Ladies and gentlemen, please welcome, Honeywell's Vice President of Investor Relations, Elena Doom.
Good morning. Thank you for that round of applause. Welcome to Honeywell's 2013 investor conference. While you guys are still getting settled in, just so you know, for the folks in the back, there are some -- a few open seats here in the front. You can find an usher to escort you and start filling in the gaps. But as you can tell, standing room only again. But thank you for joining us. For those of you who aren't able to join us in person, today we are webcasting, and you can find the presentations, including a non-GAAP reconciliation, on our website at honeywell.com/investor.
So quickly, just some housekeeping items. You'll note today's agenda with Q&A scheduled after each of our business presidents. So lots of time for your questions. And of course, I need to remind you that today's presentations do contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Note that these elements can change the reasons that we cite in our 10-K and other SEC filings.
All right, on to the fun stuff. The theme for today, Innovation and Execution, Delivering 2014 and Beyond. You're going to hear us talk a lot about the Honeywell performance track record. And while that's important, what's more important is we're going to talk a lot about the opportunity that still lies ahead. Dave Cote will kick us of with an overview of Honeywell's evolution into a company that can outperform in any market environment. He'll take us through the Honeywell business model, applied with the One Honeywell performance culture across the entire company with a relentless focus on improving our internal processes and driving sustainable and profitable growth. Dave Anderson will bookend our day, adding a lot of color around our 2013 outlook and our continued investments for growth in the future. And looking ahead to 2014, as we are closer to achieving those targets that we set in February of 2010, the focus is at the Honeywell level. But with that in mind, Dave is going to update you on the progress and talk about the key growth drivers for the company over the next 5 years.
You'll also hear from each of our business presidents as they provide additional detail on the specific strategies for their growth, update you on their key end markets and discuss their long-term competitive differentiator. Shane Tedjarati is also here with us today, along with a number of our new High Growth Region presidents, and he's going to talk about the evolution of the HGR strategy. I would also like to point out, for those of you who didn't recognize our HGR or any of the other acronyms that we will use today, there's a full list of acronyms at the end of your binder, in the Appendix.
Now you're going to hear us talk a lot about growth. But the Honeywell clock doesn't end with 2014. There's no metric around it, but investing for growth, as Dave likes to say, seed planting for our future, is as critical an element for the 2014 targets as sales and segment margins.
So to conclude, we think we have a lot of runway ahead of us. We built in a tailwind for growth with our Great Positions in Good Industries. Both of those, you'll note, are aerospace references, but I have just one more for you today. For your giveaways attached to the USB drive, you'll see this tag that says, "Remove before flight." These tags were used to identify protective cover for aircraft instrumentation. We pulled these off all of our wins, in 2012. They're not needed anymore because those planes are busy flying.
So with that, I'd like to introduce Honeywell Chairman and CEO, Dave Cote.
David M. Cote
Well, that's pretty much our story. So any questions? I actually think Elena summarized it pretty well, so the rest of this is just going to be color commentary for the day.
We've tried to keep this really simple, so it's really just 2 simple messages. The first is that we have outperformed. And I know most of you know that, but we can't wait to show you again. And then 80% -- in fact more than that. I'd say 90% of that pitch is devoted to why that's going to continue. This is not kind of a onetime phenomenon or "Boy, it was great to own it at this time and see what happens." But rather, what we've done is set up something up that I think you'll end up agreeing creates a sustainable path for sales, earnings and cash growth that I think you'll like.
So this is what you're going to hear today, that first we have a great growth trajectory as a company and that seed planting that Elena talked about, we do get everywhere. Some of it pays off the next year, some of it 3 years from now, some 10 years from now. But we're constantly thinking about the future. And for both process and product, how do we make sure we do that right seed planting?
We'll spend a lot of time on robust capital allocation. It's not something we ever get a question about, but I thought you might want to know something about it. I know, very bad joke. You all want to know what's going to happen with the cash. Here is the way to think about it.
First thing is-high-ROI-growth investment. And you'll see that with the CapEx spend, a Big part of it driven by PMT and I think you'll like the stuff that Andreas tells you about. We like to pay a competitive dividend. Dave will take you through how that's changed over the last 10 years and what the growth rate has been. And we're big believers that you want to think through "How do you message about the future at the same time that you're doing that."
We have a great M&A pipeline, and our discipline has not dissipated in the 10 or 11 years that we've been doing this and we're not going to lose our minds and do something silly. We started buybacks last year, and you've -- we'll give you an update on that.
And I think importantly is that any kind of pension contribution over the next 3 years is highly unlikely. You can always come up with a scenario that creates a problem. But if you take the -- all the most likely scenarios, we're actually in very good position here. And Dave will show you in his chat about how we're in a much better position than most of our peers because of the work that we already have done and we've taken our hits early.
As Elena mentioned, innovation is something that we're going to -- is -- you'll throughout everybody's presentations with the new products and the new process work we're doing.
Specifically turning to each of the businesses. I'd ask you to just focus on this and think about it. Some confusion sometimes about ACS just being a bunch of businesses and how they all come together. Really the way to think about it is there's 3 fundamental business models, and Roger's going to take you through each of them, the first one to think of is the product side, where really we focus on multichannel, multi-brand discipline where we can differentiate with technology. And you'll see that even when we're acquiring, it's consistent with that business model in those businesses. Then the Process Solutions business model and then the services business model, which think of as like channel to market. So Roger is going to spend some time explaining how he looks at those 3 business models. A lot of margin runway still left for us in ACS.
In PMT, same thing. Three fundamental business models there that Andreas will take you through. He has done it before, but I think you'll see even more color commentary this time on how that works. And we have really 2 sets of great businesses here: UOP, which everybody focuses on; but Advanced Materials, which is fundamentally 3 businesses, terrific. And when you see the backlog that Andreas and his team have been able to build there, just some great stuff.
Aerospace is winning big in the market. Now you don't always see the impact of that on sales right away, so there's a lot of this to come. But I think you'd be pretty excited about the stuff that he is able to talk about. And the neat thing about it is on the electrical and mechanical stuff, if you take a look at all the aerospace companies out there, we're the only ones who have a big electrical or avionics presence along with a big mechanical presence. As result of that, there's an interaction that we can get between the 2 that no one else can do. And if you want a good example, electric taxi, which he has talked to you about before. But I'm really impressed with what I've seen Tim do in aerospace and how the fundamental change, he has just been relentless about it, and it's really creating a united business that's going to grow very well.
Transportation Systems. What I'd like you to start thinking about is that Turbos are a technology business. They are a Honeywell technology, high-margin, high-growth business. And we need to think about it that way. Turbo is really going to be just tremendous, and there's going to be opportunity for just explosive growth in our Turbo business. Now you're not going to hear me argue that for Friction Materials. Now at the end of the day, though, you need to recognize Friction is about an $800 million business on a $40 billion base. And while it always generates questions, at the end of the day, that's not what drives the value. We're in a transformation process. It's going quite well. And as result of that, it gives you alternatives that we did not have before. And one of those could those alternatives be -- could turn to a very good business like we did with Resins & Chemicals when we transformed that one 8 or 9 years ago. So we have to wait and see what transpires at Friction. But the big thing is, the transformation has begun and it's going to be a heck of a lot better and provides a tailwind for 2014 and beyond. So as far as we're concerned, this is just a great time for Honeywell.
Now I thought about what's the best way to convey "How does all this go together?" So as [ph] I told you these things in the past, but I thought putting it together this way might be helpful. But the way I've looked at it is, we've created a One Honeywell culture. And I know amongst the analysts, culture and that kind of that soft stuff isn't quite as good as being able to put numbers in your model and see what it yields for a discounted value. That was a semi-joke also because I do believe that. But at the end of the day, that culture makes a huge difference.
And when you think melding 3 cultures and creating what we have, focus on these 5 initiatives and 12 behaviors, management resource review, we spend a lot of time on. We do it 3 times a year, and it encompasses discussion of strategy, operations and people. So it's not just focused on people, and you got to talk about it in the context of strategy and operations at the same time. And as a reminder, I personally interview, along with our HR leader, every single person who goes into those top 200 jobs, even if I already know them, because it allows imprinting, quality control and it's messaging to the person about how significant their job is.
We use this phrase a lot, but it really is important. The trick is in the doing. The machinery have to work. And think of it this way, and I've used this phrase before, but there's a huge difference between compliance with words and compliance with intent. There's a big difference between making sure everybody gets an appraisal because you can measure that and making sure they get a good, candid appraisal. There's a big difference between saying you need to talk to 10 customers when you do your Voice of the Customer or VOC work and saying, "gee, I'm actually going to go visit 5 of them, I'm going to watch what they do, and I'm going to change my plan based upon what I learn." So this whole idea of the trick is in the doing means a lot because if you go from company to company, if you were to compare our manual with other companies' for new product introduction, management resource review, commitment to customer service, it's all pretty much the same stuff. We all know this stuff. The real issue is how well you do it. And that gets us to those foundational tools because we need to make sure that everybody has the right kind of training up front to be able to work that way. And then we're going to stay relentless in that seed planting.
So having that kind of a culture that thinks that way, we then apply it to our portfolio, making sure we have just a terrific portfolio, and driving our internal processes. And for anybody who read my Shareholders' letter this year, we've spent a lot of time talking about this, that on the portfolio, Great Positions in Good Industries sounds simple, important to execute. And when we think about acquisitions, while we never say never on anything big, we've tended to stay incremental and make sure that it's a bolt-on -- so something we are already doing -- or, I just mentioned in some of the stuff that we've done in ACS, is consistent with an existing business model. It's something we already know how to do because when you think about acquiring into an adjacency, as I said many times to my own guys, if your business is here, there's adjacencies that are here, and there's adjacencies that are over here. And knowing that difference is big. There's a big difference between what really is an adjacency and what looks like an adjacency.
The good balance, you've heard us talk before about the long versus short cycle. So were about 45% long, 55% short. But you'll see something later on showing how we felt that I did pretty good job also blending early-, mid- and late-cycle businesses to give us something that can perform over a cycle. And in all of our business, there's a globalization opportunity that you'll see more about later on. And we take that same kind of culture and apply it to our big processes.
If you look at any company, there's really 2 big cross-company, cross-functional processes: the first one, orders to delivery; the second one, new product introduction. If you can do those really well, better than your competition, you will do extremely well. And if you take a look at any business, it's just a pile of processes. Everything is a process. But these are the really 2 big ones that cross everybody. We pay a lot of attention to them. We're starting to get payoff on functional transformation, which is really just think of it as HOS but for staff functions. And then you'll see how well organization effectiveness has worked for us over the years. So we have this consistent business model that applies to every single one of our businesses. And any place that you've ever seen us acquire or divest, it's because this business model applies, in the case of acquisitions, or doesn't when we look at divestitures.
And okay, the trick is in the doing. This shows we've actually done pretty well. Sales up 6% a year, expanding margins at 55 basis points a year, about 500 basis points over that time. And you could see the share owner return. And for those of you who have owned for the 10 years, congratulations. You should all feel pretty good. And as I've told a number of you, it's our intent to make all of you look like geniuses in your companies. So we recognize that's the way we do that.
So look at growth versus our peers. Taking out the last 3 or 4 years, we've grown well on sales. If you go to the far right, we've grown even better on EPS. And importantly, focus on that up margin, the up portion at the middle chart, because you could see our growth rate on margins has expanded at a greater rate. But here's the thing that I focus on, is because we sometimes get the question about, "So, what inning are you in, when does this stop," and "How can you keep growing margin rates?" And my point is, if you take a look at our peer margin rates, they're higher than us. So it's not like we're going to onto on untrod ground. All we're doing is getting to where others already are. Now someday, when we're at 20 and you ask me, so Dave, how are you going to get to 25, that'll be a different question. And I could promise you we'll be prepared when the time comes. But right now, right -- we -- this is not untrod ground. So we know how to get there. We can make this happen.
I like this chart also because it shows how our growth profile has changed organically and what we've been able to do with acquisitions. 2001 to 2004, you've heard me say before about the empty pipeline. We had a new product. The globalization effort where we'd already laid off thousands -- not thousands but hundreds of people in China because that's when we had to meet the headcount target at the time. A lot of silly stuff was done that really just depleted our entire base for growth, so we had to build that up. But if you take a look at what's happened since 2004 compared again with that World Industrial Production Index, our organic growth has outperformed and so has our reported growth.
Getting back to Great Positions in Good Industries, how do we think about it? Starting on the right-hand side, I always want to be in a good industry. And you've heard us talk about macro trends for a long time now, and they haven't really changed. The only thing I might do is along with globalization, I'd add urbanization because as world GDP grows, GDP per capita grows, what you find is more accumulation in cities, and that urbanization trend is important for us. The safety, security and everything, whether you're in the sky, on the ground, personally, at home, in a building, safety and security is a theme. Energy efficiency, 50% of our products generate energy efficiency of some kind. And if the U.S., and Europe for that matter, just aggressively use existing Honeywell products and technologies, you could save about 15% to 10% of the energy bill.
So the follow-on question should be, so how come everybody is not doing it. And that's where you get into governments and my favorite topic. So that's another one to come, and I think you will see more progress in that in the future. Energy generation has been great for us, and our focus on improving our customers' productivity has yielded great benefits.
So now, what do I look at as a great position? The first one is, we're very good with technology, and focusing on places where technology makes a difference. Where our knowledge of technology makes a difference is huge. But we're very careful about not buying into markets where a rapid technology change just wipes you out. So if you take a look at it, we can differentiate with a technology and do very well going forward and it's really difficult for people to follow or come up with something that's better. There's a lot of markets where you differentiate with technology, but 3 years later, somebody else can come up with something that's a hell of a lot better. And all of a sudden, your market share goes from 30% to 12% in the space of a year. We steadfastly avoid all of those places.
Every one of our businesses is a very defensible. That can be for different reasons. Sometimes, it's purely the technology and the patent protection that we get from that. But other times, and you'll see this a lot in Roger's presentation on his products business, we have superb brand and channel strength, which is tough to beat, especially if you're supporting it with technology differentiation and a lot of new products.
Government's unavoidable in any business that you're in. But I'd say there are some of them that if you look at it and go, this is heavily dependent upon tax credit, that's not a good place to be, because whatever the government gives, the government could take away. So we've been very cautious about ever going to any place that requires a lot of tax credits in order to support. We don't mind selling into some of those businesses, but again, we do it cautiously and make sure that we don't get too overextended.
And on M&A, we've talked about it earlier, but we're going to stay disciplined there, and it's really made a difference for bolstering our great positions. But when you take a look at where we are now, our portfolio provides a great tailwind for growth. And when we look at some of the growth drivers for us over the next 5 years and how you think about that, we have about $11 billion in wins that we already have. And this is incremental growth. So this is not including churn -- this excludes churn and all that kind of thing. And so this is actually incremental. And you'll hear about this from each of the businesses on what it is they have going. But every one of them has a great story with the stuff that's on this page.
And importantly, as you think about it, 40% of our sales still have not reached their prior peak. As you look at each of these businesses, there is still a lot of upside for us to come, and I think you'll get excited by some of this when you hear what the businesses have to say about it.
Breaking out Great Positions in Good Industries a little further. We've broken the company up into these end markets as a way of being able to explain our diversity of opportunities. You've heard me talk about this concept a lot in the past, but there's never any one thing that you can point to at Honeywell and say, this is going to take off and that's why their earnings are going to be great for a long time. But by the same token, there's never any one thing that goes awry because your estimate was wrong or your assumption about the future was wrong or something happens that causes us to fall off. This again provides sustainability of performance.
Starting in the upper right with homes and buildings, we've done 2 breakouts there, the top one for residential, commercial, industrial, institutional, and then, importantly, the one below it that shows that a big piece of that market for us is driven by retrofit, meaning a huge installed base. This is something that doesn't change all that much over time as it's going to depend more upon the weather or other things, but what you end up with is something that's very sustainable and that you can count on. And it's tough to get. You either have this or you don't. And we have it.
On the Commercial Aerospace side, Tim will take you through more of that. Good breakout there. And again also, between business jets and the big jets.
Oil and Gas is now about 14% of our overall sales. This is largely Process Solutions and UOP. I know there's sometimes a question about, so why don't you put those 2 together. The reason is that while they both sell oftentimes to the same customers, they're 2 very different businesses. One is driven more by chemical and process technology and knowledge; the other is driven by software capability. And it -- really, Process Solutions is really a software business.
The Department -- U.S. Department of Defense, I know there've been some questions about sequestration. It's only about 8% percent of our overall sales. We planned this very conservatively from the beginning, and we've told you that many times because quite honestly, I just didn't trust those guys. But who knows what's going to happen here? But you should plan for the worst possible outcome because it's the only way to think about it. Fortunately, we planned for it. Unfortunately, we were right. But as a result of that, you're not going to see any impact to our guidance, as Tim will tell you, because of sequestration, because we had already anticipated it.
On the other defense side, a big piece of that is international defense, and Tim will talk to you about a number of just very good singles and doubles, as he would refer to them, that he has been able to get. And this is really for me reminiscent of the Woody Allen line about "90% of life is showing up" because this is one when you're trying to do international defense sales and your sales force is in New Jersey, it's just not quite as effective as having your sales force in South Korea or Israel, other places where the market actually is. So big change, and it's paying off very quickly. On the vehicle side, largely our Turbo business, which Alex will take you through but quite encouraging with the wins and the overall penetration and growth rate. And then we have industrial opportunities also where you see safety, a lot of Andreas' stuff in Advanced Materials. But this gives us a very good diversity of opportunity in our -- for our industries.
Here's the chart that's telling you about cycle alignment. Starting at the bottom right, about half our businesses, half our sales are what we would call mid-cycle, about 1/3 late cycle and about 15% early cycle. And what we've done -- we should have made the colors, I guess, the same, but we didn't do that. That was my miss. If we take a look at the early-cycle business, the green line, you can see how -- and that's, by the way, the right axis. You can see how that's transitioned over time. And then you can see the blue line, the mid-cycle, and the dark line, late cycle. And it gives you a sense about the movement of the entire portfolio. As we begin recovery, keep the long-cycle growth and then slow macro growth. And it gives you a sense to how the whole portfolio moves. But again, for me, this protects that diversity of opportunity we talked about. And this is the sort of thing that allows us to be much more sustainable, whether it's a slow growth, a quick growth, whatever kind of economy we have to deal with, we've got something that allows sustainability of performance.
