Honeywell International Inc. (HON) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Honeywell's Third Quarter 2007 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to Mr. Murray Grainger, Vice President of Investor Relations.

Thank you, Jennifer. Good morning and welcome to Honeywell's third quarter 2007 earnings conference call. On the line from the UK today, we have Chairman and CEO, Dave Cote; and with me here at Morris Town is Senior Vice President and CFO, Dave Anderson. 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 would ask that you interpret them in that light. This morning, we will review our financial results for the third quarter and expectations for the remainder of the year, and of course, allow time for your questions. With that, I will turn the call over to Dave Cote. Dave?

Thanks Murray, and of course good morning everyone. Well, we got a pie or more of good news for you again this quarter. It's kind of nice to be able to deliver these kind of results again. Sales were up 10% to $8.7 billion and we had strong organic growth and that's about 9% across all of our businesses. Segment profit grew 13% to about $1.2 billion with margins increasing again by 50 basis points to 13.4%. And that solid segment profit growth combined with the lower share count for the quarter offset of course by the interest expense translates to 23% increase in earnings per share to $0.81; and that of course is at the high end of our previous earnings guidance. Importantly, you've heard both Dave and I talk over the years about the importance of cash and how much attention we give to it. Well, free cash flow for the quarter came in at $736 million and that's up 16% for the quarter, and year-to-date our cash flow is up over 30% to $2 billion. We see good momentum continuing to the fourth quarter and we are reaffirming our full year EPS guidance at the high end of our previous stated range. And we now expect EPS to be in the range of $3.14 to $3.16 for this year, and that's a pretty darned impressive 25% increase over last year, overall another great quarter of financial performance for Honeywell and really a continued strong outlook for the remainder of the year. Now let me spend a couple of minutes updating you on some of the highlights for the quarter and for year-to-date, and I would also like to again reinforce some of the key themes that we believe make Honeywell very well positioned for continued growth in the future. The first theme is the strength of our businesses. We continue to be awarded major multiyear contracts and platforms and that's really across all our businesses and that really reinforces the confidence that our customers have in our technologies, our products and our solutions. As you might imagine, we were very pleased to be selected by Airbus to supply all the major mechanical system for their new A350 aircraft. This win is just a credit to them for great work that's been done by Rob Gillette and his entire aerospace team. And they have really made this a much more customer focused and responsible organization than it ever was. The second theme, we continue to benefit from our strong global presence and we've got great position in emerging regions; all geographies and that includes North America experienced growth in the quarter; however both Europe and Asia Pacific continue to lead the way with very healthy growth rates. Then we also continue to effectively deploy our capital and that drives significant shareholders value. We've repurchased approximately $3.8 billion. That's over 70 million shares year-to-date, and we have closed or announced about $1 billion of acquisitions and our latest announcement of handheld products and this is just a great add to our ACS business and it provides great growth opportunities in an attractive adjacent space for asset tracking and security, and we expect that handheld acquisition to close in the fourth quarter this year. And then finally, we are very well positioned for future growth. You've heard us talk before about the need to be in industries that have good mega trends or as we sometimes call them key macro drivers. And we look at the micro drivers' safety, security, energy efficiency, air travel; all of those remain favorable and overall our market conditions look good. So with that summary, let me turn the call over to Dave to go through the financials for the quarter and the outlook for the year. Dave?

