Honeywell International Inc. (HON) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Honeywell’s Fourth Quarter 2014 Earnings Conference Call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]. As a reminder, this conference is being recorded and I would now like to introduce your host for today’s conference, Mr. Mark Macaluso, Vice President of Investor Relations.

Thank you, Lisa. Good morning and welcome to Honeywell’s Fourth Quarter 2014 Earnings Conference Call. With me here today are Chairman and CEO, Dave Cote and Senior Vice President and CFO, Tom Szlosek. This call and webcast, including any non-GAAP reconciliations are available on our website at www.honeywell.com/investor. Note that elements of this presentation contains forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change and we ask that you interpret them in that light. We identify the principle risks and uncertainties that affect our performance in our Form 10(k) and other SEC filings. This morning we will review our financial results for the fourth quarter and full year 2014 and share with you our guidance for the first quarter and full year of 2015. Finally as always we will leave time for your questions at the end. So with that I’ll turn the call over to Chairman and CEO, Dave Cote.

Thanks Mark, good morning everyone. We delivered another excellent quarter capping off terrific 2014. In this fourth quarter we delivered better than expected operational performance in each of our key metrics at sales, margin, earnings, and cash meeting or exceeding our guidance across the board. We have delivered 4% organic sales growth following 5% growth in the third quarter and we continue to drive margin expansion up 130 basis points excluding the impact of the fourth quarter 2014 aerospace OEM incentives which we discussed in detail last month. We delivered earnings per share of $1.43 up 15% year-over-year or up 11% normalized for tax. So another quarter of double-digit earnings growth and $0.01 above the high end of our guidance range with strong execution across portfolio. For the full year we increased sales on an organic basis 3% while continuing our seed planting with investments in new products and technology, high ROI CAPEX, and expansion of our global footprint. We achieved significant margin expansion with benefits from our key process and productivity initiatives and we have been able to achieve all this in what continues to be a slow growth macro environment. The momentum we saw in the second half gives us confidence in this year. Our short cycle businesses continued to improve with good organic growth in the commercial aftermarket business, ESS, advanced materials, and transportation systems all suggesting a modest improvement in end market conditions overall. We are also seeing good momentum out of our long cycle businesses building on our robust backlog. We believe the portfolio is well positioned to deliver this year and beyond enhanced by the smart gain deployment actions we have taken over the past years. While I believe the global economy could be a bit better this year than economists are forecasting currently, we will as always plan conservatively in our outlook and remain flexible. As you will hear in a moment, we continue to plan for a slow to no growth environment in Europe. We’ve hedged over 80% of our P&L exposure related to the Euro and we remain focused on controlling our spend. As Tom previewed in December, we sold the final 1.9 million shares of B/E Aerospace stock this quarter. To remind you, we originally received 6 million shares as time to consideration for the sale of our Aero consumable solutions business in 2008. At that time those shares were worth about 150 million. We sold those shares over the course of the last five quarters for total of about 500 million. We deployed the results and gains for restructuring and other actions to proactively position the company’s future growth and profitability. The actions in the fourth quarter will significantly benefit Aerospace over our five year plan and we believe we are well positioned for future success with our commercial OE customers as a result. Now there continue to be a lot of exciting things happening across the portfolio to drive those results and to highlight a few Honeywell standing and mobility delivered another quarter of double digit organic sales growth benefitting from new customer wins. Following the success we’ve had with Intermec HSM announced in December the acquisition of Datamax-O'Neil, a global manufacturer of fixed and mobile printers used in a variety of retail, warehousing distribution, and healthcare applications. This acquisition positioned HSM to expand in the $1.5 billion global bio-code printing segment and build on their existing printing capabilities prior to that. The team is really excited about this acquisition which extends our global reach and provides scale and significant synergy opportunities. Transaction is expected to close this quarter. While our dealer activity in this past year was modest; the M&A pipeline remains robust and we intend to maintain our disciplined process and extend our strong track record. We’ve also talked a lot about our Solstice line of refrigerants, insulation materials, aerosols, and solvents that have ozone depletion of zero and a global warming potential lower than co2. And that’s a thousand times better than what it replaces. Earlier this month we announced that our flowing products business has started full scale commercial production in our Baton Rouge, Louisiana facility of the newest Solstice product. HFO-1234Ze, now that is one impressive catchy name so I think we are going to publish stick with Solstice. We are seeing increasing demand for our entire Solstice suite of low GWTP material. The lifetime value of signed agreements in 2014 exceeds 2.3 billion and we have an additional billion dollars plus under negotiations. Process solutions has also been a bright spot as we close out the year. Organic sales growth accelerated in the second half of the year and orders were up double digit in the fourth quarter supporting continued growth this year. HPS is transforming project execution with LEAP, that is lean execution of automation projects and is innovating to win the market with automation offerings across control and safety systems, field devices, plant optimization software and services. We are also excited about the growth synergies from HPS and UOP doing together. Our ability to match UOP process and operating knowledge with HPS control and advance software solutions will enable unmatched operating excellence while refining petrochemical and gas process in customers. You can expect to see more of our innovation on display at the margin investor day where each of the businesses will highlight a number of heavy influence, new products and road maps for our future growth in productivity. We also plan to share with you how HOS goal is evolving throughout the organization which we believe is a key differentiator. We held at our annual senior leadership meeting earlier this month and I could tell you that each of the businesses are hard at work finding new and innovative breakthrough objectives to drive growth and margin expansion. Having successfully performed against the five year targets we set for 2010 to 2014 we are now focused on delivering 2015 and the five year targets we issued last March for 2014 to 2018. 2014 was a strong start. Our business model works. Having a strong portfolio with great positions in good industries, making sure the machinery works better every day for our customers, suppliers, and employees and a culture that focuses on one Honeywell and evolving our capability and technologies. From our culture we get sustainability results. So with that I will turn it over to Tom.