Global expansion, Shane will talk to you a lot more about this. So I really like the way this depicts how we've grown over the last 10 years.
So if you start with those charts on the left-hand side -- we've broken it out by region -- and what our sales were in 2003 and 2012 between the U.S., other developed and then High Growth Regions, and you could see that while each of them has grown, we've been able to grow everywhere, you could see the impact that High Growth Regions has had. So in our overall 6% growth, we've had 17% growth in those High Growth Regions. So as we start to expand our capability and our presence into these, which Shane will take you through, quite encouraged about where that's going to go.
Now if you take a look at the right-hand side, what we've done is broken out GDP growth. So if we take '13 to '23, just how much is world GDP going to grow? And that's the $21.5 trillion. And then said, so where is that growth going to come from? And you could see down at the bottom the developed market will represent about 40% of that growth. And you want to be there because they still have a lot of money, they still have strong spending power. But 60% of world GDP growth over the next 10 years is going to come from those High Growth Regions that we're paying special attention to now.
And the takeaway at the bottom for me is important. So it says that our non-U.S. sales, focusing on that chart in the left again, has grown from 41% to 54% over the last 10 years. However, 75%, and some would say 80%, of world GDP is outside the U.S., which says that our ability to grow, especially in High Growth Regions, is going to continue for a long time. This is a great tailwind for us.
When it comes to innovation, all of the things we've talked about, they don't happen unless you have the right, new products. Whether you want to do a better job on margins, you want to grow share where you are, you want to grow into an adjacent market, you want to grow in a high-growth region, you have to have the products that people want at the price that gives them value. Our ability to do that with Velocity Product Development and drive that innovation is important because it results in a lot of new products, which means faster growth, and gives us higher margins.
And if you look at all those things on the right, I would just kind of keep my eye open for those as we start to go through the -- each of the business presentations, because each of them are going to address those specifically and there's a great story around every one of them.
All of you are astute financial analysts. Most of you went to business school, if not all of you. So you all know that there's a pretty simple formula that manages all this, and it's sales minus costs equals income. So we've spent a bunch of time on the sales growth side, which is important. But I'd hate for you to think that we don't think about managing costs also. And we've talked about this before, but we've tried to approach it very simply, and said that all cost really results from one of two items. It's either suppliers that you pay, or it's people that you pay. And it's amazing what that's done to just simplify the entire company when you think about how we have to proceed and how we have to get things done.
Direct material is pretty well understood, and we've taken a very different approach to working with our suppliers, really trying to create better partnerships than we've had in the past. And I know it's kind of an overused word when people talk about supplier relationships, but we really are making a concerted effort to start to listen better to our suppliers, to their ideas on how we can work better with them so that we don't unintentionally create costs for them that, of course, hurts the whole cycle.
The indirect spend the side of this is driven by 2 things, consumption and price. And hugely fragmented supplier base, where there's work that we can do. But at the same time, historically, we've used more than we needed to. And we've found that we've been able to make great progress there. OEF, or organization effectiveness, you'll hear more about in Dave's presentation and I've got a couple of comments and some slides later on. But this is important because you've heard me talk in the past about our big driver for margin rate growth is to grow sales faster than fixed costs. And if you take a look at the composition of fixed costs, because our variable margin rates range from 35% to 60% on average, so to the extent that you can control your fixed cost, that variable margin fall-through is huge. If you take a look at fixed costs, depending on the business, 70% to 90% of it is people. So you have to think about how you're spending money on an organization, and in the argument between, well, wait a minute, you want the best people or do you want the lowest-cost organization, it's very consistent with the philosophy that we run the company on, which is you have to be able to do 2 seemingly conflicting things at the same time. We want the best organization, the best people. At the same time, we want the lowest-cost organization that we can have, and we've got some evidence that I think will demonstrate that, that is possible.
What we've tried to do here is break out sales and census growth over the last 10 years between developed markets and what we'd call our high-growth regions. And you could see that if you look at that last 10 years, our overall sales in developed markets are about 50% higher than they were. But if you take a look at our overall census, it's down about 8% percent from where it was.
Now take a look at the High Growth Regions. You can see sales have more than tripled, almost quadrupled, in those High Growth Regions. But headcount is up about 150 basis points less than that. And this means that we've been able to do the base building because we weren't in a lot of these places and now we are. And you'll see in some of Shane's stuff later on that this provides a great tailwind for us again because we've already built that base. So we constantly think about having a more efficient, more effective global organization. And this applies to the top also. And I like this chart enough that we included it in our proxy this year to make sure that everybody out there was well aware of it.
So starting with the chart on the left, focus on the middle line that says, "over that 10-year period, our sales were up about 71%." Moving upward, segment profit is up about 150%. EPS, 197%.
Now take a look at the 2 lines below. The actual bonus spend during that time is up only 13% from where it was in 2003. And this is not inflation adjusted or anything else. This is dollar for dollar "How much did you spend then and how do you spend now." And one of the big drivers of that is our leadership census. We would define this as Band 5 and above. So, say, the top 600 people in the company is down 6% even on a 71% sales increase from where we were. And again, it's a fundamental driver in the company because if you create a big job, put a big person in it, they will find something to do. And what they find to do will generally involve other people, which creates just a huge amount of unnecessary work in the company as everybody does a good thing. The -- one of the biggest things we've done is actually restrict that growth, and everybody will tell you the -- they all have Band 5 and above targets. And if they want to give somebody a Band 5 or a Band 6 -- that's our terminology -- they have to show where they're going to take one away. And as a result of that, we've been able to really control how many people we have at the top, making sure that this happens. At the same time, we spend a lot of time on making sure we're organized the right away, that One Honeywell performance culture that we talked about, if you take a look, very few reorganizations are ever announced in Honeywell because they're very disruptive, and I'd rather generally work with things the way they are, and I think it gives us a, I'd say, a lot less disruptive way to accomplish the same things. We spend a lot of time on making sure that we have good linkages across our businesses. And I participate in every one of the quarterly technology leadership councils and the ops councils, for example, and we do the global town hall meetings.
And succession planning is something we spend a lot of time on, as I mentioned before, because it's important. And you've never seen anything that we've ever had to do where we weren't able to instantly make it happen because of the work we do there. The -- again, this compliance with words versus compliance with intent, there's a big difference between having names on a page that you've filled out the form and having names on a page that you will actually put in that job when the time comes. And this is another one where I think our compliance with intent works pretty well.
Our driving productivity, 2 of the big process items. On the left, the Honeywell Operating System. We've talked to you about this before, but we've been able to accelerate the speed with which we implement HOS. I've said before this is one where we wanted to go slow to go fast because I didn't want something that just gave us a good pop for a couple of years and then dissipated and we'd have to do it again, but rather, I wanted something that gave us a 20-year competitive advantage. So we've made sure that we got it right. And as a result of that, it's really starting to pay off for us.
And this bottom slide of the Honeywell Silver Site example just takes a representative Silver Site for us to give you a sense for what's the impact here, because there's 2 phenomena that we end up seeing; one is that it takes you to a new plateau. So when you look at your overall productivity, inventory quality, whatever, it takes you to a new plateau. But then, more importantly, your rate of acceleration improves. And that's the thing that creates the real opportunity in the future. So this is taking one of the representative sites. You could see pre-HOS. We would expect that over about that 7-year period, about $1.5 million of productivity to come out of that site.
You could see that when we went to Bronze, you get that plateau change. When you go to Silver, you get a plateau change again. And please note that in that entire process, your acceleration rate is improving. So the rate at which you're able to be more productive improves, and that's the real key. The plateau is nice. It's a nice bump that you get. But it's that rate of acceleration improvement that really takes you for the long term.
Functional transformation, I've said many times it's really HOS for functional organizations. One of the baselines for -- or one of the basis for that is having ERP spread throughout the company. We've made great progress there: PMT and TS already at 100, Aero closing on it. ACS adds [ph] 50 because of the -- some of the variety, the number of sites that they've had, but that's going to start. We're starting to achieve critical mass there also. And you could see the impact on functional costs as it's gone from 9.5% of sales down to 6.2% last year. And this was with improvements in service because we survey everybody at the same time, again with this idea of doing 2 seemingly competing things at the same time. I don't want just lower cost. Whether you're finance, IT, HR, legal, you have to be able to deliver better service than you did before, and we monitor that through surveys that we do in every function.
Cash, we've already talked about this, and Dave will take you through it more. But trust me, we're going to continue focusing on generating great cash flow. And hopefully, after 10 years, you're convinced that I'm not going to blow the money. I may not give it to you as fast as you'd like, but I'm certainly not going to blow it.
And importantly, evolution is going to continue. There are some things that are going to stay the same. That's foundation for execution, that making sure the machinery works, the compliance with words instead of intent, being disciplined in M&A, that One Honeywell culture that we worked so hard to create, none of that is going to change because it's really the foundation for making sure that we can grow the portfolio and that we keep improving our internal processes. And that's where the evolution is going to continue because there's always more new products, more new markets, more process improvement that we can keep doing. And we've done a lot of seed planting that's going to pay off for us. And we've got a restructuring tailwind that Dave will take you through a bit more. But innovation is going to be something that we focus on and product and process for a long time to come.
So if you had to say, well, Dave how do you summarize how you're going to outperform? We've got the portfolio to do it. The internal process improvement is -- there's still a lot of money in improvement left there. And that One Honeywell culture is something that we're going to continue to apply to both. This means that there's a lot of runway for us in future growth not just in the sales side but making sure that we drive the margin rates, the cash flow and the earnings growth that everybody would like. So we're well positioned, we think, to deliver not just this year and not just on the 5-year plan that we gave you but even beyond that.
So while Elena took you through the lineup for today, and now it's my pleasure to introduce Roger Fradin to talk about Automation and Control Solutions. And I think you'll like how simply those 3 business models come across. Thanks.
As always, it's great to be with you. Pleased to share with you the ACS story. We have consistently outgrown global GDP for the past 10 years. So roughly 1.5x GDP growth every single year. So we've demonstrated an ability to outgrow the economy. You've seen our margin rate has accelerated smartly in the past 4 years, and I hope I will convince you in the next 30 minutes or so that we're going to continue to grow income faster than sales, growing sales faster than global economy and continue to smartly expand our margin rates.
As Dave said, we're -- part of my role here today is to demystify some of ACS for those who might still remain mystified. We really are 3 core business models. One is a short-cycle-product business, about half of our sales, 2/3 of our income. So if you want to really pay attention to that part of ACS, that is a big part to focus on.
The second, I think, is a model that you all understand well, is the life cycle, long-cycle industrial automation business we have with Honeywell Process Solutions.
The third business, as Dave mentioned, is really a channel business. So it makes solutions and distribution a channel or market for our Security & Fire business in the case of ADI, which is 1 of the 2 businesses in BSD. The other is, I think, a model you understand well, which is our building automation life cycle business that also serves a big channel to market for our highly profitable product businesses.
What ties together ACS is that all the tools Dave talked about, the Honeywell Operating System, functional transformation, OEF, Velocity Product Development, apply -- those tools apply equally as improvement vehicles for all of our businesses that we own as well as businesses that we acquired.
Last year, no surprise, the Western European economy really slowed our growth rate down -- we only grew 2% last year -- but expanded our income 7%. So another year of good margin expansion, 70 basis points. We expect to deliver another 70 basis points of organic expansion this year, not counting the dilutive impact of the accounting we'll get from the Intermec acquisition which hasn't closed yet.
So growing our sales to almost $17 billion. Productivity, safety, security, energy efficiency, those themes, macros, drive our business, great places to be, powerhouse new product introductions, some really good acquisitions. We enhanced our building automation portfolio last year with the acquisition of Saia Burgess, a great controls company based in Switzerland, and INNCOM, which is, for those who travel and stay in hotel rooms, ubiquitous in the multi-rooming industry, well, a leader there, really the -- bulks up our building automation portfolio. And the Intermec acquisition, we expect to close in the next few months cements what's been a great track record for us entering and really gaining a lot of traction in the automatic identification barcoding business.
A -- talk about diversity among our 3 business models, our end markets, our geographic mix and our mix between long- and short-cycle businesses, very well diversified, very balanced portfolio. I love to show this chart. I'm sorry we had a -- the Great Recession because our sales and income rate improvement was really on a tear. It got damped down a little bit by the recession. Our margin expansion, much to the delight, I hope, of people in this room, has significantly accelerated. And you haven't seen nothing yet in terms of our ability to really deliver here.
Our 3 business models, so -- are Energy Safety and Security portfolio. It is fundamentally a short cycle products businesses, unified by a common technology. We're an automation and control player, so it's control, sensors and wireless that are the themes across this portfolio. The integrated supply chain operating system, fundamentally the same across this portfolio. You'll see that these businesses are generally #1 in all the major markets we compete in. So great positions, good industries, a highly defensible portfolio. Huge installed base. We -- I think we're pretty much the only industrial company that drives a multi-channel, multi-brand model, which makes us very tough to compete with because the brands we have are a well-known, well-respected, deep relations with integrators that install our products and depend on us for their fundamental livelihood in terms of supporting their installed base. Our similar technologies, brand, channels, really, a great place to be. Let me jump to the third business model, which is our Building Solution & Distribution business. Again, think of it as a channel market, our ADI distribution business, 200 stores in the U.S., provide a logistics service for our 30,000 low voltage installers, drive $800 million of sales for our products business, gives us huge market, we have about 60% share in that market, huge market knowledge, and if I could use this word, we have a great channel control. Our Building Solutions business is a great business by itself; 50% return on investment and a very nice energy solutions, systems integration, security space. It drives back about $200 million of our product sales dealing directly with end users. So our products business, we generally go through indirect channels, HBS is a direct channel, as is HPS. So this is a business I know you all know a lot about. A long cycle business driven by oil and gas, energy efficiency, the #1 installed base in the world in terms of industrial automation. Just a great position, highly defensible, lots of upside opportunity, including smart partnerships with Honeywell UOP to drive above market growth.
A little more detail on our Energy Safety and Security business, again, 2/3 of our income, about 1/2 our sales, almost 20% operating margin. This is a business where we're in very much in control of our own destiny. So one of the reasons we grow above market growth is we use technology to invent new market, solve new problems. So let's just take building automation systems for example. Assume that market is flat. The opportunity we have to grow in that business is taking our customers' labor instead of running wire, which we don't make money on, in fillings [ph] , replacing that wire with transmitters and receivers. So sensors, coupled with wireless, takes our customer's labor, captures it as Honeywell sales. So by solving the problem, in this case an installation problem, or inventing a new market, for example, giving our industrial automation customers wireless mobile computers to take their control room around the plant, so you don't need market growth, you just need to invent a new market. So big focus of our technology and you'll see a lot of the examples during the break of where we've done just that. This is a business where we've also identified near adjacencies where we've entered scanning mobility, intelligent building control, safety products, gas detection, wiring devices, and in 3 of those markets, were already #1, from not even being in those industries.
My bragging sheet, so you talk about good industries. Good macros behind them -- safety security, energy efficiency and productivity, having great positions, we're #1, pretty much across the board in our products business. In fire systems, personal protection equipment, gas detection -- those last 2 we entered by an acquisition, residential combustion, scanning, mobility -- new industry for us. From 0 to #2 in the just 3 short years.
Innovations drives what we do. I'm going to show you a video shortly on a number of our new products, some great acquisitions and Dave talked about the great pipeline we built. And orders already booked that have not yet flowed through the sales. So a lot of terrific customer wins. If we're going roll the video now, I'd like to show you some of our great new products.
So I'm really excited about the potential of the products, and maybe just a couple of comments on the video in terms of things to pay attention to. By the way, all of the products and services are available for you to see during the break. I'm going to talk later about why believe our margin story. Lots of examples embedded in that video of what is popularly known as Software as a Service, ability to monetize data. In the case of our 2 servers, monetize the data our sensors already collect in a building. In the case of our connected home, it's not only monetizing data we get from the thermostat system and security system that's providing connectivity, you make a lot of money on software. High-margin business and to the extent -- and we have about 100 Software as a Service offerings, getting ready to launch over the next 3 years. So although we're a products business, we're going to have a big software play at higher margins. So as we continue to -- all the other good reasons on marginal expand, you have a software.
Another point. You saw our collaboration wall there, it is really cool technology. And in addition to just doing our great job in terms of industrial automation, we have closed big sales for industrial automation systems, because CEOs of a big energy company are human beings, too, and they want cool technology and that collaboration -- well, for those who saw Tom Cruise in Minority Report, it's that kind of technology that even big company CEOs susceptible to owning things that are cool. So a lot -- also, that's a lot of opportunity across the portfolio.
We have many, many examples where we planted seeds and they've grown into oak trees. In other words, start up from nothing and organically built $100 million business. This particular example, is we came up with some terrific new technology with something as mundane as a residential water heater. Very simply, we used the flame that heats the water to power the water heater. So instead of an electrician having to come in to run a wire to water heaters, it's self-powered. It may seem very simple, it's huge, it's taken over the industry from nothing to 60% share and growing, nicely profitable. Water heater by the way consumes about 15% of the energy in a home. So we not only have the product that's easier to install, provides more even temperature, lower energy cost, anybody want to guess why this particular example? My favorite competitor, Emerson, owned this market. $100 million of sales we took from Emerson with this technology and more to come. So that was a good organic growth story. Inorganic growth, hard to beat this one. I love this industry, we've been following it for years, it connects very nicely to what we do. Same electronics manufacturing, same wireless and control, and sensing technology. This industry, in terms of changing ACS's growth profile, grows 2 to 3 GDP, it's a quick payback productivity industry. Highly protected by patent, so Honeywell and Motorola essentially control the large bulk of the IP in this industry. Very difficult to enter, highly defensible, 3 smart acquisition: Handheld, Metrologic, EMS. We got to be a distant #2 in that industry, when we close Intermec, we're going to be a very strong contender for the #1 position. We really love Intermec, so for those who have followed this industry understand our product offerings and our channel in detail. We're relatively small in mobility; Intermec is 3x our size, so big scale in mobility. We have about 300 systems integrators as Honeywell mobility integrators. Intermec has 3,000. So great channel coverage. Overlapping -- I'm sorry complementary product lines, Intermec gets us into printing. We don't have receipt printing or wireless printers today. Intermec is one of the leaders there. Vocollect is a gem of the business. This is voice picking for distribution centers. And we don't have an RFID play, Intermec owns the fundamental IP in our RFID and licenses that technology -- others in the business. So great, great technology connection. Intermec is very strong and in front of the store. Government, we're very strong in healthcare -- I'm sorry, back of the store, were strong in in-store P&L, and the global fit is just beautiful. So we're very excited about getting this deal closed, and what we can do to really accelerate growth in this business.
