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Executives

Carl Esposito - VP, Marketing and Product Management Aerospace.

Paul Vasington - CFO

Honeywell International Inc. (HNO) RBC Capital Markets Global Industrials Conference (Transcript) September 10, 2013 6:40 PM ET

Unidentified Analyst

Good afternoon. Our next company this afternoon is Honeywell Aerospace. And joining us today, we have Carl Esposito and Paul Vasington from Honeywell. They are going to give us a quick couple of introductory words on what they do in the company itself and also a very important forward-looking statement and then we are going to have some questions.

Carl Esposito

Great, thank you. Carlos Esposito, Vice President of Marketing and Product Management for Honeywell Aerospace. So I am responsible for our product portfolio and strategy across aerospace and managing that portfolio of products and services across all of aerospace.

From a forward-looking statement perspective, we will talk about and some documents have forward-looking statements. Those statements are based on the management assumptions and assessments and we've identified principal risks and uncertainties that affect our performance in our 10-K and filings with the SEC.

Paul Vasington

I am Paul Vasington, I am the CFO for Honeywell Aerospace, responsible for global financial operations for the company.

Question-and-Answer Session

Unidentified Analyst

I'll kick off maybe on the commercial side of the division and the aftermarket have the good pace focused. There is not a lot of visibility in this area. So (inaudible) what your thoughts are and how this is progressing, the industry has been sort bit of a soft patch without Honeywell has been performing relatively well.

And so I was wondering if you could talk about maybe some of the dynamics you are seeing and maybe why global businesses perhaps kind of differently from some of the peers?

Carl Esposito

Sure, happy to do that. We are now -- our commercial aftermarket is up in mid-single digit, I think these are easier comps from us from a comp perspective in the commercial side, but I will talk about both the transport airline aftermarket as well as the business aviation aftermarket, because they are two different animals.

So we see aftermarket, different streams of our aftermarket business, in spares, repairs and overhauls, upgrades and in some cases mandate to require upgrades for aircraft based on regulatory rules. And so one of the things that we like about our portfolio is it is very balanced portfolio from a mix of different type of aftermarket business.

So they were pairing overall business as parts get use sometimes based on flights hours, sometimes based on just life. The spare businesses airlines continue to acquire new aircraft, putting new spare equipment throughout their network to support their airline operation. Upgrades has been a big thing for us and looking at safety efficiency upgrades that we can provide to airlines to help them improve their operational performance from an efficiency standpoint and safety performance standpoint.

So things like where the radar upgrades to help improve the safety and navigation around storm. We had that today coming in here, (inaudible) use weather radar to navigate around storms to bring aircraft safely.

Performance upgrades and efficiency upgrades like flight management system software upgrades that will let airlines fly more efficient, more direct routes help them drive more efficient operation.

On the business aviation side of things, we also have a similar mix of aftermarket business, the repair and overhaul business, engine repair, APU repair and overhaul. Service plans and maintenance plans that we have in the aftermarket and then upgrades and we’ve seen a tremendous growth in our business aviation upgrades. We’ve invested lot of money in developing new value added upgrades and many of those are software based upgrades.

So I have had the cockpit on say Dassault F7X and I can now deliver significant value software upgrades to that cockpit to provide things like three dimensional synthetic vision, those flight efficiency upgrades in the flight management systems, new train warning and new aerospace procedures. So, really a very broad and diverse after market for us.

Unidentified Analyst

There has been some concern on the aftermarket about the negative impact of retirement’s cannibalization and (inaudible) Boeing making more new planes which is still on warranty. How you seen any sort of impacting your large aircraft business?

Carl Esposito

To that bid the impact of that is not new for us. We’ve seen those types of retirements. We actually participate in that aftermarket business from aerospace trading as part of our reselling of used equipment so we participate in that part of the dismantling and the refurbishment of aircraft parts. So we see it, it’s been in the market and certainly are adjusting to it as ebbs and flows, but again it’s part of one of the many streams of our aftermarket business, not unique to one particular piece.

Unidentified Analyst

You mentioned the upgrades and metric that’s on the business jet side of things. And as you talk to customers about this, do you see this as perhaps probably to pick up in new aircraft activity or they separate sort of drivers?

