Good day, ladies and gentlemen and welcome to Honeywell’s First Quarter 2015 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 call is being recorded. I'd now like to introduce your host for today’s conference, Mark Macaluso, Vice President of Investor Relations.

Thank you, Michael. Good morning and welcome to Honeywell’s first quarter 2015 earnings conference call. With me here today are Chairman and CEO, Dave Cote, 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 10-K and other SEC filings. This morning we will review our financial results for the first quarter and share with you our guidance for the second quarter and full year of 2015. Finally as always we'll leave time for your questions at the end. With that, I’ll turn the call over to Chairman and CEO, Dave Cote.

Good morning, everyone. As I'm sure you've seen by now Honeywell delivered another quarter of double-digit earnings growth to kick off 2015 driven by our diverse portfolio and effective execution what continues to be a challenging macro environment. Our earnings per share of $1.41 increased 10% year-over-year coming in at the high end of our guidance range. The macro environment in the first quarter wasn't easy with headwinds from extreme weather, port shutdowns, decline in oil and gas investments and a strengthening US dollar. Sales in the quarter of $9.2 billion, while up to 2% on a core organic basis were down 5% reported. Our performance was driven by decent organic growth and strong sales conversion with segment margins expanding 220 basis points to 18.7%. And as you'll hear from Tom a bit later, a large portion of the margin expansion came from improving gross margins, something a bit different than the past. It results from our focus on HOS both direction and indirect material and new products. Our key process initiatives are driving meaningful results throughout the portfolio. 140 basis points of the segment margin rate improvement was driven by commercial excellence and productivity. The rest of the improvement comes from smart decisions we've made about the portfolio. An important enabler of the productivity continues to be the savings we're seeing from previously funded restructuring actions. We're being proactive about keeping that pipeline full which we think is critical to supporting our continued margin expansion in 2016 and beyond. However, while managing our costs is important, we're also focused on supporting sales growth by investing in capacity expansion, new products and technologies, and resources in high growth regions. As a result of that strong first quarter performance and our confidence in the remainder of the year, we are raising…

Thanks, Dave. And good morning. I'm now on slide 4 which shows the first quarter results, sales of $9.2 billion, were up 2% on a core organic basis, but decreased 5% on a reported basis. The absence of friction materials which you'll recall was still in the portfolio for the first half of 2014, further strengthening of the US dollar and raw materials pricing in resins and chemicals were headwinds driving the negative reported growth this quarter. However, considering the slow start that we got off to in January, we were actually 8% down in January versus 2014 on a core organic basis. So even given that slow start, we feel pretty good about the Q1 core organic growth. Shipment timing in aerospace, order delays and PMT and unplanned plant outages in resins and chemicals prevented us from fully meeting our sales expectations, but as you'll see later we expect the growth rate to improve as the year progresses. An important note, the 2% core organic sales growth excludes FX, M&A and now the raw material pricing impact in resins and chemicals. Selling prices in resins and chemicals include an element of raw material pass through, most notably benzene, which is highly correlated to the price of oil. While the pricing model protects profit dollars, sales can be volatile, so we've modified the definition here to provide further insight into the underlying volume growth of our businesses. Segment profit increased 8% with segment margin expanding 220 basis points. The most impressive part about the segment margin performance is that most of the improvement came through gross margin rates. HOS Gold is working across Honeywell, from our engineering labs to our factories and supply chains, to our selling and marketing organizations and even to our back office. Our deployment of Honeywell…

Michael, please open the line for Q&A.

Certainly. [Operator Instructions] We will go first to Scott Davis with Barclays.

Hi. Good morning, guys.

Hey, Scott.

Guys, what happened in January, I'm – is there any kind of general theme to why January started so weak for you?

You know, I wish there was. Interestingly, at least from the talking I did around the horn [ph] we weren't alone. I mean, this was kind of a phenomenon that some even saw in the banking community. There was just something about January that caused everything to be a slowdown, and I'd have to say I was a little nervous as we were in January, and then things turned in February and turned bigger in March. So I can't explain it. It just happened.

And it was pervasive Scott across the, you know, almost every one of our business units…

Around the world.

Everywhere.

Yes, that's amazing. Okay. Good. And then, I struggle sometimes, I mean your margins are exceptional and continue to be on the right path. But what does HOS really mean to margins? Can you quantify it at all? I remember when you went from nothing to bronze, it was a pretty meaningful step up. Is gold as meaning to step up when you come up from silver?