Switching gears to our second business model, which is a long cycle industrial automation business, Honeywell Process Solutions, I'm going to be the first to admit to you that this is a business where we could do better. We've done okay, we've grown faster than the market, but our ambitions and our expectations for sales growth and margin growth, we just know we can and will do better. Great dynamics. So strong position in the energy business. You guys know the story about the growing natural resource demand. So why believe the story that, "Hey, we're going to take this good business, make it even better." So huge installed base -- our margin in backlog, so orders we've already booked that haven't flown through the sales, the better operating practices we've installed in this business have led to higher margins in our backlog. So as those orders convert into sales, you're going to see a natural uplift in the margin. We also have a number of major projects like our Shell GTL project, that has matured to the point where we're now in the service phase. So we've done the project, service is a lot more profitable than projects. We've grown our product content so the acquisition of -- in the gas distribution, oil distribution business, Enraf and RNG [ph] gives us more product content. Very importantly, talking about software, we're the world leader in advanced solution that sit on top of the DCS systems. Accelerating growth in advance solution, highly profitable growth opportunity. And finally, we've restructured this business to better take advantage of where the global growth is. So looking forward to a lot of upside in HPS. We continue to lead the world and in DCS technology, so our new Experion platform is the first and only platform to deploy virtualization technology. We work with that really cool collaboration wall. And we're the only control provider to provide for a remote commissioning. For those who know that industry, that is a big deal in selecting a process automation system. We also had a brand-new pressure transmitter, that is the #1 transmitter measuring by volume in this industry. So a lot of reasons we get excited about HPS in addition to all the great wins you see on the right-hand side.
To remind the audience where we play, this is the perdu model of the automation business. We are not a strong field instruments provider, that's not our game, that's fundamentally Emerson's game, Yokogawa's game. Where we excel is levels 2, 3 and 4. Manufacturing execution systems, global leader. Advanced applications, global leader. DCS systems, global leader. As Dave said, think of us as a software automation company. A lot of room to keep growing as systems are modernized and all the greenfield expansion you see going on in emerging markets.
One example, and I showed this slide last year, just a quick progress report. This is a automation system developed in China for China by our China team. Very rapid development, from a time perspective. This not only gives us a mid-market play for China, it lets us get into the system integrator market. HPS's fundamental business model is dealing direct with major end-users. There is a whole market out there of smaller system integrators putting in small and mid-sized systems that we never went after. So in terms of reasons to be excited about HPS, we now have a very strong mid-market, third-party system integrator offering that's going to allow us to expand our reach, very nice win rate here. I'd like to show you a quick video now that tells a story of how HPS and UOP work together. And how HPS performed another critical function within my portfolio in terms of being the channel to the industrial market for all of my products businesses and HPS. So let's roll the video.
It's really great having HPS in the portfolio. Just one quick example, in our personal protective equipment business, the largest single end market for personal protective equipment happens to be the industrial market. So having 1,000 HPS salespeople directly calling on Saudi Aramco's Sinopec, Shell, Georgia-Pacific, et cetera, is just a great door opener for our safety equipment.
Our third business model, Building Solutions & Distribution. Our ADI distribution business, great channel to market for us, fire and security businesses, $800 million, $900 million worth of sales, all go through that channel. Our Building Solutions business, it's just a great business. You may say, "Hey the margin rate is a challenge. The turn on investment is over 50%. So we have very little investment in the business. We generally use customer advances so we get paid before we do the work, for example, on our energy performance contracting business, so a great ROI cash business model. Great position in terms of delivering energy efficiency, security, over the life cycle of a building. You'll see the Attune software in the next room. A lot of new products and services out of HBS, continue to rock along with great wins and energy performance contract and security. From a security perspective, we were not in the critical infrastructure protection just a few short years ago. Today, we're one of the leaders generating a business that's going to deliver between $250 million and $300 million in sales this year, delivering high margin, mission-critical, integrated security solution to demanding customers like the London Olympics, by the way $130 million electronic security customer for us. So high profile, the Honeywell brand name means a lot. They really value our service and our technology.
Our core strategy, and I've been showing this slide for years. It may be boring, but the strategy is working and hasn't changed. So our business model -- our 3 business models, all benefit from our focus on commercial excellence, innovation, globalization, our core initiatives, OEF, Functional Transformation, Honeywell Operating System, VPD, and our acquisition process, these tools and processes apply across the entire ACS portfolio. Commercial excellence is a big deal; got 10,000 salespeople deployed around the world -- having the right salespeople calling on right customers with the right marketing message at the right time, properly motivated, is what commercial excellence is all about. And we're getting much more sophisticated with our pricing tools, capabilities and when we deliver more high-value new products, our pricing tools allow us to capture the appropriate amount of value for Honeywell. So another reason to believe in our continued margin expansion story as we have better higher value offerings and we're doing a smarter job pricing to capture that value.
Thirdly, I've shown this chart, Velocity Product Development, that is the engine of my growth. So I can't get into high-growth regions without the right products. If I want to have a great sales force, I want to give them stuff that's easy to sell that customers want to buy. New product development is the lifeblood of how I drive the business. Shane is going to talk a lot about high-growth regions, you'll get a lot of detail. We are Shane's biggest partner. So think of ACS as being in 110 countries. Changing my growth profile as they get more and more of my sales coming from high-growth regions. The underlying GDP growth there is really going to be a growth accelerator to my overall portfolio, operating as a local company but leveraging the scale of global Honeywell is what our ATR to strategy is all about. Our key initiatives, and you'll see cycle time up here, it's really integrated with HOS. What that means for you is, extracting cash from our inventory while doing a better job of delivery for our customers. Last year alone, for example, we generated $100 million of cash by bringing down our inventories even though sales grew and improved delivery. The old, how do you do 2 seemingly conflicting things at the same time; better delivery, low inventory, if you change your fundamental process by using cycle time as an accelerator.
The story on HOS, for ACS margin is very simple. Our silver sites today have operating margins of 25% to 30%. And as we mature more and more sites to silver, and we continued that acceleration, the embedded margin improvement capability is there, and HOS is the enabler to make it happen. On the acquisition side, I told the story before, I think we've done a respectable job enhancing our core business, getting into new adjacencies we've been very disciplined acquisition and integration process. The margin story, however, if you look at the EBITDA expectation we have, we have not yet fully realized these multiples on a number of our big acquisitions. So in our building controls, we're not yet at 5x, personal protective equipment, were not yet at 6x, AIDC, we're more certainly not at 5x, we still got Intermec to close. So if you want to think about another margin next accelerator as we integrate these operations, we typically are able to take out cost -- it's a target-rich environment for bringing costs in line with the Honeywell standard. Think of that as another embedded margin accelerator.
So why are sales going to continue to grow faster than industry at ACS? Inventing new markets, new products, more presence in high-growth regions, expanding our reach to pull through with our install base, just we'll keep driving sales. Why believe the margin expansion story? HOS maturity is a big deal. Acquisition integration is a big deal. Our focus on smartly exacting value through good pricing tools, commercial excellence a big deal, and last but not least, good old volume leverage, keeping fixed cost fitted, and letting the sales growth fall through to income. So thank you for your time, and I'll invite Elena up here to host the Q&A.
We're going to do it just a short round of the Q&A after each business president. So roughly 5, 7 minutes of Q&A. We have our first question from Deane Dray.
Deane M. Dray - Citigroup Inc, Research Division
Roger, a lot of new data points on profitability of the subsegment, that's really helpful this year. Haven't heard you talk much about Software as a Service. This is -- it sounds like it's a big theme here. As well as the energy performance contracts, which my guess is there's some Software-as-a-Service embedded in those as well. So how big does SaaS get? What are the milestones and maybe a bit about -- you can brag if you want to, about what the economics are behind those. And on the performance contracts, how have those worked out? Do you share any of the gains and are you talk about the cash flow on those businesses as well?
So, well, performance contracting is -- it's actually a business Honeywell invented before I got there. So we're one of the pioneers, it's a great business model, heavily driven by the Federal, State, Department of Defense. So it's fundamentally government, they tend to be longer payback projects. So to answer your question, we don't share any game, we guarantee the savings, and have a terrific track record of not paying out on the guarantees because the stuff that -- we actually know what they're doing and we're able to control the systems. Cash flow, we get paid before we start the work. So that's when I talk about the ROI of the business, it's why it's so strong. Software as a Service theme, I'm not avoiding the question but I don't have the answer when in terms of how big can it be. I just -- maybe some data points. We weren't in the Software as a Service security business in our Security business. Today, we have over 1 million connections. Think of that as $30 million or $40 million worth of income we didn't have until we have a Software as a Service. You're going to see us doing something similar in home comfort. You see us doing it in building automation. It's what Advanced Solutions is all about. If I were to just take an educated guess as how big Software as a Service would be in the next few years, think about a range of $250 million to $500 million, not only in the services, but in the new product sales that it's going to enable.
Okay, great. Steve?
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Roger, you've been a big proponent of, I'll call it, smart margin expansion over the years as -- and you've done this, as you pointed out here, without volume leverage recently. Organic growth, right? Even though maybe faster than the market, has certainly not been where maybe you were expecting at one point. How do we think about it, especially as you give us the subsegment profitability now, we'll look at ESS and 19.5%, et cetera. How do you sort of think about that trade-off and balancing organic volume growth in the investment to make that with what you're talking about in terms of continued and continued margin expansion here above until very much new territory?
It's a great question, Steve, appreciate it. So, if you looked at our DPD chart, for example, even -- and it shows the number of engineers we hired over the last several years. Even in the Great Recession when our sales declined, we actually made more R&D headcount. Did I hire as many engineers as I would have liked to? No. But we hired more, still developed a lot of new products and when our competition was cutting back, we powered out of the recession with a boatload of great new products because we kept doing smart investments. So if you ask where we want to invest, high-growth regions, sales headcount is unconstrained, would be too a generous word, but we are investing in sales, tactical marketing in all the high-growth markets. Trying to manage our investments where we're not getting the growth to pay for that, driving the heck out of the backroom efficiencies on in the manufacturing side, the materials side, or maybe the all the sausage making stuff in terms of cost control that we don’t fully expose and talk about but really try to drive the heck out of because fundamentally, we want to be a growth business and to fund the growth, we've got to be smart on cost and then smart on pricing. So I'm maybe talked around it a little bit. But where does is it all go? We don't start getting some sales growth, that model becomes harder and harder to maintain.
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Yes, pricing, you guys like numbers. When I joined ACS -- it was actually started ACS, right, in '02, started with ACS, we gave up about 1.5 year on price. Today, we get a 1.5 a year. So you think about a 3-point shift as you get to be a $16 billion business. That's a huge deal. So pricing is enormously important and having products that customers value and are wanting to pay for and services that customers value and willing to pay for enables you to get that kind of price. So it's intimately connected with your new product and your new service development machine.
Scott R. Davis - Barclays Capital, Research Division
Roger, you're talking about going from 29 silver sites, kind of 2012 up to, call it, 75 or so by 2016. Does it get easier or harder to drive that change when -- I guess what I'm saying is that, for the first 29 sites, like the low-hanging fruit, the early adopters and the next 30 or so are going to be more difficult? Or because of the momentum that you have, is the next 30 easier?
No. It's a great question. As you might imagine, the sites that got to silver quicker tended to be our better forward thinking sites with probably more capable and better management at the site. And also within -- embedded with this, we've done a lot of management changes to get a culture that really buys into HOS. So, I think you a little bit answered the question, the better sites got the silver faster. But still so an enormous improvement. The bang for the buck is going to come when we drag the next 1/3 in the next 1/3, as those sites continue to progress. Our time to Silver is actually shortening, the kind of the pioneers paved the way. But there is more juice in the productivity lemon, if you will, from the second and third tier sites.
We have time for one more question, John?
John G. Inch - BofA Merrill Lynch, Research Division
Roger, if you were to sort of look around the world regionally, is there a way to contrast your operations from a productivity standpoint? Obviously, you've been putting a lot of resources into Asia. What's the run rate there? I mean, how productive could they be? And kind of the segue is, if you were in the future to operate optimally, so maybe you could define that as everything is HOS-compliant or whenever, I realize you're pushing for growth but assuming your portfolio is static, what does that mean in terms of profit margin run rate? I mean, how much uplift can you get as you continue to do what you're doing and sort of where the pockets of productivity that's going to be the easiest or have the greatest opportunity to capture?
Okay. Since I already hinted that out, I'll help you out with some of the math here. Figure our products business today, 19%, 20% margins, those are manufacturing businesses and pretty much all the manufacturing sites are in ESS. I shared with you that our silver sites are in the 25% to 30% range. You've got the percentages there. You guys are probably better than me in modeling out what the maturity is going to drive in terms of organic margin expansion capability in that business. There's a lot there. I'm not sure I answered your question, John. But -- yes? Okay? Okay.
Thanks a lot. Thank, Roger.
All right. Now we're moving to Andreas. I'd like to welcome to the stage.
Andreas C. Kramvis
Good morning. I hope this little video changed your headset to PMT. As you know, over the last few years, we have produced strong results and an industry-leading performance. What you're going to find out from this presentation today is that our prospects continue to be extremely bright, the party continues and the growth will go on.
So after a very strong 2012, let me concentrate on 2013. We're looking at around $7 billion in sales, just under 19 points of margin, and our business, if I can describe it, to set the stage, UOP is about 43%. The rest is advanced materials. Geographic split outside the United States, 56%. Now, many people can say that. However, out of those 56 points, 41 points are in high-growth regions. That says we are positioned. And if you look at that EMEA kind of slice, it's a small e with a 7% in the euro, and a big MEA.
So let's look at what happened to this business over the years. I know that Dave often tells me that at the beginning of this period, he was advised many times to throw it in the garbage can. And well, some changes were made to the portfolio. A lot of hard work. UOP was consolidated artfully. The other 50% we did not own in 2006. I guess, I can talk with more authority for the last 5 years, that I've been running this business where we've seen very strong growth and a world-class performance. Now one question that we get about the business is, "Isn't this a chemical business and aren't chemical businesses generally cyclical?" I like the word, generally. Because as you can see here, in the recession of all recessions, the chemical index we have here, and there's about 40 companies, between specialty and the blue that are more kind of commodity-type businesses, big dip. In fact, they could have dipped a bigger number. But you as you can see the red line of the top, we actually increased margins through that recession and we kept going and came out very strongly from the recession.
Where do we sit today? We have a strong productivity culture and a strong growth culture. Sales per employee, $636,000. Profit per employee, going up every year, $119,000. ROI in 2012, 21.7%. These are metrics that we really keep an eye on. But the most important thing today for you is the top right-hand side because it's got some new information you've never seen before. Now, we talked about long cycle and we report every quarter a backlog in long cycle which means the UOP, it's had a record of $2.8 billion. We've never talked about a backlog in a short cycle business because logically, it doesn't make sense. The guys prepare -- you want to be able to pick the phone and deliver. And yet we got 2.1 -- $2.15 billion of backlog here. So how has this happened? Well, very simple. And of course, this is why there's some information this year for you. We have such great new products that we went around to our customers and said, "Guys, if you want us to invest in these new products that do a lot for you and obviously do a lot for us, we'd like some orders in advance." So we have this conundrum here, that's -- I don't think it happens very frequently, that we have a backlog on short cycle orders. Now Dave talked also about the business model, so this is something I put in this business when I joined it, and I've shown this to you before. I just like to go through it again because I don't think we’re going to change the way we operate. We concentrate very much on running our plants very well. The chemical business, at the end of the day, is very much an operating business, requires very strong engineering and process capability. We are much better here than we has to be. We are able to deliver, results are showing. More importantly, the way we run the business is very clear. We have businesses that takes 6 to 10 years to bring a product out, requiring the invention of new molecule, establishing it around the world, scaling it out and so doing it in a low global warming suite. That's one way to run the business. Then we have UOP. It takes us 3 to 5 years to invent something new, scale it up to the point we can license it. That's another model. And then we have our application development business that works much more quickly. On a base technology, we modify, we can get in the market in 6 to 18 months.
Now if you are 41% in high-growth regions, you know you've globalized. Although, we think there's a way to go yet because there's a lot of high growing markets. We are able to market and sell on any part of the globe. I think this is quite a statement and it's one of our competitive advantages. And as you'll see, we handle long-term investments very well. So this is the staircase to our growth and I think that a number of companies can claim the first 2, maybe 3 areas. Everyone is going to say they got a solid base, they got strong processes. New products, though in our case, new products we're bringing out, the rate and the backlog we have. The $4.3 billion pipeline is outstanding for a business that doesn't change their products very quickly. On the other hand, I don't think many businesses can say they're in markets that are accelerating and they're actually creating new markets and inventing new markets. And I'm going to elaborate on this theme as I go through the rest of the presentation.
So what are we looking at over the next 5 years? Without us straining our neck too much, we can see a line of sight to $2.6 billion, half of it in UOP, half of it in Advanced Materials. We think this is a very good base to provide growth and the way we run businesses to provide strong earnings part for the company.
Now let's talk about the investments we are making. I've already talked about the backlog. UOP backlog, we know with building plants, we're going to need catalysts. It's how it works. So we need to put more capacity in line. I talked about the unlikely backlog but there it is for our short cycle business. It requires capacity. So I'm really very happy to be spending this money, because it's money at very high return. We have customers. We have the processes. We know what we're doing. It's high ROI. So this is what's happening. The peg is in 2014 and we come down again, higher return projects.
Okay. Let me just talk a bit about what makes UOP growth and why UOP is growing. The first one is this theme of accelerating markets. Now let's take China. I believe in 2002, China had on the road, was putting on the road, about 1.5 million new cars. In 2012, the number was 20 million. Well, guess what? They need transportation fuels and guess who supplies 60% of the technology of transportation fuels in the world? UOP. So, this is happening throughout emerging markets and I was just thinking next time you're in a traffic jam in Jakarta, in Manila, Southeast Asia, nothing else to do, just put an order for a Honeywell stock. This is what drives our business here.