Thanks Dave and good morning. Let's begin on slide 4 which recaps our fourth quarter results compared with the guidance we gave you last month at the December Outlook call. On the left hand side we have outlined the guidance we shared with you in December. On the right you can see our results for the quarter as reported. I am not going to walk through each line item here but you can see based on the check marks that we delivered or exceeded our guidance on each line item including the top and bottom line. The incremental sales and segment profit enable us to beat the higher end of our EPS guidance range and also perform incremental restructuring and other actions in the quarter. There are couple of transactions that occurred in the fourth quarter that are worth reminding you and again they unfolded exactly as we forecasted in December. First we completed the sale of the remaining BEAV share as Dave said resulting in a $114 million gain, $0.14 per share on an after tax basis. The timing of the sale was important from a tax perspective as we noted in December. The timing allowed us to offset that gain with other items and therefore incur very little income tax on the transaction. Also in the quarter our aerospace business recognized the cost of certain commercial OEM incentive that became due when our customer achieved contractual development milestones on platforms which will include Honeywell avionics and mechanical content. The cost was 184 million or 114 million on an after tax basis, that is $0.14 per share. As you know we have won significant content in the air transport and business aviation sectors and such upfront incentives are part of the business model. And as you are also aware, accounting for these incentives is quite conservative. Many others in the industry defer these types of cost on their balance sheet and expense them over the life of the platform. We believe charging incentives upfront gives greater transparency to our OEM profitability in this segment. Also the OEM incentives position us well on the platforms already won but also to win new business on the content to be selected in the future. I am now on slide 5, which shows the fourth quarter results without the aero OEM incentives or BEAV gain. Sales of 10.5 billion increased 1% or 4% on an organic basis. The absence of friction materials and the strengthening of the U.S. dollar were headwinds to reported sales growth in the quarter. If you recall we divested protection materials in the third quarter so that there will continue be unfavorable sales headwinds throughout the first half of 2015. We are encouraged with the growth momentum that are beginning to emerge. We achieved 4% organic sales growth in the second half of 2014 compared with 2% for the first half and 2% for all of 2013. The growth we saw in the fourth quarter was broad based and resulting in better than expected performance across the portfolio. I will provide more color as we review the business groups in a moment. You can see that segment profit increased 9% with segment margin expanding 130 basis points. Our efforts to drive commercial excellence supported by differentiated technology continued to produce results. In addition productivity remains a key driver of margin expansion offsetting inflation and our continued investments for growth. EPS was $1.43 up 15% consistent with our historical practice, this excludes the annual mark to market adjustment for defined benefit pension plan. In the fourth quarter this mark to market adjustment was approximately 249 million or $0.23 per share. Principally driven by lower discount rates in our German and Dutch plans. So the fourth quarter reported EPS was $1.20 and for reference purposes the mark to market adjustment in 2013 was 51 million or about $0.05 a share. Finally free cash flow in the quarter of 1.3 billion representing conversion of 119% and an increase of 6% from 2013. So overall we generated very strong results in a relatively slow growth environment and we increased our annual dividend in the fourth quarter by 15% to $2.07 a share, continuing our commitment to growing the dividend faster than the earnings rate growth and a trend you can expect will continue. On slide 6, same fourth quarter results we are presenting on a reported basis. So as you can see our reported sales decreased 1% and that was driven by the aero OEM incentives. No change to the 4% organic sales growth in the quarter as shown in the previous page. So on a reported basis segment profit decreased 2% with margins contracting 20 basis points to 15.9% in the quarter. Again the only difference from the previous slide -- is the inclusion of the 184 million charge for the aero OEM incentives. Moving to net income, the BEAV gain and the OEM incentives fully offset one another on a net of tax basis and normalized for tax EPS in the quarter increased 11% year-over-year. The rest of the figures on this slide are identical to the prior fourth quarter slides. I am now on slide 7, a recap of full year of 2014 results again without the impact of Aero OEM incentives over the BEAV gain. Full year sales of 40.5 billion, up 4% or 3% on an organic basis. The primary difference between the reported and organic rate is the Intermec acquisition net of the impact of the protection materials divestitures. We saw a good organic growth across the portfolio including in scanning mobility, the fire industrial safety businesses, transportation systems, and UOP. Segment profit increased 8% demonstrating strong sales conversion and resulted in a 70 basis point improvement in the segment margin rate to 17%. All this resulted in earnings per share excluding pension mark to market adjustment of $5.56 a share up 12% over 2013. Representing our fifth consecutive year or double digit earnings growth and EPS $0.01 above the high end of our December guidance range. Our reported EPS of $5.33 for the year again reflects the $0.23 mark to market adjustment that I mentioned for the fourth quarter. So finally free cash flow was 3.9 billion in line with our guidance. Free cash flow increased 16% year-over-year despite an approximate 16% increase in CAPEX investments in the growth areas we previously shared with you mostly in the PMT. So let’s move to slide 8 to show the full year 2014 results including impacts of the aero OEM incentives and BEAV gains. To quickly recap 2014 sales were up 3% on both reported and organic basis to 40.3 billion. Segment profit was up 5% resulting in a 30 basis point margin expansion to 16.6%. So the aero OEM incentives reduced the reported growth from 4% to 3% and reduce its margin expansion from 70 to 30 basis points. The rest of the page again remains the same as the previous slide and now I want to move on to slide 9 and discuss the businesses starting with the aerospace. This first slide highlights the fourth quarter reported and organic sales growth rate for aerospace. As a reminder in the fourth quarter 2013 aerospace recognized an IP mitigation settlement resulting in a onetime royalty gain of 63 million in defense and space that was offset at the time by OEM incentive in BGA. Both of these items were included in and therefore netted out in sales and segment profit at the aerospace level in 2013. Total reported aerospace sales were down 6% in the fourth quarter of 2014 driven by three items, the 184 million OEM incentives that we discussed in our outlook call back in December; two, the friction materials divestiture which closed in the third quarter; and three, the unfavorable impact of foreign exchange on reported results. Whether on an organic basis fourth quarter sales now were up 4% driven by strong execution across the portfolio and each of the