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oneywell International Inc. (NYSE:HON)

Q2 2013 Earnings Conference Call

July 19, 2013 09:30 AM ET

Executives

David M. Cote - Chairman and CEO

David J. Anderson - SVP and CFO

Elena Doom - VP, Investor Relations

Analysts

Steven Winoker - Sanford C. Bernstein & Co.

Scott Davis - Barclays Capital

Howard Rubel - Jefferies & Co.

Stephen Tusa - JPMorgan

Jeff Sprague - Vertical Research Partners

Andrew Obin - Bank of America Merrill Lynch

Peter Arment - Sterne, Agee & Leach

Shannon O'Callaghan - Nomura Securities

Operator

Good day ladies and gentlemen, and welcome to Honeywell's Second Quarter 2013 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to introduce your host for today’s conference, Elena Doom, Vice President of Investor Relations.

Elena Doom

Good morning. Thank you, Jack. Welcome to Honeywell’s second quarter 2013 earnings conference call. Here with me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson. Today’s call and webcast, including any non-GAAP reconciliations, are available on our website at honeywell.com/investor.

Note that elements of today’s presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. These elements can change, and we’d ask that you interpret them in that light. We do identify the principal risks and uncertainties that affect our business performance in our Form 10-K and other SEC filings.

This morning we’ll review our financial results for the second quarter, and share with you our outlook for the third quarter and full-year, and of course leave time for your questions.

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

David M. Cote

Thanks, Elena. Good morning, everyone. As I’m sure you’ve seen by now Honeywell had a good second quarter capping off a strong first half, which puts us well on our way to achieving the full-year guidance that we set back in December.

Normalizing for tax, EPS was $1.22, up 8% year-over-year on an adjusted basis and in line with our guidance of a $1.18 to $1.23. Sales of $9.7 billion were near the high-end of guidance and if you exclude defense where the headwinds are well known and as we expected them. We saw our sales growth in each of the four businesses.

We also continue to benefit from margin expansion, up 30 basis points to 16.1%. Part of the driver here has been the savings from the proactive repositioning actions we have taken in prior period. As we continue to face an uncertain macro outlook, we think it's prudent to keep that pipeline full. So we funded over $60 million of incremental restructuring this quarter, more than offsetting an OPEB curtailment gain and bringing us to approximately $100 million of repositioning actions funded this year.

Dave is going to take you into more detail on that later. However, while investing for productivity is important, it sure is a lot easier to expand margins when sales are growing. So even in this tough environment, we’re planting the seeds that will drive future topline growth. Some of the lowest the risk, highest return projects available to us are organic. So we continue to invest in R&D, new product introductions and capacity expansion.

Our long-cycle businesses, including Commercial Aerospace, Process Solutions, and UOP, continue to benefit from a strong backlog, which ended the quarter roughly $15.5 billion. The businesses are also winning in the marketplace. And some examples in Aerospace, we now – it’s the newest version of our HTF7000 series engine, the HTF7350 will power the new Challenger 350 super midsize business jet.

As we have said before, we think the super midsized and longer range segments represented an attractive space for growth and we’re excited about this most recent win. Additionally, if you were at the Paris Air Show, you may have noticed an awful lot of excitement around an A320 sprinting along the tarmac. This was a demonstration of our electric green taxiing system or EGTS, developed in partnership with Safran, which uses the APU rather than the main engines to taxi during preflight operations.

This can provide operators up to $200,000 a year in fuel savings per aircraft. We also had another important win with Airbus. Though not from the from the business you were probably expecting. Honeywell Building Solutions was awarded a $37 million project to build, operate and maintain a power facility for airbuses new assembly line here in the U.S. The project which will be done to LEED certification standard is a great example of one Honeywell cross-selling between businesses to the benefit of both Honeywell and our customers.

And finally, because there are a lot to choose from, I’d like to highlight one UOP win. Our Oleflex technology which converse propane into propylene was selected again this time by Ascend Performance Materials Operations, the world’s largest on-purpose propylene production facility. As you’ve heard I’ve said before petrochemical makers are installing additional capacity to meet growing demand and to make up for the shortage of propylene production from traditional sources.