Now, winning in this market is very key because there aren't many new projects that come online all the time. There's a few here. They are very large projects. A new refinery is $8 billion to $12 billion type of range. You're not going to go to anybody to kind of take the technology to do this. You want someone who has a history of delivering every time, has the pedigree, has the latest technology. There aren't many places to go. And certainly when you go to the bank to borrow a good part of that money, you want a marquee name behind you. This is one of the reasons, or one of the many reasons, that our win rate in this area is upwards of 75%. Expanded scope of offerings. If I talked to you about UOP 5 years ago, we were talking about process technology and catalysts. Today, we have another 2 streams of business, which are very strong. Specialist equipment that we supply to these refiners to speed up the building of these plants and enable them to monetize their investment faster. And of course, we made a very successful move into gas, which is the secular trend. At the same time as these things are happening, the installed base is going up. For every new plant that comes in operation, it requires catalysts to run. It's the razor and razor blade analogy. So very quickly for some of these markets. The refining market, demand for transportation fuels grows with GDP, demand for refining grows much faster. Why? You have obsolescence. Just on East Coast owned in the United States, 4 refineries closed down; they have been replaced by newer ones. The purity of the fuel around the globe is getting much, much better. That's a lot of work to do. A lot of countries you go to are very insecure. They are concerned if something happens, they don't have their own oil supply. So a very conservative number is 4% to 5% growth. At the same time, there's a mix in fuel. People require more diesel. Diesel is a growth area. It is our view that in the next 5 years, there will be 50 hydrocracking units around the world required to make this switch to diesel. This is a lot of business for us and if you take the lifetime of it, it's 5 billion to 7 billion. And we are the experts, by the way, on the diesel part. In taking very hard crude, we're the guys who can do it, which is the point I'm making here in this slide. You're hearing the words that crude is getting heavier. I was listening to public radio yesterday and someone was saying, this crude that's going to come from Canada is so heavy and so gungy, you're better off putting in on the train, it may not flow in the pipeline. Well, this is what we've got to process. And the guys were able to process this and have taken the steps a few years ago to do that using our technology, and the guys are making money in refining today. Because, a, they can process it and, b, they can arbitrage and there's a big arbitrage in the price between light and heavy. At the same time, we've come up with new technologies to upgrade that bottom of the barrel. The last thing you want to do is take that barrel and have a big piece of it being sold at a very low cost, at a very low price. There's bitumen or asphalt.
Now if I go to petrochemicals. Look at para-xylene. What? Para-xylene, folks. This is the precursor to PET bottles. It's also the precursor to polyester. So you got populations going around the world and growing, more PET bottles. Again, you know what you can do when you're hydrating, you can find oil. And it's a very big growth market. Again, we're the big players in it. I believe the last 7, 8 years, our win rate here is again of the order of 80% to 90%. Now there's something else happening, which again by understanding the refining business led us to create a new business, and that is hearing about this natural gas liquids. What those are doing, they're upsetting the balance in refining. And because of that, if you put the liquids in this refinery, you make more money, but at the same time you produce less of something called propylene, which is your plastic bags when you go to the supermarket, and you need to make what's called on-purpose propylene, which brings us to my gas story here that I think is another great success story. UOP has been traditionally leader in cleaning gas as it comes out on the ground, it's just not clean. About 3 years ago, we launched a campaign around the globe to take propane, which is an element of gas and turn it into propylene and butane into butane into butadiene, which is what you make rubber from. Well, we've been extremely successful in doing this. 17 projects like this have been awarded around the globe. We have won 15 of them. So it's presence, technology, ability to deliver. Of course, what happened last quarter, we purchased UOP Russell, which I think is a great business, able to separate these various types of gas, ethane, propane, butane, pentane, natural gas liquids, enable to help the people working in these wells monetize quickly. Can you run the video, please?
Andreas C. Kramvis
So you want to monetize your wells quickly, what are your options? You can get a guy to construct it, bring this deal on site, find the designs, find the drawings or you can call us. We deliver it on skids, about 50 skids, put it up in 17 days, it works. You know it's worked before. You're going to make money straightaway. That's the proposition, very simple. Okay, let me just change type here because we've got some very exciting items in Advanced Materials. In fact, after many years of work, this January, we have Cadillac XTS, the Chevy Malibu, now the BMW M3 and a number of other new cars that have our new -- our new low-global warming refrigerant. What does that mean? The refrigerant you use in your cars, 0.5 billion cars on the road around the globe, was introduced in the early 1990s, does not deplete the ozone but has a global warming factor of 1,430, very high. What we've come out with is totally compatible, global warming factor of 4. Now that is a technology that makes a lot of sense. So you can expect, we use the Solstice brand-name that more and more cars over the next few years, as they get introduced, will be switching to this new refrigerant. It is a major change. At the same time, our Solstice line consists of another 2 unique molecules and this is all Honeywell IP that changed the landscape in aerosols. They change the landscape in insulation. And just to make the point, I want to show a tape, if you run the video, please, on this installation point.
Andreas C. Kramvis
Whirlpool has signed on. Most of the other appliance manufacturers are about to sign on. We believe our first plant, major plant's coming online in third quarter 2014 but will be sold out so we're working on the next one. So we have a product that does a lot more for this kind of environmental performance. You don't have to be genius to go out and sell it. Let me just go now to a part of our business that I don't think is totally understood very well and that's caprolactam nylon, okay? It's a commodity, well, with a difference. We actually operate the lowest-cost caprolactam plant in the world because of its level of integration and that source of raw materials and some other unique process areas that we have. So how much lower is it? The next lowest cost plants are just coming on stream in China, the new plants. We can land in China and we do because that's our biggest market. From Virginia, we land in China and we can have it 20% a cheaper product. So that is our cost advantage. This is why we're in this business. There's another reason why we're in this business. It's a bit more sophisticated but I'll try and explain it. When you make caprolactam, you have a byproduct, which is a very rare fertilizer called ammonium sulfate. Now our process produces 4 pounds of byproduct, valuable, everybody else's produces 1.2. So we get more byproduct. So when times are bad, what happens? Low-cost producers like us, we just keep pumping it out. Those high-cost producers, shut down. There's less ammonium sulfate. Who has the ammonium sulfate? We do. What happens with the price? Goes up. So you got the hedging. With that thing in mind, a more complex hedge thing. We've bought backward integrated into buying from Sunoco, the Frankford plant, which makes in buying from another feeder into this. We bought it 18 months ago. We managed to work it out pretty well integrated. We had a pay bag of 6 months. So we're very happy with that.
So let me just move into another area of our business that's not quite understood, and I just wanted to concentrate on the CAGR at the bottom here. These are real historic numbers of just 3 products we have in our specialty products portfolio. How many times have you tried to get into a pill and it's got this aluminum stuff that you just can't quite break apart? A lot of times. Why? Because they're trying to get a moisture barrier. Well, we have the world's only plastic, if you like, moisture barrier that you can actually break into, you can see through if you use it. So this business has been growing for a long time. So 11% every year, at some point, it becomes a big business and this is where we are here. Our spectrum, we've advanced the state of the art. Did you know that if you're wearing a helmet in the Army or in the Marines and someone shoots you with a rifle, it doesn't stop it? It stops a handgun. Well, we have now the technology that actually stops the rifle bullet, is there interest in it? Oh, yes. Especially if you're in the Army. Now let me just go to our, a few years ago, we said we had an idea that could change the way you make roads because it uses less energy. And it makes the road have less rattling. So we embarked on a project around the globe. We've got tests in Russia, we've got trials in the U.S., Western Europe, China, India. It's gathering steam. It takes us 2 years. People want to test it for years, see how the road goes and they're coming on again. So what are the point of takeoff here? This has really got a very big benefit. So let me just run a couple of videos and wrap up here. Thank you.
Andreas C. Kramvis
Just move on very quickly. Obviously, we're on a diverse business. You cannot do that without very strong processes. And what Honeywell provides in its umbrella: HOS, VPD, sales & marketing excellence are very key. It's enabled us to do what we're doing here. And we're absolutely executing in these areas and they're part of what we do. I talked about creating markets. Just don't want to bore you too much but these things are really changing the world. First plant is coming in China, being able to take coal and they have a lot of coal to produce both propylene and ethylene. I mean this is fundamental work here. Valero started in January. Real bio feedstock in their refinery in Louisiana, totally compatible with the fossil fuel. It's come onstream. It's working. It's our technology. I've talked about taking gas and making plastics. This is big items [ph]. New low-global warming. You saw how it changes the world. These are really big items and we talked about these other products that I think are somewhat narrower in niche but they're very, very relevant. So with that, I'd like to thank you and hope you got the main message is that the growth will continue. Thank you.
All right. I know you guys are excited to ask Andreas a few questions. Let's start with Jeff Sprague.
Jeffrey T. Sprague - Vertical Research Partners, LLC
Andreas, it does seem like most of the growth is organic growth driven by your internal science and that is interesting and exciting. Thomas Russell kind of redefines a little bit kind of your sandbox, if you will, more of a product-oriented business, even has a little E&C flare to it, it feels like. I'm just wondering if you could elaborate a little bit on your appetite, continue down that path or what you see is kind of the natural adjacencies for that business?
Andreas C. Kramvis
I think that it was captured by Dave earlier on is how far do you venture or thinking you are in an adjacency. There are some very strong, there's some very strong know-how in Thomas Russell. So the possibility of that process of being able to, if someone called you up, if Chesapeake calls you up and says, I don't quite know the composition of this gas but I want something to separate it, and you have designed something on 50 skids that has the tolerance to handle it, I don't think it's going to be replicated. So I think to the extent why identify situations like that, and that's, obviously vast markets in oil & gas. You can name a number of them. We think we'll go for it. But they are rare situations and I'm not too anxious to get into something for the sake of it, but if we see something good, we certainly, as we've shown in the case of Thomas Russell, we can move very effectively and make a very good acquisition. But you can go from there. I mean, there's LNG. There's the way you work in oil fields. I mean, there's a lot of areas. But it has to be areas that we have very strong defensible know-how.
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division
A quick follow-up to Jeff's question is offshore, either FPSO related business or subsea processing, anything that you guys would be interested in looking into? And then the second question, more on your kind of shorter cycle, Advanced materials businesses, how are trends tracking so far? You mentioned the backlog, how are trends tracking so far, order trends through February?
Andreas C. Kramvis
Well, I'm pleased you mentioned FPSO, because last week I was in Brazil and -- Argentina and Brazil but Brazil is very relevant. Petrobras is trying to extract vast amounts of oil just off the bed of São Paulo 300 kilometers out. They have commissioned to date about 17 FPSOs. We are on 14 of them. And what do we do? Basically we are able to take this gas that is just not great gas to be honest. It needs a lot of cleaning. It has water and CO2 [indiscernible]. And in a very compact way, clean it and put it in a way they can pump it ashore. So FPSOs is a great area. We're looking for areas of expansion, whether it's a floating platform or a ship. It's piece of equipment of a couple of billion dollars. So we're trying to get a good piece of that. That's a good one. In terms of orders, we see the U.S. continuing strong. The chemical business in China is a bit of a paradox. We're not the only ones saying that. We see that it has slowed down. Not just now. It's been for a while. And we're not seeing it come back. The Rest of the World looks in good shape. But in the balance of our business, we feel good.
Nigel Coe - Morgan Stanley, Research Division
Andreas, you mentioned the payback on Sunoco 6 months.
Andreas C. Kramvis
Nigel Coe - Morgan Stanley, Research Division
Andreas C. Kramvis
I'd say so.
Nigel Coe - Morgan Stanley, Research Division
Right. You're picking up organic CapEx pretty aggressively in the next couple of years. I'm just wondering what kind of payback you've seen on that step-up?
Andreas C. Kramvis
Well, let me tell you. So, even on these big projects, if I don't see 3 years, I'm not going to do it. And there's 2 issues to that. We've got so much opportunity. And you just can't go and put a $200 million plant down without having worked 4 years in advance to plan it, because a lot of these processes are new. So higher capacity to execute, do with rigor and deliver the money and deliver the timing, deliver the product, I think is the limit to what we can do. So we're cutting off very profitable projects but you got to do what you got to do.
Okay. We've time for one more question. Shannon?
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
Andreas, so Roger had to give his 2016-plus margin goal, I guess I'll call it, since it was a little soft to look but the numbers are sort of implied in there. I guess you got off on that one. Can you give us a sense of where you think all these great growth opportunities put you in terms of margins?
Andreas C. Kramvis
Well, I think in terms of thinking at that business, we are at, obviously, at a record for us in the industry. And I'd like to see some of these new plants come online because they're very high return plants and they are our new products. And on those new products, you get better pricing. So just look at us as kind of increasing a little bit and then going up, I guess. As this thing, investments come up. I need a couple of years. I need a couple of years to reload. We're in a reload mode.
So next year is a catalyst giveaway?
Andreas C. Kramvis
No giveaway. We just got to reload and that's the point we're in, but there's a lot of ammo here to get there.
Great. Well, thanks, Andreas, and thanks for hanging in there with us through probably the longest portion of our program today. We're now going to take a 30-minute break for lunch in the South ballroom and we'll see you back here soon. Thanks.
Ladies and gentlemen, please welcome President and CEO, Transportation Systems, Alex Ismail.
Happy to be back and give you an update on the progress we are making at Transportation Systems, strengthening our market and technology leadership. We have a pretty compelling story to tell you about our market position and our prospects for growth. So let's get going.
I wanted to leave you today with 3 messages: one, we perform very well despite the EU macros; two, we are a Honeywell technology business, a knowledge-based business with high ROI. We see explosive growth from global turbo penetration and our aerospace technology gives us a differentiated advantage for the long term; three, we are very well positioned for 2014 growth and beyond. Our business win is fueling revenue growth for the future and we're growing in emerging region in all fuels, in all segments. And finally, we're fixing our Friction Materials business. We expect Friction in 2013 to be driving the margin leap of year between 40 and 60 basis points. I'm going to come back on this. Overall, a Honeywell technology business, driving performance above peers.
What I'd like to do is start by giving you an overview of Transportation Systems that sets the stage of our 2013 guidance. We expect revenue to range between $3.6 billion and $3.7 billion and segment margin to range between 12.4% and 12.7%. This assumes FX at 1.25 and Western EU light vehicle sales down 4% in line with production. As you can see, TS has been outpacing industry macros.
Since 2010, sales are up 12% while EU sales are down 10%. Our global turbo launches around the world are really helping us to offset industry macros. We drive significant productivity from our factories, our supply base, while maintaining a very strong cost discipline. We're growing faster than industry and driving performance above our peers. Take a look.
We drive segment margin above our industry peers. We deliver outstanding ROI, driven by working capital performance, low capital intensity. We lead an industry with explosive growth rates and we are part of Honeywell. We have a technology that nobody else has. No one else has a jet engine business in this industry.
This is just the beginning. We see explosive growth from turbo penetration. As you can see, around the world, governments are driving more stringent emission requirements and demand for more fuel-efficient vehicles. It's a 60% improvement in Europe, a 50% improvement in China, a 100% improvement in the U.S. To meet this more stringent emission requirements, car companies have already started to turbocharge their engines. Take a look at the penetration rate, in red, of turbo now and in the future. We are, right now, at 30% going to 70%. It will flatten out in about 35 years from now. And when it does, we're going to be the class and technology leader of an industry of about $20 billion. It's all very good for us, explosive growth from turbo penetration, driven by regulation. This is going to last for a long time
Being part of Honeywell makes you -- makes us unique in this industry. Our Turbo business benefits from synergy, from our aerospace heritage. Our first turbo application was created 60 years ago by our aerospace engineers in California for Cat. Since then, our engineers are collocated with aerospace engineers around the world, with derived synergies from material science, bearing technology, aerodynamic, thermal management and we continue to introduce in the marketplace a lot of aerospace innovation. The award-winning ball bearing technology available on the 3L V6 engine at Mercedes was pulled from military helicopter applications. Going into the future, we're going to continue to do so. We will be the first one introducing air bearing turbocharger for fuel-cell application, pulled this time from air cycle machine available on the A350. So overall, we are differentiating with aerospace technology. No one else has a jet engine business. That makes us unique in this industry.
This aerospace technology enables us to win in the marketplace. This is a summary of October win rates in 2012 and as you can see, we've won about 48% of all bids in all platforms, in all regions. As a reminder, when you look at it in dollars, as you can see, it translates into 80% sale win in Asia and in Americas, that's about $700 million by 2015 and it's pretty well balanced in commercial vehicle, in light vehicle diesel and the fast-growing light vehicle gas segment. We see this swing rate to be accretive to our Honeywell share demand. This is just the beginning of about $700 million sales growth by 2015 from new launches. As we win around the world, we're going to launch flawlessly and increase our global reach. This is an impressive summary of some of the 100 new launches that are going to happen in 2013, in light vehicle diesel, in light vehicle gas on-highway and off-highway. I'll come back in a minute on segment and region, but in summary, about 100 new launches that we're going to be releasing in 2013 had about 500 new engines that we're working on right now.
Just to pause a second and talk about our emerging regions. I described as turbo emerging regions, North America and China. Let's start with North America first. The industry is expected to grow about 13%, Honeywell will grow in excess of 15%. Obviously, all of it is driven by more stringent capital requirements, driving massive gas turbo adoption in addition to commercial vehicle. One story to tell -- to share with you was one of the recent EPA -- statement from one of the EPA officials during the last Detroit show. He was asked to share his outlook about North America going forward. His statement was, "In North America, 90% of the gas vehicles will be turbocharged by 2025." This is great for us. And I have to say that we are seeing it in gas, we're seeing it in commercial vehicles, and more recently, we're seeing as well a pickup in turbo diesel. All a great story for North America.
Now on to China. In China, the industry is expected to grow 15% and Honeywell will grow in excess of 20%. This is as well driven by turbo gas adoption, in addition to commercial vehicle. Here again, an interesting story for you. Recently, policy changes in China led us to believe that we're going to see a turbo acceleration in the marketplace. You know that China has been, until recently, very vocal that electric vehicles as a way to reduce emission requirements going forward. They came back on this and they see now turbocharge internal combustion engines as the mean to solve some of their emission challenges. It's very good for us. We're winning with global and domestic OEMs and I expect that to continue going forward. So overall, Honeywell will be growing faster than the industry in the U.S. and in China.
