Jeff Sprague – Analyst, Vertical Research
And this one might be a little bit in the weeds but kind of getting into fluorines and the like, with the SEER transition coming in the US here, in the fourth — really, at the beginning of the year, do you see any noise in the fourth quarter around that? Do you see signs that people are pre-building? Just anything to be aware of there?
Tom Szlosek: No. I mean we’re really excited about fluorines overall and the transition that we’ve got going, but nothing significant from that perspective.
Jeff Sprague – Analyst, Vertical Research
Yeah, and then just a quick one and I’ll jump off. Tom, you did end your remarks by saying accelerated organic growth in 2015. Obviously you’ve also hedged the macro and everything. But are you suggesting you do have line of sight at least of being inside that 4% to 6% kind of organic growth going forward, which is kind of the compound goal out to 2018?
Tom Szlosek: Yeah, I think Dave is telling me not to share anything until December 16, which I’m going to follow my boss’ orders.
Operator: Our next question comes from Andrew Obin of Bank of America.
Andrew Obin – Analyst, Bank of America
Yes, hi, how are you guys? Just to clarify on Advanced Materials, so why is it not growing faster in ’15 versus ’14 given that this is where the CapEx is going and Solstice is ramping up? Sorry, and congratulations by the way.
Dave Cote: Ah, thank you – I thought I was going to have to beg again.
Andrew Obin – Analyst, Bank of America
No.
Elena Doom: So we are seeing good growth in Advanced Materials, Andrew. I mean in the quarter Advanced Materials grew 7% organically so I think what we’re saying is at this point the continuation of that type of mid-single-digit growth rate is what we’re expecting for next year given it’s still early days.
Tom Szlosek: Yes, just a reminder on how to read that chart – the side arrows mean the growth rates themselves for ’15 compared to the growth rates for 2014. So as Elena points out we’ve seen really decent growth especially in the second half in the Advanced Materials portfolio including fluorine or led by fluorine. So we’re expecting that trend to continue in 2015. So I think it’s a good story.
Dave Cote: We had a whole page of green arrows you’d be asking how could we possibly believe the environment to be that good.
Andrew Obin – Analyst, Bank of America
I appreciate that. And just a comment on BSD, you sort of commented that you’re seeing non-res accelerating. Could you just give more color on what specifically you’re saying, what areas because it would be really good news if we are seeing non-res cycle pickup.
Tom Szlosek: Yeah, I think it’s been moderate. I don’t want to overplay the pickup on the commercial piece of the non-res but we are seeing a significant amount of quotation activity in the US and particularly on the federal side of the energy vertical. The municipalities and other institutions are also coming along but overall the orders are starting to pick up. We’re expecting good orders, a story of performance in Q4 that should serve us well in 2015.
Operator: Our next question comes from Howard Rubel of Jefferies.
Howard Rubel – Analyst, Jefferies & Co.
Good morning. Thank you very much.
Dave Cote: Hey Howard, thank you.
Howard Rubel – Analyst, Jefferies & Co.
Well no, thank you, Dave. I mean numbers like this, you know, only come from Honeywell.
Dave Cote: Now that’s what I’m talking about, Howard, thank you!
Howard Rubel – Analyst, Jefferies & Co.
Boy this is really amazing, the suck-ups we’re doing here but anyhow…
Dave Cote: Only if it’s deserved.
Howard Rubel – Analyst, Jefferies & Co.
Exactly, you know that. But to talk about a couple of business fundamentals, talk about what you’ve done to make Intermec work right. It looks like it had a very nice top line contribution. The US Postal Service piece of business looks like its market share picked up and when I walk into Starbucks I see a Honeywell logo. So what’s gone there that’s set you apart because this is a difficult market?
Dave Cote: I was going to say we appreciate you picking up on that one because we’re quite proud of everything we’ve done there, not just with Intermec but by really pulling together several players in the industry and creating a One Honeywell approach that’s really made a difference. And they all brought different technologies and perspectives whether it was Hand-Held, Metrologic or Intermec.
And I think our guys, starting with Darius, the leader originally and then John Waldron who’s in there now have done a great job pulling all that together and rationalizing it so that we expanded our offerings, pushed the technology more so than others have, including what we’ve been able to do with Voice or Vocollect coming out of the Intermec acquisition; and getting better coverage – just being out there and being able to tell our story with feet on the street in a way that we weren’t able to before. So it’s really just a matter of running it better and taking advantage of the technologies that we brought together and running it better.
Howard Rubel – Analyst, Jefferies & Co.
So when we look at the Intermec numbers year-on-year they were up, it’s hard to totally tell but it looks like high single digits. I know that’s only one part of everything you’re doing there.
Tom Szlosek: That’s right, Howard. And I know we’re getting the — as Dave said the technologies are very strong and they’re complementary to what exists in the Scanning Mobility business. We didn’t have printing; we didn’t have voice. We did have mobile computers but Intermec had a very strong platform and so we’ve been able to integrate all three of those product lines nicely and to accelerate the growth there.
And as you alluded to in the performance against what our expectations were has been tremendous and when we look at the headline multiple versus where we are today it’s quite remarkable.
Dave Cote: It’s also good, Howard, you know how we never count on sales synergies which always provide a nice upside. And we’ve gotten a pile of them here.
Howard Rubel – Analyst, Jefferies & Co.
