Honeywell International Inc HON
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/19/2013

Operator: Good day ladies and gentlemen, and welcome to Honeywell's Second Quarter 2013 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. 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 - VP, IR: Good morning. Thank you, Zack. Welcome to Honeywell's second quarter 2013 earnings conference call. Here with me today are Chairman and CEO, Dave Cote and Senior Vice President and CFO, Dave Anderson. Today's call and webcast including any non-GAAP reconciliations are available on our website at honeywell.com/investor. 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 do identify 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 second quarter and share with you our outlook for the third quarter and full year and of course, leave time for your questions.

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

David M. Cote - Chairman and CEO: Thanks Elena. Good morning, everyone. As I'm sure you've seen by now, Honeywell had a good second quarter, capping off a strong first half, which puts us well on our way to achieving the full year guidance that we set back in December. Normalizing for tax, EPS was $1.22, up 8% year-over-year on an adjusted basis and in line with our guidance of $1.18 to $1.23. Sales of $9.7 billion were near the high end of guidance and if you exclude Defense where the headwinds are well-known and as we expected them, we saw a sales growth in each of the four businesses. We also continue to benefit from margin expansion, up 30 basis points to 16.1%. Primary driver has been the savings from the proactive repositioning actions we've taken in prior periods. As we continue to face an uncertain macro outlook, we think it's prudent to keep that pipeline full.

So we funded over $60 million of incremental restructuring this quarter, more than offsetting an OPEB curtailment gain and bringing us to approximately $100 million of repositioning actions funded this year. Dave is going to take you into more detail on that later.

However, while investing for the productivity is important, it sure is a lot easier to expand margins when sales are growing. So even in this tough environment, we're planting the seeds that will drive future top line growth.

Some of the lowest-risk, highest-return projects available to us are organic. So, we continue to invest in R&D, new product introductions and capacity expansions. Our long-cycle businesses, including Commercial Aerospace, Process Solutions and UOP, continue to benefit from a strong backlog which ended the quarter at roughly $15.5 billion. The businesses are also winning in the marketplace. And some examples; in Aerospace, we announced the new version of our HTF7000 series engine, the HTF7350, will power the new Challenger 350 super midsize business jet.

As we've said before, we think the super midsize and longer range segments represented an attractive space for growth and we are excited about this most recent win. Additionally, if you were at the Paris Air Show, you may have noticed an awful lot of excitement around an A320 sprinting (indiscernible). This was a demonstration of our Electric Green Taxiing System or EGTS, developed in partnership with Safran which uses the APU rather than the main engines to taxi during preflight operations. This can provide operators up to $200,000 a year in fuel savings per aircraft. We also had another important win with Airbus. So not from the business you were probably expecting. Honeywell Building Solutions was awarded a $37 million project to build, operate and maintain a power facility for Airbus' new assembly line here in the U.S. The project, which will be done through LEED-certification standard is a great example of one Honeywell cross-selling between businesses to the benefit of both Honeywell and our customers.

Finally, because there are a lot to choose from, I'd like to highlight one UOP win. Our Oleflex technology which converts propane into propylene was selected again, this time by Ascend Performance Materials Operations, the world's largest on-purpose propylene production facility.

As you've heard us say before, petrochemical makers are installing additional capacity to meet growing demand, and to make up for the shortage of propylene production from traditional sources. Once again, order rates were mixed in the quarter, with the U.S. stable, Europe trending slightly positive in both short and long-cycle and a notable turnaround in China from the first quarter with sales up mid-teens.

The inflection point in China occurred in June with broad-based performance improvement in all businesses. ACS short and long-cycle businesses, along with stellar growth in UOP, added to a much stronger performance in China than Q1 in last year, while Transportation Systems continued its growth momentum from Q1.

We also continued to progress with our key process initiatives; the Honeywell Operating System, Functional Transformation, and Velocity Product Development. That focus on making sure that the machinery works for our employees to get their jobs done effectively and efficiently everyday makes us better at delivering both growth and productivity.

With these things in mind, we continue to be confident in our 2013 outlook. First half EPS was $2.38 when normalizing for tax which based on our historical linearity is trending toward the top half of the $4.75 to $4.95 guidance range we gave you back in December, despite continued soft end market conditions. As a result of this continued strong execution, we raised the low end of our guidance by a nickel in the first quarter and we're doing it again this quarter, giving us a new EPS guidance range of $4.85 to $4.95 or up 8% to 11% for the year.

We just concluded our strategic planning reviews with each of the four businesses and while we're preparing for near-term underlying macro conditions to be much the same what was particularly impressive was each businesses' innovation pipeline and growth opportunities. We're looking forward to sharing this and more with you early next year when we publish our new five-year plan, but you can expect our continued evolution in everything to drive outperformance over this timeframe.

So, with that, I'll turn it over to Dave to talk you through more of the details. Dave?

David J. Anderson - SVP and CFO: Thanks. Good morning and welcome and appreciate your participation this morning.

