Honeywell International's Management Hosts 2014 Outlook Conference (Transcript)

| About: Honeywell International, (HON)

Honeywell International, Inc. (NYSE:HON)

2014 Outlook Conference

December 17, 2013 9:00 am ET

Executives

Elena Doom

David James Anderson - Chief Financial Officer and Senior Vice President

Thomas A. Szlosek - Vice President of Corporate Finance

Analysts

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

Jeffrey T. Sprague - Vertical Research Partners, LLC

Jeffrey T. Sprague - Citigroup Inc, Research Division

Nigel Coe - Morgan Stanley, Research Division

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Howard A. Rubel - Jefferies LLC, Research Division

Andrew Obin - BofA Merrill Lynch, Research Division

Deane M. Dray - Citigroup Inc, Research Division

John G. Inch - Deutsche Bank AG, Research Division

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to Honeywell's 2014 Outlook Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Elena Doom

Thank you, Zach, and good morning. Welcome to Honeywell's 2014 Outlook Conference Call. Here with me today is Senior Vice President and CFO, Dave Anderson; and Vice President of Corporate Finance, Tom Szlosek.

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

This morning, we'll review our financial expectations for the remainder of 2013 and discuss our 2014 planning, building on the framework we gave you back in October, and of course, allow time for your questions.

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

David James Anderson

Thanks, Elena, and good morning, everyone. Thank you for participating in this morning's call.

Let's begin on Slide 3. And here, we're confirming the fourth quarter, which is advancing as expected with about 2 weeks left in the year. Order rates continue positive in the short-cycle businesses, specifically Turbo, as well as the Energy, Safety and Security businesses of ACS. And our long-cycle businesses are maintaining their healthy backlogs.

As a result, we're reaffirming our full year 2013 estimate for sales of $38.8 billion to $39 billion; and earnings per share of $4.90 to $4.95, up 9% to 11% on a pro forma basis and consistent with what we gave you back in October. And lastly, we're also expecting free cash flow of approximately $3.7 billion for the year. Of course, those numbers are prior to any NARCO-related cash outflows and any cash pension contributions.

So 2013 is certainly shaping up as a good reminder of the importance of Honeywell's portfolio, the balance that we have, which is helping us offset some of the headwinds that we've experienced over the course of 2013, specifically in Defense and also in the Advanced Materials business of PMT. And the businesses, importantly, all executed very well this year, delivering margin expansion in every SBG in each business in 2013.

Now the key -- some of the keys are obviously new products, geographic expansion, traction on process initiatives. All of these are contributing to growth in each of our end markets, enabling pricing power and delivering further margin expansion. Another important driver is, of course, the productivity we've seen this year, which continues to be partially benefited from previously funded restructuring or repositioning actions.

We continue to be proactive about maintaining a robust pipeline of repositioning projects and we think this is critical to supporting our sustained margin growth in 2014 and beyond.

And of course, the continued focus on top line. We're investing in new products and technologies, investing in expansion in high-growth regions and we're also investing in high ROI capacity to build the growth momentum in our businesses.

We're expecting another year of modest macro growth in 2014 to serve as continuation, I guess, you could say, of the slow climb upwards that we've all experienced. But we're going to have pockets of short-cycle positives and we've got encouraging order pipelines.

I'm going to take you through a bottom-up portfolio view today and also an end market build building that 2004 (sic) [ 2014 ] outlook. And we're going to keep utilizing, of course, the playbook that you've all become familiar with, with Honeywell, focusing on investing for the future, delivering productivity enhancements and staying flexible, which has allowed us to leverage upside in any market conditions as they occur.

Turning to Slide 4. I just want to briefly recap 2013. On the left side of the page, what you can see is sales up roughly 1% to 2% organic or 3% to 4% reported, again, consistent with our guidance. If you exclude Defense & Space where the challenges are well known and the declines, of course, over '13 exceeded initial expectations, organic growth would have been more than 1 point better. So in other words, in the 2% to 3% range for the year with improving trends as we exit the year. We're going to take you through those improving trends in just a moment.

if you move to the middle of Slide 4. Segment margins is 16.2% to 16.3%, up 60 to 70 basis points, and of course, above the high end of the guidance that we set 1 year ago. And we're achieving slightly above the low end of the 2014 segment margin targets. We're achieving that a year early. And again, those targets are the ones we set back in 2010. Tom is going to take you through the highlights of that performance a little bit later this morning.

And then finally, on the right side of the slide, EPS up 9% to 11% for 2013, another year at roughly double-digit EPS growth and right at the high end of the guidance range that we set for you this time last year.

So 2013 clearly shaping up to be another successful year for Honeywell. And while certainly not done yet, we feel very good about how we're exiting the year and the implications for 2014.

Building on that theme, let's turn to Slide 5. Now the title of the slide is obviously 2013 performance and we wanted to spend a moment here because of what it implies and sort of sets up for our 2014 discussion.

On the left-hand side of the chart, you can see the quarterly growth rates for total Honeywell in the blue bars, as well as the cut of the portfolio, which we've shown you before that breaks out our short-cycle businesses, again comprised of ESS, the Energy, Safety and Security of ACS; Advanced Materials of PMT; and all of Transportation Systems. Also shown, the long-cycle ex Defense, which would include the commercial Aero OE, Process and Building Solutions and UOP and the commercial Aero aftermarket and Defense & Space businesses.

Now, as a reminder, we track these because each of these elements behaves a little bit differently in the cycle. And we think this really illustrates the inflection points and trends we're seeing.

Generally speaking, you can see that the pace of growth over 2013 has been improving, both for total Honeywell, as well as for the respective elements.

So starting with where we've seen the biggest headwind. Defense sales are lower year-over-year, no surprise given the sequestration and budget-related headwinds. And the quarterly results have been lumpy due to the some challenges we've talked about during the third quarter conference call. However, we're expecting moderation in the rate of decline in Defense in the fourth quarter, reflecting better execution and stabilization in demand.

Now long-cycle growth has also varied from quarter-to-quarter due to the timing of a few catalyst shipments in UOP. However, orders are positive, particularly in UOP and HPS, contributing to the confidence that we have for those businesses and Honeywell overall for 2014.

We're seeing some modest improvement in the commercial aero aftermarket. We started the year, if you recall, with lower ATR spare sales. But we're now seeing growth recouple the flight hours despite what will be another tough quarter for ATR spare comps in the fourth quarter, which, of course, suggest an overall improvement in the aftermarket in 2014.

