left in the year.

So for now, we're cautiously optimistic, but it's just too early to tell what direction the economy is going. And we're all well too familiar with the issue, big democracies around the world are still in gridlock over debt and the U.S. is kicking the debt can down the road and finding that kick doesn't quite go as far as it used to. All of these factors make forecasting what's going to happen a real challenge. So we think it's prudent to remain conservative, given that uncertainty. To the extent the items noted are better, it builds contingency to ensure we achieve our commitment. We'll update you in March at our Annual Investor Conference as we always do.

Given the potential economic difficulties, we're staying conservative on our sales outlook, controlling costs and leveraging our enablers, the Honeywell Operating System, Velocity Product Development and Functional Transformation, just like we did in '11 and '12. We're planning conservatively and we're staying flexible, ensuring that we can continue to respond to changes in the market. We're also in the enviable position of having over $320 million of previously funded in-process repositioning, which we continue to execute. And this will give us a lift in 2013, as well as in future years.

So 2013 will be another year of outperformance for Honeywell, and our focus on evolving in everything we do to become better and better creates a bright future even beyond this year. Our strong pipeline of new wins is setting us up for a multiyear cycle of outperformance. As examples, Aerospace was awarded the 737 MAX Bleed Air system and several other mechanical systems wins. We signed an agreement to provide SyberJet with our Primus APEX avionics, and there are also several other unannounced wins. And that's just in Aerospace.

At the Honeywell level, we finished the year with a record backlog, roughly $15.8 billion, with new platform wins across many of our businesses last year. To support this growth, we sustained high levels of R&D spending, up approximately 25% versus 2010. We've also increased CapEx spending 11% in -- last year, and we'll increase it again this year, ensuring that we meet our commitments to our customers, particularly in PMT. So from the earliest stages of developing innovative new products that customers value, to executing on that delivery, the Honeywell pipeline looks full.

We're developing a thinking company, not thinking as in spending days in contemplation or thinking as an anarchy, so you don't have to do what's requested, but rather thinking as in understanding why we do things. That concept underlies our big process initiatives, like the Honeywell Operating System, Velocity Product Development and Functional Transformation. We want to be able to do everything right and fast. It's through our continued evolution that will sustain our outperformance. In a slow growth global economy, this becomes especially important for margin rate growth. These tools have become part of the Honeywell culture, along with our strong operating disciplines and shared best practices, all translating into meaningful productivity gains.

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