So, let's start with Slide number 4 and let me walk you through the summary financial results for the second quarter. Sales of $9.7 billion were up approximately 3% year-over-year on a reported basis, near the high end of our guidance range and up 1% on an organic basis. Regionally, on an organic basis, the Americans were roughly flat, really driven by lower Defense & Space sales, while Europe, as Dave said was good overall, up 1% and China was up 14%, driven by improvement in our short-cycle businesses, namely, ESS, the Energy, Safety and Security business of ACS and also Transportation Systems. In addition, we had continued good long-cycle growth in China. Segment profit for the quarter was up 4%, with segment margins expanding 30 basis points to 16.1%. Now, it's important to note we had margin expansion of 60 basis points or more in every business other than PMT. And you'll recall from our guidance that we gave for the quarter that PMT's margin rate was unfavorably impacted by a number of items, but most notably the lower UOP licensing activity this year compared to the record levels that we had in the second quarter of 2012. So, again, PMT's margin decrease is largely explained by that, and important to point out that the absolute level of PMT margins in the second quarter was 19%, very impressive. We need to keep that in mind.

Below line items were mostly as anticipated and importantly, we recognized an OPEB curtailment gain of $42 million which was more than offset by more than $60 million of restructuring actions which we're going to discuss in more detail in a moment, and obviously, that's another highlight for the quarter.

Moving to EPS; similar to the first quarter, we had a tax rate in the second quarter that was favorable relative to our guidance, both for the quarter of 26.5% and our full year guidance of 26.5%. So, we had 23.1% effective tax rate this year in the second quarter versus 26% even in the second quarter of last year. However, while the timing of certain tax items will continue to be lumpy, we continue to expect that full year rate of 26.5% for the year. That means that the roughly $0.11 of favorability that we've experienced in the first half, we had $0.05 in the first quarter, $0.06 in the second quarter, will be offset in the second half. And importantly, we've assumed that will occur in the fourth quarter for planning and guidance purposes, and I'm going to come back to that and cover that in a little more detail when we talk about the second half.

So, for the second quarter, reported EPS of $1.28, up 12% versus prior year. However, normalizing at the 26.5% rate, both last year and this year, EPS would've been $1.22, up 8%. Finally, free cash flow was $1.1 billion, up 10% versus prior year and represents conversion rate of approximately 112%, so a very good cash quarter also.

So with that summary, let's go to Slide 5. Let's start with Aerospace on Slide 5. For the quarter, sales were down 1% as Commercial growth of 5% was more than offset by declines in Defense & Space. In the Commercial side, OE sales were up 8%, driven by continued strong OE build rates in larger air transport and continued healthy demand in the mid-to-large cabin business aircraft segment where we got such a strong position.

Moving to the Commercial aftermarket, sales were up 3%, driven by commercial excellence, improved flight hour growth and the continued uptake of repairs, modifications and upgrades of RMUs in the BGA segment, partially offset by fewer maintenance events.

Now if you look at utilization rates for a moment, global flying hours were up roughly 4% year-over-year, compared to the first quarter, which was up less than 2%. So we've seen a steadily improving trend in the flight hours. Spares growth was slightly ahead of utilization rates in the quarter and we'd expect these improving utilization rates to support the aftermarket growth outlook, we're going to talk to you about that more in a little bit, in the second half of the year.

Defense & Space, down 8% revenues with the U.S. Defense sales unfavorably impacted by planned ramped downs, project ramp downs as well as some program delays, partially offset by growth in international markets. And again, while sequestration headwinds continue to be a challenge for the business, we still had a number of key program starts in the quarter and we continue to believe we're on track to our full year expectations for D&S of down revenues 4% for the full year.

Turning to segment profit; Aerospace margins expanded 90 basis points to 19.5%, driven by commercial excellence, productivity net of inflation and partially offset by lower Defense & Space sales.

Let's not turn to ACS, Automation and Control on Slide 6. ACS sales for the quarter were up 3% and had growth in all three of their sub-segments and in every region. On an organic basis, sales in the U.S. were up 2%, driven by improving residential end market conditions, offsetting tougher industrial comparables last year. In non-res, constructions remains suppressed, although the orders pipeline does appear to be improving. Europe was up slightly, outperforming the overall market with good growth in ESS, partially offset by Building Solutions as a result of soft economic conditions. In China, sales were up 6% with good growth in both the short and long-cycle businesses in ACS.

Now, transitioning and just going through a couple of the high points at each of the ACS sub-segments; ESS, Energy, Safety and Security, sales were up 3% globally. We had particularly good performance in ECC, in security as well as fire with organic growth in all of these pieces, 5% or better as a result of new products, continued good geographic expansion, and also continued evidence of the U.S. residential strength that I referenced earlier, and we'll come back later and particularly, give you a little more color in terms of those segments.

Process Solutions sales were up 4% for ACS supported by continued good services growth and the uptake in our Advanced Solutions software offerings. And just like the first quarter, we had strong sales conversion as a result of higher margin in the backlog. For BST, for Building Solutions and Distribution, sales were up 1%, driven by higher sales in the Americas security distribution business and also in building services.

Moving to the segment margins; ACS was up 110 basis points in the quarter to 14.4%, representing over a 50% sales conversion, much of it reflected in higher gross margins; commercial excellence, a number of operational improvements particularly notably in Process Solutions; and strong productivity net of inflation including the repositioning benefits that are flowing through. All of these contributed to the ACS margin performance in the quarter.

Now, let's go to Slide 7, look at the highlights for PMT; Performance Materials and Technologies. Sales for PMT were $1.7 billion, up 9% in the quarter, driven by continued growth in UOP. UOP saw almost 40% top line growth, 11% on an organic basis, primarily driven by the addition of Thomas Russell, increased catalyst shipments, also higher equipment sales reflecting strong petrochemical as well as gas end markets. Now, the UOP backlog continues to be robust, up 10% organically with strong customer adoption of new UOP technologies and investments in new capacity.