three legacy aero businesses accelerated growth in the fourth quarter compared with the first three quarters. And transportation systems continued its mid single digits growth performance. Organic sales growth in aero has accelerated throughout 2014 like Honeywell. So if you recall aero was up 1% in both the first and second quarters, 3% in the third quarter and now 4% to close out the year in the fourth quarter. If I look at the individual pieces of aerospace starting with commercial OE, sales decreased 14% on a reported basis driven by the net unfavorable impact of the OEM incentive. However on an organic basis sales grew 7% and that was principally the result of robust engine shipments and business in general aviation for the Bombardier Challenger 350 and Embraer Legacy 500. Moving to commercial after market, you can see 4% sales growth on both the reported and organic basis. ATR spares growth was balanced across both mechanical and electrical product lines offsetting moderation in BGARMUs, that’s retrofit modifications and upgrade. Both airline and business jet repair and overhaul activity improved in the quarter as well. Defense and space sales declined 3% on a reported basis driven by the absence of the prior year licensing royalty gain I just mentioned. However on an organic basis sales were up 2% in the quarter. International programs continued to drive growth with double digit sales increases offsetting modest declines in our U.S. DOD and government service businesses in the fourth quarter. Finally transportation system sales declined 16% on a reported basis reflecting the third quarter friction materials divestiture and foreign exchange headwinds. On an organic basis TS sales increased 4% in the quarter as we once again saw strong volume growth in light vehicle gas applications where we continue to see increased global penetration. We are also continuing to see our European commercial vehicle volumes grow as we benefit from new programs following the implementation of Euro 6 submission, regulations in the region. As you can see the underlying business growth trends across the aero portfolio remain positive consistent with the outlook we have provided to you in December. So I am now on slide 10 continuing with aerospace. The fourth quarter sales results and commentary are consistent with what I just discussed. So for the full year aerospace sales declined 1% on a reported basis driven by the friction materials divestiture and the impact of the OEM incentives. On an organic basis sales increased 2%. Aerospace margins contracted by 160 basis points in the quarter driven by the OEM incentives but excluding the 184 million charge for the OEM incentives. Segment margins in the fourth quarter were actually up 210 basis points driven by productivity net of inflation where material productivity continued to be a significant driver. Also commercial excellence and a favorable impact of the friction materials divestiture. And for the full year you can see that aero segment margins expanded 140 basis points again excluding the OEM incentives. So let's turn to ACS results on slide 11. ACS sales were up 6% on an organic basis in the quarter excluding an approximate 3% headwind from APEX. The growth came in above our guidance with both ESS and BSD finishing the year strong. ESS sales for the products businesses were up 7% on an organic basis in the quarter continuing the trend of progressively stronger growth noted in each quarter of 2014. Scanning & Mobility continues to perform well driven by new product introductions and large program wins such as the U.S. coastal service program we had in the last quarter. In addition we continue to realize integration benefits from Intermec supporting the strong growth we have seen from the combination of the two businesses. The pending acquisition as Dave mentioned of Datamax-O'Neil compliments our existing portfolio in the attractive bar code printing space acquired with Intermec. As for the rest of ESS, growth was driven by new product introductions, further penetration in high growth regions, higher residential sales which benefited both ECC and securities. And improvements in the non-resi market which benefited our supplier and industrial safety businesses. Building solutions and distribution sales were up 4% on an organic basis in the fourth quarter with continued strength in the Americas Fire and Security distribution businesses and acceleration in building solutions. Particularly within building solutions we saw a good growth in the Americas as well as an increase in higher margin service business. Both the building solutions backlog and service banks were up mid to high single digit on an organic basis supporting our outlook and confidence for sales acceleration in 2015. ACS margins expanded 70 basis points to 15.9% in the quarter. The business continues to benefit from good conversion on higher volumes and productivity net of inflation supported by our HOS initiatives offset by continued investments for growth. In addition we continue to realize incremental synergy benefits from combination of Intermec with HSM. So overall very good growth and execution of ACS and a lot more to come as the team continues to coordinate the individual businesses more and more through connected ACS which is an initiative to drive an enhanced degree of integration across the businesses and in particular in the supply chain and product developments and in the marketing areas. Alex will take more about this at our Investor Day in March. So moving to slide 12 for performance materials and technologies, PMT sales in the quarter were up 2.6 billion up 3% on an organic basis were approximately flat on a reported basis driven by foreign exchange headwinds. We will address the impact of lower oil prices on the PMT businesses in a moment but there was very little impact on PMT results in the quarter. For the fourth quarter UOP sales decreased 1% on an organic basis and as a reminder UOP had exceptional organic growth in the fourth quarter of 2013 you will recall. They were up 17% last year driven primarily by increased catalyst sales, so a very difficult comparison year-on-year. UOP executed very well reflecting strong licensing revenue which partially offset the lower catalyst sale. We also continued to see strong order trends in gas processing particularly at UOP Russell giving us confidence as we head into 2015 and we anticipate further sales growth in 2016 and 2017 for the new capacity additions across UOP and also through advanced materials which come online in 2015. In process solutions, organic sales growth continues to accelerate. HPS was up 6% in the quarter while on a reported basis sales were flat at the organic or the strong organic international growth was offset by foreign exchange headwinds. HPS saw strong volume growth driven by the advanced solution software business and the HPS service business in all regions. Orders, backlog, and service bank growth also continued at a strong pace up double digits on an organic basis in the quarter and this orders growth increased steadily throughout 2014 which sets process solutions out nicely for accelerated sales growth in 2015 and beyond. Advanced material sales increased 4% on an organic basis driven by double digit sales and orders growth in flowing products and demand for a new low global warming potential suite of Solstice products continue to grow. This was partially offset by a decline in resins and chemical sales in the low single digit range. Driven principally by the market base pricing model whereby selling prices are closely tied the market price of raw materials. Most notably benzene, which is highly correlated to the price of