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Executives

David James Anderson - Chief Financial Officer and Senior Vice President

Elena Doom -

Analysts

Scott R. Davis - Barclays Capital, Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

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

Deane M. Dray - Citigroup Inc, Research Division

Honeywell International, Inc. (HON) 2012 Outlook Conference Call December 15, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to Honeywell's outlook call for 2012. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Elena Doom, Vice President of Investor Relations.

Elena Doom

Thank you, Giovann. Good morning, and welcome to Honeywell's 2012 Outlook Conference Call. Here with me today is Senior Vice President and CFO, Dave Anderson.

And this call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Please note that elements of today's presentation do contain forward looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, and we would ask that you interpret them in that light.

We do identify the principal risks and uncertainties that affect our performance in our Form 10-K and other filings with the Securities and Exchange Commission. Now this morning, we will review our financial expectations for the remainder of 2011 and discuss our 2012 planning and, of course, allow time for questions of you.

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

David James Anderson

Thanks, Elena. Good morning, everyone. So let's begin this morning on Slide #3, first by confirming that the fourth quarter for this year is advancing mostly as we expected with about 2 weeks left in the year. Order rates continue to be positive in our short-cycle businesses, although we've seen some weakness in Europe and China, while our long-cycle sales continue to ramp nicely in commercial Aero, UOP and also in the ACS Solutions businesses.

We're reaffirming our full year 2011 estimate. We expect sales to be about $36.5 billion. Earnings per share, on a pro-forma basis, about $4.03. And that, of course, excludes the impact of the fourth quarter mark-to-market adjustment for pension. I'll talk about -- more about that in just a moment. And lastly, we expect free cash flow of approximately $3.5 billion, excluding the expected incremental pension funding of approximately $250 million that we plan to make in this quarter.

Now the 2011 performance underscores, clearly, all the work that we've done to strengthen Honeywell's portfolio over the last decade. It also reflects the strength and very solid execution that we've seen out of our business leadership on a global basis. New products, geographic expansion, the traction on key process initiatives, all of these are translating to record organic growth and continued strong margin expansion and strong free cash flow generation in 2011. And I'm going to take you through a little more color on 2011 in just a minute.

Of course, based on all we're seeing and hearing, 2012 will be a more challenging economic environment. Today, we're going to take you through a bottom-up portfolio view. We're also going to do a regional buildup of our 2012 outlook. And we'll also remind you of the core elements of the Honeywell playbook, which enabled flexibility in our planning through continued cost and census management, which, of course, enables us to leverage upside in market conditions as they present themselves.

But before talking about '12, let's go to Slide 4 and discuss 2011 in a little more detail. Now over the course of 2011, as you know, we saw continued strengthening, resulting in the company raising guidance 4 times throughout the year. We estimate that we're going to finish this year with record organic growth of around 8%. We anticipate segment margins will end up the year at about 70 basis points up from 2010. And pro forma earnings per share are expected to be up a notable 34%, reflecting what we think is top-tier performance for the sector. Again, this excludes the impact of the fourth quarter mark-to-market adjustment for 2011.

And as a reminder, we provided sensitivities to the potential range of pension outcomes we could see on December 31. We provided you that in our third quarter earnings conference call. We've also included that same table in the appendix to today's material. And while it continues to be a moving target with the volatility we're seeing in the markets, particularly with asset returns, asset return volatility, we would expect the mark-to-market adjustment for 2011 to be in the range of $1 billion to $1.5 billion. And again, you can see the intercept of the key sensitivities in the slide in the appendix.

Further, in 2011, we funded repositioning actions by smartly deploying onetime gains, which will yield benefits, obviously, for us in 2012 and beyond. These actions will make meaningful improvements to our cost structure and continue to advance our competitiveness. The businesses remained focused on commercial processes, including Velocity Product Development or VPD, which is really enabling a robust pipeline of new products and technologies for Honeywell and accelerating our penetration in emerging regions. If you look at the bottom left side of the page, you can see that 2011 is yet another year added to the company's performance track record on sales, earnings and cash flow.

Let's now look at Slide 5. Look at the 2011 and the context of our overall performance across the portfolio. You can see here -- and this is the first of several slides that we're going to provide you this morning. First, what we've shown is our short-cycle businesses on the top left, including ACS Products, our Advanced Materials and Transportation Systems. You can see they've had sustained good organic growth over the course of 2011 but are now starting to see a slowing rate of growth. And of course, the blue bars represent the absolute level of revenues, and the red shows the percent change. And of course, the fourth quarter is our latest estimate and consistent with our guidance.

On the upper right of the chart, our long-cycle businesses, which exclude Defense and Space for this purpose, continue to see sequential increases over the course of 2011, reflective of the strong orders increases we’ve had in UOP, the commercial Aero OE business, as well as the ACS Solutions businesses. Now the company's growth has been complemented by the commercial Aero aftermarket recovery. You can see that on the bottom left of this page, which has sustained 20% plus spares growth in both the large Transport and Business/General Aviation categories in 2011.

And finally, on the bottom right of the chart of Slide 5, you're seeing a modest decline in Defense & Space sales as we exit the year, primarily driven by a robust fourth quarter of 2010, where we had record T-55 engine sales that did not repeat this year. So healthy organic growth overall as we look across the portfolio, providing the starting point for our growth outlook for 2012.