And finally, the short-cycle businesses, which represent about 45% of the portfolio, have really shown acceleration. ESS has benefited from strengthening in the residential end markets, as well as a nice uptick of new products while higher passenger vehicle production globally, combined with platform launches, have driven the growth that we've seen in Turbo. And Advanced Materials got off to a tough start with organic sales in the first quarter down 9%. However, the second half volumes have improved due to higher production rates in both RNC and Fluorines and both are expected to contribute to the improved sales performance in the fourth quarter. So overall, encouraging exit rates as we transition into 2014.

Let's now go to Slide 6. Here, what we've done is we've laid out our GDP growth by region reflected in real terms. Now these are the latest numbers -- what you see here are the latest numbers from Global Insight. And while the numbers are a little more conservative, we found that -- our numbers are a little more conservative, we have found in the past that Global Insight's forecast have been pretty useful. As you can see, we're expecting modest improvement in growth across most major geographies. You can also see that we remain focused -- while we remain focused on increasing our high-growth region exposure with both China and India, again both expected to contribute nicely to global growth.

In total, it would suggest that global GDP growth is likely to increase by a little less than 1%, which is still not as robust as we'd like, but certainly an improvement over 2013. So with that backdrop, in terms of the GDP assumptions, let's go into some specific industry drivers. Let's go to Slide 7.

Slide 7 is focused on the indicators that are the most applicable to the industries, which we serve. The gray bars reflect our estimates of the 2013 versus 2012 change and the blue bars represent our expectation for 2014.

So starting on the upper left. You can see flight hours are expected to be slightly stronger in 2014, aided by fleet growth and better usage rates across higher value aircraft. If you move to Defense spending, the current U.S. budget request, subject to sequestration, would equate to spending declines of about 4% while the rest of the world is projected to be up.

Now as a reminder, international budgets continue to grow and D&S is well positioned to drive enhanced mission capabilities with existing technology, adding a lot of value for the customers at attractive margins for Honeywell.

Switching gears to construction spending. ACS has been the beneficiary in 2013 of residential improvement spending increases, sort of think about, if you will, as the residential aftermarket as evidenced by the strong growth in ECC and security and we're expecting that to continue into next year. We also see the non-res pickup in the U.S. trending positively off already relatively depressed levels. So while we continue to plan conservatively, increased order activity on the res retrofit and non-res construction gives us growing confidence in good growth in ESS and parts of Advanced Materials.

Moving to the bottom of the slide. You can see we're highlighting some of the Transportation Systems indicators, including vehicle production, both light vehicles and commercial vehicles, as well as Turbo penetration. Light vehicle production should be strong again in 2014 with Europe inflecting to the positive. In the commercial vehicles, we're expecting a modest recovery. And as for Turbo penetration, light vehicle diesel is expected to be roughly flat year-over-year on a global basis with modest European decline from peak levels, partially offset by increases in other regions. Gas, however, continues to see healthy Turbo adoption rates, particularly in the U.S. and China, and gas penetration will grow in 2014.

And finally, we wanted to highlight some of the capital spending as a key indicator for our industrial portfolio, including UOP and Process Solutions. We're in the enviable position, obviously, of having a robust backlog in these businesses that cuts across refining, petrochemical and gas verticals, which is also a leading indicator -- from UOP, a leading indicator of growth yet to come in the Process Solutions business of ACS where orders turned positive midway through 2013 and we think bodes well for higher spending in 2014. So for Honeywell, somewhat more positive macros for 2014 leading to modestly better growth next year.

So let's take a look now at Slide 8 and we'll give you sort of an indication of what type of growth we expect through that same portfolio lens we showed you earlier.

On 8, we've shown our outlook for 2014 organic growth broken down by portfolio grouping. Again, the same cuts that we showed you earlier. So starting in the upper left. The short-cycle businesses are expecting sales growth of 3% to 5% organic as a result of the improving industry macros we discussed earlier, also benefiting from new product launches in many of our businesses, and of course, geographic expansion. These we partially offset by some modest pricing headwinds, both in Advanced Materials and Transportation. So overall, a continuation of the trends that we're seeing as we exit 2013.

In commercial aero aftermarket, we're expecting 2014 an organic growth of 3% to 5%, driven by growth in the air transport flight hours and also continued high-value RMU sales in business aviation. And of course, we've seen really a very nice uptick in that in 2013.

Moving to the upper right. Our long-cycle business ex Defense are expected to grow sales 2% to 4%, supported by robust backlogs as we exit the year. And if you think about the pieces for a moment, UOP growth will moderate to mid-single-digit organic. Very tough comps, obviously, 2014 compared to 2013 strengths. HPS and HBS are expecting better growth in 2014. And commercial aero OE growth will slow, again, lapping the more challenging comps and also you've got continued regional OE declines anticipated in 2014.

And finally, on the bottom right of the page. D&S sales are expected to be down approximately 1% to 3% in 2013, driven by U.S. budget declines, partially offset by modest international growth. And by the way, at this time, the likelihood of any meaningful change in our outlook based on the recent U.S. budget developments is small. So we're seeing, hopefully, appropriately conservative here and hopefully some positive trends and some positive upside coming out of that. But as yet, we think it's much too early to do given the details of what need to be worked out in terms of the line items of the budget.

So with that backdrop of sort of the macro view of the portfolio, let's go to slide 9 on key productivity drivers.

Obviously, a common question that we get from all of you is so how much juice is left? I mean, the terrific track record that's been built in terms of margin expansion and growth at Honeywell. So it's an understandable question, which consider that performance over the recent years and also the relatively muted top line environment.

So what we've done here on Slide 9 is highlight some of the items that give us confidence that we can continue this momentum. You can start on the left. HOS, the Honeywell Operating System. It's a key enabler, which is continuing to mature across our businesses. And while we're approaching 85% of our cost base under Bronze coverage HOS, the Silver certification is just really now gaining traction. And as a reminder, HOS doesn't just take you through a new plateau in productivity, it also increases the rate of improvement. And that's why the sustained performance achieved in Silver is such a big deal. These are the businesses that have proven they can make lasting improvements.

Moving to the center. OEF, the organizational effectiveness and efficiency. We continue to be very focused on overall people costs. We want to make sure we're disciplined in managing those costs while attracting and retaining the very best people. And as you can see, we've done a good job of that over the last few years. We've grown sales faster than our fixed costs. We've maintained our flexibility to respond to changes in market dynamics. OEF productivity in 2013 was a significant contributor to margin expansion and we're expecting similar improvements, positive improvements, in 2014.

