Honeywell International Inc (HON) — Q4 2015 Earnings Call Transcript

Thank you, Kyle. Good morning, and welcome to Honeywell's fourth quarter 2015 earnings conference call. With me here today are Chairman and CEO, Dave Cote; and Senior Vice President and Chief Financial Officer, Tom Szlosek. This call and webcast, including any non-GAAP reconciliations, are available on our website, www.honeywell.com/investor. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance in our Form 10-K and other SEC filings. This morning, we'll review our financial results for the fourth quarter and full year 2015 and share with you our guidance for the first quarter and full year of 2016. Finally, as always, we'll leave time for your questions at the end. So with that, I'll turn the call over to Chairman and CEO, Dave Cote.

Good morning, everyone. As I'm sure you've seen by now, Honeywell delivered another excellent quarter, capping off a terrific year in a difficult environment. We delivered results at or above our guidance on segment margin earnings and cash flow. Earnings of $1.58 in the fourth quarter increased 10%, representing another quarter of double-digit earnings growth. We continue to drive margin expansion, up 140 basis points, excluding the impact of the fourth quarter 2014 Aerospace OEM incentives. Our free cash flow finished at $1.6 billion in the quarter, up 17% with a 127% conversion. For the full year, we increased sales 1% on a core organic basis while continuing our seed planting with investments in new products and technologies, high ROI CapEx, and expansion of our global footprint. We're benefiting from our balanced global portfolio, diversity of opportunity, and our ability to effectively manage what continues to be a slow-growth macro environment. We also proactively funded $160 million of new restructuring in 2015, and that includes $60 million in the fourth quarter, building on a healthy pipeline of new projects which will support strong margin expansion this year and beyond. Earnings for the full year of $6.10 increased 10%, representing the sixth consecutive year of double-digit growth. Our 15% dividend rate increase marked the 11th time in the last 10 years that we've increased our dividend. We committed over $8 billion in capital during the year to M&A and share repurchases, which sets us up nicely to deliver for our shareholders in 2016 and beyond. We're reaffirming our 2016 earnings guidance of $6.45 to $6.70, up 6% to 10% year-over-year. We're facing challenging end markets, but we have a credible and attainable plan to achieve this guidance, and our planning framework has not changed. We'll support growth wherever we have it to drive outperformance. However, we'll also be cautious in our sales planning, and we'll continue to plan our costs and spending conservatively, ensuring we remain flexible as a company. There continues to be a lot of exciting things happening across the portfolio driving our terrific results, and I can't help but highlight a few. At the 2016 International Consumer Electronics Show in Las Vegas, Honeywell's latest connected offerings were on display, including the second generation Lyric Round Wi-Fi Thermostat. The new Lyric Wi-Fi Water Leak and Freeze Detector was honored by USA Today with the CES 2016 Editors' Choice Award. This great new product provides users with early alerts of water leaks and frozen pipes to avoid costly repairs. The detector easily connects to your home Wi-Fi network and provides a simple do-it-yourself installation. In 2015, our connectable product portfolio sales grew nearly 30%, a good example of the benefits from our continued investment and development of new technologies to support growth. Our win rate in turbos on new platforms was once again over 40%. Honeywell turbochargers are the no-compromise solution for vehicle performance, better fuel economy and compliance with emission regulations. Our platform engine has surpassed 2.4 million flight hours to date. On the M&A front, we're pleased to have closed the Elster acquisition at the end of December, and the integration is underway. Elster brings outstanding technologies, including software, strong well-recognized brands, energy efficiency know-how, and a global presence to Honeywell in ACS. We look forward to updating you on our integration progress at our Investor Day in March. Earlier this month, we acquired the remaining 30% stake in UOP Russell, a global leader in modular gas processing technology and equipment. As an example, in the fourth quarter, PV Gas, Vietnam's primary gas provider, selected UOP Russell's modular gas processing plant to separate liquefied petroleum gas, or LPG, from natural gas. And we repurchased close to $2 billion in Honeywell shares during the year at attractive prices, which is nearly double the rate of 2014. And you can expect another terrific year for capital deployment in 2016. You can expect to see lots of exciting innovations at our Investor Day on March 2 where each of the businesses will highlight a number of new products and roadmaps for future growth and margin expansion. We also plan to share how software is evolving throughout the organization, which we believe is a key differentiator. Our seed planting for the future and strength of execution will allow us to deliver on our long-term targets and continue to outperform over the long-term. Needless to say, as we continue to talk amongst ourselves, this is an exciting time to be at Honeywell.

