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Executives

Elena Doom - Vice President, Investor Relations

Dave Cote - Chairman and CEO

Dave Anderson - Senior Vice President and CFO

Analysts

Steven Winoker – Sanford Bernstein

Scott Davis – Morgan Stanley

John Inch – Merrill Lynch

Jeff Sprague – Vertical Research

Nigel Coe – Deutsche Bank

Bob Cornell – Barclays Capital

Honeywell International, Inc. (HON) Q2 2010 Earnings Call July 23, 2010 8:00 AM ET

Operator

Good day. And welcome to the Honeywell Q2 2010 Conference Call. Today’s Conference is being recorded. At this time, I would like to turn the conference over to Elena Doom, Vice President, Investor Relations. Please go ahead ma’am.

Elena Doom

Thank you, Michelle. Good morning. And welcome to Honeywell Second Quarter Earnings Conference Call. Here with me today are Chairman and CEO, Dave Cote, and Senior Vice President and CFO, Dave Anderson.

This call and webcast, including any non-GAAP reconciliation are available on our website at www.honeywell.com/ investor. Note the elements of this presentation contains forward-looking statements that are based on our best view of the world and of our businesses as we see them today.

Those elements can change and we would ask that you interpret them in that light. This morning, we will review our financial results for the Second Quarter as well as our expectations for the second half in the Third Quarter of 2010. And of course, allow time for your questions.

With that, I’d like to turn the call over to Dave Cote.

Dave Cote

Okay, thanks Elena. Good morning everyone. We have a great start to 2010 with better-than-expected improvement in many of our end markets with revenues ahead of expectations and good execution across our businesses.

Sales were $8.2 billion, up 8%, and that’s reported and organic. With continued growth and new products, geographic expansion, and overall improving conditions. We generated earnings per share of $0.60 on an operating basis that is excluding pension.

Our earnings were up 24% in the quarter. Our segment margin rate was 13.6%, up 130 basis points from prior year, reflecting margin expansion in 3 out of 4 businesses. This really reinforces the quality of our earnings performance, and continued cost discipline while maintaining our growth investments for the future. Further reflecting that earnings quality, we generated just under a billion dollars of free cash flow, representing over 200% free cash flow conversion.

Given the strength of our first half financial performance, and improving in market condition, we are raising our full-year guidance. We now expect sales in the range 324 to 329 and earnings in the range of 240 to 250 a share.

We’re also raising our free cash flow estimate to 3.1 to 3.3 billion for the year, up from 2.8 to 3.1.

We believe the recovery is happening. However, given ongoing economy uncertainty, we remain cautious about the future. Our early cycle businesses are seeing the biggest improvement year-over-year, such as Turbo, Sensitive Control, Scanning Mobility, Field Instrument, Gas, Detection, and Safety Products.

Further, we’re benefiting in the market place from the steps we took in each of our businesses, to insure that we and our suppliers were repaired for the recovery; especially around things like electronic components. And we are seeing better growth because of it.

What’s also impressive are the orders growth rate in the long-cycle businesses, which we think of ACS Solutions, UOP, Commercial Aero, OE with book-to-bill rate above 1.

We saw strong double digit increases across the group with backlog for the company growing approximately 15% year-over-year.

The growth we seen in our end market is being complimented by the results of our seed planting initiatives. We’re excited about the acquisition we announced in the quarter, Sperian Protection, a leader in personal protection equipment.

We think the combination of Sperian with our safety products business and life safety will generate significant synergies, including expanded access to global manufacturing distribution channel and a strong retail presence.

The combination will operate full range of complimentary head-to-toe products to those who work in environments where safety is paramount; including the general industrial, construction, fire service, and electrical safety industries. Dave will provide more details on the transaction and timing in a couple of minutes.

Our investments and focus in emerging regions are also paying off. Sales in Asia-Pacific are up strongly, about 17%, reflecting good growth in China and transportation ACS, and also growth in Japan, India, and Korea. We continue to build on our platforms for growth, as evidence by the number of wins in aerospace and process solutions in the quarter.

Honeywell is awarded additional systems from C919, the single-aisle Commercial Airliner in China. In addition to the APU announced previously, CalMax selected Honeywell to provide our wheels and brakes and flight control, bringing our total wins with CalMax to more than $11 billion over the life of the program. And there’s still more to be decided.

In addition, Process Solutions was selected by Petro China to provide the control and safety systems for the world’s longest gas pipeline. And to be the integrated main automation contractor with Abu Dhabi Gas Development Company for its Shah Gas Development Project to help the site operate safely, reliably, and efficiently.

The first phase of the projects is valued at more than $80 million with a total potential of more than $200 million over subsequent [inaudible].

The Shah Gas Project is one of the largest, and most complex projects in the industry, and is expected to process 1 billion cubic feet of gas per day when the site reaches full production capacity in 2014.

Overall, some very impressive wins in the quarter. Also, Honeywell Fluorine Products entered into a supply agreement with General Motors for a new refrigerant to use in automotive air-conditioning systems. HFO-1234yf, don’t you love the marketing names we assigned to these things? In addition to its non-ozone depleting characteristics, 1234yf has 99.7% lower global warming potential than the current refrigerant, helping General Motors meet new environmental regulations in the United States and Europe.

In addition, we continue to invest in our big process initiative as well as other seed planting across the organization. Our philosophy product development initiative helps to bring new products that customers want, to market faster. This quarter ACS introduced approximately 100 new products, including the new Xenon imager, which redefines the standards for handheld scanners by delivering 1-D laser performance with all the benefits of 2-D imaging. It incorporates the best imaging technology from handheld products and a decoder technology for Metrologic delivering extended depth of field, faster reading, and improved scanning performance on poor quality barcodes.

In the quarter, we reached a mile-stone in the implementation of the Honeywell operating system, as LifeSafety’s Trieste Italy, and Turbos, a [inaudible] Italy site became the first to earn silver certification. Both sites operate at 99% percent on-time delivery, maintain terrific inventory, have great quality and safety and productivity metrics.

Across the company of 36 bronze or higher sites and we expect further acceleration as the year progresses. So in summary, a strong first half, another better than expected quarter demonstrating Honeywell’s ability to execute both commercially and operationally, and invest in future growth. So that, let me turn it over to Dave.

Dave Anderson

Thanks Dave. And good morning everyone. And thanks for joining the Honeywell Conference Call.

Let’s go to Slide 4, and let me take you through the summary of the results for the quarter. As Dave mentioned, we’re seeing signs of improvement. It’s obvious in terms of our reported financials, and better-than-anticipated performance in the quarter.

Sales were up 8% to $8.2 billion, reflecting good organic growth in a number of our businesses. As you can see, foreign exchange and M&A had a minimal impact in the quarter.

