Honeywell's Management Presents at Deutsche Bank Global Industrials and Basic Materials Conference (Transcript)

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 |  About: Honeywell International, Inc. (HON)
by: SA Transcripts

Honeywell International Inc. (NYSE:HON)

Deutsche Bank Global Industrials and Basic Materials Conference Transcript

June 4, 2014 12:20 PM ET

Executives

Kathleen Winters - Vice President and Corporate Controller

Patrick Hogan - Vice President, Strategic Marketing, Performance Materials and Technologies Division

Elena Doom - Investor Relations

Analysts

John Inch - Deutsche Bank

John Inch - Deutsche Bank

Here we go. So, welcome back everyone. It gives me great pleasure to introduce Kathleen Winters; Patrick Hogan; and Elena Doom from Honeywell, and just in terms of the set up and this presentation, which is going to be unique. Elena and I had talked about what would be of interest that to investors in terms of stuff that's very topical, obviously, the whole energy complex and build out space of which Honeywell is very active participant and a direct beneficiary is very, very topical right now.

And I thought it would be helpful just really peel the onion on Honeywell’s perspective businesses around the world and how it can benefit. And so this is, I am hoping a much more robust session than some of the sort of classic sessions that you perhaps more used to at other conferences. And I think you guys have a great story to tell. I would maybe ask, if you could give little bit of just a background in terms of how you both fit in areas of responsibility. And then, with that, I will introduce Patrick.

Patrick Hogan

Good morning, John. I’m Patrick Hogan. I am the Vice President of Strategic Marketing for Honeywell’s Performance Materials and Technologies Division.

Kathleen Winters

Yeah.

Patrick Hogan

Yeah.

Kathleen Winters

Kathleen Winters, CFO Performance Materials and Technologies. In the current capacity working very closely with the business and Patrick on growth platforms and particular some of our capital investments that we will talk about and share some details with you.

John Inch - Deutsche Bank

And you’ve both been at Honeywell how long?

Patrick Hogan

Well, I have been with Honeywell 10 years. I worked, first of all, in the Automation, Control and Solutions business. I am very familiar with some of the businesses I’m going to talk about later today and I have been with PMT two and half year now.

John Inch - Deutsche Bank

Okay.

Kathleen Winters

Well, I have been at Honeywell 12 years. In the current capacity, about year and half, almost two years now, been in various roles within the finance organization both at the corporate side and the PMT side, work very closely with Elena over the years, particularly in my prior role as Corporate Controller, particularly around kind of transparency and reporting.

John Inch - Deutsche Bank

Great.

Patrick Hogan

Okay. Thank you, John. So, good morning. This presentation is going to contain some forward-looking statements and these are based, obviously, on our best view of the world and our business as we see them today. These elements can change for reasons identified in our Form 10-K and other SEC filings.

So, as I say, it’s a great opportunity for Kathleen and I to share with you this fantastic Honeywell growth story, the ongoing growth story and we wanted to kind of give you a quick update. We are a $40 billion multi-national and industrial.

We really leverage innovative technologies to take leading positions in each of our four business group areas. As you can see here, Aerospace, Automation, Controls and Solutions, Transportation Systems, and business that Kathleen and I represent today, Performance Materials and Technologies.

So what we, with John’s kind of guidance. We are going to kind focus little bit to and share with you the growth strategies that are really predicated particularly with the oil and gas value chain, that’s what driving PMT’s growth significantly both today and in our future horizons.

That energy theme has been recently amplified by the recent integration of the Honeywell Process Solutions business into the PMT structure. You can see here on the top pie chart there, our new numbers integrated by percentage of sales, by business. You can also see geographic market vertical mix too.

So we are now at $10.2 billion business this year, very globally diverse, not only where our sales ran, but also where our local sales, service, marketing and technology development people are very close to our customers in each of those key geographies.

We have a very balanced portfolio in both short and lifecycle mix. So it kind of makes for us a very healthy balanced portfolio.

I’ll try to give you an easy way to think about how to describe PMT. Think of us in three businesses. UOP is our premier licensor of the world, making really the world’s natural resources, convert those with process technologies and catalysts into higher value fuels and chemicals.

