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Honeywell Q3 2014 Results Earnings Call Transcript

Finally, free cash flow of $1 billion in the quarter was 12% higher than 2013 despite an approximate 28% increase in CapEx investments. Overall another strong quarter, giving us confidence heading into the last three months of the year.

Moving to Slide 5, we’re looking at Aerospace results which as you will recall include Transportation Systems in both years.

Aerospace sales were flat in the quarter on a reported basis, reflecting the friction materials divestiture, but were up 3% organically which was at the high end of our guidance range. Organic sales growth accelerated in both commercial aero and defense and space while Transportation Systems saw continued strong top line organic growth.

Aerospace margins expanded by 150 basis points driven by productivity net of inflation, where material productivity continues to be a significant driver, also commercial excellence and the favorable impact of the friction materials divestiture.

Starting with commercial OE, sales increased 5% with good growth in both air transport and regional as well as business and general aviation. In ATR we saw the continued benefit of higher OE build rates while business aviation saw increased engine shipments coming with certifications on the Bombardier Challenger 350 and Embraer Legacy 500.

Commercial aircraft sales were up 2% in the quarter with strong spares growth in ATR. ATR had double-digit spares growth with increased mechanical and electrical demand across the major regions. We’re expecting the ATR aftermarket growth to be in line with flight hours in Q4 and would characterize current airline buying activity as stable to modestly better.

The ATR spares growth was offset by anticipated lower repair and overall activity and a decline in BGA RMUs – that is retrofit modifications and upgrades. You will recall that RMU sales growth has been on a tear for the last couple of years, making comparisons to prior periods challenging. We’re still excited by this business and continue to invest to develop new offerings.

Defense and space sales returned to growth in the quarter, increasing 3% and continued the improvement we’ve seen throughout 2014. You might recall we were down 8% in Q1 and 1% in Q2 so the trend as we predicted is improving. International programs continued to drive growth with double-digit sales increases, while our US DOD sales grew modestly. And government services declines continued to moderate on a year-over-year basis.

Transportations Systems sales declined 10% on a reported basis, again reflecting the friction materials divestiture, but were up 4% organically. Once again we saw strong turbo volume growth across our three largest regions – Europe, North America, and China. And in each of these regions our volume growth outpaced auto production.

Two-thirds of the volume growth was attributable to light vehicle gas applications where we continued to see increased global penetration. We also saw our European commercial vehicle volume more than double in the quarter as we continued to benefit from new programs following the implementation of Euro-6 emission regulations in the region.

On Slide 6 we are looking at ACS results for the quarter. Sales were up 9% on a reported basis and 4% on an organic basis – again at the high end of our guidance. The difference in the two rates principally reflects the contributions of Intermec.

ESS sales, so the products businesses, were up 6% organically, continuing the trend of progressively stronger growth we have seen in each quarter in 2014. It’s hard to single out one business in the ESS portfolio because the growth was very broad, but scanning mobility and industrial safety celebrated the most.

ESS benefited from new product introductions, higher US residential sales which benefited both ECC and Security, US non-residential improvement in ECC, fire and industrial safety, and further penetration in high-growth regions particularly in China where ESS once again had double-digit sales growth in the quarter.

Building Solutions and Distribution or BSD sales were up 2% with continued strength in the Americas fire and security distribution businesses offset by flat sales in building solutions. We are encouraged however as building solutions has seen an increase in North American service and energy retrofit orders. Both the global solutions backlog and service banks are up handsomely from the same point last year, supporting our outlook for sales acceleration in 2015.

In the non-residential sector the trends are similar to the first half of the year. In the ESS products businesses that serve non-residential, we’ve continued to see modest growth in commercial products throughout Q3. However, we did see an acceleration of growth on the industrial side with strength in the Americas business particularly. We anticipate further improvement in Q4 and into 2015 on the commercial and industrial products side.

As for building solutions, I mentioned that the backlog and service banks are up year-over-year and we continue to expect energy efficiency projects to support global acceleration into next year.

ACS margins expanded 40 basis points to 15.9% in the quarter and were up 50 basis points excluding the minor dilution from M&A. ACS continues to benefit from higher volume, commercial excellence and productivity net of inflation while also continuing to invest for future growth. One such investment area is connected homes where we are quite excited by the roadmap of future, integrated offerings in heating, air conditioning, security and lighting controls. Already we have more than a million internet-connected devices.

Moving to Slide 7 for Performance Materials and Technology. PMT sales were $2.5 billion, up 7% organically and were above the high end of our guidance, driven by stronger-than-expected results in both UOP and Process Solutions.

UOP sales increased 8% in the quarter driven by increased catalyst and gas processing sales reflecting a continued strong refining, petrochemical and gas market. We continue to see strong orders trends in gas processing particularly at Thomas Russell. At the end of Q3 UOP’s backlog stood at $2.6 billion driven by a strong customer adoption of new technologies and investments in new capacity.

In Process Solutions we are encouraged by the accelerated growth of 5% driven by our Advanced Solutions Software and Services businesses as well as higher sales in field products. High-growth regions remain a huge priority for Process Solutions and they delivered double-digit sales growth from China, India and the Middle East. Orders growth also continued at a strong pace, continuing the Q2 trend, and the HPS backlog is up nicely over the same point in 2013. As we’ll preview later on we’re expecting the sales improvement in the second half of this year to continue into 2015 for HPS.

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