The company had strong operating leverage, growing segment profit by 19% and margins lifted 130 bases points to 13.6%. We saw further good margin performance from ACS, which was up 90 bases points in the quarter. And another impressive quarter of year-over-year gains, in both transportation systems and especially materials, which were up 810 and 270 bases points respectfully in the quarter.

Net income rose 4%, EPS was flat on a reported bases, but when you exclude pension expense from both ‘09 and ‘10, earnings were up an impressive 24% year-over-year.

Now our earnings growth expansion is really driven by better than expected sales and terrific sales conversation in the quarter. To underscore that point, there are a couple of items worth pointing out.

First, we had $24 million of net repositioning actions in the quarter. By the way, that brings repositioning year-to-date to $63 million.

Second, we absorbed 13 million related to an asbestos insurance receivable settlement and a higher year-over-year environmental expense in the quarter.

Lastly, we had MNA expenses in the quarter for approximately 10 million were a penny of EPS. Therefore, if you were to adjust for these items, you’d have clearly a significant beat in the quarter. So the $0.50 is really a terrific number and a much stronger quarter than we anticipated, driven by better than expected operating performance.

Free cash flow was also very strong in the quarter, as Dave said, 975 million of cash. Looking at free cash flow conversion, if you strip out the impact of non-cash pension expense, it’s again, a very high quality earnings story it equates to 160% conversion of net income, reinforcing the core processes we have in place that converts sales to earnings and earnings to cash.

And, by the way, that brings year-to-date free-cash flow to over $1.6 billion, well ahead of the record $1.2 billion that we produced in the first half of 2009.

So with that backdrop, let’s turn to Slide 5 to give you an update on what we’re seeing and what we’re expecting for the remainder of the year.

Now given the pace of the strong Second Quarter performance, again on Slide 5, and the economic uncertainty that Dave referenced that obviously still lingers in both the U.S. and Europe, we thought it would be helpful to spend a few minutes updating you on both, what we’re seeing in our key end-market’s as well as providing the backdrop for how we’re thinking about the remainder of the year.

First, Aerospace. The assumptions for 2010 remain largely intact, we’re seeing some improvement in global flying hours. Global flying hours were up 5.5% in this Second Quarter. We’re already seeing these higher utilization rates translate into an improvement in commercial fares activity.

Commercial Fares were up 10% in the quarter, up 9% sequentially. And importantly, we’re now anticipating global flying hours to be somewhere in the range for the full year of ‘10, relative to ‘09, up about 3½ to 4½%, that compares to 3 to 4% in our previous guidance.

And, importantly, we now expect growth in commercial aftermarket to outpace flying hours in the First Quarter. I’ll talk a little bit more about that later when I cover aerospace.

While large transport deliveries are expected to be down in ‘10, we’re expecting delivery increases in ‘11 and ‘12 with a recently announced production rate increases from the major OEMs. And, as always, there will be some mix between platforms but we’re encouraged in particular on the production rate increases for the 737, the 8320, and the 747. And obviously, their flow through an impact on future Honeywell sales.

We’re highly encouraged by the early cycle nature of the portfolio and the recovery we’re seeing in the industrial businesses with ACF in special materials. We saw above-market, organic growth, in sensing and control, scanning and mobility, industrial combustion, field instrumentation, gas detection, thermostats and combustion control, safety products, specialty products, and electronic materials.

We believe all of those are largely attributable to our great positions in good industries, the great commercial execution that we’re demonstrating, but obviously we’re also benefiting in the marketplace from the steps that we’ve taken from each, each of our businesses to insure that Honeywell and our suppliers were prepared for recovery. You’re going to recall, this was a major theme that Dave spoke to at our February investor day. Clearly, it was a good call on his part, and it’s paying off for us in terms of our preparedness and our readiness.

Now, focusing on turbo. The first half macro environment was great. We saw better than expected European light-vehicle production, up dramatically in the first half from a very low base. European diesel penetration improved also, 3 points in the first half, over 2009 levels.

Now, it’s important to point out that the industries expecting a 9% decline in European light vehicle production in the second half of ‘10, down 12% sequentially in compared to growth of 18% in the first half.

But Turbo, Honeywell Turbo will continue to benefit from a significant number of new platform launches, which this year, you recall totals over 100. So in spite industry headwind in the second half, we’ll continue to grow our Turbo business for the remainder of 010.

Now, we’re also experiencing significant growth in immerging regions, which have been less impacted obviously, by the credit market issues, and turmoil and some of those related markets.

While the Second Quarter saw some downward pressure on China’s GDP figures, we’ll still see strong double digit growth out of these markets. UOP, of course, is benefiting from solid demand for their product and technologies across refining petrochemical, and natural gas markets. And while U.S. capacity rationalization is in process in the refinery industry, we see continued new investments in emerging regions.

Therefore, we’re seeing a higher mix of project-related process technology in equipment sales versus new catalyst units or reloads. But global energy demands continues to rise, with the most rapid growth expect to occur in emerging regions. We want a lot of new projects in both UOP and process solutions, and we’re at the forefront of new infrastructure capacity additions in both refining and natural gas.

While we saw good growth in Europe in the first half, and by the way, we – the Second Quarter was up in Europe 9% organically. That’s an impressive number. We expect growth in this region, obviously to moderate. We also expect to see further headwind on foreign exchange, given our exposure to both the Euro and the Pound. And to give you some prospective, the low end of our second half guidance, and we’ll take you through some details of the buildup of that guidance in a moment, assumes a Euro rate of 120 versus a year, a prior year actuals of approximately 146. So we’ve got FX headwind in the second half. That’s about $0.09 in terms of earnings per share on a year-over-year basis that’s built into our guidance.

In addition, there’s been a lot of talk about our [inaudible] measures, or a need for them in the U.S. and across the world. We’re assuming governments are going to be increasingly mindful of these deficits and stimulus spending will subside accordingly.

So in summary, we believe we’re taking a balance stance, as Dave said, on planning, weighing the economic uncertainties and our forward planning. But we’re obviously also seeing improvement in most of our end-markets.

However, we’re remaining cautious on the timing and the continued pace of the recovery. So we’ll continue to be very disciplined in our cost controls and exceedingly careful about adding to infrastructure, which is expected to provide us with continued strong volume leverage in the second half of the year.

Something not on the slide, and I just want to reference quickly as we transition in here. Our outlook from the timing of the funding of the NARCO trust has changed. As you recall, we had originally anticipated funding to occur sometime in ’10. However, the timing of the trust formation is dependent upon the resolution of bankruptcy preceding, including the proceedings of a NARCO affiliate.

We now believe it’s a result of certain actions there, that this will not be a 2010 event. Therefore, that’s also contributing to our free cash flow guidance improvement for the year. We’re raising that to 3.1 to 3.3 billion, reflecting both a higher earnings outlook as well as the positive impact deferring to cash funding requirements with the NARCO trust beyond 2010.

With that, let’s turn to the businesses, go through each of those in turn.