I'd like to spend a few more minutes on China and to tell you more about how we're winning in the mid-market segment. Our East4East product offering is getting a lot of traction. Just for you to know what we call the East4East, product designed and manufacture in China, for China. It's tailored locally, it is a local product ownership and we expect this offering to be about 35% of our revenue by 2017. We've developed over the past 20 years end-to-end capabilities, we have the largest global R&D center that you may have seen while visiting Xian in China and we've done a nice job translating our operational excellence to China in our legacy commercial vehicle site in Shanghai, but as well in the brand-new site that we're bringing up this year for light vehicle turbo in Wuhan. So overall, serving the domestic and the global customer locally, leveraging innovation, speed and local decision-making is the key enabler to become the Chinese competitor.
Let me pause for a second and give you an update on segments, namely gas and diesel. As you know, the gas segment is the fast-growing segment in the turbo industry. Industry's going to be growing 13% and Honeywell will be growing in the excess of 20%. We're winning in large segments and downsized engines and we've done a nice job securing top programs our key customers in all regions. You've heard from Andreas the prospect for the diesel growth going forward. The diesel Turbo industry is the largest Turbo industry. It's maturing. Industry is growing to grow at about 4%, but we do believe that Honeywell is going to be able to grow at about 6% going forward. We will extend our light vehicle diesel leadership and we're going to continue to win on, on- and off-highway with our wins and launches going forward. In summary, again, Honeywell is going faster than the industry in gas and diesel going forward.
Update on our cost leadership and how we're implementing HOS. We've done a lot of progress. We've made a lot of progress since 2009, and in 2013, more than 80% of TS sites are going to be at bronze, silver maturity level. As a reminder, Turbo will be 100% silver in 2013. As you can see, it drives significant performance improvements across our factories, and our customers are recognizing this differentiation. Quality, a 75% improvement. Delivery, inventory, productivity, a long-term competitive advantage for us and we're going to continue to leverage that as the way to win in the marketplace.
Before I wrap up, I'd like to update you on the progress we're making transforming Friction Materials. As you know in 2009, we've decided to turn around the business. Since then, in 2010, we've closed our North America operations. In 2011, we've closed our Spanish operations. And we're in the process in the first half to close our French operations. In the meantime, we've put up 2 world-class factories in Romania and in China. We believe that with the actions taken, we're going to see some tail wind in the second half of 2013 and beyond. SM transformation will drive between 40 and 60 basis points of TS margin lift in 2014.
Now let me wrap it up by telling you how we feel good about our position. We have a very compelling story to tell. We see explosive growth from global turbo penetration and wins. Our cost leadership is a key competitive advantage for us and we're very well positioned for growth in 2014 and beyond. In summary, a multiyear profitable growth story for us. Thank you very much.
All right. First question, we'll go with Scott here, front row, benefits, next here.
Scott R. Davis - Barclays Capital, Research Division
Alex, there's a couple of things I wanted to dig into a little bit on the margin side. When you think about the new product launches that you have, is there a timing issue where you have the cost up front and then big pay back, kind of year 2, year 3, year 4, if that product stays or is the cost in revenues more essential [ph] from that?
We don't really because we do a lot of products we use and we scale up and down our technology. So you're going to see our R&D and investment being pretty much what it is today going forward. So no pick-up and no big issue in that area.
Scott R. Davis - Barclays Capital, Research Division
Okay, good. And then as a follow-up, if you think about taking the leadership on the HOS 67% silver 2013, it's hard to tell where margins have gone -- or where margins would be if you're in a normal demand environment. Does this indicate that when demand does come back, you're going to have outsized incrementals, but you cost basis is so much better than what it was before?
Clearly, volume is a key lever of margin improvement for us, as you know. And HOS has helped us, I would say, leveraging our existing footprint and be able to process more volume through the existing footprints that have been pretty efficient. So as volume come back, you're going to see upsides on the margin side, no question.
Next question, Peter Arment.
Peter J. Arment - Sterne Agee & Leach Inc., Research Division
Alex, if you could give us a little more color on the North American market. It seems like there's a big statement from EPA, but it seems like there's also been some resistance from General Motors on the adoption of the turbochargers or at least that's -- whether that's just the competitive nature with them and Ford.
Well, Peter, I'd say we don't see any resistance in the U.S. for many of the big players, including GM. GM has a lot of applications to date that are turbocharged gas, and we're on the Chevy Cruze and they have the diesel applications coming up as well and they do have some significant turbocharge development going forward. And Ford has made this big statement that 90% of their gas offering will be eco-boost, and behind eco-boost, you need to win turbocharged gas engines. The Japanese are bringing as well turbocharged engines. The Europeans are bringing turbo gas and turbo diesel, so frankly, we feel pretty bullish about those numbers and you're going to see in the U.S. a turbocharger revolution. And I would even say, it's already available at your own dealership.
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Alex, when it comes to Friction Materials, clearly you've got a cost plan roadmap laid out and you're executing against it. What gives you the confidence that you're going to be able to hold pricing and not pass that through the customers in that industry as you look forward at least over the next several years?
Right. The improvement is going to come from a better cost position clearly. And we have invested, over the past 3 years, in state of the art manufacturing technology, that's going to give us not only a good process technology advantage, with a good cost position, so I feel pretty good about our ability with technology to differentiate and that's what we plan to do in the next few years.
Our last question, John Inch.
John G. Inch - BofA Merrill Lynch, Research Division
Alex, can you expand on China? It's the largest car market in the world, it has a massive pollution problem, is there any way to frame the opportunity? And the context is also the China government appreciates that perhaps turbos are part of the solution or is that theoretical or are you working with them? And maybe just a little more color around what could be the opportunity to drive penetration because the car market looks like it may slow there in the future, so how -- what's the trade off?
Well, the average turbo penetration in China is around about, all in, around 15%. 15%, 1-5 right? I could tell you that this is going to easily double in the next 5 years, right? And until recently, we always felt very confident that China would deliver these numbers. And with what we've heard in February and what I described as recent policy win changes, we even know that the Chinese government is now looking at turbocharged internal combustion engine as the way to solve some of the emission challenges that they are seeing and they are dealing with today. So going forward, I would expect these numbers to be even bigger than what I'm describing right now.
Okay, great. I'd now like to welcome Tim Mahoney, President and CEO of Aerospace; and Carl Esposito, Vice President of Marketing and Product Management to the stage.
Timothy O. Mahoney
Good afternoon. I've asked Carl to join me today to talk about some -- a part of this agenda relative to some very exciting technologies, industries that we're serving and new products. So let's -- the kind of the headlines here and that I'm going to review today with you is that we've certainly had a very big year in 2012 in winning in the marketplace and focused on those platforms that are going to be very big impact for the next couple of decades. But in this space, I would say, the thing I'm the most proud of about 2012 and beyond is the fact that there's a dexterity that the organization demonstrated of not getting fixated just on the winning on the big business, but cultivating and developing the short cycle business. And this has been a big fuel for our growth engine, relative to that significant installed base, and I'll touch on that. But last year was a very big year for us across all 3 segments in that area. From an organizational perspective, we're feeling very, very good about the organizational structure that we have in place, like I put in place in 2005, so we haven't made any changes. But I think the maturity did. So feeling good about the structure, the people, the processes and the programs that we're on relative to enabling our growth and our operating performance going forward. And the third as I touched on, Carl has got some very exciting areas that we're going to touch on, specifically about what's happened in the areas relative to connectivity of the aircraft, both from a machine-to-person in the cabin and machine-to-machine that's on the aircraft, which was not in our vision statement when the acquisition took place and the integration
In this area. Components is an area that we have serviced ourselves, meaning that we've developed electromechanical devices and so on for products that we put on to the APUs and engines and so on. But this is an area that we focused on
and operating margin expansion about 5% across all the 3 different businesses. Certainly, the commercial businesses more than offset the compression or the contraction that was
going to be from a defense and space perspective. We were actually a bit conservative by about 1.1%, so we had more sales in the defense and space area. That contribution was actually not from the DoD. It was from international pipeline. So that's one of the things that we're going to talk about because we look at this as a very significant opportunity, both on the OEM side, based on just successes that we've won, but really the market that's already out here, those aircraft that are out there. And I would say that we had a very good year in 2012, but it's exciting to be able to work based on, looking at 2013 and beyond, capitalizing on those successes and continuing to improve.
So winning big. We've put together a summary to try to look at how we've been doing over the last couple of years. And I know that there was questions already during one of the breaks around, can you talk about some of the unannounced wins? The answer is the same as last year. The answer is no. It's because we're constrained by the OEMs because obviously, they don't want to cannibalize their existing productions and so on. But we have had announcements relative to wins and you can see them in all 3 different sectors. But I think that one of the areas that has been the most exciting shift for us is maintaining our strategy relative to picking the platforms that are going to be very big impact, right? So this is when in previous years, we said, we're going to pick those platforms basing the parameters of the aircraft. And what do we think is going to be the adoption or the acceptance of those aircraft at that level and then we're going to double down. We're going to really focus on winning those aircraft or those subsystems on those aircraft. And I feel as though that 2012 was a very big year for that and putting it into context and looking at this across of our portfolio. So the fact that we have a very unique portfolio in that we have a mechanical business, we have an Avionics business, we have a software business that are all single point of contact, interacting with the customers that we serve, think that this displays the successes that we've had that are very, very high-impact aircraft meaning lots of deliveries in the near term, plus it feeds the installed base for aftermarket for growth as it goes. So very, very happy with the growth that's taking place relative to this aircraft. However, we're not done, there's more coming. And I think that's a key component.
Now I touched on this earlier in my opening comments, which is, if you look at the number of aircraft that we are on across our portfolio of products, product enhancements is a growth area for us. And you can see the numbers that are associated with this. And the organization is very excited about this. We have historically focused on long-cycle businesses, right? So you can imagine that people, engineers, specifically, very, very focused on getting on a program and you work on that program for 3 or 4 years, one thing. And what we have created this epidemic of change within the organization, such that people are taking ideas and bringing new products to market in an 18-month cycle. And that's some of what occurred relative to our growth in outperforming our peers in 2012. It was beyond our normal aftermarket streams relative to R&O and Spares, which is a very good business and we really love it. However, this has supplemented that. This is core to us now. And so I can tell you that as I'm standing here, across all 3 different businesses, we have a very full pipeline and those that are from the point of ideation, development, certification and selling, and that's going to continue. This is going to be an annuity for us for a long period of time. Now one of the key things, and Roger talked about the software model, one of the distinguishing factors of success in adoption, particularly in the Airlines business here is if we're able to develop a software change that provides efficiency or greater functionality to the customer that's flying that aircraft and it's software only, the adoption rate is going to be substantially higher. And the reason is, is that, that aircraft operates an income statement. It's got to go in the barn at night. If it can be modified during that maintenance cycle and be flying back in revenue stream the next day, that's a key component. So of course, we have been very focused on how do we develop software solutions only. Now of course, we're not able to achieve that all the time because in some cases, the electronics don't have the right processor speed and so on, but that's one of the key doctrines that we're pushing ourselves for in this area. So this is a significant growth area. For instance, in the business in general aviation, this year, it will be above $200 million. And we just started this a couple of years ago. The exciting thing is, it has created this, I would say, change relative to all 3 market segments and within the organization, it's created this excitement around seeing products that come to market much sooner as compared to working on it at, let's say, a lower speed.
So let's do a little bit of a deep dive on the 3 different segments here. From an air transport perspective, the build rates continue to grow. So if you'll look at the 737s, the A320s, it's all in the public press, the A380 volumes are going to continue to grow as they did in 2012. They will for the next couple of years. We're very, very happy about that relative to having high content on there. We have continued to be very diligent and focused around ensuring that we have renewals relative to the aftermarket and in some cases, selectively displacing our competitors on those products because that's really good business because you're in the aftermarket already and it's got a stream -- a growth stream very, very quickly. And then of course, we were outperforming from a conventional R&O and Spares and now, Enhancements area. And so of course, we're planning on doing more of this, particularly in those areas where it provides efficiency to the airlines. By coming up with solutions, innovating something that provides efficiencies, specifically one of the really hot zones here, is something that affects fuel consumption is a big driver. So if you think about the electric taxi, or connecting systems on the aircraft, that's the key component. So I think that through our marketing excellence, it shifted us from think about technology for technology sake, where we may have been 10 years ago to how this -- where is this going to provide the greatest amount of value to that customer. And of course, the airlines' value is different values proposition and different in business aviation. So feeling very good about where we're at from an transport and regional perspective. And of course, we're now just on the eclipse of going into first flight and flight test program on the A350. And of course, as you know, we have a very significant amount of content on that aircraft.
2012 was the year that validated, that regardless of what was said, relative to market share, that we had captured the right business on the right platforms. Meaning that we grew 24% in a flat market on the OE side. So the strategy, again, of getting on those platforms that we believe are going to have long production runs and we're going to have very good adoption by the market. Last year was a validation of that. I believe this year is going to be another validation point of our position here, both mechanical and in the avionics area.
One of the thing is taking place in the business aviation market is that, on top of the enhancements, we've also added some additional service venues both across our mechanical systems and our avionics systems that basically takes what would be a, let's say, an unscheduled cost with volatility based on removals. So we've expanded those services to make that a fixed cost. Basically, an insurance policy on maintenance services. So that's been a great area, relative to 2012 and beyond. And again, this is the area that there is a lot of software changes that have been already certified and are being sold, and more coming forward this year and beyond.
And then from a Defense and Space perspective, we are forecasting, this year, that it's going to be 3% down year-over-year from revenue standpoint. That's entirely associated with the planning that we've done relative to sequestration. So let me make things clear before I go to the next chart. Our planning has been that sequestration will happen. That's not a variable in our planning. That is a fixed point. If it wasn't to happen, maybe a different story. But our planning has been, I would say, very relatively precise, but we have planned on sequestration happening the way that it was defined in the law. The nice thing about Defense and Space is that, 2 years ago, we really started to take the messaging relative to high-growth regions. And we looked at the distribution of aircraft that had either been developed by international OEMs or by U.S. OEMs that had been out there or in these high-growth regions or a distributor across the globe. And what we found is, those markets have been underserved. So if you see the international aftermarket there, this is why we actually had more revenue, by about 1.1% in this space, in this business, than we had forecasted last year. All of that growth, and more, was associated with our retrofits, upgrades, modernization. And in all cases, those were products that were already certified and on our shelf. That's the key. It didn't even drive any additional investment. So we're doing this in a much larger way. And following Carl and I, you're going to hear from Shane
in the Defense and Space area -- in space the area. So I'm including that. We sold to customers that we have not sold ever before. We sold things in the space area, satellites -- components that go into satellites, that we had sold for decades to NASA. For instance react -- something that's called a reaction wheel. Last year, we sold 150 of those on a global basis. So took the orders and delivered them. So I'm very -- I'm actually very excited about what's going to -- what's happening in our Defense and Space area, particularly on an international basis, and demonstrated that performance. The pipeline is very, very full relative to Defense and Space, going forward, from an international perspective. So, again, not to be too repetitive but I know this is -- one of the most asked questions is, are you worried about sequestration? The answer is yes. I worry about everything, relative to this business, okay? To be very honest. But am I worried about the fact that we haven't done is the best job that we can relative to, I would say, the precision of our planning, as far as detail and trying to be as, I would say, responsible as we could. And the answer is, we have certainly done that. So our baseline has been that sequestration is going to happen. And, certainly, I think the variable that's associated with this is not whether sequestration is going to happen, it's really what's the timing around the CR. That, I think, is what the more meaningful question is around this area. However, you see, 2013 is the low point for us. 2014 and beyond, we continue to grow. Much of that business is booked already and much of that incremental growth is international. So if you look at the M-346 or if you look at what's been done in other areas on the defense area in 2012, business that we've booked, that's materializing. And, of course, the international defense budgets are growing by 3% to 4%.
All right. So growth is wonderful as long as we convert it to operating margin. And one of the questions would be, and should be, are we going to continue to expand our margins. The short answer to that is, yes. All right. Why is that? I know this a org chart and so it's in to numbers. But this is one of the reasons. We feel really good about our organizational structure and the alignment with our customers. So when -- we have 3 businesses that are focused on the customers and the markets that we serve. So that when we interact with an OEM or an airlines, regardless of whether we have 1 line of business or 14 lines of business, we have continuity from a business standpoint with that customer. The most important part, though, as you see, marketing and product management. I want you to think about
about, relative to marketing excellence and looking forward, and making sure that our technology and product roadmaps are aligned with what those customer needs are, for 5 years and 15 years now. And then aligning the organization, all the shared service organizations, the integrated supply chain, engineering and technology, and so on, with those priorities relative to growth and profitability. So that's working well for us.
Now, as a point of validation is -- I've included a couple of metrics that we look at on a periodic basis. And I think this demonstrates 2 things. One is that we're on the right path. This is definitely the right trajectory. We are going to continue. The second one is -- a quote by Dave Cote to me is, "you know, Tim, that's a pretty good start." So it means we're not done yet. All right. We have the same exact playbook that Dave outlined before, relative to OEF, FT, Velocity Product Development. But the 3 areas, I would say, of heightened focus for us has been, in 2012, around -- and previous to that, was Velocity Product Development. And it's about that dexterity of doing long cycle development and certification and short cycle, and having an organization that thinks in both those dimensions.
The second thing is -- I touched around globalization. I think that the commercial markets, both business aviation and air transport, we have serviced for long period of time. But the discovery that we've had is that there's a very broad installed base of defense market that we've underserved for a long period of time, and those aircraft are operating out there. And the customers have a hunger for those new products that we have already designed and developed, and provided, to U.S. Forces and other forces that we have those relationships with. And then from an HOS perspective, I'd like you to just add, supplement Alex's comments, relative to one thing. Although we talk about HOS -- and when a number of you come and meet with us, we typically go from where we're meeting in a meeting room to the factory floor. This is a much broader play. This is from a -- the view that you should have, relative to HOS, is that it is driving standardization from the point of our business processes, all the way through invoicing. That's the key for us. So this starts at the factory floor but it expands horizontally across all the functions. And that's what we started to experience in a much broader way in 2012, and it's going to continue. Where we're at on this journey, you can see that we have the same type of performance improvements relative to delivery, quality, working capital, et cetera. We're behind some of the other businesses relative to our adoption. Very, very pleased that all of our facilities are under full-scale deployment and we attained 67% of our business at either bronze -- bronze and silver in 2013 -- or 2012, and we have aggressive plans to continue on in this path. This has clearly been a differentiator relative to all of these parameters, but more importantly, standardization of work in all of the adjacent areas and support organizations across Honeywell Aerospace.