First, before we go to that, let's turn to Slide 6 and look at some of the key macro assumptions that support our 2012 outlook. Now starting with the top left on Slide 6, you can see GDP, again, bifurcated into a 2-speed world, with developed markets expected to grow 1% to 2% next year, largely due to the influence of a European slowdown. Emerging markets will continue to grow but at a slower pace. Our expectation is in the range of 5% to 6%. So in total, we're assuming for 2012 GDP growth of about 3%.

Moving across to industrial production, developed markets are expected to be up 2% to 3%, in line with 2011; emerging regions, up 6% to 7%. On the industrial side, we're not seeing, obviously, conditions getting markedly better or worse.

With that external background, let's look to the next box on the right and more Honeywell -- and some Honeywell-specific indicators. In 2012, given the relationship to GDP, we expect flight-hour growth to also moderate in both air transport and regional and Business and General Aviation segments.

For the Turbo business, while we're seeing different views today by economists and automotive analysts for automotive production forecasts, we're expecting a mid-single-digit decline in Western European light vehicle production. We also look at Western European diesel penetration. Obviously, it's another good indicator for our turbocharger business, which is expected to remain stable at approximately -- that diesel penetration at approximately 59% in 2012.

However, with our continued strong win rates and new launches in 2012, we anticipate being able to grow despite softening macro assumptions in Turbo. And we'll take you through those details for the Transportation Systems business in just a moment.

Turning to our order trends, a jumping off point for 2012. Again, you could see our short-cycle orders strengthen over the course of 2011, driven by commercial Aero aftermarket, turbochargers and ACS Products. And while the U.S. is holding up well overall, European softening is impacting our orders trends in the fourth quarter. That's built into the guidance that we're going to provide you for that segment in 2012 in just a moment.

And finally, looking at our long-cycle orders, backlog remains at record levels, having benefited from the strong double-digit orders growth that we've experienced in UOP, in the commercial Aero OE business and also in the ACS Solutions businesses.

Let's go now to Slide 7. HON sales, giving you our 2012 outlook through that same portfolio lens. Here, we're showing our outlook for '12 on an organic-growth basis by category. In aggregate, by the way, we're planning 4% to 6% organic growth next year.

So let's look at the pieces. We're expecting more moderate growth, as I've said, in the short-cycle businesses, as a result of the slowing orders trends, particularly in Europe and a more muddled growth outlook elsewhere. Pricing is expected to be a headwind in the first half of 2012, as we do not expect to repeat the favorable price to raw spread that we had in the first half of 2011 in Fluorine Products as well as in the Resins and Chemicals businesses.

However, we're expecting to see differentiated growth with new products and competitive wins in ACS, new launches in Turbo and the commercialization of new applications and as well as increased production capacity in the Advanced Materials businesses.

Moving to commercial Aero aftermarket. We're assuming good growth but slowing to approximately 7% to 12%, driven by positive flight hours, favorable out-of-warranty fleet mix and also market share gains that we've had outside of the U.S. and Western Europe. The long-cycle businesses, excluding Defense & Space, are expected to see a 9% to 10% organic growth in 2012, driven by UOP, by the commercial Aero OE build rates and, again, ACS Solutions. We expect the orders trends to continue strong into 2012 as the long-term demand for these businesses is fueled by growing energy demand, global travel and also urbanization.

And finally, we're expecting another decline in D&S sales in 2012. Although we're -- expect the total U.S. Defense budget to be down 6% to 7% over 2011, we're estimating our D&S sales down 4% to 5%. So overall, we think this framework for 2012 reflects the more cautious economic environment with an appropriate amount of consideration given to the macro and regional environment.

So now with that portfolio segment lens, let's go to Slide #8 and look at the buildup of our numbers on a geographic basis. Start with the left-hand side of the page, you can see our investments and focus on emerging region expansion is paying off. Since 2003, we've grown our rest-of-world sales footprint to just over 1/4 of the company sales, up approximately 10 points over that time period and, of course, significantly increasing our presence in higher growth regions.

Now we're going to go into more detail on Europe in just a moment. But as you can see here, we're expecting sales in the development -- developed regions, primarily U.S. and Europe, to outpace GDP through increased penetration, new product introductions and also market share gains. In addition, the U.S. and Europe are benefiting from an uptick in commercial aerospace, including that continued strength that we anticipate in the commercial aerospace aftermarket and also the benefit of new launches in Turbo.

We expect emerging regions, including China, India and the Middle East, which comprise about 20% of our total sales, to continue to grow low double digits in 2012. Here, we're seeing the biggest increases in commercial aerospace, the ACS Solutions businesses and also UOP.

We thought it'd be helpful to give you a little more color on Europe. So let's go to Slide 9 and just take you through a little more detail here. From the data indicators we're watching, it's pretty clear that we'll experience European recession in 2012. I think most economists would say euro land is today -- has actually entered into a recession. And this is reflected in our current orders and our sales outlook, principally in our short-cycle businesses, which comprise 60% of our sales in Europe.