Carl Esposito

Well, we will be here in Las Vegas next month actually for NBAA, National Business Aircraft Association Trade Show where we will release our annual forecast of business aviation growth rate. And so I think this year we’ve seen a relatively flat to slightly down new aircraft build rate, but we are seeing some very nice adoption of those aftermarket upgrades, its aircraft particularly some of the high whole value aircraft and those value and those software upgrades, safety upgrades, connectivity upgrades are doing very well for us. So we are excited about NBAA in the next month and we really setup to any forecast in the next month.

Unidentified Analyst

But as you look at the business jets, I mean that does appear to be some pretty big differences within the business jet arena, are you continuing to see the large areas being the strongest growth area or the most robust area?

Carl Esposito

Yeah, I would say that in general the larger cabin aircraft have been more robust and we look at how customers are using those aircraft to travel very long distances to do business in new parts of the world (inaudible). And so those are aircraft are continuing to fair pretty well.

We serve the entire business aviation segment so everything from single engine, private aircraft all the way up to the very large aircraft. We are very happy our position on the brand new culture in [Q650s]. It’s been a great aircraft. It’s been performing very well and very nice content from our new perspective of the cockpit. The exhorting power we are going to get from a number of mechanical systems as well as connectivity on that aircraft.

And we see nice adoption rate from those larger cabin aircraft with these upgrades as well because they want to fly more efficiently, they want to fly to airports that they don’t plan to often at least safety upgrades that we offer, really helped the pilot from the situation awareness perspective.

Unidentified Analyst

I want your expectation for new product development in this areas, I mean there has been a slide you had two, three years now really it’s a great walls of can’t talk about. They did the same that you have got disposition and yet your customer for whatever reason is not revealed it. What you think is the dynamic there because they are safer on say this is a business jet and month has been sort of if they are waiting for that demand to improve before (inaudible) glory or is there some other tactical thing they are doing here for a while to take it too long?

Carl Esposito

Well, we have been revealing new wins as our OEMs customers have announced those and so the eBay show in Geneva in May we announced cockpit selection for the Pilatus PC-24 that was one of our unannounced aircraft. We announced the engine selection and mechanical systems selection for the Bombardier Challenger and CL 350. So the aircrafts have been coming out and we continue to fill our pipeline with new unannounced models, and in many cases those OEMs don’t want to announce those aircraft from a competitive standpoint. So we certainly respect that. I think you will see some interesting things a NBAA and we might get to chalk a few off the list at NBAA as well.

Unidentified Analyst

All these revelations.

Unidentified Company Representative

Revelations.

Unidentified Analyst

There’s been a lot of talk in the industry about market share in avionics and then the business generating mostly because the government has been pushing up. How much of a threat though you really think that is considering your technological portfolio versus what they are trying to do.

Carlos Esposito

Well competitions a good thing, it will keep it a bit on their toes, and I would say that we are very happy with where we are. From a position standpoint they are a tough competitor but we’ve won new programs and new light jet aircraft like the Pilatus PC-24, and so we know how to play in that space that they play at. We also have a very broad Bendix/King product line for general aviation that we’ve continued to reinvigorate with an announcement of a number of new products last month at the Oshkosh Aviation Show. So we have a very broad set of products and portfolios to address that, and we continue to win in the market place, and we are going to continue to be very tough competitor and continue to chalk up some unannounced wins.

Unidentified Analyst

(inaudible)

Carlos Esposito

And I think one of the things that it is a big differentiator for us. In aviation it’s not just the cockpit, right. When we go and look at new platforms we have choices to make that some of our competitors don’t, our pure play competitors, we look at the engine and we look at the auxiliary power unit, connectivity solutions and so we think very broadly about not only the solutions we bring to the aircraft but the best fit of our technologies to those aircraft and its something that I think other people don’t have to make decisions about or have the opportunity to use.

Unidentified Analyst

(inaudible) large aircraft size is the A350 is one of your larger programs and you got a lot of technology on that. First of all how is that progressing, but equally how is your experience of 350 or how could it influence your thinking on the 777x where would you like to invest your R&D dollars or where are you going to be pushing to try and get a position.