Thank you. And then one just final question, sort of I’m not sure if I’m going to ask it right, but as you look at new products that you’re introducing with the R&D spend – because in each of the business units you’ve talked about there being, I’ll call it growth investments. How are you sort of measuring the premium you’re getting on the new products relative to the spend you’re making? How fast do you decide that gee, this is working really well, let’s put more in; or no, it’s not working very well and let’s scale it back?
Dave Cote: That’s something that we defer to each of the businesses to make those kinds of decisions, and each of them has their kind of kiss-or-kill approach to all of these projects. And some of it’s by country, some of it’s by business so they’re constantly looking at making sure that we get the biggest bang for the R&D buck. And I would say it’s one of the things that I look at and say across the company we still have opportunity for. Sometimes we’ll have a project that we’ll look at and say “Geez, this is going to cause sales to grow 8%, that’s great, let’s do it,” but we really don’t push ourselves because it might be a business that could be growing 20% – we’re just not thinking big enough for it.
On the other side there’s still projects that we linger with too long or we focus on little stuff when we should be conglomerating some of that and focusing on something bigger. So I’d say we do a good job overall, certainly a hell of a lot better than we used to, but I still see more upside to being more disciplined on that in every business.
We hope. We’ll see what 4:00 shows.
Operator: Our final question comes from John Inch of Deutsche Bank.
John Inch – Analyst, Deutsche Bank
So Tom, you gave us the ’15 I think restructuring tailwinds of $125 million. Just to try and make sure we have the framework could you tell us what, remind us what your spending expectations are for ’14 and then savings that would have been from ’13 and ’14; and then what you expect to spend in ’15 that dovetails with the $125 million?
Tom Szlosek: Yeah, I believe the actual savings from ’13 to ’14 is similar – it’s in that $125 million, $150 million range for 2015. In terms of the cash spend I think for 2014 it’d be about $200 million.
Elena Doom: We had an elevated Q1 restructuring charge obviously with the sale of the B/E Aero shares. But it’s probably, maybe for just the repositioning portion only it’s maybe more in the $140 million, $150 million range in terms of spend. Tom, do you want to comment on next year?
Tom Szlosek: Yeah, I think for next year I would expect, I mean our unspent backlog as of the end of the third quarter is about $350 million, a little less than that. And I would expect that we would spend $150 million to $200 million of that spend.
John Inch – Analyst, Deutsche Bank
Yeah, I mean that’s where I was going with the B/E Aerospace share gains. I mean is this, all else equal are we going to see some sort of a spending tailwind if you will, or absence of spending that could be actually material or impactful? Or perhaps you’re thinking about some other offset because you guys are pretty good at you know, doing some matching opportunistically.
Tom Szlosek: Yeah, so John, I thought you were asking about cash before.
John Inch – Analyst, Deutsche Bank
Well, I was kind of asking about both, yeah.
Tom Szlosek: Okay. So right now as I said our expense, our P&L expense of restructuring is about $120 million and we spent the cash that we had indicated. We’re always looking at opportunities. Every quarter we review with Dave; every business reviews a portfolio of restructuring opportunities just like we do for M&A opportunities. And we look at them in a disciplined way. We look at the paybacks, we look at the ROIs and so forth, and yes, it’s true – we tend to look for opportunities to fund those restructuring, and yes, it’s also true that we have some potential funding capacity as we look out. But I don’t think we’ve come to any conclusions at this point on what we’re going to do in 2015. We’ll take it opportunistically as we go through the year like we normally do.
John Inch – Analyst, Deutsche Bank
That’s fair. And then can I just follow up — you guys are a very large aerospace company and your commentary around aerospace and aftermarket is still pretty constructive kind of heading into next year. You do have this sort of Ebola thing that’s kind of in the background and I’m trying to understand, would the analogy be perhaps to what happened during SARS and the possible impact on flight hours? I’m just trying to understand at this juncture how are you thinking about the planning process for the business next year as it pertains to flight hours perhaps based on past experience? Or is it — should we just not really be concerned about this?
Dave Cote: As usual you can expect us to plan for some of the worst just so that we know what our downside is. I don’t think that’s what’s going to happen here, though, just based upon what you read about Ebola. In terms of its actual impact on the US, in terms of how many people actually get ill, at least from the best I’ve been able to glean, we don’t expect much of an impact there. The thing you can’t predict is what that fear quotient is going to do, and as people just start to become afraid and as media has something new to talk about, it’s tough to predict where that will go.
So I’d say overall I don’t expect the actual impact in terms of illness to be consistent with what we saw with SARS. You still need to start to factor in what that fear quotient could do and that we’re not really going to know except over the next two to three months I would say. And we’re going to plan, make sure that we have a plan to address it in the most conservative way possible just so that we’re prepared.
Operator: So I want to hand the call back over to Dave Cote for some closing remarks.
Dave Cote: Over the last few years we’d have to say the global macro economy really hasn’t provided much help, and we expect it’s going to continue that way as we outlined in our five-year plan back in March. As Tom and I both mentioned conservative sales planning has clearly been the way to go and we’re going to continue that approach. It’s probably obvious by now that we’re pleased with our outperformance this quarter and this year and for that matter over the last few years, and we intend to continue outperforming consistent with our five-year plan.
Within a slow global economy we will get all the sales we can because of our great positions in good industries, our high-growth region presence and focus, and new products. With that sales growth we’ll continue to drive cost and process discipline through our focus on HOS goals. So said more simply, we intend to continue outperforming.
So thanks for listening and of course thank you to all our owners. I promise we won’t disappoint you, thanks.
Operator: Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.
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