Importantly, the good news, we've got about 40% of our European sales not affected by the near-term macro uncertainty, as we continue to convert the long-cycle backlog of commercial aerospace, Process Solutions, as well as UOP. So another way to look at it, and not shown on the slide but some data that I think is very useful in terms of insight to our European footprint, 75% of our sales in Europe are in Northern European countries, that is the U.K., Germany, Netherlands, France, predominantly, as well as Eastern Europe, with only 17% in the southern periphery. So overall, we think this exposure is very manageable, and we're expecting modest growth given the blend of short-cycle and long-cycle and commercial Aero business that we have in the region and, again, all against the backdrop of the assumption of mild recession, which is consistent with consensus estimates of economists for Europe at this point.

Let's now go to Slide 10 and go through the buildup -- renaming rather and some previews that we want to do for our SBGs. These are a couple of important things that we want to take you through this morning. Starting on the left-hand side of the page, Specialty Materials will now be called Performance Materials and Technologies or PMT. And the name Performance Materials and Technologies reflects the business' expanded set of offerings and also the capabilities that reach far beyond the traditional Specialty Materials definition. And I think that SM title, our moniker, has been with us, Elena, for about a decade.

Elena Doom

Yes.

David James Anderson

By emphasizing both materials and technologies, we're both acknowledging our materials heritage, as well as emphasizing the leading technologies across the portfolio. For example, those used by refiners to produce essential products like diesel, gas and petrochemicals that people around the world rely upon every day. We think this naming conversion is also more consistent with the way we think about growing the business, both organically and inorganically. The subgroups remain unchanged, as we will still report sales for UOP and Advanced Materials separately.

And importantly, moving to the right side of the page, Slide #10. We're going to break out ACS, going forward, in the 3 products and channel groupings to provide more information and, we think, hopefully, a degree of enhanced clarity, which is representative of the key markets served by ACS. So going forward, the groups we will be reported as Energy, Safety & Security, which is ACS's short-cycle, high-margin products businesses; Process Solutions or HPS, which is, of course, a leader in industrial automation and refining, oil and gas measurement and distribution. That will be reported independently. And third, the Building Solutions -- Honeywell Building Solutions, as well as our distribution business, we're going to be combining into Building Solutions & Distribution, so combining our Building Solutions with our fire and security retail distribution channel called ADI for reporting purposes.

And importantly, these updates do not change the way businesses operate or are organized. But rather, the additional grouping will give us the ability to provide you with more insight, focusing on key markets and technologies that will drive growth and margin expansion for these sub-segments.

Let's take a little time and just go to Slide #11 entitled ACS Portfolio and just you give a little more color here on the ACS makeup. So here are some additional description on the 3 great franchises with a number of leading market positions across the very large homes, buildings and industrial control space. Of course, the key for all of you is the financial highlights on the bottom of the page. So let's just go through that.

ESS is largely the Energy, Safety & Security products businesses of ACS but also includes our leading sensors and controls business and our Scanning and Mobility businesses. Now sales in this group of businesses have grown at an average annual rate of 10% since 2006, driven by new products, business wins, geographic expansion and the net effect of M&A. We expect ESS growth to moderate in 2012, given its strong 2011 performance and also the outlook for the overall macro economy that we've taken you through. But very importantly, the margin profile for ESS is high teens, having expanded their margins approximately 100 basis points per year over the last 3 years.

Moving to the middle, the Process Solutions growth has averaged 8% since 2006, driven by continued uptake of our advanced software solutions and infrastructure projects growth. The backlog for process remains at record levels as emerging market demand remains a key growth driver for 2012 and beyond. Process margins are low teens with room to expand with net productivity from repositioning actions and also growth in the higher-margin recurring software and services revenue streams within HPS.

And finally, the Building Solutions sales have grown at an average of 5% since 2006, with energy sales growing double digits within Building Solutions. The long-cycle backlog of Building Solutions is up over 20% this year, driven by new energy, smart grid and large security critical infrastructure protection wins.

Distribution, the other piece of BSD, on the other hand, was roughly flat over the same period due to the residential and commercial downturn beginning in 2009. And now while the margins in these combined businesses are mid-single digit, they represent important channels for ACS and contain our buildings, energy, security and life cycle services businesses, which are mid-teens margins. Further, the ROI of BSD is higher than the average of the portfolio, driven by the low capital requirements in Building Solutions.

So going forward, we're going to report the sales trends of ACS in these 3 groupings. And as a reminder, historically, the report -- we report margin detail only at the SBG level and only provides subgroup directional information and not specific margin details. So that's background, and that's renaming.

Let's go to Slide 12 to look at 2012 outlook by business. Aerospace sales are expected to grow mid-single digit, with a double-digit increase in the commercial businesses, driven by higher aircraft production rates and also continued good aftermarket growth, partially offset by a mid-single-digit decline in Defense & Space. And conversion is expected to be approximately 40% next year for Aerospace, driven by lower BGA OE payments, good organic growth and productivity, partially offset by higher RD&E expense.

ACS is expecting sales up mid-single digit, with growth driven by emerging region expansion and the conversion of the robust long-cycle backlog that we have in both Process and Building Solutions. Profit's expected to increase nicely, reflecting $150 million -- translating to $150 million to $200 million a segment of profit growth, with conversion 25% plus.