Starting with Aerospace on Slide number 6. Aerospace sales, as you can see, were down in the quarter 3%. However, that reflects improvement in the rate of the change from the first quarter, which was down 9% and fell to 2.6 billion reflect the high-end of our Second Quarter guidance range that we set back in April.

The segment profit for Aero was down 2% but margins fell flat on lower sales. We executed well on cost reductions, pricing initiatives, benefits from prior period repositioning actions, which were more than offset by the absence of the benefit of a number of labor cost actions that we took last year, which were not repeated again in this year.

So excluding the impact of payments to business, also excluding the impact of business, and generally the Asian manufactures to offset preproduction cost, Aero sales would have been approximate flat in the quarter, segment margins would have been up approximately 100 basis points. As you recall, those launch contributions have been made as a result of the significant platform winds that we had both in ‘08 and ‘09.

Now, let’s talk a little bit about Total Commercial Aerospace sales, that is, the sum of ATR and BGA.

Those were down 4% in the quarter. Commercial OE sales were down 8%, year-on-year driven by declines in BGA, OE deliveries as expected, and the OEM payments that I referenced.

However, we’re now seeing sequential improvement from the First Quarter of 2009 to the First Quarter 2010, and into the Second Quarter of 2010. Air transport and regional OE sales were up 8% on higher avionics upgrade, and in line with the delivery schedule of both Airbus and Boeing.

We anticipated a decline in sales for ATR OE in second half, consistent with what we forecast in the beginning of the year. You’ll recall the guidance that we gave you in the beginning of the year with our ATR OE to be down 10% for 2010. We’re forecasting year-over-year increases in DGA OE, off about 30%, which of course will help offset those ATR OE declines.

So Commercial OE in the second half is expected to be roughly flat on a year-over-year basis.

Looking at the aftermarket, commercial aftermarket sales were approximately flat in the quarter. However, up sequentially. Commercial fares, as I referenced earlier, which we’re tracking closely, were up 10% year-over-year, reflecting improvement in both large airlines as well as business jet operators.

In transport and regional aftermarket sales were down 4% with an improvement in fares, more than offset by continued deferral of maintenance events by major airlines.

Now while the impact of airline to stocking has subsided, high levels of parked aircrafts remain a drag on repair and maintenance activity. We’re also seeing airlines drive profitability by increasing load factors, as flight hours increasing rather than adding capacity.

So we expect the older parked aircraft, which need more repair overhaul to be slower to return the service.

On the BGA side, the BGA aftermarket also benefited from an uptick in [inaudible] activity with sales up 8% year-over-year. Also reflecting good subsequential improvement and TFE engine hours, continues to improve.

Finally, as I mentioned earlier, with improved utilization rates, we expect commercial aftermarket growth in the fourth quarter to outpace flying hours.

A few words on defense and space. Defense and space sales were down 1% in the quarter, reflecting expected ramp down in the Tiger Tank Program, and lower increment – international sales particularly offset by growth and government services which provide logistic support to Military basis throughout the world and also an uptick in advanced Navy navigation system sales.

So in summary for Aero, were seeing signs of sequential growth in our commercial aftermarket business, improving market conditions in business jets, and steady performance out of defense and space.

Despite the continued challenging environment in ‘10, the Aerospace team is executing very well across all of the businesses, winning new attractive businesses, including the multiple wins valued at over $11 billion over the life of the program, on the CalMax C919 aircraft mentioned earlier.

Now, let’s turn to Slide 7. A couple of points on ACS for the quarter, Automation and Control Solutions.

Slide 7, as Dave mentioned, we’re seeing continued growth in our short cycle businesses as well as positive growth in the long-cycle businesses and backlog.

Sales for ACS were up 7% in the quarter, importantly, all organic, with the biggest increase in the products businesses. Segment margins were again a good story, up an impressive 90 basis points, 12.4%. The favorability in product performance as well as commercial excellence, really contributed to the margin lift, in addition to the continued cost controls and the benefits from prior period repositioning.

Again, with all of our businesses, we had headwinds in the quarter due to the large labor cost actions we took last year that were not repeated in this year, given the recovery that we’re experiencing.

The product businesses were up 9% in the quarter. We believe outpace in growth in the perspective markets. We saw the impact of obviously the continued industrial recovery with businesses linked to industrial production, seeing both orders and sales grow supported by increases in manufacture production, and the favorable impact of increased safety regulations.

China and India led growth in Asia/Pac up 20% and 30% respectfully, organically. And while external indicators continue to show softness in commercial construction and market, we’re actually seeing that sector held up well. Moderate growth in commercial, construction, and market, driven primarily by the uptake of several new products in customer expansion in ECC’s commercial control systems.

On the other hand, residential continues to be a soft spot in the developed regions, impacting both security as well as the ECC.

Now the solutions businesses were up 6% in the quarter, driven by strong demand and building solutions, energy efficiency and demand response, or smart grid, while process solutions sales were down on an organic basis, orders were up an impressive 22% reflecting the second subsequent quarter of double digits of orders growth for HPS.

As Dave mentioned earlier, we had two impressive global energy wins in the quarter. Shaw Gas, and the Petro China West to East Pipeline, solidifying our leadership position in the attractive and growing natural gas segment.

Backlogged in both solution business is up strong double digits over the prior year. Now, the ACS Segment profit up 16% on the 7% sales growth, reflecting strong operating leverage and delivering 90 basis points of improvement. Another great effort by the ACS team who continues to execute on commercial excellence initiatives, including a robust new product pipeline, international expansion, as well as attractive acquisitions.

So with that review of ACS, let’s now go to Slide 8 and spend just a quick minute on the Sperian acquisition and an update for you on that. As you know, during the second quarter we announced our intent to acquire Sperian Protection, a leader in the highly attractive personal equipment, personal protection equipment space. Sperian will be combined with CASS safety products business. A business we acquired through the Norcross acquisition in ’08 to create approximately a $2 billion global franchise with complementary head-to-toe products.

Sperian has a strong European presence. They have leading positions in fall and head protection. Honeywell, of course, is very strong in North America with products spanning to protective footwear and clothing, including fire turn-out gear, rubber boots and gloves.

So with the robust integration process that characterizes our acquisition capability, and our proven track record, we’re excited about the growth in emerging opportunities with increased adoption of workplace safety regulations.

In terms of timing, things are progressing towards what we expect to be a mid-September closing on the transaction. It’s received U.S. – several Trade Commission approval. It still need EU, and a trust clearance, but we expect that to receive that. We don’t see any issues there. And as you recall, the Sperian Board of Directors, unanimously recommended the Honeywell offer.

We anticipate the transaction to be dilutive to our second half by approximately $0.04 per share. Most likely, most of that all in the third quarter. And importantly, it will be the accretive in 2011.

But now to look at the next business, Transportation Systems on Slide 9. [Inaudible] sales were up an impressive 30%. Segment margins increased a full 810 basis points to 11.3%. The negative impact of foreign currency was more than offset by higher volume.