Yes. Well, it is pretty meaningful I'd say being able to get there. We don't have that many units that are actually there at gold yet. That's one of the things that – that's why we think there's a lot more improvement left in the company. It's tough to quantify exactly what the dollar amount is that – or the rate amount that comes from HOS, but it's going to continue to grow. Because as we've tried to show in the past it doesn't just kind of raise your overall level, but it raises your improvement rate per year also So think of it is, it's not just a first derivative improvement. It's a second derivative improvement also. So I'm actually quite encouraged about what this is going to continue to be able to do for us.

Yes. And I would add that the way we're defining HOS Gold, as we talked about at the Investor Day cuts across the entire business and enterprise, whereas once it was focused on factories and the supply chain, it now extends to engineering and product development, commercial excellence, dealing with our customers and the like. So all of those things were contributors as I tried to articulate when I explained that 140 basis point expansion in the first quarter.

And last just quickly, on M&A is it – are the gating factors really price or is it availability of assets or both?

I'd say its more price now than anything else. Prices are just high. This is – we're going to continue to be disciplined and be smart about this. But prices are high right now, and you haven't heard me say that much in the past, but this time they are.

Yes. Well, we hear that from everyone. So great, thanks guys. I'll pass it on.

All right. See you, Scott.

We will go next to Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone.

Hey, Jeff.

Hey. Can we just get a little more color on UOP? I may have missed it, Tom, when you went through all that detail. But what were UOP orders actually like in the quarter and, you know, if we think about the capacity that you have coming on, is it still, you know, fully sold and, you know, and how firm is the backlog in that business?

Yes. Well, the orders were roughly flat in the quarter for UOP, but it was – it was kind of a tale of two cities. The gas businesses are being impacted by delays. We think there was a significant amount of orders that were pushed out into the second quarter and third quarter on the international side. So we're expecting those to come back in. But on the other hand the technologies and equipment business, performance technologies and equipment had an outstanding orders growth, strong, strong double-digit growth. Catalysts were essentially flat to the year. So overall those were the contributors to UOP. Good activity and the backlog as well. You know, down a little bit, but overall in pretty good shape.

And on the expansion?

And to answer the question on expansion that demand is still there. I was actually at the Jon Hegan [ph] factory in the first quarter, and it will be – it is starting to run at full capacity. So really excited about those investments that we're making. And the capital spending plans are all on schedule and we're going to hit the targets and get the market benefit.

On the expansions, Jeff, I'm more worried about making sure we hit the startup date than anything else because the demand for the product's there.

Okay. Great. And just on the hedging, is the hedge only on the euro or you're hedging other currencies where you can, at that rate, at that kind of 85% coverage?

Yes, it's not just the euro, Scott – Jeff. It's all the currencies where we have exposure. We take a comprehensive look at our long – the currencies where we're long and the currencies where we're short. The currencies where we manufacture versus the currencies where we only sell. It's a comprehensive model, but in the end we end up doing comprehensive hedging in a number of different currencies, euro, GBP, Australian dollar, others. And we get some natural benefit from currencies that we are currently locking in. So unbalanced it's not just the euro.

And then given kind of the peculiarity of January, I know it's early, but, you know, any thoughts on how April is starting? I mean, there's just so many cross currents out there. Does this pick up in February and March that you saw? Is it continuing into the early part of the second quarter here?

Well, it's a little tough to tell at this point, but we think it's going to be – I don't know that it's going to be as strong as it was in February and March, but it's certainly going to be a lot better than January.

Okay. Thanks a lot.

You're welcome.

And we'll go next to Steve Tusa with JPMorgan.

Hey, good morning.

Hey, Steve.

On the aerospace side you mentioned some funding issues I guess from some customers. I know the GE talked about some supply chain dynamics going on out there, I guess PCP, there have been some issues around I guess seeding with the 787. What is, you know, maybe the flavor of what's going on in the commercial aerospace side? If you could put a little more – some more details around that?

Happy to clarify that comment, Steve. It was more to deal with the commercial side and customers, you know, emerging market regions, particularly in Russia with the, you know, the impact that the global economy has had and the sanctions it had. Our customers, some of our customers are experiencing some funding delays. And so we've held up a shipment until we can get those clarified. We're 100% confident it's going to resolve itself and it already is resolving itself in the second quarter. So it's more a matter of risk management than any kind of demand issue.

Does that, I mean I guess Dave at a higher level, is that a comment on what's going on out there financially in emerging markets or is that an aerospace specific type of thing?

I would say this is more aero specific in certain emerging market countries.

Okay. So not something we should kind of, you know, from a – just a liquidity perspective out there globally, there's a lot going on with currencies and the central banks, you know, shooting money all the over the place. So I guess that we shouldn't be kind of concerned about this more globally for the economy?

