Honeywell International Inc. (HON)

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Honeywell International (HON)

Q2 2011 Earnings Call

July 22, 2011 9:30 am ET


David Cote - Chairman and Chief Executive Officer

Elena Doom -

David Anderson - Chief Financial Officer and Senior Vice President


John Inch - BofA Merrill Lynch

Howard Rubel - Jefferies & Company, Inc.

Shannon O'Callaghan - Nomura Securities Co. Ltd.

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

Jeffrey Sprague - Citigroup

Christopher Glynn - Oppenheimer & Co. Inc.



Good day, ladies and gentlemen, and welcome to the Honeywell Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Elena Doom

Thank you, Jovan. Good morning and welcome to Honeywell's Second 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 webcast, including any non-GAAP reconciliations, are available on our website at

Note that elements of today's presentation do 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 second quarter, as well as share with you our expectations for the third quarter and the remainder of the year and, of course, allow time for your questions.

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

David Cote

Thanks, Elena. Good morning, everyone. As you saw from our press release, we had another outstanding quarter with better-than-expected performance, reflecting terrific execution and continued momentum in our key end markets, yielding EPS above the high end of the range. While there's some accounting geography complexity because of how we are required to account for discontinued ops and launch payments, and Dave will take you through all that, the overall results certainly speak for themselves, with sales up 15%, EPS up 40% and guidance again raised for the year.

Now before we get into the financials, I'm pleased to report on the progress that we've made in the quarter on the CPG divestiture. We have received regulatory clearance and anticipate the sales of Rank Group to close early in the third quarter. Dave will take you through more details in a moment, but we've transitioned to reporting CPG in discontinued ops, and we expect to smartly deploy the book gain and sales proceeds in the third quarter, which will deliver tangible benefit in 2012 and beyond. So our reported sales with the discontinued ops treatment of CPG were $9.1 billion, up 15%, reflecting continued advancement in our new products, high-growth regions, continued strength in end market and growth from acquisitions.

Segment margins expanded 70 basis points to 14.3% in the quarter, including $80 million of payments made to Aero BGA OE customers in the quarter. We had very robust new product launches. So if you look at the commercial and business and general aviation side whether it's Embraer, Gulfstream or Dassault, we have a number of large platform wins with high content.

We generated earnings per share of $1.02, up an impressive 40% over 2010, and free cash flow of nearly $1 billion in the quarter, reflecting 120% net income conversion. This really reinforces the quality of our earnings performance, volume leverage and continued cost controls while maintaining our growth investments and our seed planting for the future.

Given the strength of our first half financial performance and positive outlook for the second half, we are again raising our full year guidance. We now expect earnings in the range of $3.85 to $4 per share, reflecting a 28% to 33% increase in earnings over the prior year. We think this is top-tier performance amongst our multi-industry peer group, and we're confident in our ability to generate strong earnings growth again in 2012.

The momentum we've seen across our end market is being supplemented by the results of our seed planting initiatives throughout the portfolio. Aerospace's commercial aftermarket continues to see a robust recovery, with spares up 30-plus percent and R&O significantly outpacing flight hours. Further, we're seeing the resurgence of the commercial OE cycle, where we're smartly positioning the business to capture new business opportunities. That means having the latest innovative new products and technologies like our recently announced joint development with Safran to provide green electric taxi capabilities for new and existing aircraft, saving airlines millions in fuel costs and slashing carbon and other emissions created during runway taxi operations.

Our short-cycle businesses, including Advanced Materials, ACS Products and turbochargers, continue to show a healthy pace of growth; while our longer-cycle businesses, like Process Solutions and UOP, are starting to kick in with double-digit growth in the quarter. Further, our investments and focus in emerging regions continue to pay off. Sales in China were up over 20%.

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, it really makes a difference.

So with that, let me turn the good news over to Dave.

David Anderson

Thanks, Dave. Good morning, everybody, and thank you for joining us this morning. I'm going to start on Slide 4, and I'm going to take you through the summary of the results for the second quarter, first on a pre-disc ops basis, meaning that we would have reported as if CPG were included in our continuing operations and importantly, consistent with the way in which we guided for the quarter.

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