On the other side, Advanced Materials sales were down 6% versus prior year, reflecting soft end markets overall. Flooring saw a slow start to the cooling season resulting in delayed purchases by customers, presumably that's beginning to pick up now, as well as lower production volumes from the continued Metropolis plant shutdown, which resumed operations at the site in July following approximatley 12 months' shutdown for structural upgrades.

Now, resins and chemicals experienced lower production volumes year-over-year, primarily related to plant outages and also soft market conditions in China.

As I said earlier, segment margins for PMT were down 360 basis points, consistent with our expectations in what we communicated to you back in April, primarily driven by the impact of lower UOP licensing sales versus last year, lower Advanced Materials volumes, growth investments that we continue to make in PMT as well as the impact of inflation. We also continue to see dilution in the market rate for PMT, and again as expected from the Thomas Russell acquisition which will lap in the fourth quarter. So for the full year, we continue to expect PMT margins in the range of 18.4% to 18.6%.

Let's finish off the segment highlights by going to Transportation Systems; Slide number 8. So TS in the quarter; sales up 5% year-over-year, the first gain importantly since 2011 with Turbo volumes up high-single digits as higher Turbo gas penetration in all regions, strong growth from new launches and improving China commercial vehicle sales, more than offset slight declines in European light vehicle production in the quarter. Now we're really encouraged by what's been a relatively stable production environment. Although the possibility of a second half inventory correction still exists, as new car registrations continue to be weak in Europe and we planned accordingly, which we'll cover in a moment when we talk about TS in the second half outlook.

Segment margins for the business were up 60 basis points to 13.3% in the second quarter, primarily driven by strong productivity and volume leverage, partially offset by unfavorable price. And just as a reminder, in June, we completed the one-year anniversary of the closure of the FM's – or the initiation of the FM's closure of (indiscernible), the Friction Material closure of (indiscernible). We completed that this June. And that facility – and the full closure of that facility will provide meaningful productivity benefits beginning in the second half and of course, flowing through to 2014.

Now, before we move to our third quarter expectations, I just want to take a moment to update you on the status of our restructuring pipeline because as Dave referenced earlier, that's going to continue to be an important element of our continued margin expansion efforts.

So, on Slide 9, starting with the left hand side of the chart, what we've done here is walk you from our restructuring balance at the end of the year to where – at the end of 2012 to where we are today. And as you can see, while we successfully executed on roughly $70 million of outstanding projects, we've funded approximately $100 million of new projects, adding to the projects in process through the first six months of the year.

Now, moving to the right side of the page, just to help you a little bit in terms of understanding this chart, the blue bar on the right hand side of the chart reflects the cumulative repositioning funding that we've done in 2012 as well as year-to-date 2013. So, the blue bar represents over $200 million of gross repositioning over six quarters and delivering savings shown in the red bars of $130 million in 2013 and over $220 million or an incremental $90 million in 2014.

So many of our projects, we are very pleased to say, have between a one to two-year payback. So we're being proactive here and it's a big reason again we've been able to continuously expand margins in this slow growth environment.

Further, we continue to identify and drive cost-saving projects across the Company, funding projects to realign resources and regional footprints to reflect the current global growth outlook and our market opportunities, and we are also executing against our acquisition integration plans to drive cost synergies delivering further benefits in 2014 and obviously beyond.

So, now let's go to Slide 10 and let's discuss our outlook for the third quarter. For the third quarter, we're expecting sales to be in the range of $9.8 billion to $10 billion, up 2% to 4% on an organic basis. EPS is expected to be in the range of $1.20 to $1.25, up 5% to 10% when you normalize for the tax rate of 26.5% in both years.

So let's just do kind of a quick recap on our kind of the revenue outlook and as well as couple of references to margin for the third quarter by business.

In Aerospace, we are expecting sales to be up low-single-digits, approximately 1% to 3%, driven by commercial growth including mid-single-digit growth in the aftermarket as a result of easier comps and improved utilization rates, partially offset by mid-single-digit declines in Defense & Space.

Now we expect ACS sales to be up 2% to 4% in the third quarter on an organic basis and incremental sales growth resulting from the Intermec acquisition, which we now expect to close in the third quarter. It's also important to note that the Intermec and RAE Systems acquisitions will have a dilutive impact on ACS' margins in the third quarter of approximately 100 basis points. So the ACS' reported segment margin will be down slightly year-over-year, likely in the range of 20 to 30 basis points of result as the acquisition headwind.

In PMT, we're expecting sales to be up 13% to 16%, which equates the mid-single digit growth organically. As we've seen before, UOP can be lumpy, and as a result, we expect their organic growth to be in mid-single digit in the quarter as we lap higher catalysts and service sales. Advanced Materials in the third quarter is expected to see an improvement in organic growth with sales up mid-single digit reflecting improved production levels at Hopewell in resins and chemicals business and also the restart of Metropolis as I mentioned earlier in the fluorine's products business, both of those in the third quarter.

Finally in Transportation Systems, we're expecting sales to be up 2% to 4%, reflecting strong uptake of new launches, and also the growth in Turbo penetration globally. The growth is against the backdrop of lower EU light vehicle production rate expected be down 3% year-over-year, contemplating a slight inventory correction in Europe as we move into the summer shutdown season.