No, absolutely not.

Okay.

It is definitely concentrated in Russia, Steve, and…

Okay.

You know the size of Russia for us.

Okay. Got it. And then just on UOP, what is the – what's kind of the size of the international opportunity at Thomas Russell again? I know you guys have talked about, I don't know, something like bidding on 10 projects and you guys have given some revenue numbers. I am just – that business is clearly going to have a little bit of a rough patch here. It's only $500 million in revenues. But what is kind of the size of international and how – can you put that in a context as far as what the opportunity there is to kind of fill the hole in 2016?

Yes, I'd say it's a little tougher to say how big it could be because we're not quite sure ourselves. It's a lot bigger even than we anticipated when we first did the acquisition, and we continue to be pretty encouraged by the stuff we're finding. So what we're seeing is a much greater strength on the international side and of course less on the US side. So we expect that the international piece of this is going to be a really good positive for that business.

Can it be…

I can't put a number on it right now.

Right. But I guess can it be somewhat material to that $500 million business in 2016?

Oh, yes. Yes, definitely.

Okay. Okay. So you can see some of that comes through to offset whatever we may see in Russell for 2016. And then one last question, you said $0.10 of exposure to this kind of euro hedging dynamic in 2016, I guess at the Investor Day. I'm just doing the rough math on what you said, I guess is it – is it now about $0.15 or is it still around, you know, what's the actual year-over-year headwind number for 2016 as we stand today?

Yes, Steve I would compare the $1.24 that I mentioned that were hedged after the euro to next year's rate which will be $1.10. And…

Okay.

You can kind of apply that to our business. I think the range we gave still is intact.

Okay. So it's around $0.10 still, no real change there?

Yes. It's reasonable to think about it as, like a penny for a penny. So it's reasonable to think about it that way, and I think it's important to think about it in the context of 6 bucks.

Absolutely. Absolutely. Okay, thanks.

Thanks, Steve.

We will go next to Steven Winoker with Bernstein.

Thanks. And good morning, guys.

Hey, Steve.

Hey, Dave you mentioned before in answering the earlier question that prices were high and M&A and the current environment is a gating factor right now. I know you're a patient guy sometimes, but how long and – well, not that many topics right, but how long and how – what happens on your capital deployment strategy? Do you start to consider other means of returning capital, or do you just say look, you know, over a long enough cycle it still makes sense to wait. What are you thinking?

I would say first of all, you characterized me correctly. I'm generally more impatient about things except when it comes to spending money, in which case I want to make sure that we're smart. The New Hampshire chief in me still would bug me to overpay with something.

I have to agree with both of those.

The – at the end of the day, though, we're still pretty much going to stick with what we talked about in that $1 billion to $2 billion net cash position at which point we'll start doing more on the repurchase side. And I think that's still a reasonable and a smart place to be overall. So it preserves fire power for those times when we can be opportunistic, but also says we're not going to let this get excessive.

Okay. All right. And then the acceleration that this has baked in sequentially for ACS organically, you know, market dynamics that you're seeing in non-res specifically, could you maybe just also give a little more color, are you still seeing that strengthening, are you seeing kind of oil and gas regional slow down impacting any of those projects, the construction ones, not the oil and gas side of it, what are you seeing in that market?

The way I'd describe it is that it's stronger than our overall organic growth rate, not as strong as we thought it would be, But it looks like a lot of that was, I think a lot of that might have been weather impacted and we're anticipating that it continues to strengthen during the course of the year, Tom anything you want to…

Yes. If you look at the products that serve that or the businesses that serve that sector, the non-res sector Steve, they were between 3% and 4% organic growth for the quarter. So, I think it's very much in line with what we think the markets are doing.

Okay. All right. I'm sure you have a lot of people waiting, so I'll pass it on. Thanks.

All right. Thanks, Steve.

We will go next to Joe Ritchie of Goldman Sachs.

Thank you. Good morning, everyone.

Hey, Joe.

So interesting on the organic growth, you're one of the few companies we've heard of so far where trends actually got better as the quarter progressed. I mean, you actually had some companies talk about March not happening. And so I'm curious Dave from your perspective what kind of impact do you think that oil and gas and the currency moved through here in the US are having on just industrial CapEx spend broadly and how that impacts your business?

I would say on the CapEx side, I mean the only real effect that we're seeing is on the oil and gas piece of this. I'd be hard pressed to point to something elsewhere I would – where I could say that currency was having an impact on those decisions. I don't know, Tom, if anything comes to your mind or anything else.