So, now I'm going to turn it over to Carl who's going to talk about couple of technologies, products and market spaces that we think are very, very exciting to have an element of significant amount of growth, explosive growth. Thank you.
Okay. Thank you, Tim. As Tim mentioned, those commercial OE wins are really important, right? And those are some big wins for us, we're very happy that we're winning across the portfolio, many different technologies, many different products. But we don't want to lose sight of other growth opportunity that we have. Components, mechanical components, we have a number of them next door. Differentiated technologies, differentiated products that are undergoing a technology transition, from hydraulic, pneumatic to electromechanical, and capturing that technology transition. Aircraft connectivity, with our acquisition of EMS Technologies now fully integrated, we're really capitalizing on the desire for not only passengers, but the desire for the aircraft itself to communicate globally.
And International defense. Doing the right marketing research, putting the right people on the ground, understanding where we can grow with those upgrades to help those customers across -- effectively upgrade their capabilities.
Let me get -- talk a little bit more detail about the mechanical components. These are things like pumps, valves, actuators. They get wrapped around the engine. And we have that indigenous capability within our own design house, to design -- have for our own engines. We've really spent the last 3 years or so looking at how we can take that technology and push it out more to external customers, and sell outside of Honeywell as well. And we've had very nice wins in the past couple of years because that differentiated technology, and we've helped other companies become more efficient and make their aircraft engines more efficient. As engines get more complicated, they actually use more components. Which is a good thing for us. We like that. Makes the aircraft much -- the aircraft and the engine much more efficient. But we play in a relatively small space right now, and we're looking outside of where our traditional addressable market is and looking much broadly, much more broadly. It's a very fragmented market, the technology is moving towards the electromechanical, into a much more digital and software-controlled world. And we have advantages to that kind of technology across our portfolio and across our engineering skill sets. So it's a very exciting area for us to continue to grow in. It is important, then, as those components start to get more digital, start to talk on the aircraft, that they have connectivity.
Connectivity, global connectivity. The aircraft being able to communicate around the world is a really important trend that we're seeing. Not only passengers in the back of the aircraft that want to communicate while they're on the aircraft, but the aircraft itself wants to communicate now. We're seeing that systems about what to communicate, and we're enabling though systems to communicate global across the data links. The adoption rate has been very high. Customers are buying satcom upgrades today, and we're very excited about our exclusive partnership with Inmarsat on the next generation satellite network that will drive 2x the bandwidth. And that exclusive arrangement with Inmarsat really lets us take advantage of the demand of moving from a
as you think about, not only the innovation that's driven in our consumer world, where we've moved from a dial-up type speed to a broadband speed, we can do that on the aircraft and connect those sub-systems and really make the aircraft communicate. Not only are we providing the hardware, but we're also providing services. In business aviation, we're also named as Inmarsat's exclusive business aviation airtime distributor. So we provide the hardware and we're providing the airtime distribution for business aviation. So really looking at the entire value chain and how we can provide differentiated products, and service offerings, to those customers.
Connecting the aircraft but also connecting to the rest of the world. International defense. And as we look at where the growth is in defense, it's international. We've done a lot of market research. We've put people on the ground, working with Shane's team as well, around where are those platforms, what are the fleets that those countries have, what are their needs that they have on those platforms. And what are the singles and doubles that we can do to upgrade those platforms from a technology perspective, from a logistics perspective and from a performance perspective. In some cases, it's brand-new engines. In some cases, it's avionics, upgrades or service enhancements and improvements to the products. And so looking at where we can grow outside the U.S. and making sure we have the right infrastructure, the right products and the right people in place to capture that growth.
I'll turn it back over to Tim.
Timothy O. Mahoney
Thanks, Carl. So, in summary, 2012 was a good year not only from a performance standpoint, growth and operating income expansion, But I think more about the foundation -- some additional foundation work that we did in order to build on those successes going forward. We feel really good about the organizational structure, our people, processes, programs that we're on, and clearly, the growth projection that we've got here. I think that we are be a more thoughtful organization around -- if we think about productivity, efficiency, so on, a lot of that has been enabled by HOS and the transparency as we've got on to one ERP system. So about 90 -- slightly in excess of 90% of our business is there now, and certainly there has been a lot of learnings at being able to capitalize on the information and transparency as we've migrated from actually thousands of systems to less than 1,000 at this point, or in the States, about 300. So, we plan on continuing to stick with the playbook that we have. And we're feeling very, very good about the alignment that we have, relative to delivering more value than our competitors are, to our customers, so we expect to continue to outperform.
With that, Elaine, I'll turn it over to you for Q&A?
All right. We'll take about 7 minutes of questions. First question here, Nigel.
Nigel Coe - Morgan Stanley, Research Division
Can you talk about -- as you move from the 320 to the NEO, 737 for the MAX, 330 from 350? How does your content per ship set change?
Timothy O. Mahoney
So, on the 320, it's probably going -- on the 320 NEO, it's probably actually going to grow a bit. There is a keen interest that's predicated on the fact that we win the electric taxi. So that is something that has a lot of pull from the airlines relative to that area. From a 737 MAX, where all of the subsystems, with the exception of some small ones, have been selected, our ship set content has actually grown relative to the 737 NG. There's also a very important dimension to that and that the business that we won in the 737 MAX has a much longer aftermarket stream and fuller aftermarket stream than the content that we have on the 737 NG.
Nigel Coe - Morgan Stanley, Research Division
Timothy O. Mahoney
Well, the 350, of course, all of the selections have been determined. As you know, we have significant content on the mechanical side, so it was identified as the extended mechanical perimeter. So that's the auxiliary power unit, the environmental control systems, air management system, gallery cooling, et cetera. That is a very, very big package. I think it was $16 billion or so when it was originally awarded. We also have the Flight Management System and the ADSs or surveillance system that's on there. So we're very, very pleased with the content on all 3 of those aircraft.
Next question please, Lisa [ph]?
Can you just maybe talk about the aftermarket trends so far through first part of the quarter? Through February. If there's anything unusual, any kind of volatility you've seen, any de-stocking or anything out of the ordinary where you've guided to this year. And also your ATR OE revenues for '13 look like they're flat in this bar chart. Are there dynamics around mix of deliveries and then do you have kind of a pickup in the back part of the -- should be a delivery schedule, I'm just wondering why it's flat this year.
Timothy O. Mahoney
So, on the ATR aftermarket, we're seeing normal type of recoupling, I would say. So we're seeing a coupling with flight hours. So we're growing faster than flight hours, but we're seeing less spares activity than we did last year, which is indicative of the fact that, last year, there was some restocking. So we do not see any de-stocking relative to the ATR, and we are continuing to grow faster than the flight hours. I think flight hours in January was about 3.4% growth year-over-year. So we're aligned with that and that's what we had in our plan. Relative to the OE ship rates for this year, of course, last year there was a significant increase relative to the rate increases, right? Particularly the narrow bodies of the 737 and the A320, and so we're lapping those comps from a year-over-year perspective. There is one area, but it's not in Q1, but it would be for 2014, that we're watching very closely relative to rate changes, but that's not for this year.
On the product side, we have a continued pipeline of aftermarket upgrades that customers are demanding and wanting, those connectivity solutions for satellite communications, navigation improvements and navigation performance benefits that improve the efficiency of the aircraft, and some safety and situational upgrades as well. They're very popular.
Timothy O. Mahoney
Yes. And so, one of the difficulties this year, at least -- particularly in the first part of the year, is that we're lapping such significant comps from a year-over-year perspective.
Next question, Howard Rubel.
Howard A. Rubel - Jefferies & Company, Inc., Research Division
Tim, with all these wins comes, typically, an opportunity to spend more money in R&D. So how are you taking advantage of what you developed so that you minimize some of the bill? And then I think, just Carl's question I just want to -- or Carl's point on comps. What are we going to do in terms of -- I mean you're still not in airborne in anyway and is there any need to be there?
Timothy O. Mahoney
Okay. So I have 3 points relative to our DNA [ph]. One is, that just by -- in my DNA [ph] I'm relatively ruthless on cost, with the exception of research development and engineering. I think that's the lifeblood of growth going forward. So not trying to make bad -- trying to make all good decisions relative to costs, but I think that my comment around transparency is getting -- SAP has made it a lot more transparent on where our costs are. The second point, I kind of lost my -- third point. Sorry, Howard. So the second point though is, actually, if you go back a couple of years ago, we've talked about core development, right? That's almost in our DNA [ph] right now. So we're still grasping a bit, but what they've been doing is and we can show you, actually break it down, on how much we're doing from a core development standpoint. And core development is where we design it and developing, and certify it once, and apply it many times. So let's talk about, one, that's really, I would say, an industry bell-ringer, is next-generation FMS. We've developed a Flight Management System that is flying on the 747-8, which is a big aircraft, and on the G650. And the core functionality was only developed once. It's got 5 more applications that is going on. And the only nonrecurring cost for those applications are the application-specific nonrecurring cost. So that's what we've been doing, trying to make sure that we continue to fuel growth from an innovation standpoint and doing it by core developments.
Howard, to answer your question on the radio side of things. We're using that same core concept, around radios and radio technology. We actually make radios in all of the sort of market segments, everything from our Bendix King, general aviation, all the way up to business aviation and air transport, and even space applications. We made the radar altimeter for the Mars lander program. So we are taking those core concepts around core radio technology, software defined radios and software architectures to reapply technologies as we continue to refresh our radio product line, but we have a very strong and robust radio surveillance and communication product lines.
We have time for one more question, Jeff, Kyle. Jeff Sprague.
Jeffrey T. Sprague - Vertical Research Partners, LLC
Tim, just looking at the components opportunity as you laid it out. If you look at that $40-some-odd-billion that is not in your served market, how much of that would you kind of classify as of legitimate interest? And how do you get there? Is it all kind of bolt-on M&A or is there organic path to some of those served markets?
Timothy O. Mahoney
So I'm not dodging the question, Jeff, Dave asked me the same thing about 2 weeks or so ago. And I did have to tell them I don't know at this point, but we will know that in about another 3 to 4 months. Really, I'm being very honest. It is not -- we're not focused on bolt-ons or M&As at this point. We certainly have a milk run [ph] and we understand to place in the space, and we understand -- I would say, when we look are parametrically at where we differentiate ourselves, in the areas that we've been successful, so $2.7 billion of wins, that market was being served by others. So, in that 3 months, that remaining 3 months, what we're going to really understand is, do we have those core competencies internally? Do we build them or would it be something that we would codevelop with somebody else? So don't have quite the answer yet but it's coming in the next few months on that. Quite excited about this area. And I want to kind of expand this by saying that one of the areas that Carl touched on, around this migration, this technology transition, that's an important component to this. So, moving from pneumatics and hydraulics to electromechanical, that stuff is in our wheelhouse and has been. But in this area of growth, what it took for us is, just to open up our aperture and get our headset around this area. Not developing new technologies that we have in our wheelhouse already.
Thanks, Tim. Thanks, Carl. We're now going to take a short 10 minute break. If you would like to proceed to the South Ballroom, we have one more opportunity to mingle. Check out the cool technologies and talk with the folks that we have here from Honeywell. Thanks.
Ladies and gentlemen, please welcome President and CEO, High Growth Regions, Shane Tedjarati.
S. Shane Tedjarati
Good afternoon. Thank you. Good afternoon. It's great to be here to share with you an update on the High Growth Regions.
As you'll recall, 2 years ago, right here on this stage, we began to refer to emerging markets as high-growth regions. And for very good measure; High Growth Regions have been driving a significant part of Honeywell's growth. In 2012, we drove more 54% of our growth from these regions. And since 2009, we've been growing at a steady 15% CAGR per year, nicely spread throughout all of our businesses and all of our major geographies around the world. And even though China takes the lion's share of it, it's very well balanced between other regions throughout the world.
As Dave mentioned, the macro tailwinds that we're experiencing in the High Growth Regions, at least 2 or 3x faster at a higher pace than the developed markets in the world. And the important part of that is that Honeywell has been consistent -- in the lower right-hand side, as you can see, consistently growing at about a couple of -- twice the speed of the -- those macro changes in these High Growth Regions.
The story has been one of evolution that we started more than 10 years ago with trying to go slow, to go fast, do it right in the most important market, which was really China at that time, to make sure that we have all the on-the-ground presence and the leadership, the connectivity and the full Honeywell prescription that we needed to become a full local player. And then taking that over to India to make sure that we have the 2, if you like -- if I need to borrow a term from Aerospace, it would be the 2 rocket boosters to be able to do what we're you're doing now throughout the High Growth Regions, launching from the platform of China and India from the playbook that we've learned throughout the entire globe.
You've heard Dave and others refer to this term that we call becoming THE Chinese competitor, not a Chinese competitor, but THE Chinese competitor. On the right-hand side, there's the -- if you like the background, why is it so important for us to become THE Chinese competitor? China, unlike any of the other high-growth regions in the world, is the only place that is likely to develop those global competitors like no other country in the world. It's a combination of the state-owned enterprises, the local entrepreneurs, the subsidies, the big, local market as spirits of enterprise that is boiling there. Less than 8 years ago, there were a handful of Fortune 500 companies out of China. Today, we have over 70.
And it's not just a state of enterprise story. It's a story of private companies. Companies that are collective, et cetera. And increasingly, because of the industrial nature of that economy, these companies are coming up in areas that are of interest to Honeywell. And their expansion model beyond China are also increasingly in high-growth regions, because those are the markets which they have more affinity with their own markets and is much easier to gain growth.
For us, we have started this process of becoming the Chinese competitor long ago. More than 6 or 7 years ago, systematically, we've been looking at how do we master the mid-segment, how do we run a very tight local -- with local authority, design, research, development, engineering with manufacturing and supply chain? How do we create effective channels in Tier 1, 2, 3, 4 cities? How do we create a model that can actually do all of that with local speed. Because if anything, speed really matters in China. And in addition to that, how do we do it with the best quality and the right cost to the customers that they'll be willing to buy? That's becoming THE Chinese competitor.
So all our businesses have already gotten there. Couple of years ago when we were looking at a potential acquisition target in life safety in the Fire business, we recognized, after a full due diligence, that our business was making much greater margin for the same business size with only 400 people versus the target 3,300 people. We are truly THE Chinese competitor in some of our business, and soon, we will be in all of our businesses.
Core to that strategy and at the heart of becoming THE Chinese competitor and a global competitor is what we call East-for-East product platform. Alex mentioned that and Roger talked about that. This is so key to be able to create full-design authority in China for China, and we've done -- we began this in 2005, long before Harvard Business Review articles started showing up and other people started talking about it. We'd been doing it for a long time. And that is to be able to fully integrate our total capability of -- from cash to concept, ideation to product innovation and where clients can use them with the absolute requirements of our customers, not more, not less, with the right agility, with speed and with the right cost.
And now that we've been at it for such a long time, we see how it's paying dividends. Because those countries that we -- in the past, people thought are allergic to Chinese products or Chinese innovation are beginning to import in Russia and Brazil. More than 50% of their cameras or there thermostats or 15% of their cars is from China. This is a reality which is upon us, and we're very well positioned to take advantage of it.
A very good example of our East-For-East innovation is creating new markets where it did not exist before, like creating new segments. For example, in the video -- IP Video Door Phone, we traditionally use to only serve the top end of the market, $1,000 to $3,000 or $2,000 or $3,000, and that only skimmed about 5% to 10% of the Chinese market. But by being able to give full-design authority in this business, we're now able to grow from $100 to $3,000, and serve a whole slew of market. And more importantly, we're able to do it as profitably in the low end of it as we are in the mid or the high end. This business, for example, which is Security, last year delivered more than 70% of its revenues in China from East-For-East products. So this is here and now, for us.
Let's look at some of our mid -- multiyear and long-term wins in High Growth Regions. Across the regions, from China, whether it's in ATR, in the Transportation Systems that Alex referred to, in India, in Middle East, in Brazil and Russia, throughout these regions, in addition to our short-cycle and East-For-East products, we're also winning significant wins in addition -- in excess of more than $2 billion alone in 2012, which is going to give us a very good base to continue to innovate and seed plant in our growth regions.
You saw in the video that a big part of a story is this emerging middle class. In fact, if you look on the right-hand side, the global middle class or the developed market wealthy and middle class is about 1.5 billion people, and over the next 10 years, it's going to remain about the same. Although there's good growth there, but the growth is within that population.
The global middle class or the emerging market middle class is about 1.2 billion people. That's growing to be about 2.1 billion, more than 1 billion people added to it. And the good news is, that's coming from the bottom of the pyramid. The world is becoming wealthier. It's becoming better in terms of creating a more efficient and more safe and secure society, and it's being driven by urbanization. That is good for Honeywell, because as people move from villages and become more sophisticated, urbanized, they became users of Honeywell technologies everywhere.
But that middle class is very different than the American or Western European middle class. That is what we call the less than $10,000 middle class. This middle class had different cost points, different speed to market, different requirements for their products. And companies, multinational companies, that have not prepared for it for the past 10 years are going to be ill-positioned to serve that middle class. It is the biggest engine of growth for the world.
When we look at these major geographies in which we call the next big geographies for High Growth Regions, when you look at their GDP growth, they're in the 4% or 5% to -- like in India and China, to 6% to 7% or 8%. But when we transpose our own industries, the Honeywell industries over those geographies, we see that because of rapid industrialization and urbanization, our macro indices, the Honeywell macro indices, are growing about 2 to 3x faster than the GDP. That gives us tremendous amount of tailwind, which allows us to be able to seed plant with a lot more precision, with a lot more confidence in the market.
Let's look at priority geographies. Beyond China and India, the 2 rocket boosters that I talked about. We have chosen a strategically these 7 or 8 additional regions in the world to do full formula presence of Honeywell: places like Indonesia, with a very large GDP of 260 million people population that are now fast emerging with everything that the world wants; places like Middle East, with about a trillion dollars and a lot of oil and gas and defense; Turkey and Central Asia and all the istans [ph]; Russia, with a big oil and gas story; South Africa and Sub-Saharan Africa; Brazil, which -- you've heard some of the stories about Brazil and how that's emerging into a very significant middle class, largely urbanized today, but big opportunities in natural resources than aerospace; and Mexico. These countries, we will do full Honeywell formula.