Thanks, Dave, and good morning, everyone. Dave mentioned our deployment of $8 billion in shareholder capital for 2015. That actually excludes $2 billion in dividends; and just to remind you, we've raised our dividend rate in the fourth quarter by 15%. The biggest component of the $8 billion is M&A. We've previously articulated the rationale for each deal, and we're pleased with the diversity of the investment. The growth in these areas helped to mitigate the challenges we have in the oil and gas related businesses. On a reported basis, the sales decline in the fourth quarter was driven by the stronger U.S. dollar and the lower pass-through pricing in Resins and Chemicals, offset by the absence of the aerospace OEM incentive in the fourth quarter of 2014. Segment profit was up 15%, with segment margins expanding 290 basis points to 18.8%. We drove profit growth and margin expansion in each of our three SBGs. Overall, our results met or exceeded the guidance we provided in December. Free cash flow in the quarter was $1.6 billion, up 17% versus 2014 with conversion at 127%. We had better improvements in working capital and lower cash taxes than what we anticipated in our outlook call. So overall, another strong quarter of margin expansion, double-digit earnings growth, and strong cash flow.

Thanks, Tom. Operator, please open the line for questions.

Hey. Good morning, guys.

Hey, Scott.

Good morning, Scott.

Dave, you're not a bad CEO. We'll give you a nod.

That's appreciated. It only took me 14 years to get it.

Well, I don't know if you're worth $25 million, but if you can throw a pitch 100 miles per hour, maybe.

More. I'm worth more.

All right. Good. Well, can I answer your phones for you? Maybe I'd get a cut of that. But anyways, not much really to pick on about the quarter. My biggest question really, the Elster deal looks – I mean, I think it was a really interesting transaction and the markets have gone maybe the direction that you probably wanted them to go the last couple of years. You've had dry powder, but things have been a little pricey. I mean, is there – are there other Elster-ish type deals out there that you are starting to see? I mean, where – you've always had some confidence in M&A, but a lot of the deals have been smaller. Are there bigger deals out there that are interesting, you feel like you're getting down into the right price?

Well, there's always a full pipeline that we're working, and there's some bigger stuff, some smaller stuff and you just never know when they're going to hit. We always have a pretty full pipeline that we're working and there's some bigger stuff, some smaller stuff and you just never know. For last year, a lot of that came together in a very good way, and we're hopeful that it can continue again this year, but it's not one of those things you can guarantee.

Yeah. Makes sense. Moving more specifically, I think the one area that I've always struggled to model with you guys is PMT, and help us get a little bit more comfortable around UOP. I mean, if your core was down 10 and catalysts were strong, that implies the basic, what I'll call the consulting business and licensing business must've been down a lot. What's your confidence that that stuff comes back and catalysts don't normalize? Particularly, you've seen the GDP numbers out of the U.S. today. I mean, it’s – you may have another tough year in front of us. I can't imagine catalyst growth can stay incredibly strong forever, so help us get a little bit more confidence around that because I think it's just impossible for us to know.

Yeah. We'll talk more about this at Investor Day, but you can expect that the catalysts are going to continue to do well. We have strong demand for refined product. That's not going away. And that's really where demand comes from for us on the catalyst side. When it comes to new projects, there wasn't as much put on the board as they were in prior years, but we actually took a lot of those hits last year. So as we start looking at kind of the comparables, we should start seeing it coming out. It helps for us that this diversity of opportunity you hear me talk about where oil and gas is only about 13% in total, so it's been manageable and I think you're going see UOP getting onto a growth path again as we get into next year.

