Honeywell International Inc. (HON)

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Honeywell International, Inc. (HON)

Q3 2013 Earnings Conference Call

October 18, 2013 09:30 AM ET

Executives

David M. Cote - Chairman and CEO

David J. Anderson - SVP and CFO

Elena Doom - VP, Investor Relations

Analysts

Scott Davis - Barclays Capital

Nigel Coe - Morgan Stanley

Stephen Tusa - JPMorgan

Howard Rubel - Jefferies & Co.

Steven Winoker - Sanford C. Bernstein & Co.

Jeff Sprague - Vertical Research Partners

John Inch - Deutsche Bank

Presentation

Operator

Good day ladies and gentlemen, and welcome to Honeywell’s Third 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’d now like to introduce your host for today’s conference, Elena Doom, Vice President of Investor Relations. Please go ahead.

Elena Doom

Good morning. Thank you, Jack. Welcome to Honeywell’s third 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 www.honeywell.com/investor.

We ask that you keep in mind that today’s presentation contains 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 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 results for the third quarter, share with you our outlook for the fourth and provide an initial framework for 2014 and finally will leave time for your questions.

So with that, I’ll turn the call over to Dave Cote.

David M. Cote

Thanks, Elena. Good morning, everyone. As I’m sure you’ve seen by now we had another good quarter benefiting from our diverse portfolio, our continued focus on new products and geographic expansion and our ability to effectively manage what continues to be an uncertain macro environment.

If you normalize for tax, which is expected to be 26.5% on a full year basis again this year, we delivered another quarter of double-digit EPS growth with the results coming in at the high end of our guidance range. This is driven large part by strong sales conversion with segment margins expanding 90 basis points to 16.7%, higher than we anticipated reflecting favorable mix, a delay in closing Intermec and our continued focus on productivity.

An important driver of the productivity we’ve seen this year continues to be the savings we’re seeing from previously funded restructuring actions. And Dave will provide greater update on that shortly.

As you will see we’re being proactive about keeping that restructuring pipeline full, which we think is critical to supporting our continued margin growth in 2014 and beyond. However, while managing our cost is important, we’re also focused on supporting sales growth, investing in high ROI capacity, new products and technologies in high growth regions.

That said, it wont comes any surprise that this continues to be a challenging macro environment. EPS and margin expansion were both strong, but that was in spite of lower than expected sales in the quarter, which was driven primarily by Intermec close timing and lower Defense & Space sales. Excluding Defense & Space sales were up 3% organically in the quarter. When it comes to Defense & Space, you’re all aware of the ongoing sequestration impacts and the recent government shutdown.

We saw some shipment delays in the quarter and while we are expecting some level of recovery before the end of the year, we think the prudent approach is to conservatively adjust our aerospace sales outlook. The aero team is working hard to manage through the current defense challenges and we continue to expect a more muted decline in 2014.

On the M&A front, the good news is Intermec is now officially closed. Even though it took a little longer than we would have liked, but now the real work can begin. We are really excited about the business which roughly doubles the size of our scanning and mobility portfolio, and the opportunity to merge Intermec’s expertise in innovative products and solutions in to our already great position in the highly attractive automatic identification and data collection space.

In addition to strengthening our core business, Intermec will open up new opportunities with their global presence and channel strength, in addition to adjacencies in voice and RFID. This quarter is also a good reminder of the importance of a balanced portfolio, which helped offset some of the defense headwinds I have just mentioned.

Some of our key short-cycle businesses, specifically energy, safety and security, as well as turbo had very strong quarters. While our long-cycle businesses maintain healthy backlogs, currently over 15.5 billion.

Geographically, which is also an important part of the balance, we continue to see good growth in the U.S. in residential and turbo markets. We are encouraged by the pick-up in short-cycle order rates in Europe overall and continued growth in China following a slow start to the year. With just over two months left in the year, we are confident in our ability to deliver at the high end of the guidance we set for 2013 last December.

As a reminder, we stuck by our earnings outlook all year, steadily raising the low end of our EPS guidance in prior quarters to reflect a year-to-date performance and we are doing it again. As a result of the continued strong execution we saw in the third quarter, we’re raising the low end of our guidance by a nickel, giving us a new EPS guidance range of 4.90 to 4.95, or up 9% to 11% for the year.

Turning to 2014, I said this before, but there is nothing out there to suggest anything, but continued conservative planning is best. Despite what’s expected to be a continued slow growth environment, we’re confident organic growth will accelerate for Honeywell in 2014.

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