And finally, on the right side of the chart, you can see the cumulative savings from restructuring where we've seen a stream of steady, incremental benefits from the projects we've funded. What's important to note here is that almost $140 million of gross funding through the third quarter of this year, which will contribute over $125 million of added savings or incremental EBT -- EBIT in 2014. These projects range in scope and complexity, but the quality of the project pipeline and the ability to execute is key. And these savings are a real credit to that.

So in summary, with think there continues to be opportunity on the margin front. We're going to continue to keep executing the Honeywell playbook that got us here, delivering again in 2014 and beyond.

So let's now go through highlights of the outlook for each of the businesses on Slide #10, so the 2014 segment outlook. Now what we've provided you with is the expected sales growth and the segment margin expansion that we're anticipating and is built into our overall guidance by business. Let's go through a few of the details.

In Aerospace, we're expecting sales to be up slightly as a result of continued good commercial growth, partially offset by lower Defense sales. Commercial aftermarket should be up in line with utilization. And despite lapping more challenging comps, air transport and BGA OEM deliveries are expected to be up again next year. And as we discussed, D&S sales will be down in 2014, but at a lesser rate than we saw this year. And overall, Aero margins, which has been a great story for 2013, are expected to be up in the range of 40 to 70 basis points, driven by further benefits from continued HOS maturity, as well as supply chain improvement.

In ACS, we're expecting sales to be up 5% to 7%. Think of that as 3% to 4% on an organic basis. For ESS, we're expecting to see continued benefit from new product introductions and high growth region penetration. But we're also expecting modestly improved macro environment, as we talked about earlier, based on the indications in non-res construction. And in HPS, we're expecting mid-single-digit growth, capitalizing on higher margin wins, software and services growth. And in BSD, we're expecting another year of slow top line growth as funding for energy projects remains weak.

Margins for ACS are expected in 2014 to be up 30 to 60 basis points, including the impact of the Intermec acquisition. If you exclude that, 70 to 100 basis points of improvement in margins. So very good conversion anticipated for ACS.

For PMT, we're expecting sales to be up 4% to 6%, segment margins up in the range of 20 to 50 basis points. The new CapEx projects we're funding are scheduled to come online over the next couple of years, 2014 to 2016. And during the start-up of those new facilities, there'll be some lower utilization, as well as lower absorption. However, we still see margins growing and the backlogs for both UOP and Advanced Materials remain strong.

We're in the enviable position of needing to increase capacity to meet that demand. In 2014, we expect some pricing headwinds in PMT, but we'll look to offset those with higher volumes and also higher value applications.

And finally, for Transportation Systems, we're expecting sales to be up 3% to 5%, driven by another year of strong new launches, improved light vehicle production in Europe and also increased Turbo penetration globally, particularly on gas applications in the U.S. and China. Segment margins for TS are expected to be up 110 to 140 basis points as a result of increased volume leverage and also productivity, including the benefits of the ongoing Friction transformation. These will be partially offset by continuing pricing headwinds.

So with those details of the businesses, sort of the summary of the key assumptions for each of the businesses, let's go now to Slide 11 and total things up in terms of the total 2014 financial guidance.

You can see that we're expecting sales growth of 4% to 5% versus our expected 2013 base. Now that's based on a euro-to-dollar rate of roughly 1.30 at the midpoint with the high end of the range closer to 1.35. But I would point out that other currencies will also have an impact. Segment margins are expected to be up 30 to 60 basis points, driven by continued productivities, supported by the things we talked about earlier: HOS, a combination of OEF and FT and also restructuring benefits, as well as improved volume leverage.

Excluding acquisitions, margins for Honeywell would be up in the range of 50 to 80 basis points. So another year of strong performance.

And finally, EPS for 2014 we're expecting to be in the range of $5.35 to $5.55, up 8% to 12% on a pro forma basis assuming a tax rate of approximately 26.5%, including the expiry of the R&D tax credit and share count roughly flat to 2013 levels. So in other words, including the absorption of the lack of benefit of the tax extenders.

We expect higher pension income in 2014, driven by higher asset returns and discount rates. In fact, we're now thinking that we could experience a tailwind of approximately $100 million in 2014, which we expect to be more than fully offset with incremental reconstruction and the absence of this year's OPEB curtailment. So in other words, we expect that incremental positive pension to be more than offset with restructuring and again the absence of this year's OPEB curtailment, the net of those 2. All other below-the-line items are net slightly favorable, driven by lower interest, expense and also M&A expense. And as always, we would look to offset any onetime gains with further repositioning actions.

So with that, let's spend a moment talking about cash flow and also deployment on the next slide. I know that's a topic that's of high interest to you.

On Slide 12, if you start with free cash flow. We obviously generate a lot of cash, which enables us to deploy capital in a number of proven areas that add incremental shareholder value. I thought it might be helpful to just think of 2013 and '14 in the context of the history of the company. So I just want to take you through some of the highlights of the last 10 years.

Since 2002, our cash flow distribution, the cash available for redeployment, cash from operations, 50% of that cash has been returned to shareholders, 50% roughly has been reinvested for growth in CapEx and M&A. We've grown the dividend at a compound annual rate of approximately 10%. And we've returned almost $9 billion of cash to shareholders through share buyback net of share issuances. It's an impressive track record, demonstrating we were good stewards of capital. And we've gotten, obviously, particularly positive feedback on our M&A performance.

Turning to '14. We expect free cash flow to be in the range of $3.8 billion to $4 billion next year, which would represent mid- to high single-digit growth over expected 2013 levels. And that while this implies free cash flow conversion slightly less than 100%, it's a result of the higher CapEx that we've been discussing for some time, which is expected to be in the range of $1.2 billion or up roughly $300 million from this year, primarily to support high ROI growth projects.

Moving to the right side of the page. Supporting organic growth continues to be our #1 priority for cash redeployment. We're going to continue to invest in the businesses, therefore, driving the next leg of sales and margin growth as we work towards our 2018 targets. We're also 100% committed to paying a competitive dividend through the cycle, returning cash to shareholders during good times and bad. And we built on that record here in the fourth quarter by increasing the dividend 10% effective in December.

We'll continue to pursue M&A, building a robust pipeline of U.S. and international targets with our businesses and our corporate development teams with, of course, returns at the Honeywell standards. And while M&A is never easy, we'll continue to be very disciplined in our approach and follow it up with flawless integration. And finally, you should expect us to hold share count roughly flat again this year, which employs about $1 billion of our cash flow.

So a balanced cash deployment strategy, one you come to expect, one that we've successfully deployed over the last 10 years and one that we'll be flexible in, subject to changing market dynamics and will continue to be a strong proven cash generators and will provide excess returns for our shareholders.