oil. Well sales can be volatile. The pricing model largely protects the profit dollars in resin and chemical even on lower sales. PMT segment margins were up 90 basis points to 16.5% which exceeded our guidance driven by higher volumes and productivity net of inflation probably offset by a continued investments for growth. In UOP the higher mix of licensing revenue in the quarter resulted in a tailwind to margin. HPS also converted particularly well continuing with successful business transformation and benefiting from the growth I mentioned in the higher margin advance solution software and service businesses. I am now on slide 13 labelled 2015 planning update. And similar to what we did in December related to the impact of oil price declines on the portfolio I wanted to address some of the major global trends affecting our portfolio and explain how each of these items are impacting our plans for 2015. Let me start with oil price declines. Overall we continue to view the impact from lower oil prices as being net neutral to UOP and HPS. The upstream exploration and production parts of the value chain continue to represent at relatively small portion of our portfolio roughly 10% to 15% of the combine UOP and HPS businesses. And our upstream backlog has held firm. We are beginning to see some delays further downstream in countries that have net oil producers such as Russia and the Middle East. As refining and petrochemical progress decisions are deferred. On the other hand in countries that are big importers of oil, most notably China, India and the South East Asia region. As we had anticipated, the lower oil price has stimulated more discretionary mid and downstream spending where we are well positioned. This is being borne out for example in process solutions where orders and backlog grew roughly double digits on an organic basis in the quarter, as I highlighted earlier. So again we think oil prices are neutral, the UOP and HPS businesses at this time however we continue to monitor this activity closely as we look ahead. Sales in residents and chemicals will be negatively impacted by lower prices for the -- lower oil prices for the reasons I mentioned earlier. But while sales can be volatile, the pricing model again largely protects our profit dollars in this business even on the lower sales. Finally we anticipate will begin to see the favorable effects of lower oil prices on our cost structure particularly in our indirect spend and we believe this will accelerate throughout 2015. Of course it remained to be seen how oil prices will impact the global economy should prices stay below $50 longer term. However we continue this will be a net positive for the economy and Honeywell over the planning horizons. Turning to currency fluctuations we’ve obviously seen a continued weakening of the Euro. As we highlighted in December our 2015 plan is based on the Euro exchange rate of $1.20 as the midpoint. We have hedges in place covering approximately 80% of our Euro P&L exposure so whether we continue to be pressure on the sales line, our Euro based earnings are protected. We also continue to see volatility across our other currency exposure which again are likely to result in headwinds of the top line however similar to hedging we done for the Euro the actions we’ve taken largely protect our 2015 earnings outlook for these other currencies as well. And we will continue to actively monitor the situation. The outlook for the U.S. economy continue to improve and we are expecting a positive uptick in our U.S. businesses as a result. But we also remain focused on increasing our presence in high growth regions. As a reminder HGR now represents almost a quarter of our total business and are expected to drive 50% of the sales growth over the course of our five year plan. The population growth urbanization and infrastructure development continue to create attractive opportunities across our entire portfolio. In China we anticipate high single digit growth in 2015, after a year of roughly mid single digit growth in 2014. Our initiative of becoming the Chinese competitor continued to accelerate and bear fruit. Investments and local sales and marketing resources are targeted to the higher growth cities in China where local economies are growing much faster than the overall China GP. Also our one Honeywell approach specifically in ACS continues to drive cross selling opportunities across multiple channels. In addition we are building a robust pipeline of new products here towards the macro trends in the region, namely air purification, energy efficiency, and security. All these factors give us confidence in accelerated growth for Honeywell in China in 2015. In India after the investments across the region slowed in the first half of the year while the elections unfolded the second half of 2014 was very strong for Honeywell and we anticipate growth will be roughly high single digits in 2015 driven by international defensive space business, new launches in transportation systems, new product introductions in ESS across each of our major verticals, and growth in BSD from infrastructure projects and services. In Russia where our exposure is limited we have less than about 500 million in annual sales there. We continue to have a strong backlog in our long cycle businesses. We expect Russia to continue focusing their available capital on energy, so oil and gas and renewal of their aerospace sector, two areas where our portfolio is well positioned to grow. Our short cycle businesses in Russia have been impacted particularly as it relates to currency devaluation but again the exposure there is relatively small. And while our management team is paying close attention to the issues faced in the country, we are also continuing to look for opportunities to enhance our business in the region. In the Middle East we expect continued double-digit sales growth in 2015 after approximately 20% growth in 2014 and this is driven by big wins in both the short and long cycle businesses as infrastructure investments continue. Our portfolio was well positioned to benefit from even outpays in some cases to attractive growth rates in these markets. Turning to the non-residential sector, we are encouraged by the expected acceleration of commercial construction spending. Forecast to be up approximately 4.5% in 2015 and the continued solid growth on the industrial side in 2015. So as a reminder roughly 75% of the ACS portfolio serves the commercial industrial market and our balance portfolio is well positioned to capitalize on improvements in these areas. More specifically on the commercial product side after modest growth through the first three quarters of 2014 we saw some acceleration of fourth quarter with strong growth in the U.S. We expect the U.S. to continue to drive further commercial products growth in 2015 as well as acceleration in our high growth regions with strength in our ECC and Fire Systems businesses in particular. In the industrial products markets we expect higher sales of industrial safety equipment particularly in Americas which represents about half of our exposure. As for building solutions, the backlog from our projects businesses and service bank through mid and high single digit respectively on an organic basis this quarter and we continue to expect energy efficiency project to support global acceleration in 2015. With regard to our pension plans the net effects of higher investment returns and lower discount rates will drive up a 125 million increase to pension income for 2015. Now we intend to fully offset that increase with restructuring over the course of the year. In total our international pension plans represent approximately 