Thanks Dave and good morning everyone, and let me add my appreciation too for you joining in on our conference call this morning. I am on slide 4 titled financial summary. Again, sales up 10% for the quarter, 9% organic; now that importantly includes the 2% benefit from foreign exchange. Sales came in about $100 million more than we have previously guided driven by the benefits of foreign currency translation and also stronger than anticipated performance from ACS in the quarter. Segment property as you can see from the slide was up $138 million or 13% compared to the same period last year. Segment margin improved 50 basis points to 13.4%. Not shown on the slide but between segment profit and TBT and net income below the line spending was up year-over-year mostly driven as Dave said by higher interest expense and then a variety offsetting items mostly puts and takes for the other global line items. Net income was up 14% in the quarter or up 18% if you exclude the additional interest expense from the higher debt balances, which are really mostly attributable to our 2Q share buyback. This is another strong performance. It continues our first half momentum where net income was up 19% in the first half versus prior year. Now the lower share count as well as the strong profit performance drove earnings per share at 23% to $0.81. This is at the high end of the range for the quarter that we communicated to you. It gives us continued confidence in the 25% EPS growth guidance for the year. Now finally, free cash flow $736 million, up $100 million or 16% versus last year representing almost 120% conversion. And as Dave indicated for the 9 months, year-to-date, cash flow was up 30%... actually over 30% from last year to approximately $2 billion and we just continued to make good progress on cash metrics. Working capital turns despite the revenue growth improved again in the quarter and we are on track for again that strong free tax flow the $3 billion guidance that we've given you for the full year; so in summary, another terrific quarter for Honeywell, good momentum as we close out 2007 and at the high end of our EPS guidance range. Now let's go through each of the segments, starting on slide number 5 with Aerospace. As you can see, Aero segment sales were up 9%, 7% organic. Segment profit was up 12%, margins up 50 basis points to greater than 18% in the quarter. Total commercial sales were up 9%. Continued strong demand in commercial for both OE as well as aftermarket, the commercial OE sales were up 8% driven by strong demand from OE customers to support course production of new air transport as well as business jets. And again, we are seeing significant growth on both sides of commercial; both the air transport and business jet. The air transport and regional OE sales were up 9% and the business in general aviation OE sales were up 6% in the quarter. Commercial aftermarket sales were up 10%, the ATR, the air transport regional aftermarket were up 6%, in-line with expectations and essentially in-line with global flying hours. BGA, the business in general aviation aftermarket sales were up very robust 22% in the quarter, driven by increased service and spare parts revenues as well as higher engine utilization. Defense and space also had a good quarter, up 8%. It had good performance in surface systems, again the TIGER program continues to perform very well and made an important contribution. And we had the benefit of course in the quarter from Dimensions International acquisition, which added to the defense and space growth. The integration by the way of Dimensions International is on track. We're very excited about the opportunities in this business and what it brings to us in terms of the services and the logistics offerings forward to this business. Now on the margin side, volume growth, price, productivity more than offset inflation in aero in the quarter and as a reminder, margins in aero business are up 100 basis points on a year-to-date basis. So again, a great quarter for aero and as Dave mentioned also a quarter in which we continue to build our great base of business for the future with multiyear contract wins in both commercial aero and defense. For the year, we anticipate aero sales of around $12.2 billion, up approximately 10% for the year; by the way reflects an increase of about $100 million from a previous estimate and we expect continued margin expansion in the fourth quarter at aero, and we expect full year margins for aero to expand 500 basis points from full year 2006 to just below 18%. Let's go now to slide 6 and go through the highlights for ACS. Sales for ACS were up 12% in the quarter, 11% organic, which includes 4% from foreign currency translation. We had positive growth across all the regions in ACS. And by the way, I think it's notable, this is the 10th consecutive quarter of double digit reported revenue growth for ACS. On the product side, we had particular strength in life safety and security, which continued to perform well benefiting from our strong global presence and also the robust demand in emerging regions. The solutions businesses continue to experience significant growth. They were up 18% in the third quarter. They are benefiting of course from strong energy retrofit projects and again also robust demand in markets, in refining commercial building as well as I have said energy retrofit. The segment profit for ACS was up 13%. It's a 10 basis point increase in margin to 11.7%. And when you do the math and we've discussed this with you on numerous times previously, when you do the math, it really is the mix impact, so volume and productivity loss by inflation and the very high solutions growth that nearly doubled or more than doubled solutions versus products growth in the quarter. So another great quarter for ACS, continued momentum and continued strong execution across the ACS portfolio. For the year, we anticipate ACS sales of around $12.3 billion. That's going to be an impressive 12% full year increase over '06. It's the growth there and the increased guidance that we are giving for ACS, it's about $100 million over previous guidance is primarily due to continued strong solutions sales in both the third and the fourth quarters. Let's turn now to slide 7, talk about Transportation Systems. For TS, it's really... this quarter was really a contrast between the strong performance of our Turbo business particularly on the passenger vehicle side offset by challenges within the consumer products business. Overall sales for TS were up 10% in the quarter driven by 15% increase in Turbo and 4% increase in CPG. Passenger vehicle Turbo business continues to perform very well. We had strong demand in Europe and Asia Pacific and also increased diesel penetrations... slightly increased diesel penetration in the quarter greater than 50% in the third quarter. Our commercial Turbo business continues to be down as anticipated; however, we expect positive comparisons in the business beginning in 2008. Now CPG, up... revenue on a 4% on a reported basis; volume was down 1% in the quarter due to continued softness in the U.S. automotive aftermarket. For TS in total, segment profit