Now, Turbo was up 41% in the second quarter reflecting favorably macro trends with another strong quarter of European light-vehicle production and improved diesel penetration, and the benefit of Turbo’s robust new platform launches.

As discussed earlier, the industry is expected to slow down in terms of light-vehicle, European light-vehicle production sequentially reflecting the typical summer shutdown. And also the fact that production rates in Europe will be more in line with forecasted sales.

However, we expect Turbo volume to continue to benefit from their industry position and the market share win that they’ve experienced.

CPG sales were up 2% with improvements in sales across most of our retail brands in the pass-through impact of higher ethylene glyco pricing, all of which contributed to another quarter of double-digit margins in CPG.

TSS Segment profit was up $90 million in the quarter, primarily due to higher volumes, productivity, benefits from prior period repositioning actions. Again, partially offset by the benefit of labor cost actions that we took last year.

This quarter’s performance reflects a margin rate that we haven’t seen, the 11.3, since the second quarter of 2008 before the economic downturn. So it’s indicative of the very impressive conversion rates in transportation systems.

Now, on Slide Number 10, Session of Materials were also seeing general in-market recovery. As you can see on Slide 10, FM executed another strong quarter. Sales were up 20%, segment profit was up 43%, margins were 17% in the quarter for FM. I mean, who would have thought that, you know, as a little as a few years back, that we’d be receiving that kind of performance?

Sales at UOP were up 6%, driven by a large petro-chemical catalyst reload, partially offset by lower licensing revenues in the project businesses. Overall, UOP is seeing their market stabilize and they’re seeing a growing pipeline of global energy products.

In the second half, we’re expecting projects growth to outpace catalyst sales creating some unfavorable mix and some pressure on margins.

However, as always, there’s going to be variability from quarter to quarter in catalyst shipments and the mix of licensing revenue at UOP.

Resident Chemical sales were up 27% in the second quarter benefiting from improved global market conditions, particularly in emerging regions. And the favorable impact of higher pass through material pricing.

Chlorines and specialty products, again, had impressive quarters. Up 26 and 32% reflecting improved demand and further penetration with new products.

The business is also benefiting from a snapback in the consumer electronics business, driving a sharp uptick in electronic materials.

Now, the profit for session materials, again up 43% to $214 million in the quarter, taking margins up $270 basis points to 17% reflecting the higher sales volume, strong commercial and plant performance, and continued cost discipline. And again, offset by the absence of last year’s policy labor-related actions. So overall, another terrific quarter of session materials.

So with that review of the businesses, let’s go to Slide 11 and look at the 2010 sales outlook. We thought this would be helpful for you to give you some insight in terms of what we’re forecasting for the second half of the year.

What we’re showing here on Slide 11 are the actual and forecasted first half and second half sales on a reported basis for ’09 and ’10, intended to highlight the expected linearity in each business.

So we’re incorporating, as I said earlier, a foreign currency headwind in the reported sales figures with the Euro at 120 on the low end versus an average of 146 in the second half of ’09. We’re still planning to show good year-over-year growth, as you can see in the second half.

Let’s take a couple minutes just to highlight for each of the business. For Aerospace, we expect second-half sales to be up 3 to 6% year over year, driven by sequential improvement to commercial after-market activity. I referenced that earlier. As well as the seasonal improvements that we always see in the defense business and in defense spending.

Overall, the decline in the first half of 2010 reflects both the impacts of the inventory correction within business as well as the result of the economic recession and the high levels of park, aircraft, and maintenance for all our major customers.

However, for the year, we anticipate continued improvement in commercial aftermarket activity, and we’re looking for air revenues in the range of 10.6 to 10.8 billion for the full year.

At ACS, the top right of the chart, you can see we’re expecting continued strong momentum in the industrial short cycle businesses, coupled with higher conversion of energy projects in the solutions businesses.

We’re anticipating the significance for a change headwind to be offset by the net impact of M&A, assuming the Sperian close in mid September that I referenced earlier. So that’s built into the sales guidance here. Again, these are the anticipated reported numbers.

Moving to Transportation Systems, there at the bottom left, we saw a most pronounced increase in volumes since I said in the first half, driven by higher product rates, the favorable impact of diesel penetration and share gains with a high volume of new platform launches.

We’re anticipating second half growth to moderate, but still be up 3% to 7% driven by the summer shutdown schedules of major European auto manufactures, partially offset by the continued growth in new launches, and the improvement in diesel penetration.

As you can see given the strong sales volumes in the first half, we’ve raised our full year’s sales guidance for TS to know 3.9 to 4 billion for the full year.

And lastly, building off their first half momentum, Special Materials expects to see similar in-market demand in the second half, sales growing 12 to 15% and anticipated sales for SM of 4.6 to 4.8 billion for the full year.

Let’s now go to Slide 12 and give you a little bit insight in terms of our guidance for the second half and the full year by giving you some comparison, side-by-side comparisons on some key measures.

Now again, we saw terrific volume leverage in productivity in the first half, growing segment margins 150 basis points over 2009 levels. Our second half volume conversion, and as you can see, on expected, is still very good. It continued very strong organic growth in the second half.

Our second half volume conversion will be lower that the first half given the tougher year-over-year comps in the second half due to the impact of the large labor cost actions we took last year that are not repeating again. Those consist of work-schedule reductions, or furloughs, absence of merit, and also reductions in incentive compensation or bonus accruals and paybacks.

Also it’s important to provide you an update on our tax rate assumptions. You recall that the first half tax rate was unfavorably impacted by the charge for healthcare legislation in the first quarter. While there are a number of puts and takes in the tax rate assumption for the second half, it’s important to note we’re forecasting a higher effective tax rate in the third quarter. We expect that to be about 29 ½%, which we expect will be offset by a lower rate in the fourth quarter. For the full year, we’re expecting tax rates to be approximately at the average targeted rate of 26 ½%.

Lastly, a reminder. We contributed shares valued at 200 million to the U.S. pension plan in the second quarter. As part of our previously disclosed plan we’ll contribute another 200 million of share by year end. And while these contributions are not required, we think it’s prudent to continue to plan, to voluntarily plan and prefund the pension plan.

So with that framework for the second half, let’s go to Slide 13 just to give you quick highlights on third quarter sales outlook. We’re planning for total sales in the third quarter to be in the range of 8 to 8.3 billion. You can see that on the bottom of Slide 13, up 3 to 8% from prior year, reflecting good organic growth.

We anticipate Aero sales to be in the range of 2.6 to 2.8 billion, up on an year-over-year basis for the first time since the start of the recovery.

For ACS, we expect sales in the range of 3.3 and 3.4 billion, sustaining the positive momentum from the first half, reflecting a good growth in the industrial segments, new products as well an emerging region penetration.