But what is the whole strategy that holds them together? Part of -- one of the -- parts of the strategy is these growing in these core geographies, the 8 or 10 geographies, and making sure that we do in them, as we've done in China and India, a full formula, full capability to be a local player and to be able to move fast with the market. But in addition to that, we're looking at making sure that we also look at global natural resources and energy in countries that are beyond these 7 or 8 core geographies, global Aerospace and Defense in countries that are beyond and what we call Follow the Growth.
What ties all of them together is the core strategy of East-For-East and becoming THE Chinese competitor and One Honeywell. Increasingly in these markets, clients want to see how we can bring everything we have to bear, because they're building everything. I often joke that in some of these countries, you have to have a warning sign when you enter, warning country under construction, because they're building everything. And they need everything that Honeywell has to bring to the market, and that One Honeywell plate is very important.
Let's look at global energy in terms of oil. In the High Growth Regions of -- including the major 8 geographies, there are other places like Angola, like Nigeria, like Azerbaijan that would not have been in the original 7 or 8 additional countries, but we need to be there. In fact, UOP and HPS are in places that are even hard to spell for Andreas. These are difficult places to go, difficult places to install, but where we serve and we install and we provide our technologies in these places seamlessly. In the next 4 years, there'll be an additional 10 million barrels of oil per day, all in 3x that of the developed markets coming out in the High Growth Regions. Big part of our strategy.
Natural gas is a natural story of growth for everyone. And we -- as you know, we have a very big play in it. And in that respect, actually, United States and Canada and even Australia have become High Growth Regions. Natural gas throughout the world are a very big play. And where they are more complicated in terms of the level of purity, et cetera, we have a very big play in that area.
I'd like to talk about Defense and Space. Carl mentioned in terms of the granularity that we had to go through, in terms of where are all the current platforms, as well as the future platforms. He mentioned Israel, South Korea. But there are also other places that are in active difficulties, such as, for example, Colombia, where there's a real war going on, on the drug front, as you know. And our technologies are very much in need in terms of securing pipelines, securing borders, as well as providing the right technologies for the whole country. So Defense and Space and the entire Aerospace, in addition to the main geographies, are going to go and find themselves in all of these new geographies.
I mentioned Follow the Growth, and the concept is a simple one. In -- traditionally, multinational companies have been used to investments going from the west to the west, from the west to the east. You can follow Chevron or GM or any other company from the North America, Western Europe. But that dynamic has been changing and changing very fast. Investments are now becoming south to south with a Chinese company making an investment with Middle Eastern money in Uzbekistan, with a Turkish contractor making an investment in North Africa with some Russian money. These dynamics are here and now and are happening rapidly. More than 90 of the contract, the top 200 contractors in the world, come from China, Turkey or India, and they're increasing in the orders of 20% to 40% in terms of their businesses.
If you are not in China as a Chinese competitor, speaking their language, in Beijing or in Hunan or in other places, you have no chance of even knowing that the business is happening, how much more if you're able to bid and work with them. You have to be moving at their speed, their price, understand how to operate in their countries. So we have started this process already a couple of years ago, where we now have people in Beijing focusing on Africa. We have people in Beijing focusing on istans. And we're going to be putting people in Istanbul focusing on North Africa, as well as in CIS countries, where these contractors are happening, very big business. Many of the multinationals don't -- have not been able to crack this code. We're in very, very good position to do so.
One of the key ingredients of our leadership upgrades across all of these regions is to put Country Presidents in these major geographies that we have talked about. And they are here today. They're sitting in the back. And those of you who have not had the chance to talk to them, you can do that after the break. And this is a very important part of it and many companies get this wrong because it is at the intersection of geography, in industry, technologies and our businesses. And you can get this wrong by either making these Country Presidents as only simple, what I call, ribbon cutters, or go to the end and having all of the businesses run in a country in isolation of connecting them globally to the countries.
This is hard to do. They're there to accelerate growth, to create incremental value, to open that mid-market in each country, to develop a one country or a One Honeywell strategy and, most importantly, also to protect Honeywell's reputation and interest in each of these countries. Many companies don't get this right, and we've had a 10-year record of working and understanding the nuances of how to make this work in the country with the businesses, with the technologies at rapid speed, and this will be a very good competitive advantage for us.
Resourcing ahead for growth is an important part of the lesson that we've learned in China. You've seen some of these data before that we've resourced ahead in the past 10 years in China into -- going from 2,000 people in China and India to 25,000. But look at what's going on in the next 3 years, that, between 2012 and '14, we're going to be growing only about 4% in terms of people, but compounded over 13% in terms of that top line. So that productivity is really paying off, and we're seeing very profitable growth going forward.
In summary, we have very effective strategies that we've put in place with double-digit growth, becoming THE Chinese competitor and an East-For-East product portfolio that has been in play for nearly a decade now for us is making great wins for us, and it's -- has become part of our DNA. The macro tailwinds play very well for us, urbanization, growth in population, the global middle class, the less than $10,000 middle class, which creates a 2x GDP macro index for us. And execution, execution. Dave has said this many time, the trick is in the doing to drive more than 50% of Honeywell's growth with their Country Presidents, with the businesses, with becoming THE Chinese competitor. We're getting all of those dots, and everything working together, it's not rocket science. But I often say, rocket science is much easier. When we get this thing done, it is more than one decade competitive advantage, and we're very well positioned to do that.
Now I have the pleasure to introduce Dave Anderson, Senior Vice President and Chief Financial Officer. Dave?
David James Anderson
Good afternoon. I'm going to just provide a summary, relatively brief financial review, just to tie things together, really 4 key themes. Number one, obviously, in 2012, as you know, we set high expectations and we delivered. In fact, we're one of only a couple of companies in the multi-industry space that actually exceeded the original consensus estimates for 2012. We're proud of that performance.
We're confident in our 2013 outlook. You heard today that we're executing on attractive opportunities despite the macro challenges. I'll talk a little bit more about the assumptions, just the update on those in a moment. And we're conservatively planning our costs, no surprise there, staying flexible, and we're benefiting from ongoing repositioning. I'll remind you of some of those numbers a little later.
Seed planting continues for future growth. That was clearly a theme for the day. I think many things stands out from this year's Investor Day for Honeywell. It's really the substance of what we have been doing and what we're continuing to do to lay the groundwork for continued attractive profitable growth for the company.
And we're setting up then for out-performance, again, in 2014 and beyond.
Just a quick summary of 2012, and put it a little bit in context. I've shown '10 and '11 as well just to provide some perspective. 8% compound growth rate in revenues up to the $37.7 billion that we delivered in '12. 170 basis points of margin improvement, and you recall that 80 basis points of lift from '10 to '11 and then another 90 basis points from '11 to '12, a record for us in terms of margin expansion. 22% compound growth rate in EPS: $3 in 2010, over $4 in 2011 and $4.48 in 2012; that's impressive. And on cash flow, an average of 128% conversion and, importantly, over 100% conversion in each of those years, '10, '11 and '12. '10, you recall, we had a pretty significant contribution to cash from working capital, higher CapEx in '11, higher CapEx in '12, but very strong free cash flow continues.
Growing faster than the end markets. Just another cut on the data. And what I've shown here for the Americas, EMEA and Asia Pacific is our reported revenues in the dash line on the top indexed back to 2009. The red line just underneath is the organic growth that we experienced in each of those markets. Again, index factor '09, and then the GDP rates for each of the regions. I think that's an impressive perspective as well.
Segment margin expansion. You've seen this chart before, but it's worthwhile revisiting. You can see the acceleration in margin expansion. We've gone from the average of 45 basis points a year, pre-'09 to now 75 basis points on average per year. You heard that, by the way, from each of the business presidents in terms of the formula to drive that and the commitment to continue that.
Underscoring that, of course, and just highlighting a little bit more of what Dave reviewed this morning, he showed you '11 and '12 data, I've added also, for perspective, 2010 data for direct material, indirect spend, OEF and depreciation and then, of course, segment margins. And you can see, just take the middle of the chart just for a moment, indirect spend end points 2010 to 2012, 40 basis points of improvement. Look at OEF, 160 basis points of improvement, from 28.7% in '10 to 27.1% in 2012. And on the direct material side, we're higher as a percent. A lot of that is pass through. Also contributing to that has been the phenol acquisition, which is a significantly direct material weighted in terms of the mix of that business, relatively low-margin business, very high direct material content and, of course, strategically paying off for us.
Organizational effectiveness. Just a little bit more color on that. On the left side, you can see OEF as a percent of sales. Again, that improvement, 160 basis points of improvement during a period when sales are up 16%, endpoint to endpoint. An important contributor to that, of course, has been the smart redeployment of gains. Most of our repositioning had been -- come from effective utilization of gains. You can see the accumulative gross funding that's occurred in the red line, and the in-process repo at year-end. Importantly, at 2012, over $300 million, about $322 million of repositioning backlog in the pipeline have continued to deliver improved performance, operating income lift, segment margin lift, in '13 and 2014.
Segue now to 2013. Really no change on this slide in terms of macro assumptions, still relatively muted. GDP growth assumption at 2.6%, equal to last year. The euro, we've assumed at $1.25. Obviously, that could be a tailwind for us as we progressed the year at current rates, but sort of who knows. And you can see the other numbers are consistent with what we've discussed with you previously in terms of what we're tracking and in part of the guidance that we've provided to you.
GDP by region, again, still forecasting a sub-2% for U.S. That would have some of that sequestration impact on a total U.S. economy perspective that Tim talked about. Of course, we incorporated that, as he said, in our planning assumptions for 2013. Eurozone GDP, continued rough patch, continued contraction in terms of our planning assumptions. You can see China with a relatively nice lift of above 8% in our forecast, and that looks solid as we continue to progress through the year. Still early, but that looks solid. And India, at about 6%.
In terms of our end market trends, no real change here, but it's worthwhile highlighting a couple of these. In green at the top, for commercial aftermarket, growth moderating with some difficult comps. And specifically, that relates to the first half of the year and, particularly, the first quarter. You'll recall we came out very strong out of the gates in 2012. And BGA, we had double-digit growth in both those businesses in the aftermarket. So we're going to be comparing to tough comps in the first quarter of this year and through the first half of this year. On the Commercial OE, production ramp-ups, but again, we'll have some difficult comps on a year-over-year basis in that segment of the Aero business. Defense and Space, our guidance has been to down about 3%. So it's going to be in that range, and again, we've assumed about 80% sequestration as a -- in that assumption. A little greater downside risk with a longer, more prolonged impact of sequestration, but all of that contemplated, all of that covered in terms of the contingency and the planning that we've used to develop our 2013 estimates.
The Energy, Safety and Security, Process Solutions and Building Solutions, up low single digits. We continue to believe we're going to see modest improvements in those markets. Obviously, with the pipeline of new products, all that we're doing in terms of globalization, the other things that Roger talked about, that Shane talked about, we're in a position to -- obviously, to grow faster in terms of our performance.
PMT, the Advanced Materials is going to be up low single digits. We'll have easier second half comps. We had very strong first half in that business. UOP, it's going to be a tremendous year. We're going to -- we've continued to build backlog. You've seen the numbers there in terms of the record backlog and the orders that we have. We're going to have a particularly strong first quarter in UOP in 2013.
Passenger vehicles, flat to up slightly, and commercial vehicles, the same thing. Alex talked to you about the EU headwinds, but we're going to have improved comps, easier comps in the second half of the year and also benefit from improvements in some of the other end -- important end markets. Same thing applies, particularly with this second half China improvement on the CV business.
In terms of the segments, these are consistent with what we've talked to you about previously. The revenues tied to that $39 billion to $39.5 billion of revenue guidance that we've provided to you, and the margin tied to that 20 to 50 basis points of overall margin improvement. That's shown on this slide. You can see -- you've seen this before. We first provided this to you in late December, and then updated it, of course, at the end of January with our fourth quarter earnings release for 2012. Sales, again, up 4% to 5% on a reported basis; segment profit, 20 to 50, up 40 to 60 basis points if you exclude the margin dilutive impact of the acquisitions that we've done. Thomas Russell and Intermec plans close approximately June 1; EPS, up 6% to 11%.
On first quarter, also consistent theme here. No change in terms of our guidance that we're providing. Revenues, flat to up 2%; earnings per share, up 6% to 11% at $1.10 to $1.15, and we're tracking right according to that guidance today.
And finally, just to underscore what you've heard today in terms of the continuation of the seed planting, the investment -- investing for growth that's occurring across the company. Importantly, with R&D, at about 5% of revenues, on a 4 -- $40 billion company. So think of that as about $2 billion of spend. That's really, obviously, significant. It puts us in a leadership position. When you look across our peer group, we think we're deploying that R&D very, very effectively. You've heard from the business presidents on some of the highlights for each of the businesses. Importantly, it's all about more products and more efficiently, really, really doing a terrific job in terms of capturing and understanding of customer needs and then through our processes, our disciplined processes, delivering on time and meeting the value equation.
For capital investment, we continue to ramp up. And we have been spending above depreciation. We're going to continue to do that over the next few years as we develop the capacity to meet our end market demand. Andreas did a particularly good job, I thought, of really demonstrating the substance of what is underpinning the need for the investment and the opportunities that these investments represent for us. You can see the listings of some of the major projects, including the Oleflex catalyst, hydroprocessing catalysts, as well as the Solstice foam in PMT, the COMAC C919 is a key for us in terms of investment. Again, just an illustration of the some of the major projects that are in this capital spend. TS, of course, Alex spoke to the footprint optimization that he has -- that he's delivering and what that represents in terms of us being able to not only sustain our technology leadership, but also our cost leadership in the face of explosive growth in that business. And then of course, the HGR expansion is all about continuing to build our capabilities, particularly for our R&D labs, our engineering labs on a global basis as we build out our HCR -- HGR presence and capabilities.
Capital efficiency. Importantly, as we spend the money, we're doing it efficiently. You can see here on the blue line our fixed assets, the percent of sales going back to 2003. That's an impressive track record and, obviously, supports the ROI achievement that we've been able to deliver. By the way, there's just -- on a footnote there, the ROI numbers exclude any pension numbers, either in the P&L or in the balance sheet. So it's really an operational view in terms of our ROI.
On cash flow, working capital obviously continue to be a key focus for us. Roger spoke about the importance of cycle time and how that's enabled the release of cash from working capital for ACS, for example, in 2012, while order rates, fill rates have actually improved. So that's, again, doing those 2 competing things, seemingly competing things at one time.
You can see measured on a 13-point turn basis in red on the left side of this slide, our working capital turns from '03 to '13, that's the way that we measure ourselves. That's a pretty hard standard, because it doesn't give you any kind of year-end benefits, any of the other things you can do to manage the statistic. And you could see the performance improvement, and you can see the relatively [ph] flatline in terms of working capital dollars, so again, an important contributor to cash flow, an important contributor to that asset turnover into this ROI statistics that I showed you on the previous page.
Cash flow from operations, we're looking at about 5 -- just under $5 billion this year. You can see the deployment of that to exclude pension -- for any pension funding in terms of U.S. pension funding. And there's none planned in 2013, and as Dave said and I'll show it on an upcoming slide, we think unlikely to have any pension funding requirements in the U.S. out to 2000 through 2015. You see the deployment of the capital, the $1.2 billion of CapEx and, of course about $1.3 billion of dividends, share buyback that's playing and then net M&A and other. And of course, net M&A has a fairly sizable commitment already with the Intermec acquisition and several other smaller acquisitions that we'll be completing over the course of the year.
In terms of pension funded status, and this slide deserves a little bit of explanation, on the left side, what we've shown is the 2012 peer funded status average, which is 75%. So this is as of 12/31/12 for those peers. You can see the range is from 63% to a high of 89%. Honeywell compares very favorably at 84%. And what which shown you for '13, '14 and '15 in the blue bars is funded status assuming a 7.75% return on plan assets for each of those years and constancy in terms of the discount rate, equal to the rate that we ended the year '12, 12/31/12, 4.06%.
In red, what I've shown is the funded status improvement that would result from a 25% -- or 25 basis points per year lift or increase in the discount rate. You can see how sensitive it is to that discount rate. It really is a discount rate phenomenon. You can see we'd be essentially 100% funded in 2015, which is 25 basis points per year of lift, which, by the way, would have rates below their 2010 level, if we achieve that rate.
Returning value to shareholders, importantly, the dividend history, which, obviously, we're very committed to, a doubling on a per-share basis from $0.75 per share in 2003 up to $1.53 in 2012. And we're going to continue to focus on that path of growing dividends as we grow earnings, grow cash flow. On a 10-year TSR, Dave talked about the 240% earlier. I've just shown the makeup of the total shareholder return for Honeywell, as well as for the S&P 500, broken down between dividend, 75% return for our shareholders, for Honeywell shareholders, 165% in terms of share price appreciation over that period of time or 2.4x the S&P.
Long-term outlook update, what we have on the left are the sales, 2009 to 2014. This is the communicated targets that we did. At the end of 2009, you recall a $41 billion to $45 billion or 6% to 8% compound growth rate. We're on track to achieve that despite headwinds. The headwinds are represented in terms of lower global growth, average GDP rate. This has been about -- and using an estimate for 2014, combined with that 2.6% that I've mentioned earlier for 2013, would be at about 3.2% versus 3.5%, which is our planning assumption for global GDP at the time that we've developed these targets. Also, unfavorable foreign currency, the euro to dollar particularly important for us. Euro rate being an average of about $1.30 versus $1.35 that was utilized at the time that we developed those targets. So despite those headwinds, on track in terms of achieving the sales, a little bit of tailwind in terms of acquisition tailwind net of divestitures.
Segment margin, the 300 to 500 basis points is what we communicated to you, to be in the range of 16% to 18% in 2014. As you know, at the high end of our current range for 2013, we would actually be above the 16% at 16.1%. So we feel very good about our ability to achieve those 2014 margin targets. And again, with some headwinds, both in the form of lower global growth and also acquisitions, which for us, are dilutive in terms of the acquisition accounting. So both of those being headwinds, but still very strong operational performance that's really overcoming that, and we're able to achieve and potentially overdrive that low end of the range that we targeted for 2014.