in the quarter was down 4%, margins were down to 150 basis points to 10.1%. The strong productivity that we saw in Turbo in the quarter and also pricing contribution are more than offset by inflation, the investments we have made in new Turbo platforms, new product introductions as well as some planned performance issues at CPG. For the year, we now expect TS sales to be about $4.9 billion, an increase of 7% over '06 in line with previous guidance. We anticipate full year margins for TS to be in the range of 12%. Let's go now to slide number 8, Specialty Materials. Sales are up 6% for SM; segment profit increased 43% driving 340 basis point improvement segment margins to 13%. UOP had a great quarter; sales grew 28% compared to last year and UOP continues to experience strong demand for its proprietary technologies refining and petrochemical market conditions remain favorable, and we continue to leverage a strong market positions and global presence in UOP. Chlorine [ph] products were down 15% in revenues in the quarter due to softness in refrigerants, which is impart of course due to continued weak demands in the U.S. housing market, strong advanced fiber sales within specialty products were offset by declines at resins and chemicals due to a plant maintenance outage, so those two are essentially offset; specialty products and resins and chemicals. Segment margins for SM increased 340 basis points, as I mentioned, driven by favorable UOP volumes as well as productivity and price actions. And for the year, we anticipate now Specialty Materials sales to be about $4.8 billion, up 3% for the year. That's an increase of about $100 million compared to our last quarter's estimates with broad based growth expected in the fourth quarter. Margins remain on track to the full year at around... guidance at around 13.7%. So with that review of each of the segments, the highlights of each the segments, let's go to slide 9 and just summarize our view for 2007. Shown on the left-hand portion of the slide, the year-to-date performance and on the right, our full year expectation. Again, we have experienced good momentum across our businesses in the third quarter. We remain confident in the prospects as Dave said for the reminder of the year. We talked about... as we went through each of the business highlights; I mentioned briefly the expectations for each of the businesses. So on a consolidated level, we now expect revenues to be in the range of $34.2 billion for Honeywell overall, an increase of 9% for the full year versus 2006 and again about $300 million over the $33.9 billion that we had given you as our previous guidance. Segment profits should be up about $500 million with margins at about 13.5%, up 50 basis points from '06. Below the line, in legacy expenses are consistent to the guidance we gave you last quarter, which together with the increase in segment profit and lower share count, drive EPS to the $3.14 to $3.16 range, the high end of the previous range that we had given you. And finally free cash flow as we've discussed should be approximately $3 billion for 2007, up 20% from last year, also reflecting the top end of our range, and of course reflecting strong earnings growth and very good operating capital, and particularly working capital performance for the business. Now for the fourth quarter, as you can see in the bottom of the slide on the takeaway of the slide, we expect sales of approximately $8.9 billion, up 8%. EPS of $0.89 to $0.91, up about 25% from '06 fourth quarter and in line with our previous guidance, a good end to what looks like it is going to be another, again very successful and terrific year for Honeywell. Now before we go to Q&A, I would like to spend a few minutes on slide 10 summarizing our views, our current views on the outlook for 2008 and as a reminder, we will of course come back to you in December. We are actually scheduled for December 12th to go through the build up of '08 including more granular assumptions and also the financial guidance for each of our businesses. But right now, I just want to provide some macro summary for '08 and really built on Dave's earlier comments and share with you our initial views that really kind of laid the foundation for that outlook. So the first point is... the overall... our overall view of the global economy remains favorable, remains actually quite positive. While we are planning for modest deceleration in some of the key developed markets including obviously prominently the U.S. and Europe, we expect continued strength in developing markets and the key markets for us obviously, which are very robust where we are participating include Mid East, India and China. Now as a reminder, despite the reference to the deceleration to those developed markets just as a reminder, we have seen very good growth in the U.S. on a year-to-date basis 2007, as well as very good growth in EMEA in Europe in particular in 2007. So while we are sounding a little bit cautious in terms of the outlook for those developed markets, the fact is all the fundamentals remain very sound and the performance remains very positive. Now we have seen, and we will continue to expect softness in specific segments such as U.S. residential and U.S. automotive. However, it's important to remind ourselves that the exposure to those end markets for Honeywell is really not large. Again, we have less than approximately 6% sort of mid single-digits in terms of total residential exposure, in terms of measured in sales for U.S. residential, and frankly the U.S. automotive exposure de minimis. In fact in contrast, the macro trends in Honeywell's key markets such as safety, security, energy and efficiency, air transport all remain very favorable. And these macro factors will continue to drive growth and demand for our differentiated technologies and our products and services. On the business side going through the highlights there in terms of again sort of setting the stage for our December discussions, we expect aero will continue to perform very well in an environment of increasing commercial OE bills, continued growth in flying hours and also increased defense spending in 2008. EPS should see continued global opportunities for growth, favorable non-residential construction trends and infrastructure spending, and particularly strong in emerging regions, which will continue to drive demand for more advanced products and services. In TS, the Turbo team has had great success winning new platforms over the last few years. We will start seeing those benefits in '08 and as said earlier, we are also going to see favorable comps within our commercial vehicle business in 2008. And finally with respect to Specialty Materials really parallel in ACS, we should see good growth based on energy needs, capacity expansion, as well as continued demand for SM's differentiated products. So overall, we are confident that 2008 looks like another opportunity to extend the performance track record of Honeywell. And we look forward to speaking to you again on the 12th and taking you through the specifics of our financial outlook for 2008. So with that, Murray, I will turn it back over to you for Q&A.