Now for PMT, the Performance Materials & Technologies business is expecting strong growth in UOP, partially offset by moderating organic growth in Advanced Materials. And then despite that, first half pricing headwinds I mentioned to you earlier that we anticipate in Fluorine Products, we still expect to grow segment profit $50 million to $100 million on high single-digit sales increase for the business. The bottom line for Transportation Systems in the coming years that we expect Turbo new launches and higher Turbo penetration to offset a more difficult Western European macro environment. Therefore, sales are expected to be up low-single digit and profit for TS flat to up $50 million for the year. So in aggregate, at roughly the midpoint of the guidance range for our SBGs, we're targeting approximately $400 million plus of segment profit increase in 2012.

Let's turn now to Slide 13 and take a consolidated view of Honeywell's 2012 outlook. So in Slide 13, a format that you're familiar with. We anticipate sales for 2012 to be up in the range of 4% to 7% to $37.8 billion to $38.9 billion on a reported basis and up 4% to 6% on an organic constant currency basis. We expect segment margins to expand 40 to 70 basis points on good growth, favorable mix, continued traction on productivity initiatives, including, of course, savings from the prior period repositioning actions and segment profit in the range of $5.7 billion to $5.9 billion.

Coupled with lower below-the-line expenses, driven by the absence of significant repositioning actions in 2012, these are the key drivers of the company's earnings per share growth on a year-over-year basis. That all translates to EPS in the range of $4.25 to $4.50, a 6% to 12% increase over the 2011 pro-forma earnings guidance that we referenced earlier, the $4.03 expected outcome base case for 2011. The guidance also reflects a flat effective tax rate year-over-year at 26.5% and weighted average fully diluted share count of approximately 785 million shares in 2012.

Now we're planning for about 100% cash conversion with free cash flow of approximately $3.5 billion before any potential NARCO trust funding or further voluntary pension funding. And as a reminder, NARCO has been a possibility for several years. You've heard me talk about it over the years. All of us talked about it over the years. We continue to exclude that potential impact from our guidance. And of course, when we get better clarity as to the timing of the trust formation, we'll, of course, communicate that impact.

On pension, our guidance assumes level contributions over the course of 2012 of about $200 million per quarter. Beyond that, our priority for capital allocation, of course, in the near term remains further business investment, growth investments and continued balance sheet flexibility. You can expect we'll continue to be very disciplined on the M&A front, as well as on the share buyback front.

Moving to the bottom of the page, you can see some of the variables that will, of course, influence our performance in 2012 and form the basis for the guidance range that we've provided. The outcomes on the left would, of course, cause our earnings to be closer to the low end of the range. Those on the right would drive it to the higher end of the range, and we feel the range again is broad enough to incorporate these various outcomes. Global growth is certainly a key factor we've looked at from both a top-down and bottom-up perspective in our planning. As I mentioned earlier, we expect 2012 global GDP to be about 3%, weighed down by a decline in Europe and modest growth in the U.S. Mix of business is always important to our profitability assumptions. But as you know, that mix can change and could impact our results. More or less, inflation and, of course, offsetting productivity could also impact the results, as can foreign currency assumptions. Now, we've seen a substantial swing, obviously, in the value of the euro, just even over the last 2 weeks. We're planning the U.S. to euro rate at $1.30, well below this year's average of approximately $1.38.

So in conclusion, sort of on this slide, on Slide #13, we feel we have a plan for '12 that appropriately balances the risk and opportunities, framing the economic uncertainty that we feel we still face.

Now it's important to keep in mind, going to Slide #14, some of the key differentiators and some of the things that will, obviously, support us driving performance closer to the high end of our outlook for '12. Starting with aerospace and our long-cycle backlog, we're, obviously, very well positioned at the intersection of both the commercial aerospace up cycle and new deliveries, as well as the key macro trends around energy generation and efficiencies, safety and security. And given our robust pipeline of orders, the wins and multiyear backlog, we felt very good about the sustainable growth profile that, that's going to provide us over the next few years. Another big benefit to '12 and beyond is the restructuring tailwind that we have. Consistent with our strategy to deploy below-the-line gains, we funded, you recall, almost $700 million in repositioning charges over the last 3 years, which has helped us better position the businesses and has provided meaningful savings for us for again, '12, '13 and beyond.

We continue to invest in the deployment of our Honeywell Operating System, HOS, which is yielding significant productivity savings in our factories and also in our non-manufacturing locations. By the end of this year, by the end of 2011, we expect to have about -- I think it's about 125 bronze or better sites, representing approximately 50% of our manufacturing cost base. And we expect that to increase to about 175 sites, almost a 50% increase over the course of 2012.

We see continued momentum in the emerging regions, and we expect to grow approximately 25% of our total to -- ER to represent about 25% of our total sales by 2014. The focus and execution on our East -- for East and East to West strategies for localized growth are working, with the biggest improvements coming in commercial aerospace, UOP and ACS long-cycle businesses. And we continue to get very good feedback from all of you as you visit China, as you visit India, as you meet our leadership teams and you see the depth of execution that's occurring there.

And lastly, on M&A, we look at hundreds of potential candidates, as you know, annually through our pipeline process and our screening of attractive sub-industries that align to our macro trends. Although we don't count on any sales synergies when we do our modeling, the opportunity is there, and we've seen terrific upside as a result. For example, most recently, with the Sperian and EMS acquisitions, we're obviously, already seeing that upside opportunity, and that will continue through 2012 and 2013.