Now the HON growth driver is just a replay of what Dave reviewed with you earlier and what you've heard from each of the presidents, so a 5-year perspective of the incremental growth coming from new programs. Solidly, we think, insight relative to the wins that we've had and where we're on track in terms of achievement of these kinds of orders and this kind of revenue increase, so $11 billion, which really puts us squarely on path to achieve a very attractive growth, when you look out to the 2018, 2019 time period.
So let me just conclude with a summary, as I do each year, sitting -- trying to put myself as best possible in your shoes and say, "Okay. Now why do you want to own Honeywell?" I actually turned to Roger when Dave was giving his introductory remarks and said, "Boy, this is just compelling in terms of the Honeywell story and Honeywell stock ownership." But let me give you my view of that. This is the opportunity that I have to do that.
First of all, on track to achieve those long-term targets. You don't have to go back that far to look at comments, written comments, recall some of the verbal comments when we first issued those targets. What are you thinking, Dave? What are you thinking, Dave? Where -- if this is -- this is sort of crazy to step out like this, just came through this incredible economic downturn, you guys are just getting your sea legs, does this really make sense? The fact of the matter is when you look at our 2012 performance, what we already have in terms of momentum going into 2013, the confidence that we have in terms of 2013, absolutely on path to deliver those 2014 numbers. And importantly, the key point from today is the investments in seed planting that have continued in parallel, that are -- continue to drive future growth.
The robust margin leverage that we have. I thought the chart that Dave had was so impressive and the way he discussed it, which is to show the margin rate improvement that we've experienced but how that compares to the average of some of the large cap peers in our space and seen that as really opportunity, entitlement, in terms of continued growth and continued opportunity for Honeywell.
The restructuring tailwind. We've done this, we think, smartly. Again, you don't have to go back that far, where we've got a lot of questions about restructuring. And frankly, I feel like we were ahead of the curve. And what we were able to do to smartly redeploy gains, take, for example, prominently, the CPG gain and what we've been able to do with that and get out ahead of a slower growth economic environment, particularly in our established markets, to enable us to continue improve our operating performance and to fuel -- to Shane's point, to be able to fuel the growth in investment that we're making in High Growth Regions.
The strong capital deployment. CapEx, we have been funding capital spend. We've been spending above depreciation through this period. We're now ramping it up, and we're ramping it up because we have solid growth and solid ROI programs that are going to deliver value for the company and for our shareholders in the next 3- to 5-year period that are going to be impressive. And you heard Andreas. We actually don't have the physical capacity and capability to take on some of the additional projects that we'd like to do. But that's financially constrain, but we want to execute flawlessly on the growth and the growth investments that we're committing to.
We're returning cash to shareholders. We're committed to grow the dividends. You've seen that track record from 2003 to 2012, the smart share buybacks that we think that we've done. We've been prudent. We take some heat sometimes about that. But the fact of the matter is we think we've done that wisely, we've done it prudently and we've preserved flexibility and firepower in important times in the company's growth. We think we've done that. We think we've done that smartly.
There is clear acquisition upside. We have a disciplined process. Portfolio transformation is evident. We recently attended a conference with one of you. And I was, frankly, just couldn't be complimented more about some of the statements about some of the home runs that Honeywell has been able to hit in the acquisition space, used really as examples, as illustrations of best-in-class performance in M&A in the multi-industry space. The track record is going to continue. We're going to be highly disciplined, highly careful in terms of what we do. But the tracker is going to continue. We have the management capability and the processes to be able to do it.
So with that, Elena, why don't we turn it over to you and have Dave and Shane come up and join me. We'll do M&A -- or Q&A. We can do M&A as well. I got M&A on the brain.
All right. So we have time for roughly about 10 minutes of questions. We'll start here. Cliff?
Clifford Ransom - Ransom Research, Inc.
Cliff Ransom. Dave, you inherited a company that has had a couple of real body blows, 2 failed mergers, a culture that had been built and then lost. What were the couple of big lessons, big learnings that you got recreating that cultural format that so drives Honeywell today? And how do those learnings impact what you're going to do over the next 3 to 5 years?
David M. Cote
I think, first of all, all those bad experiences that you described upfront, while bad for the company, it was good for me because I wouldn't have got my job. So it's kind of been a plus and minus there. In terms of the big learning, see, there's just -- you have to be relentless about it, just absolutely relentless and on every dimension. It's not just with my staff, not just with a particular country, not just with a particular business, not just with the people working in the factories. It's everybody. And you have to be absolutely relentless about it. I can remember one of the first discussions that we have with my own staff, where they spent time going through how are we going to work together, that's where we derived these 12 behaviors. And I can remember being asked, "Chief, why are we wasting time on this? We have all the strategic issues that we have to address and we're not going -- we're spending our time doing this instead." And my comment was, "Well, I can make all the strategic decisions you want. But if nobody does them, it's not going to matter." So we spent a lot of time saying, "So how are we going to work together?" Now interestingly, it was only like a month or 2 later, we had made a strategic decision. And one of my guys was -- who is not on my staff anymore, was not doing it. And I called and said, "Geez, we have had this discussion about how we're going to work together. Then we had this meeting where we agreed that we were going to do something. Now you're not doing it. How do you see that as consistent?" And so we had a nice little discussion about this was not baloney that we went through on that kind of soft skill side. We're trying to drive a culture. I remember going into Europe for the first time because I thought I want to meet all our leaders and get to Europe and I've given this invitation, because I was going around the world just trying to meet people and get a sense for what's going on out there and how do people feel about things. So I get to this meeting, 20 people invited. There's only about 12 there, because 8 decided they had other things they needed to do. So I can remember calling 2 business leaders in particular and saying, "Just so we're all clear, when I send an invitation, I'm just being nice. I fully expect people are going to be there." Now interestingly, we get to the first meeting and all 20 people -- the second meeting, I should say, all 20 people show up, and you could almost feel in the room -- in fact, I did get this as one of the questions as I was trying to exhibit my open-minded self that, "Why are we doing this? I could be spending time with a customer instead I'm here having to present to you about what I'm doing." And I thought, wow, okay, we've got a ways to go here. If -- and so it was that point I started going to Europe twice a year just to meet with the business leaders there to have this discussion. Interestingly, today, if you were to attend one of those meetings what you would see is people can't wait to brag about what it is they've done since the last time I saw them. The other thing you would see is at the time I'll be picking one of Rogers guys, but at the time, that first -- the second meeting when everybody showed up, I was introducing the Europe security Intrusion products guy to the Europe security access control product's guy. They didn't know each other, and there was actually no One Honeywell at all. So it's just taken this relentlessness of effort in order to make it happen. And I think everybody would tell you we're still relentless about it, from how we do a senior leadership meeting to making sure that everybody is sitting next to people that they haven't met before, generally, the you're sitting next to people that they haven't met before, generally, we don't always get it perfect, but generally, you're sitting next to people you've never met before, to the training classes that we do, to the town halls that I do in every country I visit. But there's just have to be this relentlessness of purpose about it. That was my big learning. It was a lot tougher than I thought. Sorry to take so long, Elena.
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
Yes. So, Dave, in the release this morning, you say we're not even at the halfway point yet. I don't really know what that means. What's the starting point? What's the ending point? What's the metric?
David M. Cote
Actually, thank you, because I can't tell you how many times I've been asked. So you like sports, Dave, if this is a baseball game, what inning are we in? And I keep saying top of the first. I mean, it's there's a long way left to go. So this an attempt to answer that question for you without putting an endpoint. So you can figure out halfway to infinity how close are we. I just see so much opportunity in Honeywell. And when I look at the base that we've been able to build, which we didn't have before, the culture that we were able to apply to it, I'm just really excited about everything that's coming. And we've shown an ability to evolve, which I always think is important. So at some point, yes, we will hit those margin rates that our peers are. And I'll have to explain to you, so how are we going to get beyond that. At some point, we'll get beyond that. Then I will have to explain you, so what are we going to do next. There's always going to be an evolving part of the story, because it's what we're building into the culture. It's just how we think.
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
Dave, just one more quick one. You've been very successful with OEFs.
David M. Cote
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
How much do you still left in that? I mean, how low could that go as a percentage of sales do you think? I mean, you've accomplished a lot already.
David M. Cote
Well, I'm always astounded at the progress you can make on something like that, and it's just how people are. There's an infinite capacity to improve just about everything. And when you look at productivity, most productivity is coming from just being able to use less manpower to get something done than you did before. We've had 130,000 people. My guess is that as you look out into the long future, headcount is not going to grow anywhere near as fast as sales for a long time to come. It's -- we're just not going to have to do. There's -- it's the biggest source of productivity. And when you take a look at the things we have going for us, HOS, Velocity Product Development, Functional Transformation, I mean, those are all things that help you keep driving that OEF cost down while improving the effectiveness of your organization. So it's another one I'd say, I don't know, top of the first.
Next question, Steve Winoker.
David M. Cote
Exactly, it's a long game.
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Two questions, one for Shane and then for Dave. Shane, you've mentioned in your talk that those organizations that have not been investing for the last decade are pretty much in trouble when they look ahead in terms of take and manage the growth dynamics at High Growth Regions. Within the Honeywell portfolio, there's, I think, a very big divergence of those parts of the businesses that have been not only able to make up investments but build very well successfully, and there's a group of folks who haven't quite get the penetration there at all. How do I think about the ability for the guys, who have not yet been up to that minimum average, to get there?
S. Shane Tedjarati
Well, I would say of -- about 8 years ago, when we started looking at where are you in the continuum, from just being on the ground to all the way being a global challenger with your business in China, most of our businesses, if you like, on a scale of 1 to 8, were 1s and 2s. But today, with the relentless focus that Dave is talking about and the fact that, actually, for a good 2 years, every year, twice a year, our businesses do a self-assessment and review them personally with Dave, once in March and one time in September. We've seen significant improvement. In fact, the self-assessment of where you are in terms of being THE Chinese competitor continues to shift. And some businesses even de-grade themselves because dynamics have changed or the market has changed or the competitors have changed. And I would say of all of our, say, 15 or so SBUs, strategic business units, just about majority of them, almost all of them will be in THE Chinese competitor range within the next 2 or 3 years. So we've made significant progress in the past 3 years just because our attention is on it, and the rigor and the daily vigilance is on it. And becoming THE Chinese competitor is going to be a little bit different in some businesses, like Aerospace, which means how do we operate locally but still with global products, as well as some local products. In UOP, it's going to be execution, it's about IP protection, it's about relentless focus on being able to seamlessly bring our technologies to places. But every business is inching forward.
David M. Cote
If I could -- even before that, Steve, I'd like to build on Shane's point. Because the way we try to talk about it is in almost any industry or any business that you're in, your next big global competitor is likely to come from China. And if you can't win against them in China, you're going to be fighting them in Europe, in the U.S. And it's an important dynamic to just inculcate in everybody in the company that that's how we need to think about this, because they're the second biggest economy in the world. If we grow at 3% in the U.S., they grow at 7%. In 25, 30 years, they're the biggest economy in the world. And we need to make sure that all our business are thinking that way and winning in China today, which, by and large, they are.
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Okay, great. And then, Dave, you -- Dave and Dave, you both made us a case today of how successful the execution has been in capital deployed, certainly CapEx investments, M&A investments, et cetera. At what point do we start seeing you get even more aggressive on capital deployment or looking to provide more financial leverage or looking to push even harder and faster, given how successful, frankly, the track record has been to this point? Why not get more aggressive even sooner? Is it execution risk you guys are thinking about? I mean, you talked about physical capacity to do more.
David James Anderson
It's -- I guess I would say, Steve, we feel we are being pretty aggressive, smart, but aggressive, in terms of capital deployment, and there's a couple of ways to look at it. One way to look at it is, as you said, you can cite specific categories of spend or redeployment, and we featured prominently today CapEx because we wanted to make sure that there was a good understanding of -- if you will, of the road map that we have to both justify from a marketplace and from a opportunity standpoint that investment, but also the internal processes and disciplines that we have in place to manage that CapEx. And I'd say, the other way to think about it is in terms of capital deployment or any of the traditional metrics that you might want to apply, either traditional, for example, credit metrics that you might want to apply to Honeywell; funds from operations, for example, to use one of the -- one of the terms and one of the metrics supplied by the rating agencies, minus dividends divided by debt. Any of those kinds of metrics you would say that Honeywell has really maintained a very efficient, if you will, overall capital structure. So we think we've done a good job on maintaining that positive access to capital markets while being aggressive in terms of, if you will, the traditional measures that we used to measure credit. And we feel like we've got that right disciplines in place, the right focus and the growth focus that's in place in terms of how we're redeploying capital. So frankly, I think we are pushing to the appropriate level in terms of aggressiveness.
David M. Cote
And for what it's worth, Steve, if you need to bookend it, I don't view Apple as a role model here, okay. So you don't have to worry about that we're just going to continue let cash build to extraordinary levels. That's not our intent, not the way we think about it. And to build on Dave's point, we're always going to invest in -- first priority, I guess, is stays [ph], to make sure that we stay really good cash flow generator, which we're going to do. Then we look at deploying it, investing in our businesses, still leaves a lot of money. Next is dividend. And I like making sure that we pay a strong competitive dividend because of what that tells you about the future in addition to the reward it provides. And I think our track record is -- are pretty good and balanced there at the same time, which leaves you -- you think about buybacks, and you think about acquisitions. Our M&A pipeline is very good right now, and I think we have demonstrated a real capability to do that. But by the same token, you just never know exactly when it's going to happen, all right, because we're -- if you stay disciplined about it, like we do, sometimes you go, 1.5 years, 2 years where not much happens, then you hit 9 months where all of a sudden a bunch of things happen. And you need to be prepared for those times, and we want to make sure that we stay smart about that. Then buybacks, I do understand the -- first, I understand the desire, because I assume that there was a buyback question semi-lurking in there, that I do understand the importance of it and the significance of it to a lot of investors. And that's why you start -- I started planning to do more of that last year and are committing to it again this year. So I do understand that. But at same time, to Dave's point, it's not always bad to have some cash on hand. I don't think it's the worst thing to have. Now where's that point that dollar amount where it clicks and I flip the light switch, well, I don't have that in mind. We'll see how things end up evolving. But I can promise you, it top of mind for us.
Okay. Last question, Howard Rubel.
Howard A. Rubel - Jefferies & Company, Inc., Research Division
You talked a lot about how you've improved the profitability of the business, and many of the businesses today have enviable returns no matter who owned or operated them. But, Dave, what are you doing in terms of thinking about resetting the restructuring bar so that you can get some of these goals towards the longer term? I mean, what are you thinking about in terms of saying to some of your businesses, "Well, this is nice, but I've got a factory that's never going to be bronze, or I have an operation that, even though it might be silver, is never going to be gold." How do you think about either repositioning plants or some additional opportunities? Because there's clearly some -- to your point, the job's never done.
David M. Cote
Yes. Well, first of all, I would say every factory will get the bronze, every factory will get the silver and every factory in business will get the gold. So I don't accept the first part of that. But let's say the question that I think is implied in that is are there factories or businesses that just aren't ever going to make it. They aren't going to be a Honeywell-type operation. I'm assuming that's implicit in the question. And there, we're constantly looking at what makes sense for the company consistent with that great positions in good industries and is it a Honeywell-type of business. We're constantly looking at that. And sometimes, things can happen quickly. Sometimes, it takes time. And if you take a look at -- if you just want some examples, Resins and Chemicals. That one we were able to come up with some solutions pretty quickly. And in this space, you remember how horrid that business was when we started, when we -- what do we call it, the nylon. When it was the nylon business, it was hard. Three years later, it turned into a good business because of the things that we were able to do, and I think you've seen it performed since that time. Something like consumable solutions, an okay business, good industry, we didn't do so well just because it was tough to get Tim and his guys interested in it, because distributed -- distributing nuts and bolts was never going to save lives or get Bob Smith and his guys all cranked up in engineering. It was just never going to do that. We couldn't get their attention. It was better off owned by somebody else who could run it a lot better. Well, it took us a number of years to make that happen. CPG, that was another one that, God, I may have remembered hearing about that 10 years ago about why do you own this. Well, sometimes it takes time to get a smart deal done. And in that case, I think we were able to do very well with it, especially with where we would've been just trying to do something 3 or 4 years earlier. I would say, large part, most of the big stuff's done. I mean, there's some little things that we'll pick off here and there, that you look at, ah, it doesn't quite fit anymore, we should either sell it or do something with it. But by and large, the big things are done. But I can promise you that, that is something that we are constantly looking at in the company. We pay a lot of attention to something we call the demise curve, where we look at every single business and we position it on 4 potential places on a demise curve that says, "Given how we're treating it and given where the industry is, where are we positioned on this demise curve and how do we have -- how should we be thinking about it differently?" That's an important part of our strategic planning process. And even as we think about our businesses on an ongoing basis, I could tell you that's another one that's top of mind for me.
David James Anderson
Dave, maybe if I could just add really quickly to what you said, because, Howard, you also used the word, "repositioning", or repo, repositioning in your question. And as you know, repositioning in the sense of just continuing to build a better company by taking costs out, particularly with a focus on fixed cost, people, facilities, but a lot of it as we've done -- as you know, has been very high ROIs, smart transitions in reductions that we've made. That's just going to be part of the story going forward. This is going to be part of what we do going forward. And again, we're going to take opportunities where we have gains to do that to redeploy. But it's a -- the ideation process from the businesses, the generation of possibilities is continuous. It's something that we encourage on an ongoing basis.
Well, I want to thank you all for attending today and close -- have -- turn over to Dave for closing comments.
David M. Cote
As I mentioned at the beginning, the 2 messages are that we have outperformed and, more importantly, hopefully, you got a sense from today on why we're going to continue to outperform.
We have Honeywell culture that we have built, which really is fundamental. It's very important to try to get something done. Because if you have 130,000 people working together in the same way, giving each other the benefit of the doubt and actually working in concert, it's really surprising how much you can get done if you have a great portfolio and you drive your big, internal processes, in particular, in a way that just says, day-by-day, quarter-by-quarter, follow a consistent strategy, and it's remarkable where you can get to over a period of time. You've seen us do it over the last 10 years. And what I could promise you is over the next 10 years, it's just as good or better, because we have a lot of runway for future growth. And the nice thing about it, especially if you've got this kind of evolution concept in mind, it's just the way you think, the more you do, the more opportunity you uncover. And that's the situation with us right now, and it's just an exciting time to be a part of Honeywell.
I appreciate all of your share ownership, and I can't resist but, again, to say, "Buy now while supplies last." Thank you.
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