25% of our worldwide defined benefit pension obligations. In the U.S. we ended the year with a discounted rate of 4.08% and a return on assets of 8% which resulted in U.S. funded status of approximately 95%. Globally the funded status is about 94%. We do not anticipate any 2015 cash contributions related to our U.S. plants. Let me turn to slide 14 to summarize our outlook for 2015. Our full year guidance is identical with what we shared with you in December. We continue to expect sales in the range of 40.5 billion to 41.1 billion up 1% to 2% on a reported basis and up approximately 4% on an organic basis. Reported sales growth is expected to be lower in organic primarily due to the impact of friction material divestiture and the foreign exchange headwinds. We are planning segment margin expansion of 100 basis points to 130 basis points or up, 60 to 90 basis points excluding the fourth quarter OEM incentives. We are projecting EPS and this excludes the pension market adjustment of $5.95 to $6.15 representing 7% to 11% growth versus 2014. The quarterly growth trends remained in line with our prior year results and this range also continues to be based on a full year income tax rate assumption of 26.5% and share account held roughly flat to 2014 level. Free cash flow is expected to be in the range of 4.2 billion to 4.3 billion up 8% to 10% from 2014 with CAPEX investments peaking at roughly two times this depreciation in a more normalized rate of CAPEX investment so around 1.25 times depreciation we expect free cash flow conversion to be at roughly 100%. So I am now on slide 15 with the preview of the first quarter. For total Honeywell we’re expecting sales of 9.4 billion to 9.6 billion that’s down 1% to 2% reported but up 3% to 4% on an organic basis. Segment margins are expected to be up approximately 110 basis points and EPS is expected to be in the range of $1.36 to $1.41 up 6% to 10% versus 2014. Starting with aerospace sales are expected to be up 3% to 4% on an organic basis was down 2% to 4% on a reported basis reflecting the year-over-year absence of friction materials as well as foreign exchange headwinds. We are expecting positive organic sales growth from each of the four businesses in the quarter. In commercial OE we are expecting sales up lower to mid single digit driven primarily by new platform wins and BGA. The growth is driven by favorable demand trends for high value business jet platforms where we have significant new engine content. In commercial after market we are expecting sales to be up low single digit with continued repair and overhaul growth as well as ATR spares growth in the quarter driven by higher demand for both mechanical and electrical products. Partially offset by a decline in BGA RMUs against the challenging prior year comparisons. Defensive space sales are expected to be up lower to mid single digit in the quarter driven by continued strength in international businesses. In transportation system sales are expected to be up mid single digit on an organic basis were down significantly on a reported basis driven by the absence of friction and the foreign exchange headwinds I mentioned. On organic basis the growth in TS is primarily driven by new launches and strong light vehicle gas demand at each of our three key regions, U.S., Europe, and China. As for aerospace margins we expect an increase 100 to 120 basis points driven by commercial excellence, significant productivity improvements across the portfolio along with the favorable impact on the margin rate from the friction material divestiture. Turn to ACS sales are expected to be up 4% to 5% organically or flat to up 2% on a reported basis with continued mid single digit organic growth in both ESS and BSG. The difference between reported organic rates reflects the foreign exchange headwinds in the quarter. The end markets where we primarily participate, residential, commercial, and industrial are all looking moderately better as we start 2015 and we continue to benefit from new product introductions and high growth region penetration. Also the strong orders growth we saw at the end of 2014 involve the short and long cycle businesses, gives us increasing confidence in our outlook for 2015. ACS margins are expected to be up 100 to 120 basis points with continued benefits from commercial excellence and productivity net of inflation while accelerating investments for growth and new product area such as connected homes and in high growth region. Further we expect to realize synergies from integration of Datamax-O'Neil acquisition after the transaction closes as we did with Intermec throughout 2014. In PMT sales are expected to be approximately flat on an organic basis and down approximately 1% to 3% reported driven by foreign exchange headwinds and the impact of lower oil prices on resins and chemicals, a point I made earlier. Excluding these factors PMT sales are expected to be approximately 4% in the quarter. We are expecting UOP to be up low single digit with gas processing sales expected to drive majority of the growth. In HPS we’re expecting organic sales up mid single digit. A favorable orders and backlog growth we saw in 14 will support the sales acceleration in 2015. On the advance material side we are expecting a low to mid single digit organic sales decline principally driven by a double digit decline in resins and chemicals due to the fact as I mentioned earlier. These declines are offset by a continued strength in our flooring products business which is benefitting from increased demand relating to the new products principally the Solstice product suite. Also PMT segment margins in the quarter are expected to be up 100 to 120 basis points versus 2014, driven by higher volumes and productivity as well as a favorable margin rate impact of the market based pricing model in resins and chemicals. Let me move to slide 16, for a quick wrap up. In 2014 we demonstrated once again that Honeywell can deliver on its commitment in a relatively slow growth economy and amidst of very volatile global trends reminding once again the value of our diversified and balanced portfolio the management team focused on execution and the strength of the Honeywell playbook and P&A. Combined these enabled us to add to our performance track record as we exceeded guidance on sales, achieved significant growth in segment margins and delivered on double-digit EPS growth we originally laid out last December. We are going to continue investing in our future with a focus on profitable sales growth. This will continue to meet investments in high ROI CAPEX and new product development and in sales and marketing resources particularly in high growth regions. The investments are paying off and you can see it in our results. As we turn our attention to 2015 we recognize the uncertainty in the macro environment but this is not new for us. We have and will continue to plan conservatively. We are confident that our portfolio is well positioned for continued outperformance. Our order trends both short and long cycle point to accelerated sales growth for next year that should enable continued strong improvement in our profitability. We are forecasting strong organic growth in 2015 and over 100 basis point improvement in our margins as our HOS golden issues are deployed across the portfolio. In addition we have significant restructuring savings in the bank for 2015. So we will continue to execute in 2015 and beyond. We are very excited about the upcoming year and have a lot of momentum across the portfolio as we head into year two of our five year plan. We look forward to telling you more on our March 4th Investor Day. So with that Mark let us go to the Q&A.