Thanks Dave. Jennifer, let's open up the line to questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of Shannon O'Callaghan with Lehman Brothers.

Good morning, guys.

Hi Shannon.

Just a couple of questions, I guess, on transportation. You mentioned some of the Turbo investments there as well as some issues in CPG. Can you give us a little more color around that? Maybe some quantification of where the margin pressure was driven from?

Well, on the quantification, I probably won't want to give you a lot of that because we don't generally disclose it, but it really does come down to the two things that you mentioned. One is we have won a lot of orders if you look at the last couple years and it was the previous boost in new platforms to the greatest number of new platforms in that two-year period than... had been seen in a while. And our guys want a pile of them. We will want to make sure that we launch flawlessly. We want this to be one where customers look at us and say, wow, those are the guys you want to go with because they know their stuff. Well, that means we'd be very careful and spending the money that we need to, to make sure that we've got great reliability, and that's why call it an investment because it is. We have unfortunately kind of an expense, but the fact is an investment that we are making sure we do right thing for the customers. On the second one on CPG, I'd have to say it's really as simple as we are just not executing as well on there as we should. And our team knows it. We got a renewed vigor in there. And they are going to be paying more attention to it. And it's painful and it's simple as that. Dave, anything you want to add?

I would just say Dave, I think relative to the quantification just directionally about half of the margin, the client is associated with that new product investment, and about half of it is related to the operational issues that Dave mentioned.

Okay, great. And I mean... I guess as you look out on those, I mean, the turbo stuff is sort of... is good news because you're investing for a lot of growth there, you say maybe you have some visibility in terms of when that investment turns to an improving margin, and then in same in CPG in terms again through some of the issues there. Can you talk about them a little more and when you think you might go from margin pressure to maybe recovery or flattening?

That's not the kind of timing I guess that I'd want to put on. But beyond saying, let's say the 2008 will be better, let's put it that way.

Okay. And then just a question on ACS, I mean the growth in solutions continues to be really impressively strong there, and it seems like that it's probably going to stay that way. I mean in terms of the mix right, which is fine but I guess if you think about the margins there, it would seem to me that that pressure is probably going to stay there for sort of positive reasons. Would you agree with that?

I would say that we expect to continue to grow very well in both and I think it's one of the advantages of being in multi industries. You never know... you are playing at a lot of different places because you never exactly, which market is going to do extremely well, or what area you are going to do extremely well despite your best efforts to forecast. To the extent that solutions does grow faster than the product side, then yes, it does cause more of the mix issue. But just because that's happening this year, I wouldn't say that necessarily that's the way it has to be going forward. And I don't think we're good enough to be able to predict that.

Yeah, okay. Just seems like they drivers for solutions are probably going to stay pretty strong, but --

Actually, we kind of hope so because we kind of like the... we kind of like the overall growth. And when you have the business growing consistently, as Dave pointed out double-digit sales and income that's not so shabby.

And just the last one on CPG, obviously, you will get a quarter like this and everything really all the key drivers of the company are doing exceptionally well. And then you have CPG kind of dragging on you a little bit. Any thoughts of doing anything differently there or getting more aggressive either on the cost side or strategically?

I would say definitely there were two things differently and that's why the team is in there. This is all stuff that's correctable. We have done it to ourselves and we need to fix it and we will. Dave is there anything you want to add on either the ACS margin comment or CPG?