Carlos Esposito

We are very proud of Airbus with the flight performance of the aircraft, they have been doing a lot of line with that airplane. So its pretty nice to see that first flight test aircraft get that many flight hour and we have a very broad (inaudible) content on that aircraft, one of the broadest ever that airbus left from a system perspective, mechanical subsystems, mechanical extended perimeter, things around the air-conditioning systems, things around the auxiliary power unit and really throughout the mechanical part of that aircraft. It’s doing very well, we are very proud to be on that. And those investments will as that aircraft matures and goes into service, we will obviously taper off and then there is other things to go after and look at.

Unidentified Analyst

And your experience on that how do you think that could influence when [that] comes up on the 777X, I mean are there certain technologies where you feel the risk return, whatever might be is shaking up really and you think you’ve got a good package there and others that are not quite so good?

Carlos Esposito

Yeah. We continue to mature some of our really core technologies that differentiate Honeywell auxiliary power unit technology from an efficiency of that auxiliary power units, the emissions performance of those auxiliary power units, and continuing to push that technology forward our flight management systems and around the flight guidance. The flight management system is really the brains of the aircraft that manages the performance and efficiency of aircraft, and we continue to develop and deploy new technologies there.

And we are able to reapply core technologies in core pieces of software across multiple platforms, and that’s again something that we are able to do that that other people can’t do. On aircraft that needs operate in the airspace doesn’t matter of it’s A350 or 777 or G650 or in some cases just a 172, those all need to operate in many of the same rules and environments and we’re able to take software from one of those application and really reapply it across many applications. So that’s been a core focus of ours is how we are able to reapply technology, flight management system technology, navigation technology, precision guidance technology and reapply those. So we certainly will benefit from those developments.

Unidentified Analyst

And I am not going mean doesn’t get as much attention, but it’s quite a view is the regional jet market particularly with that Embraer. What sort of dynamics are you seeing in that area at the moment?

Carlos Esposito

We are very happy to be selected by Embraer Air for the E-Jet 2 the E2 aircraft that they announce that the Paris air shows has been very successful, I think they announced almost 300 orders the week of Paris air show. So it’s been a great program we have been on the original 170, 190 program and with the new Embraer cockpit we are able take again some of those technologies that we’ve developed in other application and reapply those to Embraer to get them to the next generation and technology in cockpit technology.

I think we continue to see interest in that segment from a regional jet 70 to 90, 70 to 100 seat, continues to be able to fill out new markets for the regional aircraft and help to fill in and develop new markets. And we see everyone has often used those 70, 90 aircrafts to prove out routes to develop new routes and then they can maybe upsize aircraft as those routes get more mature, but it’s really nice product and Embraer has done a great job with that

Unidentified Analyst

And one of the platforms is known as the COMAC, C919. I think that’s probably still work, doesn’t get quite as much attention as they did a couple of years ago. I don’t know if you can give us an update on where the technology development is that on that aircraft. But perhaps a [vested] interest in these as well, how comfortable are you that your technology on this plane is being protected?

Carlos Esposito

Well, we are happy to beyond that aircraft and we have a number of sub systems on that aircraft, the ancillary power unit, wheels and brakes, flight controls and navigation systems. So from a technology perspective we are very strong and with protection policies, programs and procedures across aerospace, and we implement those across and around the world. So trying to not specifically on the area that we are concerned over, we think we have got very strong on controls from an IT protection perspective to manage that technology.

Unidentified Analyst

But you couldn’t argue that perhaps your control [news] be able to stronger in China?

Carlos Esposito

Well I’d say we continue to review our controls, we continue to improve our controls and monitor those controls and that protection program, protection programs and layers of protection and layers of IT security throughout the time we continue to upgrade as those things change.

Unidentified Analyst

I mean finally on the aerospace side of things looking at Airbus and Boeing, both of them are planning [certainly] for a production on everything at the A350 next year, what sort of impact do you think that will have on the supply chain, obviously rates have slowed down, it will be planning up. But what sort of other ramifications might that have.

Carlos Esposito

I think that for us we have the very strong relationship with those customers and cant’ really get to understand where we think they are going from a forecasting perspective as well as our own forecasting, that we do within Honeywell aerospace. And so, I think that we have got a very nice long look ahead around where things are going to help look at where our supply chain needs to be doing and our suppliers, sub tier suppliers and sub sub-tier supplier to be ready for changes overtime.