Thanks Tom. Lisa if you would please open the line for questions. Operator Thank you sir, the floor is now open for question. [Operator Instructions]. Our first question comes from Steve Winoker with Bernstein.

Hey, good morning all.

Hey Steve.

After last quarter's multitude of congratulations, I am hesitant to say it again Dave, but I will say nice quarter and I guess I will get blamed by all my colleagues out there for doing this.

Yeah but same thing is nice. You wouldn’t want to do something like that.

Well, I am trying to be very cautious on that front. It is one of my development needs. So any way listen, on the outlook call we spent a lot of time, you guys provided a great amount detail for thinking through the oil price -- declining oil price impact across all your businesses and I am trying to compare that to what Tom just walked us through but the thing that really is of maybe concern to me is that midstream downstream commentary where in December you really talked about how it was a net positive in terms of refined product demand investment downstream and other areas. I would just like to get a little more color on that particularly around the impact of maybe narrowing oil and gas spreads on some of those investments that are happening out there, just some more color on why we shouldn’t be worried about this for you guys and why is it actually a good thing?

I will kind of start with my perspective on it and turn it over to Tom for even more color commentary. But there is a difference between the upstream and the mid and downstream segments as you know and the mid and downstream in my view are going to be driven more by overall economic activity. Demand for that could be driven more by overall economic activity than whatever oil prices are. As a result of that I am expecting to see increased demand for refined goods and products which is going to cause greater demand on the mid and downstream side. Offsetting that at least in the short term is probably going to be some of the investments in places like Russia and Middle East, perhaps some in Brazil but they had already slowed significantly. That we will be more than offset by where everybody has to crank up everywhere else around the world. So that's kind of an overview that I see for it and as you probably know for the first time in five years I am actually a little more bullish on where the global economy is going than economic forecasts are. For the last four years I had been more negative generally and so far that's been a good call. But this time I think it could be more positive than what they think because that impacts. The lower oil prices is causing this major redistribution from oil producing to oil using economies and those oil using economies are quite large. So overall I think this is a good phenomenon, it is going to help drive more of that mid and downstream investments. Tom.

Yeah, again what I would reiterate is the portion of our HPS and UOP business that's in the mid and downstream number one. Number two, the backlogs really backed up by the strong second half particularly in HPS are really strong. If you look at HPS, the backlog on a constant currency basis up 12% year-over-year and UOP backlog is also the UOP backlog is relatively flat 0% to 1%. But when I look at UOP continue to be always a lumpy business. Fourth quarter was a difficult comparison as I said, we had 17% growth from the fourth quarter 2013. But the backlog is strong as it’s ever been, its holding up, and our growth rate in 2015 are forecasted for UOP is at mid single digit growth or constantly look at all the indicators.

And UOP is lumpy but with a very positive trend.

And Tom you are not seeing any backlog price renegotiations. There is a lot of chatter about that in the market. No not at all we probe and probe this you might imagine and the only development I would say is you know deferral on new orders where you know multibillion dollar investments where decisions are being thought through carefully in the regions that Dave mentioned. But by and large that’s about the only impact we’ve seen so far.

Okay I’ll hand it off, thanks.

Our next question comes from Scott Davis with Barclays.

Hi, good morning guys.

Hey Scott.

I am glad to see you guys are bullish. We haven’t had a lot of positive conversations in the last couple of months. But maybe you can, I think your view on oil was pretty clear Dave but give us a sense of a view on currency and really the angle I am looking for is we’ve had a such a violent move that how does it change to competitive landscape. Do you see guys who can come in from Japan or other high cost regions like in Europe that can now suddenly compete against you and areas where they couldn’t compete against you before is that real or not real.

Well as you know the Japan phenomenon on this been a currency phenomenon. It’s been a couple years in the making and I can’t say that we ever saw much of an impact from any of that. I guess it remains to be seen on what happens with European competitors but again not thinking much of anything happening there when it comes to the overall currency we’ve assumed the U.S. dollar would strengthen for a while now and we’re little surprised actually that didn’t happen sooner than it has. So I would say it is one of those things we’ve been kind of counting on happening and as you know this is the first time in, well this is my going into my 14th year, this is the first time we’ve ever hedged the Euro translation and its solely because it seems like that was the 70% debt at this point. Who knows, things have a way of changing in ways that you never predict. But I still think that the prospect of 110 Euro this year is entirely possible.

The other thing I would add Dave is the hard cost base. We do benefit in some cases from the decline Scott, you are are fully aware we have significant production capacity in China and Mexico and other parts of the Eastern Europe. So we do feel like our position from a supply chain perspective and cost base perspective does enable us to continue to compete with the – of the competitors you referred to.

I hope you got the good point Tom just made Scott.

Okay.

We have great presence in Europe already. We have a big base there about 30,000 employees so we have a base to compete from.

Okay fair enough and then guys give us a -- I was encouraged by what you said about non resin, our forecast is actually a little bit higher than your forecast so I hope we are right and you are not right but either way directionally it is the right answer. But can you walk around the world a bit on that and what’s really tough for us to get a feel for as we’ve got great data in the U.S. on non resin and things that we use to contract and once we get outside of the U.S. it starts to get a little bit more difficult. So can you walk us around the world and more in context on maybe your order book or backlog or how you see it playing out in different regions?