So overall, these drivers would take us again to the high-end of the outlook for '12, as well as the things that give us confidence in our continued progress towards our long-term sales and segment margin trends that we first communicated back in 2010.

And speaking of those, let's go to Slide 15, just with a quick update on how we're performing against both those revenue and margin trends. You can see on Slide 15, we're tracking slightly ahead of our long-term sales growth target of 6% to 8% per year, estimating an 8% to 9% CAGR over the 2009 to 2012 period.

Looking at margins by the end of '12, we're expecting to achieve in the range of 170 to 200 basis points of margin expansion since 2009, putting us well in the path of our stated 16% to 18% segment profit goal target by 2014. Terrific execution, again, against a much strengthened portfolio. And of course, we'll look forward to updating those targets with you when we meet with you in March at the annual investor conference in the city.

So let's finish now with Slide 16, and then Elena will go to Q&A. Well, clearly, what we're seeing is Honeywell growing faster than the end markets we serve, faster than the underlying macros that we would project, that we did project for 2011 for the current year just about to conclude. We think our growth in this period is reflective of the seed planting that we did throughout the downturn that continued well into the recovery, the investing in new products, geographic expansion and the smart accretive acquisitions we've done. We've also built momentum in our long-cycle businesses, 25% of our revenue base excluding Defense & Space. We expect that robust backlog to give us a healthy foundation for growth in 2012.

Further, we're expecting strong operating performance in 2012, increasing our sales conversion entitlement, something we're absolutely committed to do, something we feel is a key differentiator for Honeywell in 2012. And whether it's our relentless focus on cycle time, both in terms of commercial and operational execution, as well as in R&D effectiveness, controlling our fixed cost through OEF, layering in the benefits from ongoing repositioning actions, we'll deliver another year of continued margin expansion and also another year of 100%-plus free cash flow conversion in 2012.

So taking all this into account, as well as the visibility to known tailwinds, we feel our 2012 guidance from both a top-level perspective, as well as a bottom-up build is balanced in what is a period of a much more challenged, we think, 2012 economic growth. The company's operating performance underscores the organization's ability to be a top-tier performer. We've got a balanced portfolio of short- and long-cycle businesses. We've got a demonstrated and disciplined playbook focused on aggressive census and cost management and, again, a bottom-up plan that layers on contingency at both the SBG and the Honeywell level, very appropriate, we think, in this environment and gives us, again, confidence in terms of our positioning for top-tier performance again in 2012.

So with that, Elena, let's turn it over to you and the group for Q&A.

Elena Doom

Terrific. Giovann, if you can now open up the phone line for our first question?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Sprague from Vertical Research.

Jeffrey T. Sprague - Vertical Research Partners Inc.

A couple questions, Dave. First, just on the short-cycle businesses, Q4 does look like it was down sequentially versus Q3, and that didn't happen in 2010. What is the normal pattern? Is it normal for Q4 to be down sequentially or not?

David James Anderson

I think the normal pattern, Jeff, would be flat to be up slightly. What we're seeing, as I mentioned to you, is a little bit of additional softness as we close out the year on the ACS Products businesses primarily and a little bit also in Specialty Materials, PMT, the Performance Materials and Technologies business in there, Resins and Chemicals, and Fluorines. And that latter is really pricing as we expected. So a little bit of fine-tuning. Elena, anything you want to add to that?

Elena Doom

The only other thing I would add is that we typically would see an increase in Transportation Systems revenues from the third quarter to the fourth quarter, which would be part of that slight increase sequentially, and we're not seeing that this year, partially because of the impact from the Japan situation in the second quarter. We had a number of units that shifted from the second quarter into the third quarter, so the third quarter was, in essence, a little stronger than our normal run rate in terms of the linearity profile. And therefore, we're seeing that sequentially about flat.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Okay, great. And then I was wondering on capital allocation. If nothing else, we're a year closer to NARCO ultimately happening. I don't -- it sounds like maybe your confidence level on something happening is rising. But really, the question is to what extent does that kind of color or limit your views on deploying capital in 2012? How much cash do you think you can kind of readily deploy and/or your appetite for M&A to maybe use a little bit of debt financing also?

David James Anderson

Well, again, I think we're looking at strong cash flow again next year, although we do have assumed in our numbers, Jeff, higher CapEx on a year-over-year basis. Probably in the range of $200 million to $300 million is reasonable to anticipate. We've got additional growth investments and capacity investments that are going in for several of our businesses in 2012 that's assumed in our numbers. We also have a little higher cash taxes on a year-over-year basis. You can think of 2012 as on an otherwise -- if we had normal run rate or 2011 run rate on both those items, it'd be closer to about a $4 billion free cash flow year. So we think about the redeployment of that cash. Obviously, after dividends, priorities are going to be back into M&A, back into reviewing the pension situation and pension voluntary contributions in 2012 as a possibility. As I indicated, we have a placeholder of about $200 million per quarter for pension contribution for 2012. That's a TBD based on actual events and returns and rates, et cetera. But we certainly have that as a placeholder. And then beyond that, we would, obviously, evaluate share buyback. Right now, the assumption is holding shares flat roughly year-over-year.

Operator

Our next question comes from Steven Winoker with Sanford Bernstein.