Once again, order rates were mixed in the quarter, with the U.S. stable, Europe trending slightly positive in both short and long cycle and a notable turnaround in China from the first quarter with sales up mid teens. The inflexion point of China recurred in June with broad based performance improvement in all businesses. ACF short and long cycle businesses along with stellar growth in UOP, added to a much stronger performance in China than Q1 in last year, while transportation systems continued its growth momentum from Q1.

We also continue to progress with our key process initiatives. The Honeywell operating system, functional transformation and velocity product development, that focus on making sure that the machinery works for our employees to get their jobs done effectively and efficiently everyday makes us better at delivering both growth and productivity. With these things in mind, we continue to be confident in our 2013 outlook. First half EPS was 238, when normalizing for tax, which based in our historical linearity is trending towards the top half of the 475 to 495 guidance range we gave you back in December, despite continued soft end market conditions.

As a result of this continued strong execution, we raised the low end of our guidance by a nickel in the first quarter and we’re doing it again this quarter, giving us a new EPS guidance range of 485 to 495 or up 8% to 11% for the year. We just concluded our strategic planning reviews with each of the four businesses and while we’re preparing for near-term underlying macro conditions to be much the same, what was particularly impressive with each businesses innovation pipeline and growth opportunities.

We are looking forward to sharing this and more with you early next year when we publish our new five-year plan. But you can expect our continued evolution in everything to drive outperformance over this timeframe.

So with that, I’ll turn it over to Dave to talk you through more on the detail. Dave?

David J. Anderson

Thanks. Good morning and welcome and appreciate your participation this morning. Let’s start with slide number 4 and let me walk you through the summary financial results for the second quarter. Sales of $9.7 billion were up approximately 3% year-over-year on a reported basis, near the high-end of our guidance range and up 1% on an organic basis. The Americas were roughly flat, really driven by lower defense and space sales, while Europe, as Dave said, was good overall, up 1% and China was up 14% driven by improvement in our short cycle businesses, mainly at ESS, the Energy, Safety and Security business of ECS and also transportation systems. In addition, we had continued good long cycle growth in China.

Segment profit for the quarter was up 4% with segment margins expanding 30 basis points to 16.1%. Now it's important to note we had margin expansion of 60 basis points or more in every business other than PMT. And you'll recall from our guidance that we gave for the quarter that PMT's margin rate was unfavorably impacted by a number of items but most notably the low UOP licensing activity this year compared to the record levels that we had in the second quarter of 2012. So again, PMT's margin decrease is largely explained by that. And important to point out that the absolute level of PMT margins in the second quarter was 19%, very impressive. We need to keep that in mind.

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

Moving to EPS, similar to the first quarter, we had a tax rate in the second quarter that was favorable relative to our guidance both for the quarter of 26.5% and our full-year guidance of 26.5%. So we had 23.1% effective tax rate this year in the second quarter versus 26% even in the second quarter of last year. However, while the timing of certain tax items will continue to be lumpy, we continue to expect that full-year rate of 26.5% for the year.

That means that roughly $0.11 of favorability that we've experienced in the first half, we had $0.05 in the first quarter, $0.06 in the second quarter will be offset in the second half. And importantly we've assumed that will occur in the fourth quarter for planning and guidance purposes, and I'm going to come back to that and cover that in a little more detail when we talk about the second half.

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

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

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

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

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

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

Let's now turn to ACS, Automation and Control on slide 6. ACS sales for the quarter were up 3%. They had growth in all three of their sub-segments and in every region. On an organic basis, sales of the U.S. were up 2% driven by improving residential and market conditions offsetting tougher industrial comparables last year. And non-res construction remains depressed although the orders pipeline does appear to be improving.

Europe was up slightly, outperforming the overall market with good growth in ESS, partially offset by building solutions as a result of soft economic conditions. In China, sales were up 6% with good growth in both the short and long cycle businesses in ACS.

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

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

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

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

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

Now Resins & Chemicals experienced lower production volumes year-over-year, primarily related to plant outages and also soft market conditions in China. As I said earlier, segment margins for PMT were down 360 basis points, consistent with our expectations and what we communicated to you back in April primarily driven by the impact of lower UOP licensing sales versus last year, lower advanced material volumes, growth investments that we continue to make in PMT as well as the impact inflation.

