Honeywell International Inc. (HON)

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Honeywell International (HON)

Q1 2011 Earnings Call

April 21, 2011 9:30 am ET

Executives

David Cote - Chairman and Chief Executive Officer

Elena Doom -

David Anderson - Chief Financial Officer and Senior Vice President

Analysts

Scott Davis - Morgan Stanley

John Inch - BofA Merrill Lynch

C. Stephen Tusa - JP Morgan Chase & Co

Robert Cornell - Barclays Capital

Steven Winoker - Sanford C. Bernstein & Co., Inc.

Ajay Kejriwal - FBR Capital Markets & Co.

Jeffrey Sprague - Citigroup

Nigel Coe - Deutsche Bank AG

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Honeywell First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Elena Doom, Vice President, Investor Relations. You may begin.

Elena Doom

Thank you, Stephanie. Good morning, and welcome to Honeywell's first quarter 2011 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. Note that elements of this 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. This morning we will review our financial results for the first quarter, as well as share with you our expectations for the second quarter and our revised guidance for 2011 and, of course, allow time for your questions. With that, I'll turn the call over to Dave Cote.

David Cote

Thanks, Elena. As you saw from our press release last night, lots of cabbage this quarter. We had a tremendous start to 2011. We had better-than-expected performance across the portfolio yielding EPS above the guidance we provided you early last month. Sales of $8.9 billion were up 15% and above the high end of our guidance reflecting continued improvement in our end markets, growth from new products and geographic expansion.

We generated EPS of $0.88 reflecting an impressive 40% increase over 2010, which was also good as you'll recall. Segment margins expanded 120 basis points to 14.5% in the quarter, reflecting margin expansion in every business. This really reinforces the quality of our earnings performance, volume leverage and continued cost controls while maintaining our growth investments, our seed planting for the future.

We generated $433 million of free cash flow in the quarter excluding the $1 billion pension contribution made in January. In the quarter, we had a higher segment profit partially offset by higher working capital to support the sales increases we're seeing in the businesses and the higher CapEx as planned. Given the strength of our first quarter financial performance and improving end market conditions, we are raising our full year guidance. We now expect earnings in the range of $3.80 to $3.95 a share, reflecting a 27% to 32% increase in earnings over the prior year.

The strong momentum we've seen across our end markets is being supplemented by the results of our seed planting initiatives throughout the portfolio. While our early cycle businesses including the Advanced materials, ACS products and Turbo continue to show record growth, our longer-cycle businesses including Process Solutions and UOP are really kicking in with double-digit growth in the quarter.

Aerospace's commercial aftermarket saw spares orders increased 28%, significantly outpacing flight hours. Further, our investments and focus in emerging regions are really paying off. Sales in Asia-Pacific were up strongly, reflecting good growth in China and minimal disruption from the situation in Japan in the quarter. Fortunately, all our employees and sites are okay, and while we have virtually no direct impact in our businesses from Tier 1 supply chain issues affecting our production, we continue to monitor potential future risks from the electronic components that could impact global automotive OE and aircraft production rates.

Our strong quarterly performance and improved outlook for 2011 reinforce that our strategy is working. Having great positions in good industries, the power of One Honeywell, our consistent focus on improving every year in each of our 5 initiatives, the seed planting, it really does make a difference. With that, I'll turn it to Dave.

David Anderson

Great. Thanks very much. Good morning, everyone. Let's go to Slide #4 entitled Financial Summary. To start at the top, again, reported sales of 15% to $8.9 billion, 11% organic growth in the quarter, so another strong organic growth quarter for Honeywell. We saw greater-than-expected growth in every region, the Americas and Europe were both up 10%, China and India were up 23% and 43%, respectively. Acquisitions in the quarter contributed 3% growth. Currency was a slight tailwind that rounded to just 1%.

Segment profit up 25%. Segment margins just terrific, 14.5%, reflecting good conversion in the quarter. And as I take you through the business highlights, you'll see the businesses are doing a terrific job managing in this higher inflationary environment, while also continuing to invest for growth.

Earnings per share at $0.88 were up 40% over the same period last year, considerably higher than the estimate that we gave you back in March. And just a couple of comments on that. The better-than-expected earnings performance was driven by higher sales, better conversion in the quarter, primarily in Specialty Materials, also Commercial Aerospace and our short cycle ACS products businesses.

Repositioning spend in the quarter was $44 million net. That was 100% funded by below-the-line gains, mainly the sale of the Automotive Sensors business. In addition, we absorbed a $29 million charge in the quarter related to the early redemption of debt that otherwise would have matured in 2012, a smart move lowering our overall interest expense carry, and you saw the evidence of that in the very successful bond offering in the first quarter.

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