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

Very helpful set of slides today and outlook. A couple of follow-up questions here. One, on the repositioning chart, you, obviously, took a huge number in the third quarter. Where are you ending up in the fourth quarter for a year?

David James Anderson

We would anticipate very, very modest repositioning in the fourth quarter, Steve. Anywhere between 0 and probably $5 million at the outside.

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

Okay. And is that a function of the fact, not only did you spend so much in third quarter, you don't have the resource capability or project pipeline to switch it on if you wanted to?

David James Anderson

We really identified and are executing -- I mean, another way of saying it -- and I think your question's exactly right on. It's really that we identified and we're executing really the priority items, given the capacity that was enabled to us because of the deployment of the gains.

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

And 2012, that repositioning number, how are you -- how does -- I might've missed that. I didn't see it. How does that fit into it? Or what's your plan for it?

David James Anderson

We’ve assumed [ph] that we've got a placeholder, Steve, in 2012 of $50 million, so about $10 million to $15 million per quarter.

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

Okay. And can you -- I mean, to what extent, given your entire discussion about the range of possible macro outcomes and the impact in the short-cycle businesses, what is your -- how do you feel about your ability to accelerate and increase that in the first half of the year, if you see the need to do so?

David James Anderson

Well, I think, right now, we don't really see the need to do so. That's really something that's going to be evaluated at the time. I don't see that as that likely in terms of doing anything meaningful at this time, either required or necessary. On the other hand, we'll continue to be opportunistic as gains present themselves. We'll continue to evaluate repositioning opportunities. We have, as you know, a rich, active process with the businesses of identifying and evaluating repositioning opportunities. So it isn't as though that we've shut off that ideation or that pipeline of possibilities. But I don't see that as being a high likelihood in the first half of 2012.

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

Okay. Great. And then just secondly, on the ACS redefinition and reporting. Part of -- I always view part of my new job here as being advocate for increased transparency, so I think that's fantastic. But first of all, have you changed any of the P&Ls?

David James Anderson

No. We really haven’t. What this really represents is just the opportunity, I think, to provide greater clarity, greater transparency and, I think, a more meaningful segmentation, if you will, of the businesses within ACS and more how we think about it in terms of the financial and return characteristics growth -- in financial return characteristics of the sub-segments of ACS. But no change in terms of the ledgers or the financial reporting systems or structures.

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

Okay. And still -- and I get the concept behind HBS and ADI, but still, different businesses. And the -- what kind of visibility can we get as you go forward between the 2, because they've had very different dynamics in some ways historically?

David James Anderson

Sure. Well, what we'll provide you is, each quarter, we'll provide some color in terms of what we're seeing in their respective markets and as well as growth outlook. So we'll continue to provide the same way we did today. We'll give you commentary and color to help you understand what are some of the sub-dynamics and what's going on within each of these 3 pieces.

Operator

Our next question comes from Scott Davis with Barclays Capital.

Scott R. Davis - Barclays Capital, Research Division

Dave, can you talk about -- you did this $150 million in restructuring in 2011. Can you talk about where that was, I mean, how it breaks down per segment? Even if it's not exact, just give us a sense?

David James Anderson

Well, we had sort of the usual suspects. But what you would think about is you'd think -- first of all, ACS was an important recipient. If you're talking now, Scott, in terms of by business segment?

Scott R. Davis - Barclays Capital, Research Division

Exactly.

David James Anderson

Yes, so ACS is an important component of that. Transportation Systems, because we continue to work on enhancing the -- if you will, the operating footprint of Transportation Systems, and that's really going to support that business over the '13, '14 and '15 kind of time frame. Then we also have some investments in aerospace and some investments in PMT. If you look at it on a regional basis, it's really concentrated. I would say, the majority would be on Europe, followed by the U.S. So it's really, if you will, aimed at -- focused at more of the supporting the growth that we're experiencing in higher growth regions. That's what it really translates to.

Scott R. Davis - Barclays Capital, Research Division

Just moving on to TS. It's the one business where the up low single digit number sounded just a little bit below what we were thinking. And maybe, I mean, you gave the penetration number for Europe. I mean, do you think in terms of a penetration number in the U.S.? Or is it too early to kind of do that?

David James Anderson

Yes. Elena, you want talk about the U.S. Turbo penetration?

Elena Doom

Yes. The Turbo penetration, Scott, as you know, is obviously, much lower in the U.S. It's probably just around the high single-digit, low double-digit range. But it is growing, and I think that between OE production and the U.S. as well as Turbo penetration next year, they're both going to be positive drivers of the segment.

Scott R. Davis - Barclays Capital, Research Division

Let me approach it from a different angle then. When you think about -- let's just say for the sake of argument that you're guiding to a 3% growth rate. I mean, what is the contribution of the U.S. adopting Turbo? I mean, is it 1 point, 2 points? Is it 5? I mean, how do you think about that?

David James Anderson

Well, let me take the Europe piece of it first. And then, Elena, why don't you respond to the U.S. piece of it? So Europe represents in terms of combination of both light vehicle and commercial vehicle would represent about 60%, Scott, of total HTT's volume, Honeywell Turbocharger volume. So given the expectation that we're going to see negative -- probably mid-single digits right now would be our best judgment, in terms of European light vehicle production. Clearly, that's going to be kind of a bit of a challenge in 2012. And the good news is -- and, of course, the offset still to that is the penetration that we have with new launches and the growth that we anticipate in terms of new platforms within Europe. Elena, you want to talk about the U.S. and what you would see U.S. contributing in terms of percent change on a year-over-year basis?