Now speaking of expectations, I'd like to turn the call now over to Tom Szlosek to appraise you of our 2014 guidance and how that stacks up against the long-term targets that we issued back in 2010. Tom?

Thomas A. Szlosek

Thanks, Dave, and good morning, everybody. As you're probably all aware, 2014 will be the fifth year of the 5-year targets we issued in early 2010. And I'm on Page 14 (sic) [ 13 ] , which provides an update on where we stand on those targets.

So starting on the left. You can see our expectations for sales based on the 2014 guidance.

Our guidance for next year implies roughly 6% compound annual growth over the 5-year period. And while it looks like we're going to be just slightly shy of the low end of the target range for sales, when you consider the macro environment over that time frame, especially the unanticipated headwinds in Defense and in Europe, we think the performance against the target is pretty good.

Moving to the right side of the chart. You can see our segment margin expansion versus the target of 16% to 18%, reflecting over 300 basis points of margin lift since 2009. Our guidance for 2014 puts us well into the middle of the 2014 target range. And as you know, we're expecting to be above the low end of that range a year early in 2013. So a very strong performance on segment margin targets.

Taking a step back. This target achievement demonstrates a performance culture that penetrates deep into the organization. Back in 2010, the company received a lot of feedback as to the achievability of these metrics, predominantly on the margin side. And having been in the businesses during this time frame, having been in ACS during that time frame, I can attest to you we definitely felt the challenge.

So delivering this level of margin expansion, especially in a lower-than-foreseen growth environment, underscores not only our commitment to these targets, but also the strength of execution and momentum that's building from the organization's maturity of culture, processes and portfolio. That's obviously something we're very proud of.

So with this in mind, let's turn to Slide 15 (sic) [ 14 ] where I'll talk a little bit about the performance of each of the businesses relative to the 5-year target. So just like we did on the prior page, you can see the 2009 baseline, our 2014 guidance and our 2014 targets. As you can see, we had big improvements across-the-board with every business contributing solid sales and margin growth. And as I said earlier, we did see some anticipated sales headwinds relative to our macro assumptions, particularly in Aerospace. Sequestration wasn't part of our vocabulary back then. And while Aerospace is doing a nice job of aligning their cost structure to that new reality, they've obviously had to overcome lower sales, in addition to higher R&D, reflecting their segment margins as a result of all the business wins on the commercial side. ACS and PMT have done a nice job of capturing growth in their respective end markets, both organic and inorganic. And TS is recovering from lower automation production -- lower automotive production, especially in Europe. All 4 segments benefited from their continued focus on innovation and technology differentiation.

And what you've seen is that this has had very positive impact on margins. ACS and TS are expected to be roughly in line with the 2014 framework, offsetting lower macro growth. PMT has significantly overdriven relative to our expectations, supported by both UOP becoming a larger piece of the segment and margin expansion in Advanced Materials. And Aerospace, which is coming in slightly below our initial framework, has made great progress expanding margins above that 20% threshold with more room to run.

So let me turn the call back over to Dave to summarize things before we open it up for your questions.

David James Anderson

Tom, thanks for taking us through it. I mean, it's worthwhile just to stand back and reflect on what we just went through in terms of the substance of the performance, the transparency of the review and our performance over that period, as well as the recap you just provided. So it's -- I mean, it's a great source of pride. And obviously, we've delivered terrific shareholder return during that same period. So really good.

So Slide 15. Let's just go through the summary. 2013 was another very good year for Honeywell. It was a much more challenging environment than anybody anticipated in the beginning of the year, much more dynamic than anybody could have anticipated, but we're delivering again. And despite limited help from the macro environment, we're delivering at the high end of our commitments while also investing for the future.

All the businesses are executing well. We're finishing the year strong with fourth quarter performance tracking to the guidance that we gave you in October. And as our attention turns to 2014, we feel we have a strong foundation for continued outperformance. We've got Great Positions in Good Industries. We're investing both organically and inorganically to grow faster than the markets we serve. And we'll stay the course on seed planting, as well as on our continuous improvement initiative.

As a result, the restructuring pipeline remains full as the businesses continue to elevate new ideas. We're investing in R&D, in sales and marketing resources globally and these are well aligned to the new products and technologies that are coming to the market that will benefit 2014 and the future years.

Our mantra is to continue to stay flexible, leverage the Honeywell playbook, make the smart choices that will allow us to deliver on our 2014 project while also setting us up for another 5 years of outperformance, which we'll speak to you about in March when we set our new targets for the 2014 to 2018 period.

And so with that, Elena, let's go to Q&A.

Elena Doom

Thanks, Dave. Zach, if you can now open our line, we'll take our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Steven Winoker with Sanford Bernstein.

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

So just one question. I was looking back at the same outlook a year ago. At the time, you were talking about an expectation for 40 to 60 basis points ex M&A of segment margin expansion. You've ended up delivering what looks like it's going to be 80 in that same time frame. And I'm trying to understand sort of where that's -- where you were surprised on that front that drove that in the context of the segment margin incrementals that you're talking about for this year, which, given all the restructuring benefits that you're mentioning, just seemed to me like there could be or should be maybe more coming through margin, maybe you're investing more on the operating expense side or maybe there's a pricing assumption. Just maybe help us understand that a little bit better.

David James Anderson

So I think if I understand your question, let me start off. And then Tom and Elena, you guys add to this. I think, for 2013, what we saw is a more difficult macro environment, particularly as it unfolded. I mean, it was most pronounced, obviously, in Defense & Space and the Advanced Materials piece of PMT. And I think, globally, we did, as a company very smartly, is just leveraged the existing playbook. We enhanced the returns that we're able to achieve out of repositioning. We executed even stronger performance in both Functional Transformation and OEF. And there's an interrelatedness there, Steve, as you know, because of the labor cost component of FT, but we executed even better there. And frankly, I think in some respect, surprised ourselves at how well we could do despite the greater macro challenges and headwinds. And that's what's enabling us to deliver at the high end of the range. And Elena, you may want to add a little bit, just talk by segments. So that's sort of from an overall Honeywell standpoint.

Elena Doom

Sure. I think the one business that really stands out relative to the guidance that we've set in December of last year, Steve, is really around the Aerospace margin rate. And I think the original guidance was for 50 to 70 basis points of expansion. And we're now looking at nearly 90 basis points of expansion. So they've had top line challenges, but they have more than overcome that on the cost side.

David James Anderson

Right.

Elena Doom

While still continuing to invest.

David James Anderson

Right. Yes, yes. R&D is not separate. They would continue to invest in all the right initiatives.