So it takes a lot of diligence and effort, I'd say to make sure that you are very complete in looking at those capacities, all the way down through your supply chain and it is not just your sub-tier suppliers, but going three and four steps down and that's something that we have deployed within out integrated supply chain organization, really a very in-depth look at the sourcing, capabilities.

Paul Vasington

I think the continued adoption of Honeywell operating systems will continue to drive productivity and capacity within our supply chain. So it’s a very restructured approach and that will continue to evolve and will continue to adopt and rate of productivity continue to increase and capacity will continue to increase certainly.

Unidentified Analyst

Yeah, Paul I thought you as you get to full rate you can look at things like inventories and other things as well. I mean if you got a bit of contingency in that you can take that out and

Paul Vasington

We're looking to continue to drive inventory out and then prove our process and be more efficient.

Unidentified Analyst

Yeah.

Carlos Esposito

Regardless of what our customers are doing, we're going to focus on that continued evolution of efficiency within our plans and our overall project.

Unidentified Analyst

Yeah.

Unidentified Company Representative

We deploy that Honeywell operating system and get to next levels of performance across all of our site thing actions we see a significant impact to our performance and that helps our efficiency.

Unidentified Analyst

And on the operating system and implementation you are seeing more progress in the division, but how much of that has gone down to the supply chain, because it was said the light behind the customer wherever it might be, but how much far along do you think you and how much further is there to go.

Unidentified Company Representative

I’d say where we have needed to look at suppliers and bring the kind of tool sets that we have from an operating system perspective. Those suppliers have been very receptive at the tools that we bring to them and some of the techniques around managing their own factories, managing their own supply chains and we continue to invest in some of those suppliers to bring those kind of tools and operating system and we've seen significant improvement in where we need to see improvement.

Unidentified Analyst

And defenses 40% division space, what sort of (inaudible) we’ve seen here as the DOD implement sequester and has more sequester they come and all the rest. What sort of as you look at say over the next three, four, five years, what sort of growth rate are you anticipating maybe and managing for a new capacity over the cost base?

Carl Esposito

Yes, so I think, we had a little bit of further reduction, so about 2% reduction over the three-year period ending in 2012. I think we are going to continue to plan conservatively and thoughtfully. I think where the growth will come is the continued penetration growth in the international markets, where we can be at good position to clean and emerging markets and then the commercial helicopter space. So we think there is good growth opportunity internationally, which will continue to drive the business forward at a moderate rate of growth I would say.

Unidentified Analyst

Maybe the export big enough to offset the scale of the DOD in this side of the business?

Carl Esposito

Yes, I would say that one of the things that you need to about our portfolio is that we are very broad from a defense exposure perspective. And so we don’t have more than 3% concentration on any one particular platform. So, a very broad from platform perspective. And as we go look outside U.S. but also inside U.S. the military are keeping their aircraft longer, so they are keeping those aircraft longer, what does that mean? It means that we needed more upgrades, more maintenance to those aircraft and some of those very same technologies that I am bringing to bear in a commercial space around safety upgrades, weather radar upgrades, connectivity, satellite communication connectivity upgrades are playing very well in that space in defense side.

And then the international piece I think is something that we’ve seen nice growth and some nice space wins for satellites and semi-control systems and winning a customers that we had one had before and we are going to look at parts of the world that need the defense technologies that we have.

Certainly mindful of all of the export rules that we need to follow and all the aspects around from technology perspective just like the intellectual property technology protection, certainly all the ITAR protection that we need to ensure, but I think that there is nice opportunities for us in international space.

Precision navigation continues to be a nice technology for us, the guidance that we have or the guidance technology, the inertial measurement system technology used both in missiles, in ground vehicles, so really things want to know where they are.

Our navigation technology lets stays know where they are, right. and then next thing we wanted to do is communicate where they are and what they are doing and our connectivity solution is really help enforce that. And so those two core technologies we are going to continue to move forward throughout the industry.

Unidentified Analyst

And what sort of impact do you think on the defense side from the (inaudible) tempo and the OCO coming down, is that having any impact to talk?