Now we expect a lift in TS margin rate year-over-year helped in part by the footprint transition that I mentioned earlier, although we expect given their strong margin rate performance in the second quarter, that TS sequentially their margin will be flat to slightly down now in the third quarter.

So, with that in mind, let's turn to Slide 11 and we'll through some of the second half drivers that could push us toward the lower high end of our guidance range. So, looking at Slide 11, entitled 'Second Half 2013 Guidance Framework.' Let me just give a couple of highlights. In terms of our key assumptions, again, for commercial aircraft, we expect growth will be an important contributor to the second half outlook. We're lapping a relatively easier which is to say a more normal year-over-year comps. At the midpoint of the range we've assumed the aftermarket sales are largely in line with utilization with the likely case that airlines continue to aggressively manage inventory levels, but that improving flight hour growth will equate to more normal buying patterns, consistent with what we saw at the end of the second quarter.

For ESS, the business was up roughly 2% organic in the first half driven by again ECC, security and improvements in life safety. And while the composition may fluctuate a little bit in the recovery, we're still expecting low to mid-single-digit growth overall for ESS with no change in the overall economic backdrop. Now the composition of PMT growth is expected to be different. UOP sales will be up organically but at a slightly lower rate with lower petrochemical catalyst shipments sequentially in the second half which would create an unfavorable mix dynamic. And as we referenced earlier, we should see a meaningful improvement in both R&C and fluorine products in the second half for both those businesses. Pricing will also continue to be an important variable with our midpoint based on stable prices at today's levels.

For Turbo in the second half, we'll be watching obviously the summer shutdown plans of the OEMs with our base case assumption best described as stable which would translate into second half EU light vehicle production down just slightly on a year-over-year basis.

Finally, rounding out the list, we have China sales which we thought of more broadly as a barometer for our high growth market and the Euro and FX rate which we will continue to plan for at the (125) at the midpoint. So, taking these elements into account complemented by a continued assumption of strong cost controls, strong execution by the businesses, we think this gives us a balanced range of plus or minus $0.05 around $4.90 at the midpoint for the full year.

So, now, let's turn to Slide 12, where we'll put it all together from a full year perspective. Now, the slide is a little different than we've given you in the past, but we think it will be helpful for you to understand the dynamics of our second half outlook. First, full year sales reflect our first half performance and no change to the second half outlook, with sales for the full year expected to be up 3% to 4% or 1% to 2% on an organic basis. Now on a reported basis, we could see an impact based on the timing of the Intermec close, but we feel it's incorporated into a range at this point and we are reworking to complete the transaction in the third quarter.

Segment margins are estimated to be 16% to 16.2% for the full year 2013, up 40 to 60 basis points year-over-year. Now, as we've discussed, you can see the estimated impact in the third quarter to segment margin due to the dilutive impact of Intermec, RAE Systems and the Thomas Russell acquisitions, roughly a 50 basis point headwind in the third quarter in terms of our margin rates which translates to $0.02 to $0.03, think of that as $0.03 of EPS headwind for the quarter.

Now, obviously, on the subject of M&A as the integrations occur and the cost synergies are realized, the M&A will be a benefit for us in 2014 and beyond. However, even with that headwind, you can see that our full year guidance is roughly at or above the low-end of our 2014 margin targets with significant contributions coming from Advanced Materials and Transportation Systems in the fourth quarter.

Finally on EPS, we're raising the bottom end of our guidance by $0.05, making the new rage $4.85 to $4.95. And as we've referenced earlier, we continue to use a full year tax rate of 26.5% which will be flat to 2012, so no impact to year-over-year. However, as we think about the linearity within 2013, again, the first half EPR of about 23% was below the full year rate. So we've guided now to 26.5% for the third, and for modeling purposes, we're expecting a headwind in the fourth quarter which works out to be approximately $0.11 versus our 26.5% full year planning assumption.

Now, we think this updated range captures our strong performance in the first half. It's appropriately balanced for the remaining risks and opportunities we've talked about in the second half. And as for the takeaway, it's important to be clear that we're not counting on a macro lift in the second half.

So now let's turn to Slide 13 for a brief ramp-up before we turn it over to you, Elena, for Q&A.

In summary on Slide 13, the second quarter results put us another step closer to delivering on the high expectations that we set out for you last December. As expected, the environment has remained challenging, but Honeywell continued to see strong execution supporting its results. And consistent with our prior views, we're not expecting not counting on a big second half recovery. We've seen pockets of short-cycle improvement. The comps are getting easier and the investments in residential construction do seem to be improving and again, evidence of that in our ESS businesses. However, while we have seen some signs of improving co-activity, non-residential investment remains weak and we'll be watching the customer demand signals in aerospace and automotive obviously very closely in the second half. Emerging markets are not likely to accelerate in the near term. So, probably the best way to summarize our end market expectations for the second half is really just stable.

With that in mind, we'll continue to focus on executing sustainable productivity, including delivering on the strong project pipeline we've already funded. And new product introductions, which are the lifeblood of our growth, will remain on overdrive, helping to deliver next quarter, next year and beyond. You'll see evidence of that in the wide range of exciting new wins that Dave highlighted at the start of this call.

So, with that, Elena, let's go over to you for Q&A.

Elena Doom - VP, IR: Thanks Dave. Zack, we'll now take our first question on the line.