No.

So, those – that's the only one that I could see, that's more oil price impacted than it is currency.

It seems like there's more of a direct impact to your business, but nothing indirect that you guys are hearing from your customers today?

Yes, I would say in general when it comes to FX, the only effect we're really seeing is on the translation side, and as you know we hedged the income number there and so it shows up on the sales side. But preserves the income side, which is one of the reasons our margins look good, and jeez, I think we should be getting kudos for being smart on how we hedged this year and next.

I'll give you kudos, it's by far the number one question I got from investors heading into the quarter. So I think taking – tabling some of that risk was definitely a smart and prudent move on your part. Maybe one other question because you did mention the margins. I mean, in your core operations, the margin expansion this quarter really good despite slower organic growth than expected. You've got this like five year target at the high end of 75 basis points, and you know, assuming organic growth continues to improve with the capacity investments that you've made, it would seem to me that that 75 basis points should be a lot steeper. So maybe some comments around the conservatism around the high end of that guidance range over your five year planning period.

Well, I would love to see that myself, and as you know, margin rates are a combination of a lot of things, so we're going to continue to drive it. I'm very committed to that five year plan and understand what I promised I'd deliver there. So there's a whole combination of thing that go into it, and yes, I'd love to see that margin rate improvement continue and I don't see any reason why we don't continue with a triple digit increase this year.

All right, helpful, guys. Thank you.

See you, Joe.

We will go next to Nigel Coe of Morgan Stanley.

Yes, thanks. Good morning, guys.

Hey, Nigel.

Yes, so I just wanted – just come back to this January issue again. And if I just do the rough math and maybe someone can help me out here. It looks like February, March trended up 5%, and I'm sure that benefited a little bit of snap back from January, first of all is that correct. And secondly, given all the macro volatility, do you think we're in a – sort of a more volatile month-by-month pattern from here on Dave?

I don't know that it's going to be more volatile month-by-month. I would say, though, I really do believe that lower oil prices are going to play through bigger in the macro economy than what we've seen so far, especially in the US. And this is the – kind of the longest the consumer is gone historically with not spending kind of newfound riches, whether it's through oil price or tax refunds. So I think we're going to start to see the benefit of that sooner rather than later. I don't think it waits until next year. That being said, I don't want to count on it either because if I'm wrong, that's not a – not a good place to be. So I don't think that kind of what we saw January, February, and March continues, and then we'll see something that's a little more stable going forward.

And on your first – your first question, Nigel, yes, you got it pretty much right in terms of the 7 March numbers.

Okay. And then just a follow up question on the aerospace. You call that tough China comps, you call out Russia, but outside of those regions would you say especially on the ATR side that, you know, airlines – airline behavior was consistent with plan and did provisioning have any impact on either the quarter or the year-over-year comp?

Provisioning didn't have that much impact on us that I'm aware of. And yes, airlines have been pretty consistent. And I actually think aerospace improves during the course of the year because of the timing on some of the shipments that didn't happen in the first quarter.

Yes, I think also the – when you look at it by region, it's quite interesting Nigel, and we had mid-single digit growth in spares, ATR spares in the US, but because of those China issues we were definitely weighed down.

Okay. And then just finally, you announced a big order in Egypt's – Egyptian refinery, $1.4 million, when does that start hitting the backlog?

I'm not sure. I don't know if that's in the backlog number yet.

Okay. Thanks, guys.

You're welcome.

We will go next to Howard Rubel of Jefferies.

Good morning, gentlemen. Thank you.

Hey, Howard.

Dave, thank you. Dave, there's been a lot of stimulus efforts in Europe to help the economy. We can see a little bit of it in air traffic. What about on the ground in some of the ACS businesses or elsewhere?

I'd say ACS we're starting to see some improvement. I don't think it hit as fast as what you'd see on the aerospace side. But, yes, we're expecting that that's going to play through especially as that economy gets closer to 2%.

Is there any market you can see better. I mean is it still just Germany or you see France improving or Spain or anything of that order?

I would just kind of – I'd say leave it as a general comment. The north is still stronger overall, and I think it's going to take a little bit of say a few more months before say some of the southern economies really start to feel it.

But it sounds to me, though, like you're being very conservative, and it's still a wait and see. You're not adding people or anything like that at the moment?

I could say I am definitely not adding people in Europe.

I get it.

Howard, just to put a little color on that. The – I mean, as we've continually said over the last two or three years, Europe and Africa for us have been relatively1%, 0, minus 1%, consistently quarter-over-quarter over quarter. This year was similar, to your point aero was stronger. We also saw good performance in the turbo business, good volume growth as that – the gas penetration continues to grow. So –but you know, it nets out to similar to the environments that we've seen in the past for Europe.