No. I just... I think your point was good... points were good, which is the fundamentals on ACS, Shannon, as you know are good. Across the board, we obviously have backlog and sort of if you will long cycle contribution of the solutions that's going to... we think that's going to continue obviously into 2008 and beyond, hopefully beyond. And with respect to CPG, I think just underscore what Dave said, we have got new leadership in the business both the President of the business, as well as on the ISC side, the innovative supply chain side. Top talent recently put in place into new roles and very, very focused on fixing some of the issues that we saw, which really came through in the third quarter.

Okay. Thanks a lot, guys.

You're welcome Shannon.

Your next question comes from Jeff Sprague with Citigroup.

Thank you. Good morning.

Hey Jeff. A: Jeffrey Sprague: Dave Anderson, when you were actually going through your segment update for '07, you actually did not give the margin target for ACS. Has that changed?

The full year number for ACS now is 11.3%; and Jeff, it has changed. We have guidance of about 11.5% previously. And it's reflective of that higher solutions mix that we anticipate now for ACS for the full year. So it's just... that higher revenues that I mentioned, the $12.3 billion and that significant contribution that's coming from solutions and that's... it's really a second half phenomenon compared to the guidance that we gave you in July for the full year.

And can you give us a sense of the type of operating leverage that you are seeing in products. So we obviously understand this mix issue. I guess I personally was hoping to see a little bit more margins comes through despite that on the notion that operating leverage and products margins that are still probably fundamentally lower than they should be would in fact start to turn up. So can you give us just a little bit of color where product margins are or what the incremental margins are like and what kind of upside you might have there?

The conversion remains very strong on the products side. So Jeff, we are getting the benefit of volume as well as productivity with some price and productivity... actually price is about neutral. But we are getting the benefit of volume as well as productivity. Some of that is being offset by material inflation. So... one of things we obviously work very hard on is having the combination of price and productivity offsetting material inflation. But we did have material inflation headwind in ACS and literally across our businesses in the quarter. So part of that is being impacted, but the conversion rate... the margin conversion rate, the incremental pre-tax that we are getting on the product side of the business is very strong in terms of... we are typically in that 20% to 30% range in terms of conversion in the products, and that was our performance in the third quarter as well.

Right. And then just one on aero; it looks like Boeing kind of took you guys out of the spotlight on 787 issues, but nevertheless your R&D is ramping up as you try to help them get the program launched. Can you just give us a sense of where R&D was in the quarter versus the prior year and how to think about whether there are headwinds or tailwinds in that number as we look into '08?

Yes, R&D was up slightly in aerospace in the third quarter compared to prior year, but not really anything that significant. And what we've been able to do and this is consistent with our previous discussion on this. It's really to continue to balance our overall engineering and R&D spend consistent with the earnings guidance, Jeff, and the margin expansion guidance that we've given you for aero, both for the quarter, the remainder of the year and the full year. So it's really pretty... it's significant in terms of managing the overall mix of R&D spend and resources, if not significant financially.

Thanks a lot.

If I could be just build on Dave's point, the 787 is one of a multitude of programs that we work on. I wouldn't say it in anyway dominates our R&D spending. And we have a lot of programs that we focus on and manage. And for me it's always been one of the strengths of the Honeywell Aerospace businesses is breadth to the different platforms we are on. And I hope Jeff, well, you could say you were somewhat disappointed in the ACS margin growth, but overall you'd have to say that if we keep being disappointing with 23% EPS growth that's still not a bad place to be.

The EPS growth is good, but I think the kernel of my thought there is as you guys did put out this 20% margin target, you are a long way from that if margins were only going up 50 bps a year on a consolidated basis. That target just does not ring creditable at all, so the question really becomes when we really start. Particularly in light of maybe the macro fundamentals not looking quite as bright, maybe you can't rely on the top line quite as much and therefore you need to really bring it home on the margins. So if you got any thoughts there on kind of '08, '09 margins as horse works it way through on some of these other things, I think we probably all love to hear it actually.

And we look forward to our December discussion.

Thank you very much.

Thanks Jeff.

Your next question comes from Scott Davis with Morgan Stanley. Scott Davis - Morgan Stanley & Co.: Hi, good morning everybody.

Hey Scott. Scott Davis - Morgan Stanley & Co.: I was hoping you talk about all the cabbage you are making there, Dave.