Elena Doom

Yes. And ACS, I'd say, probably comes in second in mind in terms of stronger margin expansion, partly due to the timing of the Intermec transaction and when that actually closed versus our initial assumption, Steve, but obviously delivered very strong margin expansion in 2013.

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

Okay. And so in the context of 2014 now, right, when you're looking at the segment margin expansion opportunity, the incremental $125 million of saves, what are the headwinds on this front that you're anticipating that's sort of keeping you from putting -- passing more margin through? Is it invest-- to what extent is it investment on the OpEx side? And you can maybe just give us some color there.

David James Anderson

Well, first of all, I think the margin expansion is strong. So the starting point is we feel very good about the commitments that we're making in terms of this guide. So nothing to be shy about in terms of what we're stepping up to the plate in terms of what we're committing for 2014. 2014 represents a continued opportunity and focus for us in our growth initiatives. I mean, it's -- while we speak of productivity, the reality is, and you know that, Steve, there's a tremendous focus on investing and building our businesses and building top line momentum in light of what we think are more favorable macro conditions that are starting to be set up for the '14, '15 and '16 time period. So for us, investment in R&D, the new product, introduction and innovation process, sales and marketing. And also in high-growth region, we're formalizing. And I know you've seen and seen evidence of the strength of the footprints and the model that we're deploying for high growth region. You've spent time with Shane. You've spent time with our leadership team. We're now expanding that, the other key markets, other key regions, not just in a one-for-one basis, but selectively deploying business development -- marketing and business development, government relations and other support to really accelerate growth in those additional high-growth region opportunities. So that's also built into our numbers. So you're seeing very, very, we think, strong guidance in terms of margin for 2014 and that's coupled with a lot of investment that we're making for growth that's going to benefit -- continue to set the foundation for future growth for Honeywell.

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

Okay. And just, finally, if therefore, you are -- if you actually see margins expand internally more than you're expecting, similar to last year for whatever reasons, would -- you think -- are you more inclined to sort of take the additional and continue to reinvest that piece? Or would you be inclined to pass some of that through to the margin line?

David James Anderson

I think we'd weigh that on a case-by-case basis. But I think, in general, we're going to look at smartly how we continue to reinvest in the business. But it's going to be case-by-case. I can't generalize because that's going to be really subject to situation-specific opportunities and needs.

Operator

And our next question comes from Jeff Sprague with Vertical Research.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Just a couple of quick ones. Dave, you mentioned relying on backlog, which is obviously quite significant in UOP and Process. Do you actually anticipate backlog depletion in 2014? Could you speak to maybe kind of what the long-cycle project an order outlook is currently?

David James Anderson

So we saw a very nice backlog growth in UOP in 2013. It was a little bit diluted by -- on the reporting by Thomas Russell where orders weren't as strong, but we had almost 12% increase in the UOP backlog in 2013. We would anticipate continued very good orders in UOP in 2014. I don't have a specific 2014 backlog number. Do you, Elena?

Elena Doom

I don't. But I think just inherently, implicit in our guidance, we have a lower organic growth assumption for UOP in 2014 that's below the increase that we've seen in backlog of this year. So I think backlog at the end of '14 is still going to be up year-over-year, Jeff, in UOP. And partially, we're a bit constrained in UOP growth this year as we're adding the incremental capacity on the catalyst side to fulfill the demand that we have.

David James Anderson

And Tom, you may want to speak to Process Solutions where we're seeing great order rates and also just in terms of by virtue of our offering, the tech strength with our technology.

Thomas A. Szlosek

Yes, I think 2 things going there. The orders rate, as you alluded to, the orders rate were challenging in the first half, but picked up nicely in the third quarter and we're seeing some really good momentum in the fourth quarter as well. We think the technology platforms in HPS are on leading-edge and are giving us an advantage, particularly on the control side. And the other point is that the quality of the backlog continues to improve. As we -- as the market has tempered a bit for us, but we've looked hard at the type of businesses that we're taking. And when you look at HPS and look at their backlog, you definitely see an improvement in the gross margin that underlies the businesses in that backlog.

David James Anderson

I would anticipate there, I think, the -- Tom, just reading into your comments, of anticipated growth in the backlog at HPS as well.

Thomas A. Szlosek

Yes, it picks up a little bit in 2014.

Elena Doom

Yes.

Jeffrey T. Sprague - Citigroup Inc, Research Division

And then just secondly and I'll move on. Just Dave, can you give us just a little more color on where your headset is on capital deployment? You announced a $5 billion repo, right? You're planning on base cases. You offset the creek [ph]. Should we expect, though, if M&A doesn't materialize in 2014, that we would see more share repurchases? And how does the M&A pipeline look?

David James Anderson

So we'll be flexible on that. I think you stated it well. I think we'll be flexible on that as conditions warrant. I would say in M&A, it's always challenging. We set a pretty high bar. We have, we think, really advanced the capability execution of the organization around M&A. That being said, it's never easy. And connecting all of the dots and actually going from pipeline to, through due diligence, to actual negotiations and close, it's -- there's always a lot of challenges in that entire process. But we will -- we're going to continue to be very active. I think $1 billion as a play folder for M&A in 2014 is not unreasonable, Jeff, given the quality of the pipeline, given all that we've got going on globally. That, combined with the $1 billion that I mentioned in terms of -- roughly in terms of share buyback, we're going to be spending over $1.4 billion. So we'll put $1.4 billion, $1.5 billion in terms of dividend in 2014. You get to a point where 85% to 90% of the cash is really being consumed, both with CapEx, which as I mentioned to you, will be in the range of $1.2 billion next year. So between growing and investing the business both inorganically and organically, returning high value to shareholders through both the share buyback, as well as through the dividend and we're committed obviously to continue to focus on the dividend, I think that really is the model you should look at and it's worked well for us historically. I mean, the numbers that -- what we've demonstrated since 2002 in terms of cash redeployment is very impressive. And we'll continue to monitor and evaluate incremental share buyback in light of the M&A pipeline and M&A activity.

Operator

And we'll go next to Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

Great. So just taking a step back from 2014, back to 4Q. Any -- it sounds like overall 4Q's tracking in line. But any sort of major puts and takes that you want to highlight versus the detailed parts back in October for 4Q?

Elena Doom

Sure. Nigel, of course, the organic growth assumption is for 3% to 4% in the fourth quarter. It's revised slightly from the 3% to 5% estimates that we talked about in October, primarily due to Aerospace tracking closer to the low end of that guide. PMT, primarily UOP-driven. And Transportation Systems are tracking slightly above towards the high end of the guidance that we provided in October. And ACS is also near the high end of the range on sales. And of course, the margin rates are continuing to be in the range that we've provided.