Honeywell Process Solutions, HPS, they are one of the premier players in the Process Controls and Automations space and we manage very complex operation and manufacturing processes in the energy and other industrial verticals.

Advanced Materials, we are world leader in innovative chemistry and bring that to -- leveraging that to large scale technology and manufacturing capabilities to deliver noble materials and chemicals to many different industries. So kind of the common theme with PMT is, we help our customers with their raw and processed materials to be more productive, to be safer and to be more environmentally efficient.

We look at classic oil and gas energy value chain. We will see all of the touch points where both UOP and Honeywell Process Solutions have been working for many years to service our customers in this exciting space.

If we go upstream, we are working with the off-shore platforms and vessels, as well as kind of helping them with our combined suite of control systems, safety packages, gas processing technologies and metering and other kind of packages there that really are unique to Honeywell when you put all those together.

As we move a little bit further down to the other side of the slide here, you will hear a lot about our gas processing capability, particularly here in North America we associate this now with the booming shale gas expansions. And here we are helping clients monetize this very precious gas and natural gas liquid mixes and being able to get them ready to condition to transport those downstream to, we are helping with metering and other controls and safety systems.

Down to the refining and petrochemical sector where we have an unbeatable array of process technologies, equipment services, sensors and a whole kind of lifecycle approach to these kind of 30-year plus lifetime assets.

It’s an interesting time for PMT because it’s really, I think this is a big space for us that is predicating where our current growth is coming from and also where we see our future growth coming from too. Just last year in the America’s region alone across these three value streams $315 billion was invested in related capital expenditure.

We are also seeing, I mentioned that shale gas phenomenon, here in the North America alone we are seeing the natural gas liquids, those are the high value liquids trapped in those shale deposits. They are going to double from 3 to 6 million barrels per day equivalent by 2020.

So what does that mean for us? What it means, in the next 20 years or more, recent American Pipeline Association study just came out in March, told us that there is going to be at least order of $14 billion a year of capital equipment spend in things like LNG liquification, new pipelines, compression, gas processing and that $14 billion a year is going to go on to at least 2035. So it’s a massive investment going on in North America.

But also we’re going to see the ripple effect go all the way around the world. As we move further downstream, you’ll see from the American Chemistry Council just recently just announced a very credible $100 billion plus of investments in big petrochemical plants converting gas to chemicals in particular.

And again Honeywell PMT very strongly aligned with these macro markets. So really just kind of -- want to kind of dive a little deeper now into how we’re servicing each of these segments in the energy value chain. So you’ll find UOP and Honeywell Process Solutions worked many years offshore to help our customer process those resources more efficiently and do it with greater safety.

Our controls and solutions you’ll find them at the bottom of the sub-sea, optimizing the well, the well heads and mostly the unique technology that stabilizes these large floating vessels, the FPSOs, the FLNGs you may have heard of, making that a very stable and safe environment to work and to produce more effectively.

In the middle of that picture, that you’ll see these large gas modules packages that we put together from UOP. And here we’re removing the series of contaminations that are in the natural resources, getting the high quality product ready to either be shipped offshore through pipeline or through other floating vessels. And there we are removing the contaminants that would otherwise corrode the pipe work and deplete the quality of that natural product.

At every level below desks and above on the top side, each PS is working to protect the assets, the environment and the workers from such things as fire or gas releases or even ship-to-ship potential collisions that we can avoid. These are, as you can imagine, incredible extreme environments that we’re working in. Our PMT experts know how to design and make these fit-for-purpose technologies.

And you’ll find us chasing the brand new big greenfield deepwater pursuits of Brazil and Mexico. But also we’ll be going back to our legacy accounts, let’s say in the North Sea and helping them really kind of extract more value and cost savings out of those mature platforms in that part of the world as well.

The global gas dynamics are really changing now the international energy economics. And I think this is something that we’re spending a lot of time matching the countries and the companies that have a lot of resources, gas and natural gas liquids with those on the receiving side that have a high willingness to pay to import in bringing these precious hydrocarbons, convert them maybe to cleaner fuels or energy or novel roots to petrochemicals.

And so we’re very excited, for instance, about our recent acquisition of the Thomas Russell business by UOP at the end of 2012. And now we have the leading modular gas processing technology that separates the gas from those precious natural gas liquids. And we’re being very proficient in winning our share here in the North American remote shale fields.