It is lots of cabbage, and it was up 30%, I'd have to say it feels pretty darn good. Scott Davis - Morgan Stanley & Co.: Put a smile on my face and what's been a pretty long week. But I don't want to be a communitarian [ph] but I am going to pile on, on Jeff's comments. And I guess one thing I don't get and it could just be that I'm dense, but why can't you get some operating leverage in the solution side of the business? And I guess what I am asking is when you're up 19%, seemingly it provides an opportunity to maybe get a little price, a little operating leverage. And I assume some of this would be fairly high margin sales and things like experience in PKS, where you have already expensed a fair amount of that R&D development costs. And so, I would think your incremental margins there would be pretty higher. Am I missing something?

No. Actually, I think what you find is in just about everyone of the businesses margin rates are increasing. It really is the mix issues that Dave was talking about. Dave, I don't know if there is anything you want to add there. It's really just kind of a math thing.

Yes, it is. And also I think within solutions, we had particularly good growth, stock on the building solution side. So you kind of had mix within mix so to speak in terms of that. And just didn't see kind of contrast to the question earlier about conversion just didn't see that same level of conversion on the solutions. So I just... we just didn't see the volume leverage during the quarter. Scott Davis - Morgan Stanley & Co.: Now, I mean again to pile on what Jeff was saying, I mean you had a lot of macro tailwinds in ACS, and when you think about kind of converting 12% top line to 13% segment profit, I mean if we had a little bit of a speed bump, is there anything you can do? I mean are you in a position where there are high discretionary expenses in that business right now or some other lever that you may have to offset any weakness?

Well, of course. We spend a lot of time and money building the product pipeline, building the common processes system, all things where in the good times you really invest -- Scott Davis - Morgan Stanley & Co.: Hello?

Yes, sorry. We are getting a lot of feedback. On the good times you invest and you do just buying because it sets you up for the tougher times. However, tougher times come; you don't have to keep investing at that rate because all your markets got pushed out also. So yes, we have... I think we have real flexibility there and actually I think over the next few years, you'll be quite encouraged by what you see coming out ACS. Scott Davis - Morgan Stanley & Co.: Okay. And lastly again to pile on transportation a bit, the... when you think about kind of where you came in versus guidance, I mean you... presumably you would've known a quarter ago that you have platform investments in your product costs, plan performance issues. I'm sure you didn't and you certainly knew about the inflation costs. So, I'm still not kind of getting 150 bip miss here if it's not adding up; I mean is this the function where maybe you went after volumes a little aggressively and could have gotten some more price if... or again, is it all just buried in CPG and we are just not seeing... we're just not getting the breakout?

Dave, why don't you go ahead?

Okay. Again as I've said earlier, Scott that we had from an R&D, from an engineering standpoint, greater new product expense and new platform expense in the quarter. That affected us in terms of the 90 basis points hurt in the quarter from a margin standpoint. But the more important thing to your question in terms of what we had visibility, and to... where we were disappointed in the quarter was really these operational challenges that we had in CPG in both North America, as well as in Europe mostly client related with other operational issues and that resulted in about 90 basis point impact in terms of margin as well. So that was earlier when I referenced the directionally is half the investment and half the operational performance. So really from a visibility standpoint, I think the thing that really hit us in the quarter for TS and for CPG were these operational issues. And we just didn't have the visibility, didn't have the... have that in our sites when we forecast the quarter for the business. Now the good news is that we had greater than anticipated strength in our passenger vehicle business, they executed very, very well from a volume standpoint in the quarter, and that momentum is going to continue. And as Dave said earlier, we are very confident that we are getting our arms around the CPG-related issues. We are very, very confident that we will round those and we will see year-over-year, quarter-over-quarter improvement as we progress. But the big thing on the visibility was the operational issues. Scott Davis - Morgan Stanley & Co.: Okay, now I get it. I mean the reason why everybody I think is being so tough on is that the last several quarters, you have been so good on guidance and everything has been fairly spot on. And this is the first quarter I think where we, where there is just some clear questions plus at $60 stock price, you going to have tougher questions than when it was $40 stock price.

Absolutely. As we take pride, obviously and in terms of not only our macro guidance, but also the specifics of that guidance. And the execution of this is just one where we missed on the operation issues. On the other hand, it doesn't affect... the numbers in total given obviously the strengths that we had overall. And as we said with the confidence we have in the leaders, new leaders that we have in place there, and already what we have in place in terms of the actions, I'm confident we've got our arms around it and we'll see quarter-over-quarter improvement. Scott Davis - Morgan Stanley & Co.: Okay, great. That's helpful. Thank you, guys.