Transcript Call Date 07/19/2013

Operator: Steven Winoker, Sanford Bernstein.

Steven Winoker - Sanford C. Bernstein & Co.: What was the pricing in the quarter?

David M. Cote - Chairman and CEO: I don't know off the top of my head, but pricing or commercial excellence is one of the things that we have focused on for a long time and it gets geared towards the value that we provide with a lot of our new products and services, but I don't have the number off the top of my head.

Elena Doom - VP, IR: We've got 50 basis points for the margin rate expansion in the quarter.

David J. Anderson - SVP and CFO: I think another way to say it, and it's a theme, Steve, we talk about a lot, is pricing and productivity more than offset inflation, and that's what we're just going to continue to do.

Steven Winoker - Sanford C. Bernstein & Co.: I'm just trying to get a sense for the unit versus pricing impact, but that's helpful. On Defense & Space down 8%, I know you mentioned its line with the planned ramp downs and expectations. But I recall from the Defense & Space Day, a plan that was just close to full sequestration but not at full sequestration. Are your planning numbers now incorporating kind of a full sequestration impact over remaining next – on a multiyear basis?

David M. Cote - Chairman and CEO: Well, the way we planned, and I think I've said this before, but we assumed about 80% of the sequestration impact and had contingency plans for the remaining 20%, just assuming that that was probably the best bet. It unfolded that way. We launched a contingency plan. So, yeah, everything we are reflecting and the way we're looking at the Company going forward is to assume sequestration stays.

Elena Doom - VP, IR: With that, that basically gives you about a 4% decline in D&S sales for 2013 versus 2012.

Steven Winoker - Sanford C. Bernstein & Co.: I know you can't say too much about it, but on the ELT topic that's come out in the – your announcement on that, I'm just still trying to get my head around something that doesn't seem to have enough power to generate the heat that would be required to melt the frame in kind of a non-rechargeable self-contained basis. Any kind of color you might provide that this maybe more than that or I just don't get – I'm just struggling with the kind of physics of the issue.

David M. Cote - Chairman and CEO: I guess a couple of comments. The first one is, my biggest learning from going through a number of these kinds of investigations in the past is ways to find out what the final result is before opining on anything, because these things just – they go all over the place, media loves it. So, any of those snippet they pick up anywhere, they report, and I've just learned to wait, wait until they've done the job and when you look at the AIB and FAA, they will do a good job sorting this whole thing through. So we'll just wait to find out what the actuals are and respond to it then. In the meantime, with any things that have been discussed, we can say there's no significant financial impact on Honeywell in anyway.

Operator: Scott Davis, Barclays Capital.

Scott Davis - Barclays Capital: The one thing that there wasn't a slide on was really cash usage, and can you give us a sense of – and maybe on a forward look really, I mean, next six months, next 12 months, given the M&A pipe you have out there, what kind of opportunity you have to put things to work?

David J. Anderson - SVP and CFO: Well, I just talk a little about the quarter. We bought back shares in the quarter, I think it was 6 million shares in the quarter, so that was an attractive, I think, use of cash. We closed on the RAE Systems. Due to regulatory review, the close on Intermec was pushed in the third quarter. We'll close on Intermec in the third quarter. That's mid-$600 million in terms of acquisition. I would say Scott right now, just on a forward-looking basis, Dave, get your views on this. I think the acquisition pipeline is relatively attractive. It's always a matter of the distance between the cup and the lip and seeing the whites of the eyes of these opportunities in terms of the full due diligence and valuation in the very disciplined approach, Scott, that we take to M&A. But I would continue to say to you that I think that we're very, very well positioned for inorganic growth that complement our organic growth in this environment. And the other thing we'll continue to do is we'll continue to look at – from a dividend standpoint, we'll look at doing the right thing there in the context of growing earnings and what makes sense in terms of dividend payout. Don't you think Dave it's the best…

David M. Cote - Chairman and CEO: Yeah, I agree. The strategy remains the same, Scott and we'll continue to be very disciplined as Dave said when it comes to acquisitions. We haven't lost our mind in the air and I'd say the nice thing about having a full pipeline is it allows you to be more disciplined in what you go after.

Scott Davis - Barclays Capital: Yeah, agreed. I mean, since you've done a nice job in the past, I think, there's always an interest in seeing more of it, but that's a high-class problem.

David M. Cote - Chairman and CEO: We'll continue to be smart about it. I can promise you that.

Scott Davis - Barclays Capital: So, I want to talk a little bit about UOP and then I'll pass it on. I mean, this is a business that I'm not sure – I know I've never been able to forecast and I'm guessing that a lot of other people struggle with it. I mean, it's been outgrowing the end market for quite some time now and with less volatility than what used to be – it was always a great business, but it used to be much more volatile. It scares me only because we've had so many good quarters in a row here. I mean, what's changed in this business that makes it so much of a better business now or less volatile business now or maybe even more predictable now than what we used to get? Or are we going to get blown up one of these quarters on this thing and not see you coming?