What’s exciting to know about that is, we help our customers come on stream at least six months earlier than the alternative conventional designs. And that’s really has resonated around the world and we’ve now started to win our first two international accounts in the Middle East with this gas processing technology as we see the onset of this international dynamics starting to take place.

Tremendous sales funnel to with gas processing for instance in South East Asia. Just as an example, some of these are processing modules that I’m talking about, can scale from $30 million to $130 million depending on how much gas flow that we’re processing for the clients and how much additional engineering and capabilities they have asked for us to support and win.

So let’s kind of go little bit further navigate to the downstream. This is the core refining in petrochemical markets where both HPS and UOP have been very successful for decades. And in the last seven years since Honeywell fully acquired UOP, we have a lot more synergies working together to support our oil and gas customers.

The way to read this chart, look at the left hand side first. These are the drivers that are very strongly aligned with UOP growth regarding the new dynamics in the fuel refining businesses. But the key issues here is people want their fuel with tighter specifications, removing the sulfur contaminations in different parts of the world, getting to those higher euro standard equivalents.

There is also a big demand for diesel conversions. So again, this is a big pull on the UOP Hydrocracking Technology. These are the technologies that convert the crude oil into the higher value fuels. And as you can see, another additional 50 hydrocracking units have been predicted just in the next five years or so. And we’re kind of very well positioned to take place with that.

One of the other dynamics we’ve seen internationally is the lot of traditionally more remote parts of the world are looking to be more self sufficient in their refining capabilities. We are able to package together the big modular packages and expand our pocket share from a few millions of dollars of -- for license revenue all the way through to a package of UOP and HPS systems for well over $100 million package solutions.

So we’re getting some new ways to grow. These are long-term revenue trails. On the right hand side of this chart, we talk about two key petrochemical indicators that talk a lot about the growth of the petrochemical industry, again UOP and HPS are strongly aligned with. Paraxylene is used in many fibers and plastics. It is used in this water bottle here that I’m holding and many of you have there before your desk.

And propylene is what they call an olefin is one of these chemical building blocks that are going to so many plastics and solvents, chemicals and paints. And the demand for these chemicals is growing phenomenally. A lot of it’s coming from the developing markets, a lot more bigger populations, high levels of urbanization, a lot more mid market income -- disposal income to be spending.

And again we help our customers here in number of areas at the top right of that chart, UOP has an amazing technology called the Parex adsorbent. And it allows the market place which is very strongly competed for making this paraxylene material. We allow our clients to get a competitive advantage. They can keep increasing their conversion rates and also reduce the energy that it takes to make that paraxylene. You can see that there is a very large 20 million metric ton additional capability being pulled in the next four years or so.

Olefins or these materials that go in to the chemical building blocks like propylene, we see a real change has happened as people are now moving from the traditional crude oil resource of getting into synthetic plastics and moving to these lower cost natural gas liquids. And they are looking to UOP and Honeywell to say, how do you help us grow in this area? So good example is that in the last three years or so, we’ve actually been awarded 25 out of the 28 global awarded projects to make these olefins.

And that’s a tremendous success rate. 15 of those projects are in China alone. And when we look at the customer profile, these are new breed of people getting investing into the petrochemicals world. And really we don’t have any background in engineering or in project management. So the seeking UOP’s track record in these quick returns in the superior process economics. And we are able to help those customers monetize these precious resources very quickly and that’s kind of seen in our order book.

Just as an example, one of these olefins licenses and typically in the first year or two is about a $5 million to $10 million revenue stream for UOP. Over the next three years, we have a commissioning revenue, construction and then commissioning and over a 25 to 30-year period, we will have additional catalyst services and expansions and so forth.

Put all that together, one of these olefins licensees alone can equate to a $140 million to $270 million of revenue over a 25, 30-year lifetime. So this is a tremendous flywheel that we’ve been generating. It’s going to be pulling in new catalysts, additional services and equipment controls and so forth.