At Transportation Systems, sales are estimated to be in the range of 900 million to 1 billion, reflecting the impact, as I mentioned earlier, of the European OE and some shutdowns, and also the lower Euro assumption that I referenced.

Finally, at SM, we anticipate sales in the range of 1.1 to 1.2 billion with growth driven by continued in-market improvement, projects growth and UOP and the commercialization of new products in the remaining of FM.

So in summary, it looks like we’re set up for another nice quarter and expecting growth in each of our businesses.

Turning to Slide 14, let’s take a moment to review our third quarter EPS guidance as reflected – we’ve given here a walk from our second quarter just to give you some insight. It obviously – I think you’ll see what the takeaway is. Our guidance for the third quarter, again, reflects strong operational performance.

If you start with the $0.60 recorded EPS for the second quarter, if you lay on the normal seasonality, the in-market recovery we’re expecting, we’re forecasting $0.03 to $0.07 higher operating earnings in the third. And as I mentioned earlier, we’re also expecting a higher-than-average tax rate in the quarter.

This translates into a sequential $0.02 headwind which we expect to be offset in the fourth quarter as I mentioned earlier with a lower tax rate.

In net, these items in the third, we’ve walked to an initial guidance range of $0.61 to $0.65, excluding the impact of Sperian.

Now, depending upon the timing of the close, I mentioned the mid-September expectation earlier, we think the EPS dilution associated with the closing of Sperian to be in the range of $0.03 to $0.04 in the quarter, that is diluted in the quarter, due to transaction costs and acquisition accounting, which include the step up of inventory in intangible amortization. Therefore, we arrive at the third quarter value of $0.57 to $0.62. But again, the operational strength is pretty clear.

And by the way, a little bit wider range than $0.05 that we would do typically in a quarter, but reflective of that uncertainty regarding the timing of Sperian.

Slide Number 15, let’s just conclude now and just a couple comments before going to Q&A.

Obviously, we’re off to a strong start for the year with second quarter performance, again ahead of expectations. We saw continued improvement in transportation systems, especially the materials and ACS in both the short and long-cycle businesses.

The businesses demonstrated strong growth in operating leverage, outperforming their industry. They were wall positioned and are well positioned for this recovery.

We’re also encouraged by the rate of improvement and the uptake in commercial aerospace, after market orders, which are up high single digits in the quarter reflecting sequential growth in commercial.

So while we remain cautious in light of continued mixed economic signals, it appears the back half of the year is shaping up for continued good organic growth in each of our businesses.

Commercial Aero utilization rates are expected to drive the aftermarket activity in the second half. And by the fourth quarter, we expect our aftermarket growth to out pay [inaudible].

General industrial recovery and emerging markets will be a bright spot, fueling continued double-digit growth. Turbo will continue to benefit from their strong industry position and their new platform launches. However, growth will be at a slower pace in Transportation Systems given the projected second half slow down in OE product schedules.

Further as a result of the difficult cross actions we took last year in the downturn, we won’t have won’t have tougher comps in the second half of 2010.

And again, as a reminder, the labor related headwinds include the impact of plant shutdowns, furloughs, low incentive compensation and the absence of merit increases, salary increases in 2009.

By taking these actions, we preserved our industrial base and we’re reaping now the benefits of having an organization that’s fully primed to deliver for improved market conditions and better able to meet the commitments that we’ve managed to our customers while continuing to invest in the future.

And finally, while we expect to have foreign exchange headwinds in the second half, and some disparity to our normal EPS linearity profile due to the tax rate variability quarter to quarter, third quarter and fourth quarters are referenced. We’re raising our sales, earnings and cash flow outlook for the full year.

Again, expecting sales in the range of 32.4 to 32.9 billion, earnings in the range of 240 to 250, and free cash flow in the range of 3.1 to 3.3 billion.

So with that, Elena, let’s turn in back to you and go to Q&A.

Elena Doom

Great. Thank you, Dave. Michelle, can you please open the line for our first question?

Question-and-Answer Session

Operator

Of course. (Operator Instructions) We’ll take our first question from Scott Davis with Morgan Stanley.

Scott Davis – Morgan Stanley

Hi. Good morning. Overall, good presentation. The one thing, I hate to do this to you guys, but I think a year ago in the same quarter you gave a little bit of forward guidance on pension for the following year. Obviously, lower discount rates, and it’s a headache for everybody. But can you give us a sense, Dave Anderson, where we kind of stand if we mark things to market right now?

Dave Anderson

Scott, so let me – what you’re saying is, tell me a little specifically, what you’re asking about is the forward pension expense?

Scott Davis – Morgan Stanley

That’s correct, for 2011, yeah.

Dave Anderson

Okay. Well, I think it’s probably instructive to go back to the framework that we reviewed with you in February. That’s still intact. What we said at that time is for Honeywell, pension expense is clearly going to be a headwind in 2011, and it’s going to probably continue to be outsized in terms of our peers. They just have to deal with our shorter smoothing and amortization periods.

The chart that I showed you, though, and I think this is very instructive and helpful and will be good for you to visualize, is that chart that showed 2011, 2010-2011 and then out to 2015. I dubbed it, by Body Miller Chart.

And what it showed is that the pension expense continues to rise in 2011.

Scott Davis – Morgan Stanley

You’ve got to love those New Hampshire boys.

Dave Anderson

You bet, that’s right. And then decelerates and in fact creates relatively significant tailwinds for us. That’s essentially built in. I mean, the fact that we’re going to have headwind in 2011 and we’re going to have tailwind in 2012, both of which, by the way, are going to stand out relative to our peers. That’s kind of a given.

The other thing that we talked about, and numbers you know well, Scott, are the guidance or framework, the matrix if you will, the intercept between discount rates and asset returns.

And just to revisit those numbers a little bit, at the time, we talked about a 575 discount rate. That is essentially the rate – that is the rate we used at year end of ’09. We talked about a 9% return on assets. That’s our targeted return. You know, if you do those intercepts and look at those in terms of our actuarial numbers, that’s about $200 million dollars headwind on a year-over-year basis.

Now, the sensitivity is every 25 basis points, and this is the biggest sensitivity, 25 basis points of change in the discount rates equates to about $15 million of pre-tax. So you know, it’s either 6% which translates to $50 million less expense and 25 basis points lower, let’s call it 5.5, which translates to $50 million more of expense.

One-point change on the return on assets equates to about $10 million. So again, you could take that 9% return, if it’s 10% or if it’s 8%, you know, add or subtract $10 million.

So that’s really the framework. You know, the numbers are kind of where they are today, you know, probably low single-digits in terms of return on plan assets, certainly lower than 5.75 in terms of discount rate. Those will all be marked at year end. That’s the framework. You can do the sensitivity analysis from there.

Now, the other thing to tell you is that we will clearly do everything right in terms of the intelligent prefunding the plan, every dollar that we put in on an accounting basis contributes 9%, so $1.00 of additional funding contributes 9% of that in terms of income. So that will be something that will mitigate assuming that we do more funding and we’ll continue to valuate funding in the pension plan through the rest of the year.