We also continued to see dilution in the margin rate for PMT and again as expected, from the Thomas Russell acquisition which we will lap in the fourth quarter. So for the full-year, we continue to expect PMT margins in the range of 18.4% to 18.6%.

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

Segment margins for the business were up 60 basis points to 13.3% in the second quarter, primarily driven by strong productivity in volume leverage partially offset by unfavorable price. And just as a reminder, in June we completed the one year anniversary of the closure of the FMs or the initiation of the FMs closure of Conde, the friction material closure of Conde. We completed that this June and that facility in the foreclosure that facility will provide meaningful productivity benefits beginning in the second half and of course flowing through to 2014.

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

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

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

So many of our projects, we’re very pleased to say have between a one to two year payback, so we’re being proactive here and it's a big reason again we’ve been able to continue to expand margins in this slow growth environment. Further we continue to identify and drive cost saving projects across the Company. Funding projects to realign resources and regional footprints to reflect the current global growth outlook and our market opportunities, and we’re also executing against our acquisition integrations plans to drive cost synergies delivering further benefits in 2014 and obviously beyond.

So now let’s go to slide 10, and let’s discuss our outlook for the third quarter. For the third quarter we’re expecting sales to be in the range of $9.8 billion to $10 billion up 2% to 4% on an organic basis. EPS is expected to be in the range of $1.20 to $1.25 up 5% to 10% when you normalize for the tax rate of 26.5% in both years. So lets just do kind of a quick recap on kind of the revenue outlook and as well as a couple of references to margin for the third quarter by business. In Aerospace we’re expecting sales to be up low single digits perhaps 1% to 3%, driven by commercial growth including mid single digit growth in the aftermarket as a result of easier comps and improved utilization rates, partially offset by mid single digit declines in defense and space.

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

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

Finally in Transportation Systems, we’re expecting sales to be up 2% to 4% reflecting strong uptake of new launches and also the growth in turbo penetration globally. The growth is against the backdrop of lower EU, light vehicle production rates expected to be down 3% year-over-year contemplating a slight inventory correction in Europe as we move into the summer shutdown season. Now we expect a lift in the TS margin rate year-over-year helped in part by the footprint transition that I mentioned earlier although we expect given their strong margin rate performance in the second quarter that TS sequentially their margin will be flat to slightly down now in the third quarter.

So with that in mind let’s turn to slide 11, where we’ll walk through some of the second half drivers that could push us towards the lower high end of our guidance range. So looking at slide 11 entitled to second half 2013 guidance framework, let me just give a couple of highlights. In terms of our key assumptions, again for commercial aircraft we expect growth will be an important contributor to the second half outlook; we are lapping a relatively earlier, which is to say a more normal year-over-year cost. At the mid point of the range we’ve assumed the aftermarket sales are largely in line with utilization with the likely case the airlines continue to aggressively manage inventory levels, but that improving flight hour growth will equate to more normal buying patterns consistent with what we saw at the end of the second quarter.

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

Pricing will also continue to be an important variable with our mid point based on stable prices at today's levels. For Turbo in the second half, we’ll be watching obviously the note that summer shutdown plans of the OEMs with our base case assumption best described as stable which would translate into second half EU light vehicle production down just slightly on a year-over-year basis.

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

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

Second, margins are estimated to be 16% to 16.2% for the full-year 2013, up 40 to 60 basis points year-over-year.

Now, as we discussed, you can see the estimated impact in the third quarter to segment margin due to the dilutive impact of Intermec, RAE systems and the Thomas Russell acquisition, roughly a 50 basis point headwind in the third quarter in terms of our margin rates which translates to $0.02 to $0.03, think of that as $0.03 of EPS headwind for the quarter.

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

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

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

So now let's turn to slide 13 for a brief wrap-up before we turn it over to you and Elena for Q&A. In summary, on slide 13, the second quarter results puts us another step closer to delivering on the high expectations that we set out for you last December. As expected, the environment has remained challenging, but Honeywell has continued to see strong execution supporting its results. And consistent with our prior views, we're not expecting, not counting on a big second half recovery.