Sure, it will be pretty consistent with how we’re seeing the economy. The U.S. would say I hope you are right also. We’re little lower in our estimation but we think that continues to rise upward and it’s still kind of a reflection of the great recession and you heard us say the time about we shape in, we shape out, slow in, slow out, and non res construction is more of a slow in, slow out. So we think it’s a nice steady gain and that just continues. You can argue there is some offset to that with the oil and gas CAPEX but that has really minimal effect on our non res construction business. In Europe it is consistent with the economy, it is going to be very slow. China probably going to continue to be a mix and interesting phenomenon there because the tier one cities that are still experiencing more of the economic slowdown, they still could use more housing and in the some of the tier 2, 3, 4 cities where GDP is going to be growing faster may have been over built a little bit. So that one is still to be figured out but overall we think it is still a net positive on non res construction. India there could be an awakening in India. I have never seen such excitement in the business community in the 20 plus years that I have been going there so I am actually pretty encouraged about what they could be doing and in fact I am going there tomorrow to be there for the President’s visit as part of this U.S. India CEO forum. And I really think there could be a kickoff there that we’ve all really been waiting for, for at least 10 or 12 years now. And one could turn out to be quite a good positive.

The thing I would add to that Dave is, Scott to get your questions on the non resi, I look at our exposure in the products businesses in ACS principally in fire and in some of their commercial business in ECC. As I said in my comments the growth rate had been very nice, mid single digits approaching and double digits in some cases. So you know good trends there and then in building solutions where we have the -- we provide both projects and services in that same space. The order rates and backlog has been good. If you look at the backlog overall for the business it’s up about mid single digit over last year. And its across all the regions. It is actually double digit in Europe but that comes off a lower comparison but overall each of the regions are in that range. So we feel like its heading in the right direction.

It’s encouraging. Well have a safe trip to India Dave and give the President my best.

Okay.

Thank you.

Our next question comes from Jeff Sprague with Vertical Research.

Thank you, good morning gents.

Hey, Jeff.

Hey, just a couple things back to the energy exposures and the like. On UOP in particular and kind of the capacity that you put in place, do you guys have people contractually locked up there, is there any kind of take or pay or if this thing does kind of unexpectedly to kind of a sharper turn to the worse you are kind of exposed there?

Exposure is not that great it helps that we get up front payments on the technology licensing. So yes, if there was a severe downturn of course we feel it but I am not that worried about it right now.

I mean we are seeing a few refinery cancellations in the U.S. just two this week alone. I was also just wondering on hedges, Tom how those work, was there a P&L expense in 2014 to prep yourself here for 2015 or is that running through on the balance sheet somehow?

No, good question Jeff. All of the hedges qualify for mark to market accounting. I am sorry qualify for not mark to market, I am sorry about that. So the impact of the hedge instruments when they settle would be recognized at the same time the underlying items that are being hedged are recognized. So there is nothing unusual, it’s just the extent of the currencies that we’ve gone out and hedged.

Okay and I was just wondering if you could give a little more specific color on aero spares. When you spoke to kind of aftermarket generally and kind of all in with R&O but what’s going on in spares trends, are you seeing more activities over aeroplanes that might be fuel cost related or anything that kind of stands out?

I’d say on the -- it’s a little bit of a dichotomy between ATR and BGA but real strong growth on the ATR side than mid single digit growth on the spares. Its growing on BGA side as well but not as significantly but we do expect that to improve and the ATR trends to continue for 2015.

Okay, great. Thank you guys.

You’re welcome.

[Operator Instructions]. And we’ll take our next question from Steve Tusa with JP Morgan.

Hey guys, good morning.

Hey Steve.

Mediocre quarter but you now it’s good enough for you Dave. Just on UOP, just remind us how much of that business is new projects and if you were to see an air pocket in new projects what kind of backlog do you have today to kind of give you a little bit of leeway to take action. So for example in the first quarter if you saw that number go down 30%, when would that hit you revenue wise, I mean is that even a 2016 issue or is that more like a 2017 issue? Or is it a 2015 issue?

I guess I would consider the composition that UOP backlog Steve to kind of answer that question. As I said the backlog has held up very well.

But you have a tough time even in the recession I don’t think it’s more that often.

I think on the capital side a lot of these where we come in on these capital projects is towards the middle or the end and so the most of the capital spent in the ground and we can make it solid and the systems and the technology. So the backlog is holding up. I would also say that if you look at the composition of the backlog it’s in the catalyst, it’s in equipment, and it’s in gas and in all three places its holding up and there is really not any material difference from what we are seeing. So like Dave said I haven’t heard or seen anything in terms of potential declines there.

Right but I guess I am just trying to understand what kind of visibility and timing dynamics play in to your ability to take action if you do see something like that?

Well we have time to react not just there but around the company.

Right and your orders and backlog in UOP, and the orders in the fourth quarter and then what your backlog in the year at.

I don’t know that we disclose that backlog.

Wasn’t it like 2.8 billion or something like that at the end of the third quarter. I know you guys gave a number your HPS day at November I believe?

Not at the top of my head but we can get back to you on that one.

Okay and I guess just one other question on the capital allocation. And any kind of change in philosophy around buybacks versus deals here, anything getting a little more attractive and is the market kind of bumps around?

I wouldn’t say our philosophy has changed and that’s why you saw that’s increased dividend greater than the earnings rate this year because that’s consistent with our five year plan of raising the payout ratio over this five year period. So that is going to continue to be a priority for us. And I’d say on the M&A pipeline I am actually feeling better about that then I have in these past few months. I always felt good about it but I’d say the work Roger is doing and its businesses are doing is improving that overall pipeline. Doesn’t mean anything is going to be happening soon. But I can say I feel better about it. I think there is some increasingly let’s say good properties, it would be very good fit with Honeywell if we can make them have them.