Elena Doom

Yes. In 2011, maybe as a starting point, I think we saw in the teens growth rates in the U.S., although we're building off of a very small base. So our revenue base in the U.S. today is just in that, call it, $700 million, $800 million range. So the growth we're expecting for next year in the U.S., we actually are planning in sort of the mid-single to high-single digit range for the U.S. based off of new platform launches, both on Turbo gas, Turbo diesel, as well as the growth that we have -- that we're expecting in the commercial vehicle area.

David James Anderson

So, it's -- whether that may translate, Elena, to a point or something like that in terms of...

Elena Doom

In terms of overall TS growth per share, yes.

David James Anderson

So the real news is -- I mean -- or the real insight or the real driver here is really the -- that European assumption.

Scott R. Davis - Barclays Capital, Research Division

Sure, no, I get it. It just sounds...

David James Anderson

The weight of that…

Elena Doom

2/3 of the Turbo business.

David James Anderson

Yes.

Operator

And our next question comes from the line of Shannon O'Callaghan with Nomura.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Dave, so how are you thinking about kind of managing the Defense business? I mean, it's naturally going to shrink here. It's only 15% of Honeywell now. But it's naturally going to shrink a little more. I mean, is there any restructuring you need to do there or reallocation of resources or any pruning of what you have there? How are you thinking about running it?

David James Anderson

Well, I think we've done some of that, and we've talked about that. I think we've done that smartly and really began that several years ago. I mean, we really began that in 2010 as we began to recognize the budget -- U.S. budgetary pressures and other challenges in terms of just the level of DoD spending as well as just the likelihood, Shannon, as we've talked about of the wind down of some of the key programs and initiatives, including both the Iraq and Afghan theaters. So we began that process. We continued that through 2011. I think the important thing for us is, #1, the starting point. As you know, we've got a very diversified set of businesses, products and technologies that comprise our Defense business. Number 2 is the fact that there really is opportunity within that business for growth to offset DoD budget decline. And a couple of specifics on that. One is non-DoD opportunities, so we're really leveraging the strength that we have with agencies and other customers outside of DoD, including international customers. And second, there's a tremendous installed base and aftermarket opportunity. And realizing our -- if you will, sort of our potential, in terms of our entitlement -- because, frankly, it's an area that's been, I think, underleveraged, underdeveloped. And given the leadership that we have now within our Defense & Space business, they've really recognized that, and they've added sales and marketing capability and focus. So it’s a -- despite the kind of the macro budgetary pressures within this business and the near-term, call it, 2012 outlook -- 4% to 5% down on a reported basis, top line, the reality is when we go out for the '13, '14, '15 time frame, even including worst-case scenarios, including sequestration scenarios, the numbers for this business don't look bad. We're looking at low single digits kind of declines in this business.

Elena Doom

On a compounded basis.

David James Anderson

On a compounded basis. So it's something that we feel, a, we've been preparing for on the cost and organization side; b, I think we're really focused now on things that are legitimately within our wheelhouse in terms of supporting actual growth in the business to offset the budgetary pressures and decline and even -- and sort of, c, pressure testing or stress testing the outlook for the business beyond 2012, it looks as though things are going to be okay, still decline, but at a very manageable rate. So overall, I think we feel very good about how we're positioned in this business.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Yes, that's really helpful. And then just a question on the Process and Building Solutions. You're mentioning sort of sustained order strength there. Any color on what's driving that in terms of the mix of what's new project activity versus you guys sort of selling upgrades into your existing installed base?

Elena Doom

Sure. I think, Shannon, where we are seeing the orders growth, which is not a reflection so much of the -- we don't count the service base, which is also growing, but it's growing at a much slower pace. The new projects are coming from new customers in the emerging regions, primarily. And you look at the growth there, it's in the double digits, where the service growth off of the existing installed base is in the low single-digit range.

Operator

Our next question comes from the line of Peter Arment with Sterne Agee.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Dave or maybe Elena, you can address this. So just on the commercial aftermarket range, you're putting out 7% to 12%. I wonder how just kind of you're backing into that. It seems like the trend is -- on the slides that you provided, it's been very strong, and it seems like, obviously, there's been some restocking that was going on maybe this year or just easier comps. But how should we think about that 7% to 12%? And what are you viewing kind of the cadence? Or any expectations there?

David James Anderson

Well, I think first of all, we're going to have, obviously, stronger numbers on the first half, Peter, compared to the second half, just given the strengthening that we saw in the R&O piece of the business during the second half of 2011. So comps are going to be much, much tougher in the second half of 2012. The other thing, just kind of building it up, it's coming more in line with flight hours but still positive as a result of when we look at the mix of aircraft that are flying, the number of aircraft that are coming off warranty. And as I mentioned, and as you're aware of, Honeywell's penetration, its share of market demand that we have gotten in terms of airline selectables, BFE, if you will, Buyer Furnished Equipment, and how that flows through in terms of our aftermarket penetration and our aftermarket revenues. So that 7% to 12% is really a buildup of, again, flying hours, mix, planes off warranty -- coming off warranty, which is a positive for us in 2012.