The other thing to keep in mind too is the stronger-than-operational performance. There’s other things that will mitigate pension. If you look at just our performance this year, and how we’re doing against that “$800 million” of guidance for pension expense this year. I mentioned, for example, $63 million of repositioning on a year to date. That’s going to generate higher income than we anticipated for 2011 when we began 2010.

So all of those things are in the mix. Hopefully that’s helpful to you in terms of thinking about pension.

Scott Davis – Morgan Stanley

It is. Just while you were talking, just doing the backend. It sounds like the $0.20 additional headwind hasn’t really changed much from our last update last quarter, that’s really what I was kind of getting at.

Can we move on to Sperian and kind of future free cash flow, or cash reinvestment. What are the rating agencies saying? I think Sperian kind of is a little bit larger of a deal than maybe you were planning for the year. I mean, does this mean you’re not going to be able to do share repurchase, or forward deals, or is there still some cushion in really without losing your credit rating?

Dave Cote

I would say, Scott, you’re unlikely to see us doing much in the way of stock repurchases. But I’d say at the same time, we’re always going to be aware of and looking for the potential for deals that make sense for us, like Sperian because we think that really does make a lot of sense for the share owner. And I think that’s the best way to think of it. Dave, anything you want to add?

David Anderson

No.

Scott Davis – Morgan Stanley

So just to clarify, so you – if another Sperian came up, you feel like you could do the transaction without issuing equity?

Dave Cote

I would say we’d find a way, if we come across something that makes a lot of sense for the company, we’ll find a way to do it.

Scott Davis – Morgan Stanley

Okay. Fair enough. Thanks, guys.

Dave Cote

You’re welcome.

Operator

We’ll take our next question from Jeff Sprague with Vertical Research Partners.

Jeff Sprague – Vertical Research

Thank you. Good morning, everyone. Just a couple of quick questions on ACS. It’s a little unusual for ACS not to have a sequential margin list. And you did have a pretty good sequential revenue list in the quarter. Can you just give us a little more color on what’s going on in the mix there that might have contributed to that?

Dave Cote

I’m proud of what they did, Jeff. I’m not sure – I have a tough time finding any bad new on anything that they did. I have to admit, I haven’t really thought about it that much that way.

Dave Anderson

Jeff, if I could just comment a little bit. The big change here, we really initiated significant labor cost actions in second quarter 2009. That’s really when the market – really we saw the market begin to turn. Dave had all of us on our toes with preparedness in terms of the actions that we would take. So we commenced furlough actions, work schedule reductions, and other actions significantly in the second quarter of last year for all of our businesses as I cited.

That is a headwind for the second quarter. That is the answer fundamentally to your question in terms of what took place for ACS.

If you look at it kind of setting that aside, as I said, operationally, tremendous performance in our products businesses, solutions were not up as much, but were good performance in the quarter. So it really if you point to a single item, it’s really that.

Dave Cote

These guys are rocking and rolling, Jeff.

Jeff Sprague – Vertical Research

All right. I mean, I was talking about the sequential, not the year over year.

Dave Anderson

Yeah, and that’s it. When I talk about the sequential, the second quarter is when we took those actions. That’s the same answer, the same answer as year over year as you have sequentially.

Jeff Sprague – Vertical Research

Okay. And then on the dynamic of Spheres versus Flight Hours finally flipping the other way, can you give us some idea of the magnitude of your thought there? And you know, just kind of a state of inventories in the channels, best you can read it?

Jeff Sprague – Vertical Research

Yeah. Let me just give you some numbers of what we’re anticipating for the fourth quarter. As I mentioned, by the way, we’re looking at Flight Hours in the range of about 3 ½% for the third quarter and about 3% for the fourth quarter. And that ties out with the actuals for the first half, ties out to that 3 ½% to 4 ½% range that I mentioned to you earlier.

Now, what we’re expecting for the fourth quarter, we’re expecting that we’ll see revenue growth in our ATR aftermarket business, total aftermarket business at about double the Flight Hour growth. So call it an arranged 6%. And for the total commercial aftermarket, we’re going to see about 8% growth. So almost three times the Flight Hour growth in the fourth quarter. So in other words, that total that would include our business aviation business as well as the ATR business.

Dave Cote

And I’d say it’s tough to read it. It’s kind of blog trying to read into how much inventory is there. It’s more, I’d say, by feel than it is data, Jeff.

Jeff Sprague – Vertical Research

You’re actually giving a fairly precise answer to the question, implying that I’d see it in orders or shop visits or something.

Dave Anderson

Yeah, that’s exactly right. Yeah, we’re seeing it in schedules, we’re seeing it in other activity. You know, we’ve got forecasts in terms of utilization, etc. So you know, it’s in that kind of range. I mean, we’ll see plus or minus on the Flight Hours and plus or minus on the aftermarket revenue, but we feel good about those kinds of directional numbers.

Jeff Sprague – Vertical Research

Okay, great. Thanks a lot.

Dave Anderson

You’re welcome.

Operator

I’ll take our next question from Nigel Coe, with Deutsche Bank.

Nigel Cole – Deutsche Bank

Thanks, guys. So a quick question on pension. I don’t want to kind of keep banging on pension, but it looks like you’ve taken down the full year by $100 million, which is sort of interesting. Can you maybe comment on that?

Dave Anderson

We haven’t done that. We’ve taken it down moderately from the prior starting point. We always get a fine tune on our form plans as we progress through the year. Nigel, that’s just kind of the state of play. And that’s mostly what’s reflective of these numbers.

I mean, a good number to use now is around $800 million for the full-year pension expense.

Nigel Cole – Deutsche Bank

Okay. Great.

Dave Anderson

Seeing that you’re probably looking at, and you might be combining, is OPEB. And when I talk to pension number around the $800, that excludes other post-employement benefits. Those OPEB numbers have improved over the course of the year as we’ve gotten the benefit of curtailment gain from some of the plan-design changes that we’ve successfully executed over the course of this year.

Nigel Cole – Deutsche Bank

I’m using the pension OPEB number at the back of the slide.

Dave Anderson

That’s what influencing it. Yeah.

Nigel Cole – Deutsche Bank

Good. Got it. And then, I thought the comment about the outgrowth in the transportation in the second half of the year was very interesting. Based on what you see coming through for 2011, what kind of outgrowth do you expect next year versus the market?

Dave Anderson

Well, I think we’re going to see a good – I think we’re going to see a good year again. Dave, commented on this. I think we’re going to see another good year for Turbo. In fact, the outlook for Turbo is very good.

You probably saw in the earnings release this morning that we have another billion dollars over their expected cut program life of wins in Turbo in the second quarter. That brings the year-to-date wins to $2 billion approximately.