We’ve had a lot of opportunities in these recent investor events to kind of keep you briefed on the scale and the progress of our key investments in expanding our current capacity. And again, this is a critical point in our growth story. I’m excited to tell you that we continue to be on target with our goals to produce these world-class catalyst factories, both here in the U.S. and in China. And this is against the tremendous (inaudible) customer backlog as well as giving us that additional capability and capacity to keep selling very aggressively in the petrochemicals and gas-to-chemicals space that we do very well in.

Also, talk about our Solstice low global warming platform, the range of molecules that are helping us to create new environmental efficient standards for such things as your vehicle refrigerants, your stationery, air conditioning, the insulating foams in our construction materials, solvents and propellants and so forth. These are proprietary patented molecules, very high profitability for Honeywell and again, in the next two or three years, you will see that the big uptick there, both in our topline as well as kind of a profit margin growth there to do that. So, again, we are very kind of excited about that.

So just -- John, just quickly to summarize, PMT off to a very strong growth foundation, kind of our fundamentals are in differentiated technologies that is aligned very strongly to those core kind of global economic drivers. They are having our -- the integration process with Honeywell Process Solutions is very well underway and we would like to come back and kind of update you later at another event and tell you how we are doing against those targets?

John Inch - Deutsche Bank

Perfect.

Patrick Hogan

Thank you, John.

Question-and-Answer Session

John Inch - Deutsche Bank

No, thank you. So let’s start with just -- I want to simplify things just so that everyone has kind of an understanding of the context. So basically, can you bucket your revenues for us just into sort of what are project activity versus recurring and maybe give us a little bit of a sense of what these products actually look like? I mean, are you actually manufacturing chemical pellets, or I’m thinking of the olefin side? Or is there actual equipment plus pellets? What -- just a little bit more context around what you would see if you were on the site?

Kathleen Winters

Sure. In terms of the broad buckets, you can think about the business as kind of a three, I’ll call them sets of businesses, the Process Solutions kind of $3 billion-ish, the UOP which consists of same size in magnitude but consists of both project businesses as well as than a substantial part of the business being a catalyst product that we actually make and shift to the customers. And then the advanced materials portion being on kind of the remaining four billion piece of the business which is a set of businesses, some both long cycle in development and some very fast cycle application businesses, bringing products to market.

John Inch - Deutsche Bank

So what’s going on in terms of infrastructure investments, both in the U.S. and continuing in China? Is the business overall positioned to actually see its growth and pace of growth pick up over the coming years, or are you already at a robust level that you think can be sustained?

Patrick Hogan

We definitely see robust level that can be sustained, but we are seeing a lot of upside too.

John Inch - Deutsche Bank

Okay.

Patrick Hogan

John, the reason we see that is that is particularly, we are very lucky. The UOP processes are one of the first things that chosen, when you design the concept of a new refinery or new petrochemical plant. So, our first teams are often having very high levels C-suite type conversations much earlier than many other companies. So we kind of give a big indication of where the demand is, we are now seeing that in a pick up in demand for people now, be at the next layer of engineering firms, coming back to HPS asking us to kind of update our bid packages, make sure we have the capabilities in going forward. So, we are seeing a good sustainable part but also we are seeing the onset now with that kind of tipping point down, with some of those big capital expenditures we mentioned.

John Inch - Deutsche Bank

I think UOP officially -- you believe that can grow at around 9% topline type of CAGR? Could it be much higher than that if some of these other things -- obviously your company doesn’t go out on a limb typically with this forecast. If things play your way, could it be significantly higher? I’m not saying it is a forecast.

Kathleen Winters

Certainly could, we hope it would be right. I mean, we are looking at that 9% CAGR over the kind of the next five year period as a pretty balanced view in terms of what we can do.

John Inch - Deutsche Bank

And does China become a much bigger slug of your mix of revenues just based on the build out of their production processes between now and the next five years?

Patrick Hogan

Absolutely. I mean, it’s always been a focal point for our growth area. We wanted to kind of get our China, kind of position done first before we -- as well as we are expanding in other parts of the world. We are investing very heavily in one of those big capital equipment projects we showed you is in a kind of a world-class chemical plant just 80 miles north of Shanghai.