Elena Doom

Positive pricing.

David James Anderson

Positive pricing, as well as our own very good execution and share of demand that we've captured.

David James Anderson

I might just also add that the R&O, Peter, in terms of our overall assumptions is -- and that’s about 2/3 of the weight of the aftermarket business, is expected to be -- to outpace overall flight hour growth. But it's, obviously, not going to grow at the rate that we're expecting to see the spares or 1/3 of the aftermarket grow.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Okay, and so -- but just to follow up, based on what the slide is in the fourth quarter. I mean, you're not seeing a slowdown yet or the recoupling...

Elena Doom

Not at all.

David James Anderson

No. We're seeing very continued strong demand. It's one of those things that when you think about the outlook by sort of broad segment, as we've talked about, we feel good about the Defense & Space assumptions. We feel very good about the continued momentum in the Aero aftermarket. We've, obviously, benefited from very strong backlog in the commercial long-cycle businesses that will translate to revenues. The sensitivity, and really, the range outlook is really based upon the shorter-cycle businesses and just the susceptibility to macro factors and trends, which are inevitable.

Elena Doom

All right, and Giovann, we have time for just one more question.

Operator

Our next question comes from Deane Dray with Citi Investment Research.

Deane M. Dray - Citigroup Inc, Research Division

Just wanted to ask a question about the disclosures on the backlog. At this stage of the cycle, I'm not surprised to see that, that's growing nicely. How much of this backlog do you expect to ship in 2012?

David James Anderson

I'm sorry, Deane, I missed the very last part. How much backlog what -- in 2012...

Deane M. Dray - Citigroup Inc, Research Division

How much are you assuming of this backlog gets shipped in 2012?

Elena Doom

It's probably close to between 1/2 to 2/3.

Deane M. Dray - Citigroup Inc, Research Division

And do you -- can you just give us some more color about the composition of the backlog, anything about the embedded price that has gone into it, and just the expectations towards the line of sight for 2012 in terms of quote activity and so forth?

David James Anderson

I'd say, first of all, the -- in terms of the margin rate implications or implied, Deane, that we have, so kind of addressing your point about cost and price, I mean, we feel good that this backlog is going to translate to support the guidance that we've provided, the 40 to 70 basis points of margin lift overall for Honeywell that we've provided for 2012 over a very strong 2011. So I'd say that's #1. In terms of the, call it, sort of bid and proposal and quote activity, I think you’d have to say it’s high. Particularly, when you get into the oil and gas arena, anything energy-related, what we're seeing with UOP, just to take that slice into it, which I think is very illustrative, demonstrative of what we're seeing, it's really more of a concern about resources and having the caliber, the engineering talent and capability to actually execute than it is in having the opportunities. So we feel very, very good. And you know what we've all benefited -- the commercial aerospace business has benefited from in terms of the upgrades and improvements, the more energy-efficient aircraft, all the things that are driving demand in terms of the replacement cycle there. That's very positive. So and again, on the D&S side, which, when you look at our total backlog is included, those numbers are actually good.

Elena Doom

Up, low single digits.

David James Anderson

Up, low single digits. So we're -- we feel very, very good about both the makeup -- the margin makeup of the backlog and the sustained strong interest measured in bid and proposal activity and other activity, quoting activity, et cetera, on our long-cycle businesses.

Deane M. Dray - Citigroup Inc, Research Division

That's really helpful. And just a quick question regarding the new split on ACS. I know you're not going to give margin details on the 3 pieces, but you did call out for the BSD business lower margin, but it's also low capital-intensity, so you've got higher return on invested capital. How about on the other 2 pieces, the ESS and HPS, how do they look on return on invested capital?

David James Anderson

They look pretty good. The thing that would suppress a little bit the ESS businesses, of course, is the amount of acquisitions that we've made and the amount of goodwill, but the ROIs are all attractively north of our cost of capital. It's just that the BSD business has a very, very good ROI.

Elena Doom

So think about Process Solutions sort of being in the mid-teens from a return on invested capital perspective and the ESS business being just below that, given the M&A that Dave alluded to.

Deane M. Dray - Citigroup Inc, Research Division

Got it. And will Elena be sending out quarterly restatements on this ACS split?

David James Anderson

No.

Elena Doom

No.

Deane M. Dray - Citigroup Inc, Research Division

So it'll be on a go-forward basis?

Elena Doom

On a go-forward basis, starting in the fourth quarter.

Operator

And this time, I'll turn it over to our speakers for any closing remarks.

David James Anderson

Well, thanks again for your participation in the call today. We're obviously very, very pleased with the performance that we've demonstrated in 2011, how that adds to the multiyear track record of Honeywell. Despite a more challenging macro environment and economic environment that we anticipate in 2012, we're clearly, we think, very, very well positioned again with strength in the backlog in our long-cycle businesses, the continued momentum on the commercial aerospace and commercial aerospace aftermarket business and with all of the planning tools and analytics that we have in terms of really being able to manage through a more uncertain period and managing through, we think, a more difficult Europe and a more -- and a potentially more difficult China. But overall, very, very well positioned, positioned for attractive growth, both top line, bottom line and strong cash flow for 2012. Thank you.

Elena Doom

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone, have a great day.

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