I appreciate that. I'm just, you don't want them to spend all that money and not get anything for it and you have a lot of early cycle businesses and that's why I asked.

I think it does – it will show up Howard. I don't think though this turns Europe around. I do believe that we'll see some short lived impact from all of this. But, at the end of the day they still need to address a lot of their social issues. And they are just – and my fear is that some of this is going to cause them to delay taking the actions they need to, to become more competitive as a region.

And then just as a follow up in a slightly different vein, you have talked a lot about new products. Could you elaborate a little bit on what we might see in a fashion later in the year in terms of – it sounds like a lot of things are going to happen in ACS either in connected home. Is there – you know, as you're sort of previewing ideas to the dealers or otherwise when might we expect some rollout and impact from this?

Yes, as is typical with us and I know you hear me talk about this diversity of opportunity a lot and that there's never – while there's never any one big thing that's going to hurt us, which I think is a good way to run the place. There's never any one big thing that's going to make all the difference for us, either, rather it's going to be a series of products in a number of areas that are going to make the difference here. And I'm actually pretty encouraged in some of the gross margin rate improvement you saw was attributable to just being able to introduce new products at better margin rates because it adds more value. And I think you're going to – I feel pretty confident you're going to continue to see more of that.

Thank you very much.

You're welcome, Howard.

And we will take our final question from Andrew Obin of Bank of America Merrill Lynch.

Thanks a lot for fitting me in guys.

Hey, Andy.

So my question is just a follow up on Joe Ritchie's question. Obviously the margins were fantastic in the quarter. But if I look at your core growth outlook, you know the 18 target is 4% to 6% top line and last year we were below this target and the idea was that we were going to accelerate into 2015. And as I look at your organic growth target for 2015 it seems we're actually decelerating versus 2014, 2 to 3 versus 3%. So does that mean the plan now is more about margins as opposed to organic growth? Has the balance shifted between the two given what we are seeing now for two years?

I would say 2018 is still three years away, and things have a way of changing, and of course we're trying to make sure that we end up in that range, that combination of sales growth and margin rate growth. And right now, last year and this year, organic sales were not as good as what we'd hoped for. Largely because global GDPs didn't even achieve the kind of conservative numbers that we thought we had in there. So I'd say, yes, we're going to make sure that we continue to work on both. If GDP growth isn't there to support that kind of organic sales growth then you'll probably see even more margin rate improvement and vice versa. If global GDP does start to take off and sales start to improve, well, you'll see more attributable to the sales side. So, we're still committed to those five year targets and we're going to continue to work both of those variables.

And if I could add…

That’s a great…

And if I could add the – as we talked about the Investor Day, we are experiencing really good win rates and we are expecting inflection points at aerospace and in PMT given the investments that we've made and the new platforms we're on. So, I think that's going to be a nice catalyst and we still obviously – you know, obviously have our eye on organic growth as a big part of it.

That's a good point, Tom, and we've talked about that on Investor Day with those inflection points. Those definitely happening.

And if I can just squeeze in one technical question, in terms of your change in your methodology for PMT for input costs, what kind of impact did it have in terms of your organic growth number. Did it have a negative impact for the annual guidance? I just didn't quite understand that?

It’s about half a point, I'd guess.

It’s about a half a point for the quarter, yes.

The reason that we excluded Andy is just that it has no impact on operating income, and you want to use that as a proxy for volume and what's occurring out there in your actual shipments. So the shipments are actually fine. Operating income is just fine, and in fact, it increases our margin rates because of it. So that's why we excluded it because it just didn't seem to make sense.

No, terrific. Really appreciate the comment. Thanks a lot.

All right. Andy, thanks.

And ladies and gentlemen, that does conclude today's question and answer session. I would now like to turn the conference back to Dave Cote for closing comments.

In a difficult first quarter macro environment, we were actually quite pleased with our operating performance, and I hope you were too. Our initiatives like HOS Gold, HUE and software are working, and our business model continues to deliver. Raising our guidance for the year is a nice display of our confidence in our ability to deliver this year, next year, and beyond. The diversity of opportunity resident in our portfolio really does make a difference in our ability to outperform. Our opportunities far outweigh any risks we deal with, and we're actually pretty excited about where we're going. So thanks for listening. Bye-bye.

Thank you. And this does conclude today's teleconference. Please disconnect your disconnect your lines at this time. And have a wonderful day.