We've seen pockets of short-cycle improvements. The costs are getting easier and the investments in residential construction do seem to be improving and again evidence of that in our ESS businesses. However, while we have seen some signs of improving activity, non-residential investment remains weak and it will be watching the customer demand signals in Aerospace and Automotive obviously very closely in the second half. Our emerging markets are not likely to accelerate in the near term, so probably the best way to summarize our end market expectations for the second half is really just stable.

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

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

Elena Doom

Thanks, David. With that, we'll now take our first question on the line.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Steven Winoker with Sanford Bernstein. Please go ahead.

Steven Winoker - Sanford C. Bernstein & Co.

Thanks and good morning, Dave, Dave, Elena.

David M. Cote

Hi, Steve.

Steven Winoker - Sanford C. Bernstein & Co.

Nice productivity. What was the pricing in the quarter?

David M. Cote

I don't know, it's top of my head but…

David J. Anderson

Pricing or commercial excellence is one of the things that we have focused on for a long time and it gets geared towards the value that we provide with a lot of our new products and services, but I don't have the number at the top of my head.

Elena Doom

It's up several basis points to the margin rate expansion in the quarter.

David M. Cote

I think another way to say it is and this is a theme, Steve, where we talk about a lot is pricing and productivity more than offset inflation. That's what we're just going to continue to do.

Steven Winoker - Sanford C. Bernstein & Co.

Okay. I'm just trying to get a sense for the unit versus pricing impact to that. That's helpful. And on Defense & Space down 8%, I know you mentioned it in line with the planned ramp-downs and expectations, but I recall from the Defense & Space Day a plan that was just close to full sequestration but not at full sequestration. Are you planning numbers now and incorporating kind of a full sequestration impact over the remaining next – on a multiyear basis?

David J. Anderson

Well, the way we planned it and I think I've said this before, but we'd assumed about 80% of the sequestration impact and had contingency plans for the remaining 20% just assuming that that was probably the best bet is unfolded that way. We launched a contingency plan, so yeah everything we're reflecting and the way we're looking at the company going forward is to assume sequestration stays.

Steven Winoker - Sanford C. Bernstein & Co.

Okay.

Elena Doom

And what that basically gives you about a 4% decline in D&S sales for 2013 versus 2012.

Steven Winoker - Sanford C. Bernstein & Co.

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

David M. Cote

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

Steven Winoker - Sanford C. Bernstein & Co.

Okay, all right. Let me get off. Thanks.

David M. Cote

Thanks, Steve.

Operator

Our next question comes from Scott Davis with Barclays. Please go ahead.

Scott Davis - Barclays Capital

Hi. Good morning, guys.

David M. Cote

Hi, Scott.

Scott Davis - Barclays Capital

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

David J. Anderson

I'll probably just talk a little bit about the quarter. We've bought back shares in the quarter I think was 6 million shares in the quarter, so that was an attractive I think use of cash. We closed on the RAE systems. Due to regulatory review, the close on Intermec was pushed into the third quarter. We'll close on Intermec in the third quarter. That's mid $600 million in terms of acquisition. And I would say Scott right now just on a forward-looking basis, Dave get your views on this, I think the acquisition pipeline is relatively attractive.

It's always a matter of the distance between the cup and the lip and seeing the whites of the eyes of these opportunities in terms of a full due diligence and valuation and a very disciplined approach, Scott, that we take to M&A. But I will continue to say to you that I think that we're very, very well positioned for inorganic growth to complement our organic growth in this environment. And the other thing we'll continue to do is we'll continue to look at, on a dividend standpoint, we'll look at doing the right thing there in the context of growing earnings and what makes sense in terms of dividend payout. Don't you think, Dave, that's the best…?

David J. Anderson

Yeah, the strategy remains the same, Scott, and we'll continue to be very disciplined as Dave said when it comes to acquisitions. We haven't lost our mind there and I'd say the next thing about having a full pipeline is it allows you to be more disciplined in what you go after.

Scott Davis - Barclays Capital

Yeah, agreed. I mean since you've done a nice job in the past I think it's always been interesting seeing more of it but that's a high class problem.

David J. Anderson

We'll continue to be smart about it, I can promise you that.

Scott Davis - Barclays Capital

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

David M. Cote

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

Scott Davis - Barclays Capital

It looks like it is. Thank you guys, good luck.