There is tremendous capacity there to probably triple if not quadruple the amount of other process capabilities that we could put down there in China. We’re seeing a lot of demand for a lot of our fast cycle application work as well. So, as well as catalysts, its fibers, it’s fine chemicals. We’re seeing a lot of growth. And also I think that’s a good platform jump for us also to get into other parts of Southeast Asia as we get closer to our customers.

John Inch - Deutsche Bank

And just to put this into context, so I'm going to build a hydrocracker, what is your -- what does Honeywell, if you have won everything you could possibly win to service a big multibillion dollar facility like this, what’s your content value? And then what -- again, you gave us some numbers, I am just trying to put this into a context?

Patrick Hogan

I mean, we will have the coal license and those licenses are the kind of the know-how on how to convert the crude materials into those process fuels, and they can be tens of millions of dollars for a license and then we have kind of…

John Inch - Deutsche Bank

That recurs, right?

Patrick Hogan

That’s recurring.

John Inch - Deutsche Bank

Yes.

Patrick Hogan

The utilization fee that goes with that. Then we can wrap around that, we can wrap that -- these equipment packages, I think they can scale from tens if not to fifties of millions of preconfigured hundreds of feet high modules that help the conversion processes there within those things. And then inside those reactors, inside those large columns, if you see at every refinery are adsorbents and catalysts. And these are the materials that convert the chemicals or clean them up. And again that’s kind of the razor blade mentality where we are seeing those ongoing consumable items over a two or three year cycle as we generate those efficiencies there with our customers.

And then on the round out then is the package of controls of optimizing the process, combining the HPS and UOP technologies to really understand when is that catalyst going to die? How much longer can we drive that far before we maybe have to go back in and change that catalyst path? Can we mange our OpEx and our cash flow to do that? And we are protecting the environment both physically with physical security, fire and gas, and so forth but also with the layer of cyber security as well.

John Inch - Deutsche Bank

Can you bundle HPS with UOP and take it to a customer who is building these mega facilities and say here is our bid for the whole thing or is that not really the way it works?

Patrick Hogan

We’ve done that on a number of projects in Vietnam and Russia where it does make sense to do that. So each project is customized to the needs of the customer, how they like to behave, how they like to buy, do they have in-house engineering, do they have the controls philosophy already?

Kathleen Winters

Yes. So I think we’ve got the flexibility to do it either way, whether the customer likes to buy it in that bundled, bundled approach or at different phases as they progress through the project.

John Inch - Deutsche Bank

Now, I think, MCO you mentioned you had won 25 of, what was that statistics?

Patrick Hogan

That was in Oleflex.

John Inch - Deutsche Bank

That was in Oleflex, okay.

Patrick Hogan

So that’s the creation of these like propane from natural gas liquids.

John Inch - Deutsche Bank

25 out of what 28?

Patrick Hogan

Out of 28.

John Inch - Deutsche Bank

Why didn’t you win the last three, what happened. I’m just kidding. So if could you give us a sense of who exactly are you competing with in these situations, and how exactly are you winning with such high penetration?

Patrick Hogan

Well, I think, we are winning because we’ve really focused on understanding that process knowledge. We are also a chemical manufacturing company ourselves. So we have a unique internal system about how do these processes work? What are the metrics of success if I am running an asset, if I own an asset? I think that’s the unique differentiator that we have. We are able to pilot and scale these capabilities again using the tremendous process control data management systems that we now have access to. We are one of the world’s biggest generators of bits and bytes just based on all the pilot work that we have here in Chicago actually.

So we are going to take tremendous amount of research, tremendous amount of real world process knowledge and keep our customers ahead of the game with those solutions that aren’t just a one-time deal, John. We continue going back. We are able to dial in with our customers’ permission and actually diagnose their systems with them and keep them optimizing the efficiencies real time over the lifetime of those projects. I think that whole capability of know-how material science investment connectivity I think is really making a big difference for us.

John Inch - Deutsche Bank

But industries typically don't behave this way in terms of such a one-sided market share grab, if you will. So, is there something else that you are able to -- I mean that sounds great, right, you have knowledge and so forth, but is there something else about the technology that you offer or do you -- are you able to -- I mean I don't know, package other things into the offerings or…?