David M. Cote - Chairman and CEO: Yeah, I see the direction where you're going. At the end of the day quarter-to-quarter it's still – I mean, lumpy is the word we've always used. Some don't like it, but it's true. Quarter-to-quarter, it's always going to be lumpy. Year-to-year though, the forecast ability, if that's the word, is pretty reasonable and should continue to grow. It's not just the end market goodness that we've seen, but you've heard me talk about it before when it comes to UOP, but we've got a significant amount of seed planting here. If you go back to when it was a JV, you've heard me say before that when one partner wanted to invest, the other didn't and that was – and it true for us too. And as a result of that, there was 20 years of just kind of ambling along – just terrific technologies, people, culture, everything, but it was really ambling along more than anything else, We've really invigorated that when we took over the whole thing and put a lot more money into R&D and horizon-free spending. You don't see it right way. But over the course of that ensuing six or seven years, man, it started to pay off really well and that's what's you are seeing the benefits of which allows us to put even more money back into to develop new things. You've seen it happen in some of the cultural changes as they've expanded globally, improving our reach that used to be more mental than physical, and we just have more people out there now than we ever did before, and all those things taken together, the technology, the money we've put into it, the people outreach, the customer outreach, is just really paying off very well.

Operator: Howard Rubel, Jefferies.

Howard Rubel - Jefferies: I want to go into Aerospace for a moment. Just two things; one is, could you characterize where you're spending on research and development and how you look for that? And what were the numbers, Dave, this year versus last and how do you characterize it?

David M. Cote - Chairman and CEO: Well, I'd characterize it as – we like all the businesses that we're in Aerospace, so we support them all with R&D. In terms of big programs, they're all the ones which you are familiar with, like the A350 and the wins that we've gotten over the last four or five years. In terms of the overall spending, growth investments continue in Aerospace. I don't know if we disclosed the specific numbers?

Elena Doom - VP, IR: We spent just under 8% of sales on R&D that's funded from the Company.

David M. Cote - Chairman and CEO: Because I would say, Howard, one of the things that we've tried to do is consistent with the seed planting point is we're still investing in all the businesses when it comes to the growth investments that we've talked about, because we don't want to just make this quarter this year, we want to make it next year, six years from now, 10 years from now. So all the businesses are doing a really good job of reinvesting.

Elena Doom - VP, IR: And that spending level is up about $75 million, $80 million on a year-over-year basis.

Howard Rubel - Jefferies: So that's on the quarter or that's should be…?

Elena Doom - VP, IR: For the year.

Howard Rubel - Jefferies: It sounds like you are putting a little more emphasis on mechanical and based on some things that Tim seem to have said lately, is there some incremental opportunities there?

David M. Cote - Chairman and CEO: I like both, both the mechanical and the electronics side, and increasingly we're seeing an interplay between mechanical and electronic and that's what you see with the electric taxi. We do like the components business, the mechanical components business as we've discussed, because there is a place where you can truly differentiate with technology, and I think Tim mentioned that we – at Investor Day, that we had about $4 billion in wins on mechanical components that we had not anticipated in the past. So I like the whole thing.

Howard Rubel - Jefferies: And then just a change, Dave to talk about ESS. I mean, there is clearly – either it's change in the market or some product differentiation, could you just elaborate a little bit more on some of the successes that you've achieved there and address the momentum, please?

David J. Anderson - SVP and CFO: Maybe I could just start there, Howard, just give you a couple of numbers, just add a little bit more color to what we talked about in the second quarter and then I'll ask Dave to talk a little bit about some of the innovations, some of the things that are really going to continue to drive ESS growth going forward. We saw, as I mentioned in my comments, we saw good growth in the second quarter in ECC, Security and in Fire particularly. Fire was up 6% globally; ECC was up 5% globally and HSG, the Security business, was up 7% globally. And the numbers are all better in the U.S. for those businesses. So, whether it's, call it, residential retrofit or some benefits of improved housing starts – there is a little bit of evidence as well of that when you look at the ECC homes business. It's clearly – and the momentum has been building. You can see it. It's not like it spiked. You actually can see the momentum building. And as Dave said, kind of back to the broader theme, we completed our staff reviews last week. I mean, there is just a lot of good stuff that's going on within that group of businesses.

David M. Cote - Chairman and CEO: Yeah, going back to the seed planting point, Howard, it may seem like an overused message here, but man, it's the truth. It's the money that we put in in the past to developing products that people want that help to develop adjacencies where people maybe didn't even realize it was a product that could solve their problem. We are doing that in every single business across the company, and what you're seeing in ESS is a function of that. So the only business that has continued to be a little bit slow is sensing and control business, largely driven by a weak industrial environment, but same thing there. They've got some great stuff coming that's helping to mitigate that and I think portends a pretty good future.

Operator: Steve Tusa, JPMorgan.

Stephen Tusa - JPMorgan: Can you guys just maybe walk through if there's been any change to any of the segment revenue forecast for the year? There doesn't seem to be many, but are there any kind of tweaks, up or down, obviously (it didn't change) sales, but within that, the segments?

David M. Cote - Chairman and CEO: Elena, do you want to talk about that from a guidance standpoint?

Elena Doom - VP, IR: Sure.

David M. Cote - Chairman and CEO: We tweak slightly up our overall revenue guidance for the year and if you could talk about that by segment.

Elena Doom - VP, IR: We raised it by $100 million reflecting the second quarter revenues coming in at the high-end of our guidance. When you look the businesses, for Aerospace, there's really a little bit of a change upwards relative to the midpoint by maybe $50 million. If you look at ACS, ACS is still on track relative to their, call it, $16.4 billion to $16.6 billion for the year, so that's up again at the midpoint slightly versus our prior guide. PMT is looking potentially a little bit lower, so $6.8 million to $6.9 million versus – so maybe at the midpoint, about $100 million less. And then TS is, we're still continuing the outlook there given, as Dave referenced, the potential for some inventory correction in the third quarter given the strength that we had in the second quarter.

