Honeywell International (HON)

Q4 2011 Earnings Call

January 27, 2012 9:30 am ET


David James Anderson - Chief Financial Officer and Senior Vice President

Elena Doom -

David M. Cote - Chairman and Chief Executive Officer


Howard A. Rubel - Jefferies & Company, Inc., Research Division

Nigel Coe - Morgan Stanley, Research Division

Scott R. Davis - Barclays Capital, Research Division

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

John G. Inch - BofA Merrill Lynch, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Deane M. Dray - Citigroup Inc, Research Division



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Good day, ladies and gentlemen, and welcome to the Honeywell Fourth Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host, Elena Doom, Vice President of Investor Relations. Please go ahead.

Elena Doom

Thank you, Stephanie. Good morning, and welcome to Honeywell's Fourth 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

We ask that you note that elements of this 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. We also identified the principal risks and uncertainties that affect our performance in our Form 10-K and other filings with the Securities and Exchange Commission. This morning, we'll review our financial results for the fourth quarter and for the full year 2011, as well as share with you our updated guidance for the first quarter and full year 2012 and, of course, allow time for your questions.

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

David M. Cote

Thanks, Elena, and good morning, everyone. As you saw from our press release, we had another great quarter marked by terrific execution with continued growth in most of our end markets. And then yielded earnings per share above the high end of the previous range. Our reported sales were $9.5 billion, up 8% reported or 7% organic, reflecting continued advancement in our new products and the focus on high-growth regions. We ended the year with segment margins of 15.1%, expanding 90 basis points over the fourth quarter of last year. Then pro forma earnings per share were $1.05, up 21% over last year. Free cash flow was an impressive $1.4 billion in the quarter, reflecting 169% net income conversion prior to a $250 million cash pension contribution. Our 2011 performance underscored our balanced portfolio mix and strength of execution. New products, geographic expansion and traction on key process initiatives, all translated to record organic growth, margin expansion, high-quality earnings performance and strong free cash flow generation. And we did all this while continuing to maintain our seed-planting for the future.

In the fourth quarter, we had another quarter of robust new product launches and big wins starting with Process Solutions, who was awarded a highly competitive 15-year $90 million contract to completely overhaul the technology controlling the massive Los Angeles wastewater treatment system, ousting the incumbent in the process. Building Solutions & Distribution expanded their Smart Grid wins internationally with a project that will help connect up the 30 commercial and industrial buildings in the Thames Valley area, west of London. This will help alleviate the potential for future bottlenecks as the peak demand for energy grows. Honeywell is helping to create a more agile grid, without the public disruption or expense of major infrastructure upgrades.

UOP, as you might expect, also did well within the quarter. National Refinery Limited awarded UOP a major Uniflex project in Pakistan. As a reminder, Uniflex is the process technology that maximizes the conversion of crude residues. Think of it is as the bottom of the barrel to high-quality transportation fuel. Uniflex technology can significantly increase refinery margins $2 to $4 a barrel over other conventional technologies, and that's a big competitive advantage for our customers.

The emerging regions are continuing strong and now comprise approximately 20% of our total sales. We're seeing the biggest increases in Turbo, Commercial Aerospace, UOP and Process and Building Solutions, with sales up approximately 20% again in the fourth quarter for China, India and the Middle East combined.

Turning to 2012. We still think the high probability outcome is for slow growth economic environment. That said, our developed market order rates are mixed with continued growth in the U.S., partially offset by weakness in Europe short-cycle businesses. We still expect these businesses to grow but at a more moderate rate in the first quarter. Meanwhile, the commercial Aero aftermarket remains robust with spares and R&O continuing to outpace flight hours. And our longer-cycle businesses like commercial Aero OE, Process Solutions and UOP are increasing backlog with our total book-to-bill rate above 1.2.

Dave will walk you through an updated view by business when he discusses the outlook for the first quarter of 2012. But from an overall Honeywell perspective, we remain confident in our ability to sustain good growth, while continuing to expand margins over the course of 2012. So once again, 2011 is further proof that our strategies are working, and we think we've got a balanced plan for 2012 that incorporates the current economic realities, as well as the benefits derived from our continued seed-planting initiatives.

And finally, we think that puts us in excellent position to achieve our 2014 sales and margin commitments. 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 it over to Dave.

David James Anderson

Thank you. Good morning, everyone. So let's start off on Slide #4, and I'll take you through the fourth quarter highlights, just adding to Dave's comments. As you can see, reported sales of $9.5 billion, up 8%, 7% underlying organic growth in the quarter, so continued strong organic growth and a finish for 2011. Acquisitions contributed about 2% of growth, and we had about a currency of 1% headwind in the quarter. On a regional basis, as expected, Europe was lower in growth. However, we saw strong organic continued growth from the Americas, up about 7%. The Middle East, China and India combined were up almost 20%.

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