Honeywell International Inc. (HON)

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Honeywell International, Inc. (HON)

Sanford C Bernstein Strategic Decisions Conference

May 29, 2013 9:00 a.m. ET


Dave Cote - Chairman and CEO


Steven Winoker - Sanford C. Bernstein


Steven Winoker - Sanford C. Bernstein

Good morning and thank you all for joining us at Sanford C Bernstein Strategic Decisions Conference. I am Steve Winoker, US multi-industry and electrical equipment analyst and we are delighted to welcome Dave Cote who we finally coaxed to be here, chairman and president and CEO of Honeywell, a company with about $39 billion of sales expected this year, we thought expected segment operating margin of about 16% and return on capital of low teens with the dividend payout ratio of about 33% or so. Dave’s 2014 targets call for $41 billion to $45 billion of revenue and segment margins of 16% to 18%. Dave took Honeywell over in February of ’02, 2002, so now more than 11 years or maybe it sometimes feels like 45 quarters and over the last decade the stock is up some 226% compared to 76% for the S&P, or almost 15,000 basis points of outperformance.

So with that, I’d like to remind all of you that after Dave speaks, we have some anonymous index cards for you to fill out questions, raise them up, we’ve got runners who will bring them up to me for Dave and I will do my very, very best to prioritize those and not my own and get to as many as possible. Thank you. Dave?

Dave Cote

Thanks Steve. I just wish Steve wrote about me as nicely as he just spoke about. I think it’s a nice trend. So why we’ve been successful along the lines is what Steve was just talking about. It’s really the application of this business model, starting over on the right hand side, upper right, starting with a great portfolio and then down the bottom focusing on our internal processes and to both of those applying left side which is our culture.

Starting with portfolio, I think we’ve been in great positions and good industry. If you are in a good industry you have a tailwind for growth and you will see – we describe that little bit more later on. And a good position, because then you have critical mass and things like feet on the street, R&D, backroom office allows you to be able to gain share. If you take a look at the acquisitions and dispositions we’ve done, we’ve done about our 125 transactions, about 75 acquisitions that added about 10 billion in sales, about 50 divestitures that reduced it by about 6 billion. Significant for that is $6 billion were in industries that were growing zero to 1%. The $10 billion were in industries growing 5% to 7%. So that did a lot to help change the composition of the $22 billion portfolios started with. Balance is pretty good. You will see on the long and short cycle and early and mid-late cycle, so we can sustainably perform. And we want to make sure we are in places where we could globalize. So it starts with a great portfolio.

The second piece though is making sure that you have internal processes that are superb and the way I frequently talk about my own guys is part of the leader’s job is just make sure the machinery works. We have 130,000 people, you can’t just assume the machinery is working. You got to pay attention to it all the time because all those people out there in your operations they are the ones getting the job done everyday and you need to make sure they have the right tools, the right processes to get their job done. As a result of that the company moves forward.

Left side of the page, a very different from where we were 11 or 12 years ago. And I would say something that’s generally underappreciated when it comes to looking at the company, and that’s, does it have a culture that will perform? We did not have one of those. You all understand about where we started 10 or 11 years ago. If you take a look at where we are today with our five initiatives and 12 behaviors, the one Honeywell drives, how everybody is driven to perform because they want to, not because they are being forced to do it, it’s something they want do, the trick is in the doing, we talk a lot about this. There is a huge difference between compliance with words and compliance with intent. As everybody can use all the words, we all read the same manual and magazines on customer service, how to do new product introduction, how to do auditive delivery, they are all the stuff that’s important.

We all know the same stuff might get as we’re talking company to company manuals look pretty much the same because we all know the same stuff. The really issue is how good a job you actually do in making that happen. And that’s why talk a lot about trick is in the doing. Then seed planting is something we talked about a lot for a long time because I don’t to make just this quarter, I want to make this quarter next year, three years from now, 10 years from now, that means that we need to be planting seeds now whether it’s geography, product, macro trend, business that we need to be planting those process, we need to be planting those seeds now so they perform later on. And you could see it’s worked.

If you take a look at our sales number, that a 10-year period sales were up 6% a year, margin expansion has been 55 basis points a year, and there's on the far right-hand side what Steve was talking about in terms of our overall shareowner performance. And if you take a look at it versus our peers over the last four or five years, without growing on sales, op margin rate which is an opportunity because while our – the slope of our line is greater, the fact is we’re still not as high as our high margin rate peers. And I've always looked at that as this is not a case where we're going on to unfraud ground rather there is opportunity here because others are already there and we’ve got the right kind of portfolio and internal processes to make that happen. And you could see what’s happened to our earnings-per-share as a result.

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