David J. Anderson - SVP and CFO: So really just refinements I think you would say to those numbers.

Elena Doom - VP, IR: Yeah, exactly. On the midpoint, plus or minus $50 million to $100 million.

Operator: Jeff Sprague, Vertical Research Partners.

Jeff Sprague - Vertical Research Partners: Can we talk about China a little bit? If I think about what seems to be playing out, right, from a macro standpoint, it sounds worrisome and you are now the third or fourth Company this earning season that sounds actually better and more confident. I just wonder if you could elaborate a little bit more on from your vantage point what do you think really is going on, and is it CapEx driven or people catching up on maintenance. Any impact from this whole shadow-banking question? Just asking for your collective wisdom on what's going on in there?

David M. Cote - Chairman and CEO: I mean, the collective wisdom may still a symbol here, but at the end of the day, as you know long-term, I'm very much a believer in China and what I think they can accomplish. And it's going to endure its ups and downs for a variety of reasons, but I do think that that kind of 6% to 7% GDP type planning is the way to go. We have seen some downturn as we talked about in, I guess, the first four or five months of the year. I think that was more, let's say, correction, than anything else responding to tightening money.. We still see the impact of some of that on something like airline spares where in China where I think the fourth quarter was up like 30% or 40% in anticipation of what was going to come. So, first six months continue to be low. That's another one that I do think comes back at some point. So, I'm a believer long-term and I think we're going to continue to do well there.

Jeff Sprague - Vertical Research Partners: I was actually also a little surprised. I think you said China is up 14% overall. I would have expected that would have been driven largely by ACS, but I think the comment was ACS China up 6%. So, where did it really come? It was TS or was it somewhere else?

David J. Anderson - SVP and CFO: Well, we had good growth and we talked a little bit about that, Jeff. We had good growth, kind of across the board. We had good growth in Aero R&O. We had good growth in the ACS short-cycle. You sighted the number we mentioned earlier, but also in the long-cycle businesses of ACS. We had good growth in UOP, particularly at two projects completed where there was revenue conversion. And HTT in the Turbo business what we've seen is kind of a rebound now in the commercial vehicle business sales and our penetration there as you know is good. So, we saw good growth in Turbo as well. By the way, we expect that to continue into the second half which is a nice tailwind for that business and into 2014. So, it's not an individual business. It really is kind of – I mean, there's a few exceptions that go the other way. But in general, when you look across the Honeywell portfolio, China looks pretty good.

Jeff Sprague - Vertical Research Partners: And then just on restructuring, I mean, obviously the story is well understood on Honeywell operationally. It's a much better company today than it was eight or ten years ago to all of your credit on the line. It seems like you continue to find a lot of restructuring opportunities. I mean, intuitively, I think they get harder to find and they're longer payback, and instead you continue to find them and the paybacks are decent. Is it actually because of HLS and other things that it's actually getting easier to find stuff to do, things that maybe weren't obvious are now jumping out? How do we get our head around that?

David M. Cote - Chairman and CEO: Yeah, I would say, we're never going to be devoid of ideas. We were getting some of the same kind of question, if you recall, Jeff, even five or six years ago, and I think, as long as we keep focused on those key process initiatives, so the Honeywell operating system as you mentioned, where we're just getting to the point where we're 70% to 80% bronze and we've still got silver and gold to go and there's big benefits in each of those cases. Functional transformation, you've heard me say we expect another 1.5 to 2 points of margin expansion over time just coming from that and Velocity Product Development which helps to reduce the overall cost of R&D, and that frees up additional resources for us to be able to do more in new programs, so I'm going to point to all three of those and say, every one of those initiatives helps us to come up with more and more ideas as we go forward. It's not like we're scraping the barrel to find ideas, there's still plenty more out there.

David J. Anderson - SVP and CFO: One thing maybe just to add to that very quickly is Dave's kind of underpinning all of it is the continued investment that we make in the ERP, (EPS) implementation which is a big enabler and foundation that's really supporting the efficiency productivity across all of the items that Dave mentioned, Jeff.

David M. Cote - Chairman and CEO: I think that's a good point, Dave, because that's particularly true in ACS. If you take a look at – that's the business that has been I guess the most complicated to get SAP installed. And we're finally getting to a critical mass there with 60% or 65% by the end of the year completed and we're starting to see the benefits of that. So I still see lots of good ideas to come.

Operator: Andrew Obin, Bank of America.

Andrew Obin - Bank of America: Just a question on Aerospace aftermarket. Could you give us some more color by region as to how this 2% improvement was across the globe?

Elena Doom - VP, IR: Sure. Andrew, so I guess the color I would start with is that if you look at the large air transport and regional market, which is really the big commercial jets, the aftermarket there was up 2%. And what we really we were looking at there is an indicator versus flight hours of the spares growth. The spares were up 4%, R&O was down slightly. From a regional perspective, I call out that China continues to see the same phenomenon that we had in the first quarter with spares down large double-digit partially offset by about a mid-teens percent growth in R&O business. So, for total China, which again, we've been watching because the dynamics there really shifted in 2013, the overall aftermarket was down slightly, but significant – yeah, some good improvement versus the first quarter.