Just to put a little more color on what Dave said, I think the orders and backlog are holding up okay in what is a rough environment. As I mentioned, UOP orders were up over 50% in the fourth quarter, and that was across all their business lines so equipment, licensing, gas, and catalysts.

Okay. That's helpful. Thank you, guys. Good luck.

Thanks, Scott.

Thanks.

Thank you. Good morning, everyone.

Hey, John.

David, it's nice to see a company report a quarter that isn't padded by 5% tax rates and below the line parlor tricks.

Well, thank you.

Tom, what was commercial vehicle on the light side if you exclude, I'm sorry, what was Turbo on the light side if you exclude commercial vehicle? What was the growth rate there?

It was roughly mid-single digit growth.

So I guess my question is if you think of Turbo, right, and the penetration you've just articulated getting to the 50%, you would think this business should be pretty well-positioned to start to put up a really high growth segment and driver of profit for Honeywell?

Yeah. That's the whole point. You hit it exactly right. It's going to be very good growth. I can understand Tom's reticence of the double-digit but I would say at the end of the day there are several phenomena that when commercial goes the other way and you don't have an offset impact to currency, I think you're going to say it looks pretty darn good.

Yeah. I was literally taking your 40% win rate times the global auto sales times 50% delta, right, and then just sort of assuming currency and the commercial vehicle didn't factor in it.

You mean, do I think I need to do something that's foreign? No, I don't feel compelled to do it because somebody else is.

Okay. But what about then doing a bigger deal? Does that, I mean, are you still sort of wed to this notion that you've got to really be able to be ring-fenced and bolted on?

No. I don't feel compelled to do it because somebody else is. And I feel like we're big enough and we're going to perform very well on our own.

Got it. Thanks much.

Thanks. Good morning, guys.

Hey, Joe.

So, Dave, nice quarter. It's got to make you feel a little bit better about the Pats' loss last week.

Oh, geez. Why'd you have to put it that way?

Sorry. I had to dig a little bit. Let me start on that – let me kind of start on a near-term question. Last year, I recall January getting off to a really slow start. It surprised you. It surprised us. I think it was down 8%.

Right now, I'd have to say it feels just fine. I know last year we got surprised the other way. This year we're not getting surprised.

Okay. All right. No, that's helpful. I guess maybe one of the things that we've been talking to investors a lot about recently with the Boeing results earlier this week was just the potentially weakening longer-term production schedule at Boeing.

No, it doesn't really have any effect on us. And you've probably heard me say in the past, this diversity of opportunity that we talk about for the company applies to our Aerospace business also. We’re tied to basically everybody.

Okay. That's helpful. Maybe one last question for Tom, just going back to PMT for a second, it seems like you're starting off the year pretty slow with organic growth expected to be down 11% to 13%.

It's a good question. I mean, as we and we gave you our guidance for the full year on both UOP, HPS, and the like. And given the backlog dynamics that we talked about as well as the visibility that we have into the service bank and HPS, in particular, we're still confident in the full year outlook.

Yeah, Tom, if I could add, the other thing to point out, Joe, is that our gas processing business in Q1 of last year had just a fantastic quarter; so we also have a little bit of a comp issue just in Q1, and that'll ease through the rest of the year.

Thank you very much. I want to also stay with Aerospace. I mean, the deliveries at Boeing are really more due to timing because they're building new planes for R&D.

Are you talking about on the connectivity GX side, that kind of thing?

Absolutely.

Yeah, I can't put any numbers on it at this point, but so far – and I think you'll get some of this at Investor Day – Tim's pretty excited about what he's seeing, the sign up rate and the speed with which they're able to acquire new customers here, because the value that Tim's able to add through is connectivity and services.

Yeah, no. They're pretty much throughout the year.

Thanks, Tom. Operator, please open the line for questions.