You're welcome.

All right. Thanks Scott.

Your next question comes from the line of John Inch with Merrill Lynch. John Inch - Merrill Lynch & Co.: Thanks. Hello?

Hey John.

Hi John. John Inch - Merrill Lynch & Co.: So UOP up 28% pretty lumpy versus last quarter. Could you guys talk about the refining side of UOP versus the non-refining side? Was there one particular aspect throughout those results and how we should think of this business going forward?

Well, I'd say prospects for the business look good for our long part of the cycle here. This is still a real shortage of overall refining capacity out there. And there is a lot of refineries on the drawing board all of which are going to be good for UOP. So I feel pretty good about the prospects of this business for a while. Dave, anything you want to add?

I'd say we had kind of across the board to your question, John, we had across the board strength in UOP in both refining and petrochemical, and in terms of products, as well as in license, and royalty income. So... and across all the regions, so and just underscore of what David said, we just see really good continued momentum and that's based into that fourth quarter guidance that we'd given to you. John Inch - Merrill Lynch & Co.: Right. But that's really on your trend line expectations for these businesses are robust on the refining side. Is that not?

Yes.

Yes, I think that's fair to say. John Inch - Merrill Lynch & Co.: So was there something about the petrochem business this quarter or is it just --?

No. I think it's more of when we talk about UOP given the breadth of UOP, and again the number of different contracts, the revenue recognition in terms of the recognition on both product side, and on the services side and the royalty side. What we are going to see is we are going to see these kinds of quarters and we have guided that historically. Directionally, I think pretty well in terms of the ups and downs in terms of that variability. But the trend line to Dave's point, which is I think really the important takeaway is that we continue to see very positive underlying macro trends for the business. We have got real good confidence in the outlook for the business for the remainder of this year. John Inch - Merrill Lynch & Co.: So Dave, you spent $3.7 billion on share repurchase year-to-date. It's actually about double what you spend all of last year. Can you just remind us again the process... the thought process, the capital allocation thinking behind why you have been so aggressive through the first part of this year, and what would have changed from last year, particularly considering last year... the share price was actually not immaterially lower than where it is today. Just a little help on kind of how you sort of how we got to where we are today and what are you thinking?

Let me take a shot and then we'll ask Dave. And as I said you'll probably be bored with my answer because it's pretty consistent with what we've said in the past is we always look at dividends, share repurchase and acquisitions. The dividend we want to ensure stays competitive. Acquisitions, we think we are very good acquirer and we think there is the... we do a very good job of building value with those. And we also always look at share repurchases and how does that makes sense. And obviously, there is a trade off. If we think that we have a lot of very good deals in the pipeline then we pull back on repurchases. If we don't see as many good deals in the pipeline, well, repurchases make more sense. And if we take a look at the... as we got into the beginning of this year and the frothy market, there weren't a lot of good deals out there. And our guys really worked hard at beating the bushes looking for those good smaller industries where we can really make a difference. And it was really tougher to find something. And we talked about it Dave, me, my staff discussed it with the Board. And we elected that it made sense to go forward with the bigger share repurchase is the best deployment of capital that really was as simple as that. Dave, anything you want to add?

No. I think that really says it very well. I think the other thing is that when you... as we go forward and we said this to kind of repeating what Dave said but a little different words is we want to able to do it all. We want to be able to grow our strong businesses, reinvest and add both organically and inorganically to the growth, and also return value to the shareholders in the best way possible. John Inch - Merrill Lynch & Co.: Okay. So I understand that. So since then of course, we've had the liquidity crisis and at least some evidence that multiples are coming down. So as we think about this, does the outlook for capital allocation as it tilted more favorably to sort of away from share purchase, and more toward doing some deals... actually you did that one deal in ACS. Should we be thinking about more of those coming or versus share repurchase going forward?

I would say when it comes to our timing and having repurchased that 40 million shares, hopefully everybody out there is giving us a blue ribbon for timing because I don't think it could have been much better. We have seen since that time that our prices have become better. And when we look at acquisitions, the deals are better than they were just 6-8 months ago. Whether that will stay through and be for stuff that we like, like this handheld products remains to be seen. But certainly pricing has gotten better. It used to be... and as said, if you just go back 5-6 months ago, it was getting tougher and tougher to find stuff that made sense. And a lot of that stuff does make sense today. Dave?