Nigel Coe - Morgan Stanley, Research Division

Okay, that's really helpful. And then turning to CapEx for '14, Dave. You highlighted it's picking up meaningfully. Can you just maybe give us some color in terms of the programs you're putting in place? We've seen the refrigerant capacity expansion. But where else are we seeing that expansion? And what kind of ROIs are we seeing? You said good ROIs. But what sort of ROI and paybacks have we seen on this investment?

David James Anderson

Well, about 1/2 of that incremental CapEx, the increased 2014 over '13, about 1/2 of that, Nigel, will go to PMT. And the significant percentage of that is going to be within UOP, and if you will, catalyst-related and really building out the capacity to meet the demand referenced earlier in terms of the backlog discussion that we had about UOP. When you look overall at the -- across a spectrum of projects in our CapEx, we're looking at very attractive internal rates of returns from 25% to 45% with the clustering around the 30% kind of range in terms of the anticipated internal rates of return. So very, very good projects and ones that you're going to see benefit the company in terms of its growth trajectory and its profit -- the continued profit growth and margin expansion is going to benefit us in this '15, '16, '17, '18 time frame. So again, it's a long-term view with very attractive returns.

Nigel Coe - Morgan Stanley, Research Division

Okay, great. And just a final one before I pass it on. The repositioning for 2014, you mentioned intention to offset the good news on pension with repositioning. Is that over and above what we're doing in 2013? Or was that just the $100 million repositioning in placeholder for '14?

David James Anderson

It's -- think of it as $100 million as a placeholder for 2014. And the way to think about 2013 in terms of our repositioning is most of that repositioning -- the preponderance of that positioning has been funded with gains. You recall the OPEB gains, for example, that we had this year. So the preponderance of 2014 -- 2013 has been funded with gains. What we've done very deliberately from a planning standpoint, so when you think about building your models, is the improvement in pension income on a year-over-year basis. It significantly does not live through in terms of P&L or EPS benefit. So what we've done is offset the net of pension goodness with some OPEB headwind because we don't have the anticipation of gains in OPEB in 2014 like we had in '13. So you look at those in combination. It's a accommodation of that impact in '13 versus -- or '14 over '13 that's being offset with incremental repo for 2014.

Operator

And we'll go next to Steve Tusa with JPMorgan.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Sorry, just -- I think you just talked about the restructuring. If you already went into it, that's okay. But I guess you talked about the savings of at least $125 million this year. I mean, was that -- is there upside to that number? Or is it kind of too late in the game to load the barrel for this year? And I guess, what's the potential for further costs this year and any gains that -- at what point would you think about doing more restructuring? Or is it the economic environment's stable enough where you're kind of just going to let the businesses run here?

David James Anderson

Yes, it's a good question. I mean, obviously, we're going to be -- continue to be focused on both generating gains and smartly redeploying those gains. At this time of the year, and Steve, you sort of alluded to it in your question, is going to be limited 2014 benefit of anything that we did in the remainder of 2013. However, it would support, obviously, 2015, 2016. So anything that we do in that regard will be looking at how do we continue the momentum in terms of the out year momentum and we'll obviously appraise you of any of that activity when we release fourth quarter earnings in late January.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And then what specifically are you assuming for European auto production? I think you talked about global auto production, but I guess, Europe light vehicle?

Elena Doom

Yes. Where -- our assumption, Steve, for 2014 European light vehicle production is low single digit in the, call it, 2% growth range.

Operator

Our next question comes from Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies LLC, Research Division

I want to go back to sort of a dumb assumption that you have, if I can call it that, is the EUR 1.30 and I don't mean it in a pejorative way. What I meant is that it just seems that, that's off by quite a bit, Dave. And I know you've talked about other currencies being a little bit different. But could you help us understand how you arrived at that? And what sort of bans you thought in terms of that?

David James Anderson

Well, I think it's obviously an important assumption. And again, we'd like to be very transparent both in terms of the planning and the actuals to give you real visibility in terms of the organic numbers and the actual growth rates. For us, it's -- currency is one of the most difficult things. The fact is you're always going to be off one way or the other. But what we want to do is we want to be balanced in our forecast. And for us, the expectation of some Fed tapering, of the likely continued strength in the U.S. economy and all the indicators supporting to just a continued resilience, not exuberance, but resilience and expansion in the U.S. economy. A good example of that, we talked about on the phone today, was the growth that's anticipated -- continued growth in industrial production and measured in terms of capital spending, overall U.S. capital spending, for 2014. So in light of that and in light of the relative outperformance, in light of what we think in terms of likely Fed actions, we think being balanced at about 1.30 as a base number for the euro-dollar relationship is a pretty good starting point. That being said, if we -- if it turns out to be EUR 1.35, we'll have another $250 million or so in terms of revenue, all else held constant, and let's call it about $35 million of op. So that would be good news if we're being too aggressive. And if it's 1.25, you can just subtract that $250 million and subtract the $35 million. So I think it's important thing to be thoughtful about. The fact is you're never going to be right. But we want to be thoughtful about it. We want to be transparent in terms and the way it interrelates with our forecast.

Howard A. Rubel - Jefferies LLC, Research Division

I think that is tremendously helpful. That's exactly the color I was hoping to hear from you and that's tremendously helpful. And then just the other question is can you help a little bit with your R&D profile? Obviously, Aerospace takes a big chunk of it and I would also suspect that you're continuing to invest in PMT in a meaningful way. Would you...

David James Anderson

Yes, I'm going to ask Elena to elaborate a little bit on what I'm going to say. But Howard, as you know, R&D, technology, innovation and the whole process of driving innovation is just becoming increasingly important to Honeywell. And again, we think it represents big opportunity, continued upside for us. In terms of the spend, it's across each of the businesses. We view every one of our businesses, all of our core businesses, as really being technology differentiators and see that as just critical. We continue to maintain the momentum and the margin expansion that we're able to achieve. Elena, do you want to talk a little bit just in terms of any insight by business?

Elena Doom

Yes, I just want to add that, I think, as contemplated in the 2014 outlook, one of the things that may be a little bit more surprising is the increase in RD&E investment in ACS. It's probably the biggest year-over-year increase that we have in our segments, obviously, to support a very robust and technology and new product pipeline, but I think bodes well for incremental sales and organic growth in the years to come.

David James Anderson

And also the addition of Intermec.

Elena Doom

Yes.