Patrick Hogan

I think there is a couple of areas, one is likely when you have these processes we are able to create what we call like a simulation of that. We can actually help train your operators on how to run that process, how to deal with scenarios if they weren’t expecting, although they will plan into that. So we can package the Honeywell process controls together with UOP processes and give now performance guarantees that are unique to Honeywell for those processes. So that’s an extra layer of productivity that we can gather just by aggregating those technologies and inside knowledge.

John Inch - Deutsche Bank

And how much of your business has benefited from U.S. shale? And the context of my question is, there is more shale resources in China, is this also opening up -- what is the timing of that and does that file also open up perhaps an equivalent or comparable business the way you have built here in the United States?

Patrick Hogan

Definitely, I mean, we’ve seen some of the major Chinese trans-Asian pipeline projects already. So the first thing too with China is they have the world’s biggest amount of unconventional gas compared with any other country. The issue is it’s in quite a remote part of the world of China, so you have to have the infrastructure to get it down to the urban area.

So –first of all they are investing very heavily in these pipelines compression and liquefaction capabilities and we are helping them with them on there. We just won some major process control systems there in the trans-Asian pipeline projects. But also what we are finding John too is a lot of Chinese private money is actually here in the States. And it’s learning how to develop these shale fields and there is going to be -- we are going to be taking that technology back with our partners back to China where more of the infrastructure is built and we are going to help them capitalize on their natural resources.

John Inch - Deutsche Bank

And there is no risk whatsoever, not to be rude, but there is no risk whatsoever of IP theft by the Chinese. Cyberhacking is in the news and is the press almost every day. Is that in any way shape or form a risk to you?

Patrick Hogan

It’s something we are very passionate about. We are every fierce about controlling our IP. We have a number of mechanisms for doing that, sometimes physical ways of separating drawings and technology from vendors and partners to do that all the way through to the digital side, the cyber security side. We are one of the leading proponents in that area protecting chemical plants for obvious reasons.

Kathleen Winters

Yeah. And just a follow-on, kind of the activity we’re seeing in China. I mean, we’re seeing that in order rates, very kind of strong mid-teens order rates in terms of what we’re seeing in China.

John Inch - Deutsche Bank

Maybe a slight twist on the question, do you feel that in terms of your businesses in China, do you think the desire by the Chinese to effectively master technology, has it lessened in any manner? In other words, they are saying, you know what you guys are the leaders and rather than try and steal what you have, we are going to be more closely -- we’re going to want to work with you more rather than simply learn from you and take what you have. Of course that is what they are going to say, of course, but…?

Patrick Hogan

We have some tremendous joint ventures in China in a number of our businesses, in UOP and HPS, in our fluorine businesses. So we’ve had some very long-term successful business partnerships, technology development coming - like Haier one of the leading appliance manufacturers for instance. We co-developed some foams for them to better make a new range of energy efficient appliances that is becoming a major kind of selling point for them in Asia and also they come out of Asia with their exports too. So, we take it very seriously but I think those partnerships are the way forward. So, I think it’s more -- I think people are, to your point, John…

John Inch - Deutsche Bank

And you just have to manage it, right. So what about Thomas Russell? I mean it looks to be a huge success. Your company is officially targeting, trying to double its M&A spend over the coming five years. Are there other Thomas Russells out there? How does M&A and the framework of desiring to double M&A spend in the next five years, how will your businesses play a role in that if at all? They may not, but I am just curious what your thoughts are.

Kathleen Winters

I think we’ll clearly play a role in that. Particularly, we’ve got the demonstrated capability in terms of finding these good opportunities. The Thomas Russell acquisition, what’s the next good opportunity like that, very rich pipeline, looking very much in the space of expanding UOP capability and in the Process Solutions space as well.

John Inch - Deutsche Bank

So, are these opportunities -- are they international companies, are they bigger companies, are they smaller companies?

Kathleen Winters

I’d say it’s all of the above.

John Inch - Deutsche Bank

It’s a bunch of different things.

Patrick Hogan

Yeah. Absolutely, and it’s very strategic. We’ve been building this long range plan for quite some time. We look at what we do organically with our technology. I mean, we know the gaps that we want to fill and the sequence that we want to fill them in. So it’s a very rich pipeline of prospects that we are pursuing and now that we’ve integrated HPS and PMT together, I think our kind of understanding too about what we could offer with those new targets has kind of expanded too for us, John.