David M. Cote

Thanks.

Operator

And our next question comes from Howard Rubel with Jefferies. Please go ahead.

Howard Rubel - Jefferies & Co.

Thank you, good morning.

David M. Cote

Hey, Howard.

Howard Rubel - Jefferies & Co.

I want to go into aerospace for a moment, just two things, one is could you characterize where you’re spending research and development and how you look for that, what were the numbers Dave this year versus last and how do you characterize it please.

David M. Cote

Well, I’d characterize it as we like all the businesses that we’re in, in aerospace, so we support them all with R&D. In terms of big programs that are all the ones which you’re familiar with like the A350 and the wins that we’ve gotten over the last four, five years. In terms of the overall spending growth investments continue in aerospace. I don’t know if we disclosed the specific numbers.

Elena Doom

We spend just under 8% of sales on R&D that’s funded from the Company.

David M. Cote

That I would say, Howard one of the things that we’ve tried to do is consistent with the seed planting point is, we’re still investing in all the businesses when it comes to the growth investments that we’ve talked about because we don’t want to just make this quarter this year, we want to make it next year, six years from now, ten years from now; sp all the businesses are doing a really good job of reinvesting.

Elena Doom

And that spending level is up about $75 million, $80 million on a year-over-year basis.

David M. Cote

Per year.

Howard Rubel - Jefferies & Co.

That’s on the quarter or that should mean …

Elena Doom

For the year.

Howard Rubel - Jefferies & Co.

For the year. And it sounds like you’re putting a little more emphasis on mechanical and based on some things that Tim seemed to have said lately; is there some incremental opportunities there?

David M. Cote

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

Howard Rubel - Jefferies & Co.

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

David J. Anderson

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

David M. Cote

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

Howard Rubel - Jefferies & Co.

Thank you all very much.

David M. Cote

You’re welcome.

Operator

And our next question comes from Steve Tusa with JPMorgan. Please go ahead.

Stephen Tusa - JPMorgan

Hey, good morning.

David J. Anderson

Hey, Steve.

Stephen Tusa - JPMorgan

Can you guys just may be walk through if there has been any change to any of the segment revenue forecasts for the year, that doesn’t seem to many, but are there any kind of tweaks up or down? Obviously, it didn’t change sales, but within that – the segments?

David J. Anderson

Well Elena, do you want to talk about that from a guidance standpoint?

Elena Doom

Sure.

David J. Anderson

We tweak slightly up or overall revenue guidance for the year and if you could talk about that by segment.

Elena Doom

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

David J. Anderson

So really just refinements, I think you would say to those numbers.

Elena Doom

Yeah exactly on the midpoint plus or minus $50 million to $100 million.

David J. Anderson

Right.

Stephen Tusa - JPMorgan

Got you. Okay, thanks.

Operator

Our next question comes from Jeff Sprague with Vertical Research. Please go ahead.

Jeff Sprague - Vertical Research Partners

Thank you. Good morning folks.

David M. Cote

Mr. Sprague, how are you?

Jeff Sprague - Vertical Research Partners

I’m doing good Mr. Cote. How are you? Hey, can we talk about China a little bit?

David M. Cote

(Indiscernible) when you say it.

Jeff Sprague - Vertical Research Partners

You know, if I think about what seems to be playing out from a macro standpoint, it sounds worrisome and you’re now the third or fourth Company this earnings season that sounds actually better and more comped. You're the fourth company in this earnings season that sounds actually better and more confident. I just wondered if you could elaborate a little bit more on some new advantage point what you think really is going on? And is it CapEx driven or people catching up on maintenance? Any impact from the full shadow banking question, just ask for your collective wits on what's going on there?

David M. Cote

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

Jeff Sprague - Vertical Research Partners

I was actually also a little surprised. I think you said China's up 14 overall. I would have expected that would have been driven largely by ACS but I think the comment was ACS China up 6. So where did it really come in, it is TS or was it somewhere else?