David James Anderson

RAE Systems. What you're seeing now is the flow-through to, to your point, Elena, what you're seeing is the flow-through to of some of these very high-caliber M&A in terms of the R&D spend and the R&D firepower, which is, as you know, one of the sort of unspoken synergies is we don't really count those sales, new product development synergies in terms of our map, our acquisition map. That's really the most significant upside that we have in those acquisitions.

Howard A. Rubel - Jefferies LLC, Research Division

So really you're seeing the seeds of this will accelerate some sales growth maybe later in '14, but clearly in '15 and beyond, David?

David James Anderson

Absolutely, absolutely. We're really committed to that and enthusiastic about that.

Operator

And our next question comes from Andrew Obin with Bank of America.

Andrew Obin - BofA Merrill Lynch, Research Division

Yes, just a couple of questions. First, you talked about very high ROIs on internal projects. And I'm just wondering how are you guys thinking strategically between the spread on investing in M&A longer term and investing internally, as I said, given really high returns that you get internally? Should we expect a higher internal rate beyond '14? I know we're not talking about beyond '14, but I was just struck by your comment there.

David James Anderson

No, I think the -- we don't believe view those as necessarily, Andrew, as trade-offs. As we've discussed, it's really what meets our return criteria, what generates shareholder value. M&A is the most, from those economics, is among the most challenging of all the activities, obviously, because of just the way the efficient M&A market works. So -- but we're very, very prudent in that regard, very disciplined in that regard. But the fact of the matter is we want to do it all. We want to do the smart CapEx and we want to do the smart M&A. And we have the resources, the managerial resources and the financial resources to do it. We're going to be very prudent in all of that. But the fact is that's all part of building and growing our businesses.

Andrew Obin - BofA Merrill Lynch, Research Division

And just a follow-up question on price cost dynamic. You touched on PMT. You talked about early cyclical businesses. And I apologize if I have missed it, but how do the rest of the businesses look in price cost dynamic into 2014?

Elena Doom

Yes, I just want to -- I want to go back on PMT for a moment because they do have approximately a 200 basis point headwind on price cost dynamic. It's reflected in their margin rates and the guidance that we've included there for 2014. The other businesses, the Aerospace and ACS, that's obviously a positive contributor to the margin rate, Andrew, wherein TS, the price environment is one in which they obviously have a lot of material productivity but they look to offset the negative price environment that they have in 2014.

Andrew Obin - BofA Merrill Lynch, Research Division

And ACS?

Elena Doom

ACS is positive, yes.

David James Anderson

Positive, yes. Positive.

Operator

And we'll go next to Deane Dray with Citi Research.

Deane M. Dray - Citigroup Inc, Research Division

I was hoping to get more clarity on your positive comment about the business jet environment. Is this more volume growth across the market? Or is this contributions from some of the new platforms?

David James Anderson

Well, I think what we're seeing is we're seeing growth in that mid- to large-cabin segment of the market, Deane. We've shown in our industry drivers that, as you know, as a continued positive. And then, in turn, if Honeywell's penetration in that segment, which, as you know, has been very, I think, very, not only strategically smart in terms of allocating our focus in terms of our business, building and business development and technology focus, but it's also played out very well in the marketplace. So I think it's been the smart thing to do. And the other thing we talked about was the growth in RMUs, the retrofits, modifications and upgrades. That's been a key contributor in our BGA aftermarket growth in 2013. That's going to continue at a lesser rate as we're lapping a very big year in 2013. But we are going to see a further increase in RMU sales in 2014. So it's both the OE and then the RMUs. And the RMUs are big beneficiaries that's being driven by the product development and technology advancements that we're making. While we talk about it as -- account for it as aftermarket, the fact of the matter is, is really that new innovation, the innovations and new technology that are really generating that growth.

Deane M. Dray - Citigroup Inc, Research Division

And just last question related to business jets. So you're seeing a difference or are there differences in your assumptions on production rates on the higher end of the business jet aircraft where you have more content?

David James Anderson

Oh, definitely. I mean, that's where we're seeing the positive growth and positive development.

Operator

And we'll go next to John Inch with Deutsche Bank.

John G. Inch - Deutsche Bank AG, Research Division

$4 billion of free cash. So you do $1.5 billion of dividend, $1 billion of acquisition, what, like $0.5 billion of share repurchase. Where does the rest go? And the context of my question is you had $5.5 billion of cash and equivalents, Dave, on balance sheet of the third quarter. It's sort of like -- this is at an all-time kind of high for Honeywell. You don't really need that much cash to run the company. So it's a little bit of a circular reference back to capital deployment, like are you just -- are you building this for a rainy day? A bigger deal like there's -- it clearly doesn't help shareholders having all that cash sit there. I'm just curious what your thoughts are.

David James Anderson

Yes, sure. Well, there's a certain amount -- obviously, there's a certain amount of that cash and the flexibility that comes with it and the liquidity that's very, very important to have and we're all reminded of the experiences of '08 and '09 and '10 to -- that's not that far back in terms of history to recognize the importance of it. The reality is, and we've talked about this, the geography, the cash is [indiscernible] and the tax, our anachronistic tax code, is unfavorable to us. And so that's the reality. So when we look at the best economics for the use of that cash and, if you will, the after-tax deployment of that cash, some of that cash is just going to continue to build. That's the nature of the beast. But what we're going to do in terms of our cash generation, as I mentioned earlier, cash from operations, we're going to very smart, very disciplined. If you look at our track record, roughly half of that cash from operations has been returned to shareholders. And by the way, that's net of cash proceeds from option exercises. On a gross basis, it's overlapped, It approaches more like 65% has been returned to shareholders. And the other half, most of it -- of the other half has been in building the business, both organic and inorganic growth. CapEx over the time period, I think, was $9 billion. And then M&A is strong, M&A net of divestitures of roughly equal amount. So that's what we're going to continue to do at Honeywell. And when you look at our capital metrics, when you look at the things that are important to the rating agencies, we're rolling back into our A/A2 ratings. Those ratings, we think, are very important. We think that's part of maintaining both our relatively low cost of capital, the significant flexibility we have and we think the necessary liquidity. We -- in an ideal world, we wouldn't have the cash built because we wouldn't have the friction associated with the geography and the cash. But that's not the world we're in.

John G. Inch - Deutsche Bank AG, Research Division

No, I understand. Can I ask you, Dave, just sort of a detailed question on CapEx. I think it's Page 12 you say $1.2 billion is going to be up 30%. But if you go back 1 year ago, you were targeting $1.2 billion. And I thought that even in the summer you had reiterated the $1.2 billion. So what -- I mean, you got presumably $100 million or $200 million from Dassault investments alone. Sort of what's really kind of happening year? Did you just not get projects done that's built into 2014? And the other sort of aspect of the context is if you really are building the CapEx that would support kind of a capital investment cycle improving in the United States, which kind of backs into the green shoots that everyone's seeing right now. So I'm just -- more color there would be great.