Got you, great. Thanks a lot.

You’re welcome.

Our next question comes from Nigel Coe with Morgan Stanley.

Thanks good morning.

Hey Nigel.

Hey Dave, so you mentioned you’re feeling more bullish in the consensus for first time in the five years and everyone is against CFO, hot spot is coming somewhat, it sounds like you might be about to deploy the balance sheet, is that a fair comment, you mentioned the backlog is looking pretty – but just conceptually is that correct?

Just like trying to study you’re saying am I getting ready to do something?

Well just give me assets and multiple that comes down a little bit and you got more bullish view on the economy then most competitors?

Yes well I would never of course say anything one way or the other there Nigel. I’d just say I am encouraged by the work the guys are doing on the pipeline and the stuff I am seeing. And we’ve got the capability and we are just going to continue to be smart about it.

Okay, that’s fair. And you all see the commissary around done solutions is really encouraging and its because he will be general construction activity. But I am wondering the end, the performance contracting, and the saving part of that circle for you. are you seeing similar trends there and there is bit of debate that’s low energy prices may some of this look pickup pushed out do you agree with that whole process?

I guess you would have to say yes, possible but we are not seeing that because it’s not like $50 oil is cheap. It wasn’t that long ago that we were concerned that it could be a recession if it hit 35? So 50:50 is not cheap, it’s cheaper than it was but not cheap.

Okay and you’re similar trends in the before the contracting side of things?

Yes orders are good there.

Okay and just a quick one on the hedge accounting term. So the way that works is you take the full impact on the top line and then the mitigation institute the line?

Well actually the items that we are hedging and we can get into a complicated accounting lesson here but the items that we are hedging are actually cost items and we are doing it selectively throughout the portfolio. As you can appreciate we have a global supply chain and a lot of currency movement across borders. What we do is focus on hedging the expense items and that enables you to protect the overall P&L but what that leaves open is the top line and so the top line is in a lot of cases exposed to currency movement.

Right and then just quickly, I think you mentioned you hedged down to 110 is that correct Tom?

No, I said our plan was based on 120, and we’ve hedged at a rate that I think protects that pretty well.

Okay, great. Thanks guys.

We’ll take our next question from Joe Ritchie with Goldman Sachs.

Thank you, good morning everyone.

Hey Joe.

Dave I guess since last time I saw you guys say congratulations to your past just like notwithstanding. But the…?

Not reading the post and the news just ahead of the ball so to speak with this.

Indeed they are and they probably should but moving on to maybe a question on capital allocation I just want to ask Nigel’s question slightly differently valuations have come down especially in oil and gas, has your priority in terms of where you are looking for the next target does that change at all just given clearly they’re more attractive valuations on the oil and gas side today?

Well I would say I would backup on it I guess and say that great positions in good industries are still going be kind of a fundamental for us. And secondly pricing makes the difference. So there is a lot of stuff that we’ve liked in a lot of different segments many of which we’ve outlined for you in the past. And we’re going to continue to look at does pricing makes sense, does it makes sense today versus further into the future. And we tend to try to be pretty careful about timing when it goes into even picking of a great position in a good industry.

Okay that makes sense and I guess given this month you just got back from your top 300 meeting I’d be curious to hear how do you feel about the progress that you guys are making in terms of pivoting the company really to an organic growth story. The margin story is there but really pivoting to organic growth and improving your cash flow conversion over the next few years?

Maybe the best way to say it is that coming out of that meeting we had 300 unbelievably energized people even more so than I’ve seen in the past and everybody is really pretty bullish not just about what we’ve done but about where things are going. And HOS Gold and what we are doing to develop and fund the breakthrough initiatives, the 76 enterprises is really energizing everybody around the world, it’s just wonderful to see.

Okay, alright. So pretty confident in the outlook there and I guess maybe one last follow up question on TS. Tom you mentioned that the growth has been really good. Your exposure is predominantly to Europe and you’ve got auto builds that are expected to moderate in 2015. You mentioned in your prepared comments that there has been increasing improvement in the light vehicle gas application. Is your portfolio positioned well for that opportunity and maybe just a little bit of color there?

Well first of all the and what I am referring to is that the increase penetration turbos on the gas combustion engines on light vehicles that that’s just a trend that we’re seeing in the U.S., China, India everywhere and we are well positioned to take advantage of that. We have got not just manufacturing capacity in each of those places but also your local product development capacity and engineering teams that work with the OEMs in those region. So it feels like we’re pretty well positioned and the growth rates support that.

Okay, thanks guys. I’d get back in queue.

And we’ll take our final question from Christopher Glynn with Oppenheimer & Co.

Thank you, good morning. Hey, a lot of detail already just drilling into ACS a little bit. It’s nice to see a 6% organic number against the 5% organic comp a year ago in particular, just wondering how you guys are kind of processing attribution here in terms of markets first, execution against VPD and HUE and things like that?

Pretty well overall. I think some of the businesses are doing extremely well with it and so the scanning and mobility for example, we have to highlight the gas detection business is done extremely well with it and then I’d say everybody else is kind of in the middle of progress but progress is good everywhere. It is really working well.

Okay, thanks that was all.

You’re welcome.

I would now like to turn the conference back over to Mr. Mark Macaluso for any additional or closing remark.

Thanks Lisa. With that I’d like to hand the call back to Dave for final remarks.

Well we’re proud of what we’ve done but even more importantly we are excited about where we are going. Our business model really does work and while I believe that lower oil prices will lead to a slightly better global economy than what’s forecasted currently, will plan conservatively as always to ensure that we do deliver on our commitments to you. We believe we are well positioned to deliver on our five year commitment to you and we look forward to seeing many of you at our March Investor Day where we’ll share more about how and why we’ll get there. And in the mean time the following Sunday in a very American Sport I hope we can all be Patriots. Thank you.

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.