Carlos Esposito

We didn’t have significant exposure to that OCO piece. Our business is very diverse, our defense business is very diverse, we do everything from engines on the Chinook helicopter to power systems, to electrical power systems, to Avionics and the precision navigation. And then the satellite and space products. So very, very broad set of products and services that go into that defense and space business.

Unidentified Analyst

Now on the deployment of capital looking beyond your organic side of things and new programs on that, do you think there are some opportunities for M&A for the aerospace division Honeywell has been doing a few acquisitions over the last couple years that tends to be in other areas of the business do you think there is an opportunity to aerospace to get involved?

Carlos Esposito

I think we won’t comment on acquisition targets and changes, but Honeywell I think is a company that set a strong track record of successful acquisitions. So can’t comment on anything but certainly we are very happy with the acquisition we did do in aerospace recently the EMS Technologies acquisition about two years and where we have been able to capitalize on that with our Inmarsat GX aviation win exclusive win around providing the hardware for the next generation satellite network that will be up in the 2015 timeframe. So we are very happy with that acquisition and the business growth that that’s brought to us not only in the upgrades but in the future about $2.8 billion opportunity for us. So can’t comment on specific targets but we’ll continue to [drive].

Paul Vasington

And we have a dedicated team that’s fully resourced that are looking at opportunity for the part of our business to the core competency within Honeywell so it’s certainly putting that asset behind it.

Unidentified Analyst

As we look across on all the things you do, you know there are areas where you feel like we’d like to have more (inaudible) be it electromechanical or avionics or commercial, this is defense for me. Are there an sort of preferences and non preferences that you don’t feel stacking these things up out at the moment.

Carlos Esposito

Lets say we keep a wide aperture.

Unidentified Analyst

Fair enough, and looking at operating margin that you said that Honeywell operating system implementation of that. How do you see margins progressing from here, given some of the (inaudible) programs coming in I think, so does that have a nice diluting affect or do you see offset with incremental progress on say the after market helping you to add (inaudible).

Paul Vasington

I think there is room for continued margin expansion, and I think we get a lot of different levers productivity and improving our business process in HOS and you see all the different, and (inaudible) we have bear until be bring to bear Honeywell, I think we will continue to drive expansion in the aerospace business as it relates to market.

Unidentified Analyst

And as we thinking of how much you factor in continue OEM deflation. Now Boeing (inaudible) staffing things alright. I mean is there something you did say that and still anticipate price reduction as well?

Paul Vasington

I say that those working with OEMs, we work on OEMs for a long time and different things that they do in the programs and projects that we could collaborate with those OEMs on, and we work together to find the right solutions there for both of us to make sense. I say that as we look at managing the core products and how we take those investments from multiple places and re-apply those that helps us get much more efficient from an engineering investment perspective.

As we look at how we use core product building blocks, not only software building blocks, but electrical building blocks, mechanical building blocks again that helps drive our productivity from an engineering perspective, also from a manufacturing perspective, as I kind of simplify the product structure that helps me to be more efficient, helps my suppliers have more consistency in terms of what they need to supply me. So driving our internal productivity on the development side and the manufacturing side and with our suppliers.

Unidentified Analyst

Would you characterize these, but it seems very public negotiations that (inaudible) was talking about, is there any difference from what you seen in the past where you have been able to keep your margins in the prior years. Is this similar to that or is that to be different as (Inaudible)

Carlos Esposito

I think the each OEM has a different way of working and we enjoy working with them all. But there is a business for long term

Unidentified Analyst

Yeah. And I you guys going to back to them with engineering solutions to maybe offset some price issues they are having.

Carlos Esposito

Yeah, I think with all our OEMs, they are collaborative working relationship around your suggestion to help improve productivity, improve efficiency, reduce cost. That’s the hallmark of a good relationship with power customers and that’s the kind of relationship we want to have to with our partners as well. So that way we can move both together to be more productive, that’s a good thing for everybody.

Unidentified Analyst

Any final questions from the floor. Alright well Paul, Carlos thanks so much. Inaudible) the call.

Carlos Esposito

Thank you very much.

Paul Vasington

Thank you very much.

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