Yes. That's great and I would say just a rich pipeline, a robust pipeline in terms of acquisition opportunities that will continue to be very disciplined about but we are frankly excited about. John Inch - Merrill Lynch & Co.: Right. Thank you.

You're welcome, John. John Inch - Merrill Lynch & Co.: Okay.

And your last question comes from the line of Howard Rubel with Jefferies. Howard Rubel - Jefferies & Co.: Thank you very much. Couple of things. First on something simple.

Not even a hello, Howard? Howard Rubel - Jefferies & Co.: I'm sorry, Dave. I apologize. I figured you just wanted to be all business.

Hey, Howard. Howard Rubel - Jefferies & Co.: Thank you, gentlemen. I will remember that. Couple of things. First on CapEx, you've running a little bit ahead of last year but you'll need a little over $300 million in the fourth quarter to make your $800 million plan. Is that typically... I know fourth quarter is always big. Is that what we are looking at or might you come in a little below the $800 million for the year?

Dave, why don't you grab --.

I think we are probably coming in a little lower than the $800 million, Howard for the year. I wouldn't be surprised -- Howard Rubel - Jefferies & Co.: I'm sorry.

I wouldn't be surprised to see a number closer to around $770 million for the year. Howard Rubel - Jefferies & Co.: Pension and OPEB was a little higher than it had been in the last couple of quarters. Was it an actuarial change or was it something that different like that?

Pension in the quarter in addition to the normal run rate that we have through 2007, which you've seen in the first two quarters of the year, we also recognized a settlement in principal on a class-action suit referred to as Allen [ph], which you may recall has been in our disclosures in our K and in our Qs. And just to give you a little bit of the highlights on that, in preliminary settlement that will be dismissed in which we have a number of claims in that case that will be dismissed in exchange for $35 million, and we recognize that in the third quarter. Now the important thing regarding this is two important points to make. One is that the settlement payment will be payable from the company's pension plan, so it's not cash that's coming out of operations and as you know, the company's pension plan is currently over funded. Number two, we expect to prevail in this matter. We've got a very strong case based on the merits and substantial affirmative defenses, but we settled in terms of this preliminary settlement, the majority of these claims 18 of the 21 claims in this class action suit. Just because of the risk that's inherent in cut complex class action litigation. So it was something we feel good about. Basically, it helps us in terms of... we hope significant resolution of an item, and again is reflected in that pension expense for the quarter. Howard Rubel - Jefferies & Co.: But that was like $0.02, maybe $0.03 a share, Dave?

Yes, about $0.03. Howard Rubel - Jefferies & Co.: $0.03?

Yes. Howard Rubel - Jefferies & Co.: And then the final thing, I could not talk about avionics for a moment; you were a little bit abused by one of your customers, I mean, Boeing moved the goalpost a bit on the 787. Flight controls are probably one of the hardest things to do on an aircraft. And so how did you go about repairing your public reputation or perception of it because frankly from what I can tell, you're actually doing a pretty good job on it?

Yes, that's actually kind of interesting, Howard. Because I'd say amongst our customer base, our reputation is actually pretty good. We do the most sophisticated avionics in the world. But I would say that sometimes in the press the way things get picked up, we can end up being blamed or taking an unfair share of an issue and while bothersome at the end of the day. I think if you want to talk to Boeing and ask Jim McNerney, he'd say Honeywell does a great job for him and he is very pleased with the work we do on the 787 and we work extremely well with them. And it's just an unfortunate fact sometimes that we do end up with kind of reactions due to comments made by a customer. But at the end of the day, our customer relationships are extremely good. There is a reason why we win about 80% of what we go after. Howard Rubel - Jefferies & Co.: No. And I recognize the difficulty in the flight control system, and you have done a good job. It just seems that the perception was a little bit harder on you than reality?

Yes, it was and it's nice to have you say it though, Howard. I'd have to say it's very nice to hear it because let's say that's not a fundament that we get from our customers when we talk with them. But as you know, we don't get to write the articles. Howard Rubel - Jefferies & Co.: Thank you for your time.

Thanks Howard.

And I would now like to turn the conference back over to Murray Grainger.

Thank you very much and thanks very much for joining the call. Remember to join us again on December 12th for our 2008 outlook. We'll speak to you later on in the day. Thank you very much.

Ladies and gentlemen --

Hey guys, thanks.

This concludes the Honeywell's third quarter 2007 earnings release conference call. You may now disconnect.