I mean, Turbo is just, as Dave said, it’s just executing very, very well and we think we got built in now sort of to imply the results of those launches in favorable macro trends in terms of turbo penetration locally. Dave, can you add?

Dave Cote

These guys are on fire. They’re just – they’ve done a very good job of having the lowest cost, highest technology, best flawless launches in the industry. And it really shows, and you see a lot of the growth coming from the new launches that they’re getting. They’re just on fire.

Nigel Cole – Deutsche Bank

Any sense on the $2 billion to date? Any sense on how much of that is U.S. versus Europe?

Dave Anderson

I would say the majority of that is European, but it’s a nice mix and it includes Asian business, and it includes also North American business. But the majority, just given the significance of our European business, which represents about 65 to 70% of our total turbo revenues, you know, the majorities of those wins are for European OEs.

Nigel Cole – Deutsche Bank

Great. One more quick one. You gave some color of [inaudible] margins in February, any big changes to those segment by segment targets based on your influence?

Dave Cote

No. I think those numbers are, you know, those numbers are very much still in range. I’d say the one thing that we have is a little bit upside in the transportation systems, just as a result of their enhanced volume leverage.

Dave Anderson

Just with the transportation systems revenues for the full year, that will translate into some improved margins. And you know, it’s TBD on the foreign currency. We’ll see how that plays out.

Nigel Cole – Deutsche Bank

Great. Thanks, guys.

Operator

We’ll now move on to Steven Winoker with Sanford Bernstein

Steven Winoker – Sanford Bernstein

Good morning. First question, just on the quarter, do you have any sense for the restocking impact on the sales that you had over the quarter?

Dave Cote

No so much. It’s certainly not happening in Aero. I’d say ACS would be the next one. And the same thing, it’s tough to see into what those inventory balances are out there. I would say most of what we’re seeing is flow through, we believe. Maybe some restocking, but I wouldn’t say restocking is a big number yet.

Steven Winoker – Sanford Bernstein

All right, and are you anticipating that that, other than the Sphere’s discussion that we just had, that that would be continuing through the year?

Dave Anderson

I’m sorry Steve. I’m not sure [inaudible]?

Steven Winoker – Sanford Bernstein

No, no. Non-Aero. So outside of Aero, for the rest of the year, you’re saying you haven’t had much restocking driving the 8% number in the quarter. Would you expect that to be the case going forward when you’re giving us the numbers for the rest of the year?

Dave Anderson

Yes.

Steven Winoker – Sanford Bernstein

Okay. And stimulus impact that you talked about coming down. I guess the first question I have is did you actually see the benefit of stimulus then in the numbers in the quarter?

Dave Cote

In more orders than anything else. Orders has started to pick up, but I wouldn’t say we’ve seen big spending from it yet.

Dave Anderson

Yeah. I’d say early the benefit we’ve seen there is on the energy-efficiency.

Dave Cote

We’ve seen a nice flow through and we’re well positioned.

Steven Winoker – Sanford Bernstein

Okay. And then you have been kind enough before to break out margin for us a little bit in terms of where that 130 basis points overall improvement – in terms of how to think about that and what was driven by productivity versus volume and any other breakout of that would be helpful.

Dave Cote

Well, you know volume was obviously a big driver. We really benefited in terms of volume leverage in a quarter. That’s really the key driver. And then I’d say the other thing is just – we would sort of contribute a porton of that to what we would call commercial excellence. Just executing very, very well. And then we had the offset, as I mentioned earlier. Each of our SBGs, each of our businesses offset from the labor policy cross actions. Those not reoccurring both sequentially to Jeff’s question earlier, as well as year over year.

Dave Anderson

The big item though, Steven, we talked about this in the past, is growing volume and controlling fix spots. It’s really as simple as that.

Steven Winoker – Sanford Bernstein

Right. But just not able to quantify the different categories at this point?

Dave Anderson

You know, I’d say – just the only thing that I would add today, it’s a big item. Just think about it as volume leverage and then the other thing is productivity is a result of the repositioning actions that we took in prior periods. That’s all living through in terms of that volume leverage.

Steven Winoker – Sanford Bernstein

All right. Well, maybe at least on the ACS side, that 90 basis point margin expansion, how much of that was mix?

Elena Doom

Mix is maybe 100 basis points, Steve.

Steven Winoker – Sanford Bernstein

Okay. All right. And then finally on Sperian, have you had anymore visibility through the diligence process, etcetera to that 6% to 8% sort of thinking on cost synergies as you look forward? Are you still thinking about that range, or is that going up?

Dave Anderson

No. Nothing to add there yet. I’m just going to make you eat that headline of yours.

Steven Winoker – Sanford Bernstein

I hope you do. I hope you do. All right. Thanks. I have to leave it there.

Operator

We’ll now move on to John Inch with Merrill Lynch.

John Inch – Merrill Lynch

Thank you. Good morning, everyone. Just first as a clarification, does the 240 to 250 map to $0.61 to $065 in the third quarter, or $0.57 to $0.62 in the third quarter?

Dave Cote

It maps to the $0.57 and $0.62.

John Inch – Merrill Lynch

Okay.

Dave Cote

That’s a good question, John. And just to clarify what we did in that walk is said, okay, here’s going to be the reported, $0.57 to $0.62, but we wanted to just show you the strength of the underlying operational performance that’s really driving it.

John Inch – Merrill Lynch

I understand. It just wasn’t clear. The third quarter, the $0.02 of higher tax, is that washed in the fourth quarter roughly?

Dave Cote

Yes.

John Inch – Merrill Lynch

It is.

Dave Anderson

Yeah. So the 29.5, again, I’m giving you kind of a precise number, it’s going to be plus-minus in the third quarter. That same number is going to be 22 and change in the fourth quarter. So we’ll be at around 26 ½ for the full year.

John Inch – Merrill Lynch

Okay. And I’ll end without splitting hairs. The 240 to 250 does include the $0.02 related healthcare charge in the first quarter, right?

Dave Anderson

It absolutely does. It includes the additional healthcare charge. It includes the Varian acquisition. And it includes the higher repositioning that I mentioned early. All those are baked in.

John Inch – Merrill Lynch

And then Dave, corporate expense meaningfully was higher sequentially, what was going on there and what kind of a run rate would you expect for that segment? Or I’m sorry, for that line item?

Dave Anderson

You know, corporate expenses run in the neighborhood of $50 million, $45 to $55 million dollars per quarter. It’s sort of depends in terms of things that we may want to recognize or proof in the quarter. I think, you know, Elena talked a little bit about some of the things, we talked about some of those things previously.

So you know, it’s always going to be kind of in that range. If you use a guidance somewhere in the 190 to 200 range for the full year for that, it’s a pretty good number.

John Inch – Merrill Lynch

Okay. So there’s nothing – I’m sorry. Did, I’m not sure if you talked about this. Was there something unusual in the second quarter in the corporate –

Dave Anderson

No. Nothing unusual. We’re always just looking at – we anticipate things like accruals for incentive compensation. We anticipate all kinds of things. And those will always move around depending upon the period. So comparing that year over year, it’s going to always be in that kind of range.