David M. Cote

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

Jeff Sprague - Vertical Research Partners

And then just on restructuring, I mean obviously the story is well understood on Honeywell operationally it's a much better company today than it was 8 or 10 years ago. It's all your credit on the line. It seems like you continue to find a lot of restructuring opportunities, I mean intuitively I think they get harder to find in their longer payback and instead you continue to find and then the paybacks are decent. Is it actually because of HOS and other things it was actually getting easier to find stuff to do, things that maybe weren't obvious or not jumping out. How do we get our head around that?

David M. Cote

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

David J. Anderson

One thing maybe just to add to that very quickly is Dave's kind of underpinning all of it is the continued investment that we make in the ERP, EPS implementation which is a big enabler and a foundation that's really supporting the efficiency productivity across all of the items that they've mentioned, Jeff.

David M. Cote

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

Jeff Sprague - Vertical Research Partners

Great, thanks. Good work.

David M. Cote

Thanks.

Operator

Our next question comes from Andrew Obin with Bank of America.

Andrew Obin - Bank of America Merrill Lynch

Hi. Good morning.

David M. Cote

Hi.

Andrew Obin - Bank of America Merrill Lynch

Just a question on Aerospace aftermarket, could you give us more color by region as to how this 2% improvement was across the globe?

Elena Doom

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

David J. Anderson

Yeah, and that R&O growth which you cited and we had good numbers in the U.S., we had good numbers in EMEA. So that's what really supported it.

Andrew Obin - Bank of America Merrill Lynch

And just to follow-up on the question on China, your strong performance there, can you guys separate your strategy where you're taking market share, you're going to later markets versus the underlying markets? How much of it is do you think macro on the ground versus how much of it is your – the company-specific strategy?

David M. Cote

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

Andrew Obin - Bank of America Merrill Lynch

Thank you very much.

David M. Cote

You're welcome.

Operator

Our next question comes from Peter Arment with Sterne, Agee. Please go ahead.

Peter Arment - Sterne, Agee & Leach

Good morning, everyone.

David M. Cote

Hi, Peter.

Peter Arment - Sterne, Agee & Leach

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

David J. Anderson

I'll think you'll see likely a decline, Peter, in 2014 for D&S but at a lesser rate than 4% that we're forecasting, guiding to for 2013.

Peter Arment - Sterne, Agee & Leach

Okay.

David J. Anderson

We see some improvement in the rate of decline for D&S in 2014 would be our current thinking.

Peter Arment - Sterne, Agee & Leach

Okay, thank you.

David M. Cote

It's a positive statement, Peter.

David J. Anderson

It takes years to develop them.

Peter Arment - Sterne, Agee & Leach

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

David M. Cote

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

Peter Arment - Sterne, Agee & Leach

Okay. And just if I could squeeze in one last one. On the electric taxi, which was a cool demo in Paris, but how do we think about – can you give us any sort of color on the customer interest that you saw and when will we expect to see some of those customers sign up? I know entry into service isn't until 2016?

David M. Cote

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

Peter Arment - Sterne, Agee & Leach

Okay, and that's great. Thanks.

David M. Cote

Thanks.

Elena Doom

Jack, we have time for one more question before we hand the call back over to Dave Cote for his final comments.

Operator

All right. We'll take our last question from Shannon O'Callaghan with Nomura Securities. Please go ahead.

Shannon O'Callaghan - Nomura Securities

Good morning, guys.

David M. Cote

Hi, Shannon.

Shannon O'Callaghan - Nomura Securities

Hi. A couple things, first on Europe, you guys have been seeing some improvements in Europe for the last couple quarters. What's better there, what's not?

David M. Cote

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

David J. Anderson

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

Shannon O'Callaghan - Nomura Securities

And then just on CapEx, we haven't really seen that go up yet year-to-date. Is there any change to your plan there or is that going to ramp more kind of second half of this year and into '14 and any color there?

David M. Cote

I would say the plans haven't really changed to your point but both the UOP and fluorine plants we need to build because we have the orders for them already, so this just more a matter of timing than anything else.

David J. Anderson

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

Shannon O'Callaghan - Nomura Securities

Okay, great. Thanks guys.

David M. Cote

Thanks. Very well. We continue to be confident in our ability to outperform even in this weak macro environment and all the feed planting we've done and continue to do for growth in productivity around the world and in every business makes a huge difference for us. So thank you for listening and have a great summer. See you.

Operator

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

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