David J. Anderson - SVP and CFO: Yeah, in that R&O growth which you cited. And we had good numbers in the U.S. We had good numbers in the EMEA. So that's what really supported it.

Andrew Obin - Bank of America: And just to follow up on the question on China, your strong performance there. Can you guys separate your strategy where you are taking market share, you are going to (lay the) markets versus the underlying markets, how much of it is do you think macro on the ground versus how much of it is your the company-specific strategy?

David M. Cote - Chairman and CEO: I'd say that's a tough one to ever sort out. But I would say you're right about the focus on becoming the Chinese competitor. It does make a difference. It's not the easiest markets to measure when it comes to what the overall size is. But I do know that's making a difference. I'd be hard pressed to be able to say how much of the growth is because of the market versus what we're doing specifically.

Operator: Peter Arment, Sterne, Agee.

Peter Arment - Sterne, Agee & Leach: Just first a clarification on the comments on Defense being down 8% and kind of your expectations in the second half of the year heading into '14. Is it still the expectation that '14 still would look better than '13 given the international programs or has that changed with sequestration?

David J. Anderson - SVP and CFO: I think you'll see likely decline, Peter, in 2014 for D&S but at a lesser rate than the 4% that we're forecasting guiding to for 2013. You'll see some improvement in the rate of decline for D&S in 2014 would be our current thinking.

Peter Arment - Sterne, Agee & Leach: And then back to…

David M. Cote - Chairman and CEO: It's a positive statement, Peter.

David J. Anderson - SVP and CFO: It takes years to develop that.

Peter Arment - Sterne, Agee & Leach: Back to Jeff's question on the restructuring comments, in particular, I guess the Defense & Space. Given the softness you're seeing, are you – you've made a lot of progress already on all the enablers that you have across all the businesses, but in particular, Aerospace. How do we think about restructuring opportunities as Defense kind of softens here?

David M. Cote - Chairman and CEO: Well, I'd say for us it's less of – whatever Defense decline we run into – I mean, I think you've heard me talk about this some in the past. It's not that big a deal for us when it comes to what's kind of the impact on restructuring, because Defense is more of a sales channel than it is a, let's say, specific market with specific products. It's really just kind of similar jet engines that we make for commercial, go into military, APUs, electronics. So, it's pretty easy for us to just shift, say, engineering resources and plant production from working on Defense to working on commercial. People don't need to move. You don't need to rehire anywhere, so it's pretty straightforward for us.

Peter Arment - Sterne, Agee & Leach: Just if I could squeeze in one last one. On the electric taxi which was a cool demo in Paris, but how do we think about – could you give us any sort of color on the customer interest that you saw and when will we expect to see some of those customers sign up? I know entry into service is until 2016, so…

David M. Cote - Chairman and CEO: This one's been pretty cool because when we first came out with the idea, there was a lot of interest, more than – I have to admit, I really expected right from the beginning, because usually it takes some time, and the interesting part is that interest has grown, and the amount of publicity that we got for that electric taxi and the increasing speed so that it outraces a human today and will do even better in the future, is pretty exciting. So, there is a huge amount of interest. I can't predict when the first order comes in, but I am pretty confident in this product. This really looks like we jointly have a winner here.

Operator: Shannon O'Callaghan, Nomura Securities.

Shannon O'Callaghan - Nomura Securities: A couple of things. First, on Europe, you guys have been seeing some improvements in Europe for the last couple of quarters. What's better there, what's not?

David M. Cote - Chairman and CEO: Well, it's been – I'd say, the short-cycle side has actually been showing improvement. We're not ready to declare victory on this one yet, because it kind of – it's tough to see the end market or macro conditions supporting a big bounce there, but it's been encouraging to see so far. The new product introductions that we've had do help. Our expectations were low and we've planned pretty conservatively. But it's been pretty much across the board on the short-cycle side. Turbos did better, the ACS businesses did better. So, it's been kind of across the board.

David J. Anderson - SVP and CFO: And I mentioned earlier, Peter…

David M. Cote - Chairman and CEO: Shannon.

David J. Anderson - SVP and CFO: I'm sorry, Shannon. We talked earlier too about the Aero business and we saw reasonably good numbers in terms of the EMEA or the European aftermarket for Aerospace as well. So, as Dave said, it's no single item but – I mean the good news is when you look at our short-cycle businesses to your point Dave, against the backdrop of the macros, it's really very good performance.

Shannon O'Callaghan - Nomura Securities: Then just on CapEx, we haven't really seen that go up yet year-to-date. I mean, is there any change to your plan there or is that going to ramp more kind of second half of this year and into '14, any color there?

David M. Cote - Chairman and CEO: I would say the plans haven't really changed to your point. Both the UOP and fluorine plants we need to build, because we have the orders form them already so this just more a matter of timing than anything else.

David J. Anderson - SVP and CFO: And you would anticipate, given the point you make, Shannon, that's a good observation that the third quarter, for example, we're going to see cash flow probably a little lower than prior year as a result of that ramp up in CapEx. So, we'll probably give back a little bit of that favorability that we've got on a year-to-date basis because we've got very nice cumulative free cash flow favorability going into the second half.

David M. Cote - Chairman and CEO: We continue to be confident in our ability to outperform even in this weak macro environment and all the seed planting we've done and continue to do for growth and productivity around the world and in every business makes a huge difference for us. So, thank you for listening and have a great summer. See you.

Operator: Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.