David James Anderson

Sure. Well, a couple of things. I think, first of all, in terms of the underspend in 2013, really a variety of items. And we did have some delay in some projects.

Elena Doom

In Solstice.

David James Anderson

In Solstice, which market timing, that moved to the right, which is very understandable, the smart thing to do. We had a lower growth economic environment. We've gotten better. HOS has been a key contributor to producing more with less. We've seen footprint reduction opportunities as a result of HOS. So it's a combination of those things. I think the good news is, number one, we're very disciplined in terms of CapEx. It's got to -- we have to see the whites of the eyes of the market demand. We really have to see the whites of the eyes of the economic return characteristics to really commit. And I think the second thing it really suggests is that there is, to your point, we believe now a pretty strong likelihood of that type of increase in 2014, which is consistent with the economic indicators and the economic forecast in terms of CapEx growth. Overall, industrial production growth and CapEx growth. And we're seeing signs of that around us. We're seeing signs of that in terms of the bid and proposal activity in our long-cycle businesses, in the increased order rates and the backlogs that we referenced earlier.

John G. Inch - Deutsche Bank AG, Research Division

Right. But it's not really up 30% if you make these adjustments, right, on a pro forma?

David James Anderson

No.

John G. Inch - Deutsche Bank AG, Research Division

Like if you could just sort of that's what you mean?

David James Anderson

No, some of that is really unique when you look at, John, and we talked about this earlier. You know this well. Some of that is really specific to UOP.

John G. Inch - Deutsche Bank AG, Research Division

No, I absolutely get it.

David James Anderson

So it's Honeywell specific in that regard, but it's against the backdrop. I just provided that macro indicator. This is against the backdrop of a bit more favorable macro environment.

John G. Inch - Deutsche Bank AG, Research Division

Understood. Just one more. The U.S. is set to realize the benefit of literally tens of billions of LNG and petrochem infrastructure investments over the next sort of 3-ish plus years. Do you believe that's already -- I mean, your sort of PMT mid-single-digit guidance. On the surface, wouldn't seem to reflect much of any of that. Yet we know that PMT, UOP, and I guess sort of at the middling point, ACS, right, should have pretty significant exposure to that build-out. I mean, are you -- is that in your guide? Or is that sort of on the come? or is it because it's a little more -- that's something that proportionately begins to hit just based on the nature of your products, say, in '15 versus '14?

David James Anderson

It's a little later on in that strap horizon. And it's really related to what's happening overall in the, if you will, the gas development markets. Exploration is robust. But the actual production and distribution have remained to be really built out. Those investments are forthcoming. They will occur, but it'll be lumpy initially, but it will occur. Two key drivers are going to be the investment again and the infrastructure, particularly the distribution infrastructure, both from wellhead to point of usage. And also the second point will be export licenses. So once we see that occur, I mean, demand is really -- and terminals are being built, we're going to see the growth. It's going to happen, John. It's a favorable macro for Honeywell. It is -- you're exactly right. It's a very good question. It's really not reflected in our numbers yet. But it will occur and it's going to be another significant positive for us. Andreas will speak more to that at March Investor Day.

Operator

And we'll take our last question from Joe Ritchie with Goldman Sachs.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

So my first question is really around ACS growth. And specifically, if I take a look at organic growth for the year, it looks like you're guiding for '14 at approximately 2% to 3% and yet we're seeing short-cycle momentum in ESS. I think you said HPS was going to grow at approximately mid-single digits and you still expect growth out of BSD. And so it seems like the guidance is a bit conservative. And so hopefully, you can just comment on that.

Elena Doom

Yes, Joe, the -- you're absolutely right in terms of the outlook, the ESS exiting the year at sort of mid-single-digit organic growth rate, consistent with the outlook for 2014. There is, obviously, some puts and takes. But accelerated growth in ECC, life, safety and S&C, the Sensing and Control business, will return to good growth in 2014 having had some negative in 2013. In Process Solutions, we're anticipating that organic growth there goes from slightly positive in 2013 to, again, something in the low to mid-single-digit range for organic growth. And then in Building Solutions & Distribution where it's been a bit of a tale of 2 cities. The Building Solutions portion of that does return to positive growth in 2014. Think about that being a low single-digit-type guide. And then we had good growth actually in the Americas Distribution business in 2013. We're expecting that growth to moderate slightly in 2014, but still be a contributor in the mid-single-digit growth range. So on the whole, organic growth in 2013 for ACS going from, call it, roughly 2% at the midpoint to something more positive than that in the mid-single digit range for ACS overall.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Great, that's helpful color, Elena. And I guess, as it relates to ESS, specifically, I think you guys called out a 5% organic growth number in 3Q. Has the momentum continued or stayed at that level throughout 4Q? Or if any of the trends either potentially improved? Because as I take a look at your construction spend outlook for next year, it seems to be getting better. That's a market that's tied to that. So perhaps any commentary that will be great.

Thomas A. Szlosek

I would say, Joe, the ESS has moderated a little bit in the fourth quarter, but nothing appreciably down from the 5% you saw in the third quarter and kind of consistent with the -- those exit rates that Dave showed you earlier for the short-cycle businesses.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Okay, that's helpful, Tom. And then one last question on the margins. ACS has been phenomenal growing the margins this year. You've averaged about 1.5% to 2% organic growth and yet the margins were up roughly 100 basis points. Taking a look at your organic growth or organic margin guidance for next year, it's 70 to 100 and yet you're expecting better growth. And so is there any reason not to believe that, given improving volume leverage, that margins should be better? Or were there some onetime items that potentially helped margins this year?

Elena Doom

Yes, I'm not aware of any onetime benefits to the margin rate, Joe, for this year. I think, as we talked about, there is, obviously, a reinvestment in the businesses in terms of sales and marketing resources and R&D as well, which is contemplated in our -- nearly in that 40% to 50% organic conversion rate that we're contemplating for ACS for 2014.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Okay. But no onetime items. And R&D was stepped up this year as well. And so potentially then, you've got a relative conservative guide there as well if organic growth steps up? Is it fair to think of it that way?

David James Anderson

Yes, I mean, based on the current organic growth rates, I mean, the R&D as a percentage of revenue for ACS is fairly stable.

Operator

And this does conclude today's conference. You may now disconnect, and have a wonderful day.

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