John Inch - Deutsche Bank

Could you give us a little color in terms of what some of those gaps might be? For instance, HPS doesn’t classically offer field devices for big facility applications, right. So would that be an area of possible interest or I don’t know, again, I’m not a chemical engineer, I’m just more interested in…?

Patrick Hogan

I think anything that we can measure that has to do with process or with some kind of a parameter, to do with flow, temperature, et cetera, those are the areas that we are very excited about. We already have a tremendous kind of solution set around implementing that data.

John Inch - Deutsche Bank

Right.

Patrick Hogan

Basically, fluids, I mean, processing the fluid, cleaning it, transporting it. But those are areas that we were excited about both offshore and onshore in our portfolio.

John Inch - Deutsche Bank

And chemical production itself, do you actually touch all the areas that you want to be in today or there are other areas that you could be in that you just don’t have those capabilities?

Patrick Hogan

Definitely, I mean we look at that -- we have a very rich pipeline in that area too looking at specialty materials, looking at kind of extensions often kind of just other ways to get capacity, even to get channel and access to market and those are some of the other things we’re thinking of beyond just the chemistry itself.

John Inch - Deutsche Bank

So your businesses actually are large users of CapEx currently, right, to build up capacity. Could you provide a little bit of color around what investments you’re making today and where that will basically carry the two businesses in terms of what the future runway is expected to be, which sounds to be very high. So are you building enough capacities, and other way to say it so where, and what are you spending, just a little bit …?

Kathleen Winters

So as you mentioned, we’re kind of a big part of the capital spend for the corporation and we’re spending it really across that portfolio. Particularly, I’ll mention two areas, on the UOP side of the house as well as on the advanced materials part of the portfolio as well. On the UOP side of the house with very strong backlog that we have and the fact that we are very highly utilized in terms of the capacity we have. We are making additional investments in terms of that catalyst capacity and doing that and bringing capacity online both in the U.S. as well as in China in the next couple of years. And then on the Advanced Materials on the fluorine side of the house as we commercialize and bring our new portfolio of products, our Solstice products to the market, making investments in CapEx in order to that as well. So that’s a low global warming set of portfolio.

John Inch - Deutsche Bank

Those are in several million dollars of investment, is that correct?

Kathleen Winters

Yes.

John Inch - Deutsche Bank

And then this goes on for what, two years and then…?

Kathleen Winters

So we are not high -- I would say higher capital spend period of time right now. And we’ve really ramped up in 2014. We’ll see that sustained level of spend in ‘15 and ‘16 and then it starts to ramp down a little bit to a more normalized level.

John Inch - Deutsche Bank

It’s a kind of a three-year runway. And then just in the context of being a chemical business, what are the risks perhaps pertaining to feedstock pricing or anything of that order or ilk and how do you actually -- how do you mitigate that?

Patrick Hogan

That’s an area that we spend a lot of time looking at kind of direct material costs and ways to manage that. We’ve got a number of areas. One is we have a very rigorous process looking at our contract management, John. So we’re looking at ways to -- can we go up to use a lot of e-auctions, for instance. Quite a large percentage of our raw material spend now, we actually e-auction and that’s enabling us to leverage good -greater productivity and choices.

We’re spending a lot more of our spend now overseas in different parts of the world and traditionally we’ve done that before as well. And our expertise in large [inaudible] freight management because we’re a chemical shipper, we’re actually using logistics advantages to help us bring in raw materials on the same ship that we then pack up and send with our products and so forth.

John Inch - Deutsche Bank

But there is no one big feedstock bucket, is there, that we need to be mindful of as you sort of think about future profitability that could, for whatever reason, fluctuate based on supply/demand or other shocks in the system?

Patrick Hogan

We’ve spent a lot of time looking at what issues are critical and stuff. And I think we have contracts, we have alternative supplies, we have a very good mitigation process John around each of those critical paths.

John Inch - Deutsche Bank

Perfect. Exciting story. Well, thank you both, Patrick, Kathleen and Elena.

Kathleen Winters

Thank you.

Patrick Hogan

Thank you.

John Inch - Deutsche Bank

Much appreciate it. Thank you.

Kathleen Winters

Thank you.

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