Elena Doom

And John, I think that’s tracking on target to that 190 to 200 million that Dave –

John Inch – Merrill Lynch

Yeah. That’s good. But first quarter was a little lighter, second quarter a little heavier. Dave, you said you’re sort of expecting it to slow. I guess my question is did you lower any of your European segment revenue targets? I mean, you suggested transportation was going to be higher, so I’m just trying to – is that more of a commentary around you’re not going to get too excited even though for a while the company is actually accelerating right now? Or did you actually change some aspect of the roll up of your forecast?

Dave Anderson

We didn’t really change any aspects of the forecast. It was really just pointing out for you that from a planning standpoint we continue to be prudent and appropriately prudent or conservative. We didn’t have a lot of expectation build in for European growth for the year. We had some recovery obviously in the automotive market Turbo related. We’re seeing better-than-anticipated performance there. But we’re being cautious as we look forward to the second half.

Dave Cote

Remember, expectation where never that high for Europe in the first place.

Dave Anderson

Yeah. So hopefully, John, we’ll see better than this. But we are, you know, we’re maintaining – I’ll call it a flat, slightly range for Europe expectation in the second half.

John Inch – Merrill Lynch

So in other words, the – I forget what you said. Europe was up 9%? So in other words, the trend of Europe in the second quarter, you’re not expecting to be sustained in the back half. Is that the way to think about it?

Dave Anderson

That’s stated very well.

John Inch – Merrill Lynch

Okay. And then just lastly, Turbo really never got the benefit. If you go back to last year of Cash for Clunkers, and I know that your guidance had always presumed that build rates were going to be lower by the second half of this year. I’m just trying to reconcile the fact that you never really go the benefit of that, and that’s really sort of driving the lower build rates.

So ultimately, if you kind of pinpoint this down to kind of build – with that material, is there a drag associated with Turbo and lower build rates just based on sort of where you guys are penetrated on larger vehicle models?

Dave Anderson

The Cash for Clunkers in Europe really drove low-end gas, and Diesel Pen dropped a bunch. And as soon as that went away, Diesel Pen has been growing very well.

John Inch – Merrill Lynch

Okay. So in other words –

Dave Cote

But you’re right. We’re both affected by the overall production rates, and in some respects we disconnected from the overall production rates because of our strength in terms of Turbo penetration and that we’re not on the lower-end vehicles, which are the more subject to the influence of the scrappage programs, whether they were there in ’09 or gone in 2010.

John Inch – Merrill Lynch

Maybe a way to ask this is, all else equal once we get through a little bit of the first half, second half dynamic and incentives and so forth, given the win rate, I mean, Turbo seems like it’s accelerating next year. Would that be a fair statement?

Dave Anderson

It all depends on what the markets end up doing. But I’d say certainly when you look at the dynamics of diesel penetration and new launches around the world, we’re in very good shape.

John Inch – Merrill Lynch

Yep. Thank you very much.

Elena Doom

We have time for one more question.

Operator

Okay. We will take our final question from Bob Cornell with Barclays Capital

Bob Cornell – Barclays Capital

Thank you guys. I’ve got two detailed questions. One big-picture question. On process, I mean, you guys talked about sale are down, but orders and backlog were up. I mean, when would you expect to see the backlog convert to sales growth for process solutions?

Dave Cote

Second half.

Bob Cornell – Barclays Capital

Second half of this year?

Dave Cote

Second half of this year.

Bob Cornell – Barclays Capital

Okay. My second question is, you talked about the Business Jet market improving, or an outlook improving. Could you give me a little insight on what you’re talking about in terms of size of jet, timing of jets, what really is the color there?

Dave Anderson

The color is that we had a pretty precipitous decline in the second quarter, as you recall, Bob, as we went through the numbers. It’s the timing of deliveries and the overhang of prior orders in the first half of 2009. We’re now at a more stable level. And what we’re seeing is, now on the OE side is an up check on some of the higher-end platforms, so we’re seeing improvement in terms of Gulf Stream, Falcon, some of the Bombardier’s etcetera. And that’s all driving, as well as obviously Embraer an that’s all driving our performance outlook going forward.

And it’s against very, very low numbers. So it’s very, very easy comp that we’re talking about on the Business Jet side. But that business will have turned and will see improvement in terms of year over year in the second half of 2010.

Bob Cornell – Barclays Capital

Okay. That was an easy question. Here’s the tough one. You know, some in the company are talking about difficulty in dealing with [inaudible] China becoming a difficult market to serve, and you guys, again, have been working in there with Comac and you mentioned the HPS win. Are you finding it more difficult to work there? Are you having to give anything away with regards to technology? I mean, give us some color around just, you guys have been in China in the process business for decades. I mean, how do you see that market evolving in terms of the receptiveness to U.S manufactures and players?

Dave Cote

Bob, every market has its ups and down and the evolve over time. And every company has to be able to evolve with it. China is going to continue to be a big and growing market. Nothing ever proceeds in a straight line, so I’m sure it will have its ups and down also. It’s important to be there, to be the local Chinese competitor and not just the multi-national who’s kind of coming in from overseas. And we work pretty hard on that. That’s not going to change.

I’d say everything has it’s ups and downs, you work your way through it. We’re very good at not giving anything away, but rather working with partners and making sure we develop the market. So yeah. I mean, there will be ups and downs, but all in all, it’s a place we’re going to stay and a place we’re going to –

Bob Cornell – Barclays Capital

Well, Dave, in the Comac wins, you mentioned wheels and brakes, is the pressure to share technology higher now in those businesses than you might have seen like three years ago?

Dave Cote

No. I would say nothing beyond anything that we’ve ever expected. As the market evolves, you have to find a way to work with the local guys, local partners. I think we’ve come up with a very effective way of doing that. I don’t see that changing.

Bob Cornell – Barclays Capital

Good enough. Thanks.

Elena Doom

All right. Well, thank you for your participation on today’s call. As always, I’ll be available for questions that you may have today. And in fact, I want to just turn it over to Dave Cote for some final comments.

Dave Cote

Okay. We’re off to a great start, as you’ve been able to see. And I think that reinforces our ongoing strategy having great positions in good industries to focus on Honeywell, our five initiatives, and that continued focus on feet planting.

And I think it’s also a demonstration of what happens when you stick with a strategy over a period of time. Good times, and bad times, you stick with a smart strategy and it really is surprising that in the relentless execution of that strategy, day by day, quarter by quarter, year by year, it’s amazing where you can get to.

So we’ve executed well. I think we continue to execute well. And you can count on us to continue.

Operator

That concludes today’s conference call. You may now disconnect.

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Source: Honeywell International, Inc. Q2 2010 Earnings Call Transcript
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