David Cote - Chairman and Chief Executive Officer Elena Doom - David Anderson - Chief Financial Officer and Senior Vice President

Scott Davis - Morgan Stanley John Inch - BofA Merrill Lynch Shannon O'Callaghan - Lehman Brothers Steven Winoker - Bernstein Research Robert Cornell - Barclays Capital Jeffrey Sprague - Citigroup Peter Arment - Gleacher & Company, Inc. Nigel Coe - Deutsche Bank AG

Good day, and welcome to the Honeywell Q4 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Elena Doom, Vice President of Investor Relations. Please go ahead.

Thank you, Diana. Good morning, and welcome to Honeywell's Fourth Quarter 2010 Earnings Conference Call. Here with me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements of today's presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, and we would ask that you interpret them in that light. This morning, we will review our financial results for the fourth quarter and 2010, as well as share with you our updated guidance for the first quarter and full year 2011. And of course, allow time for your questions. With that, I'll turn the call over to Dave Cote.

Thanks, Elena. Good morning, everyone. We had a strong finish to 2010, capping just a great year for Honeywell. Our result this year reinforced that our strategy is working, having great positions with the industries, the power One Honeywell, our consistent focus on improving every year in each of our five initiatives. It really does make a difference. I'm extremely proud of this team, delivering through the worst recession in 80 years and now delivering in the recovery with record segment margins and free cash flow. We've demonstrated we are a stronger and smarter company with a very good start to achieving the five-year targets we outlined last February. Sales in the quarter were $9 billion, up 12% reported and 10% organic, with continued growth in new products, geographic expansion and strong momentum across the portfolio. While we've seen the biggest improvement in our early cyclical businesses that includes Turbo, which added approximately $3 billion of additional platform wins last year, our longer-cycle businesses are really kicking in. Process Solutions increased backlog 26% last year, and had double-digit organic growth in the quarter. Aerospace's commercial aftermarket saw spares orders increased 25%, significantly outpacing flight hours. And we generated pro forma earnings of $0.87 a share ahead of guidance. Segment margin rate expanded 50 basis points in the year even as we covered the reinstatement of some labor-related costs. We're focused on controlling our fixed cost with OEF organization efficiency, which concentrates on having the best people organized the right way and motivated, while also decreasing every year our OEF cost as a percentage of sales. It's a simple but effective strategy of increasing sales, while controlling fixed costs. It works and our key process initiatives are enablers in effect, accelerated. Our growth continues ahead of our markets because of the seed planting we've done for new products and services in new geographies, while always staying focused on doing a great job for the customer everyday. Our investments and focus on all the emerging regions are really paying off, with a number of impressive customer wins in 2010. We've done very well in China as evidenced by the sizable wins of the backlog we're building in the region, including COMAC selection to provide four systems on the C919 commercial aircraft, and that yields over $11 billion in a lifetime value. Our successes in China will further enable accelerated sales growth in the region. UOP's recent Petrobras award is another great example of our emerging region growth. Petrobras selected UOP technology to produce high-quality diesel fuel from Brazilian national crude oils at two new refineries and also selected UOP to be the front-end engineering design or feed contractor, strengthening our capabilities globally. Our emerging region opportunity is huge, and we'll continue to resource it. The seed planting we've done there will continue to accelerate our growth profile, and we now have over 44,000 employees in emerging regions. We've also been selected for a number of new and derivative high-value commercial aircraft platforms. Customers continue to select Honeywell over a field of avionic competitors, citing the company's technology and product differentiation as the key deciding factor. In 2010, we won 50% of the business avionics contracts we pursued, making Honeywell the clear share winner. That competitive spirit is evident across all our businesses. I just spent three days with our top 300 leaders from around the world, where we concentrated almost exclusively on building on our strength this year, 2012 and beyond. There is a lot of momentum coming out of 2010 with positive order rates across the entire company. The seed planting we have been doing for the past nine years has clearly been paying off, and we believe we're still in the beginning stages of seeing the benefits. Our key process initiatives, emerging region expansion, our disciplined acquisitions process and new products and services are all feeds that we have planted and continued to plant to improve our growth productivity and cash flow. We have the right leadership team in place to deliver even better results. And I've asked all of our business leaders to remain flexible because you never know what can happen economically in times like these. But to also aim high. The great positions we have in good industries and continued improvement we're seeing in the global economy, we're confident in our outlook for higher revenues, segment margin expansion, strong cash flow and 20% plus earnings growth in 2011. And today, I'm also pleased to have the opportunity to tell you we've entered into an agreement to sell the CPG business to Rank Group, a New Zealand-based private investment company with a track record of investing and building upon established franchises like CPG. This is a good outcome for both Honeywell and CPG, as we've found a buyer that recognizes the value of CPG and is intent on further developing the already strong consumer car care platforms in this space. Dave will take you through more details in a moment, but we think the smart deployment of CPG's sales proceeds into repositioning, share buyback and pension contributions will deliver terrific long-term value to our customers and share owners. And in Transportation Systems, our strong advantages in cost technology and flawless launches will result in terrific future performance from those TS businesses. So in summary, another better-than-expected quarter, a strong finish to 2010 which gives us confidence to raise our earnings outlook for 2011 to $3.60 to $3.80 per share, up from $3.50 to $3.70 per share. Notably, our performance in 2010 and 2011 is tracking ahead of the five-year targets we laid out last February. While we like what we've done, we're even more excited about our prospects for the future. So with that, let me turn it over to Dave.

Thanks very much. Good morning, everyone. Let's go to Slide #4 entitled Fourth Quarter 2010 Results. As you can see and as we discussed reported sales for the quarter, we're up 12% to $9 billion, 10% organic growth in the quarter. And to put that in context, it's a new quarterly organic growth record for Honeywell, so very impressive. We saw a greater-than-expected organic growth in every region. The Americas and Europe, up 9% and 11%, respectively. China, up over 20% in ACS, Turbo and Specialty Materials. Acquisitions contributed on the recorded side an additional 3%. Currency was a slight headwind of about 1% negative. Segment profit for the quarter was up 4%. Segment margins at 14.2% reflected good productivity in the quarter, overcoming approximately $160 million of labor-related cost segment headwinds that resulted from the actions that we took in '09 that did not repeat in '10. And as I take you through the business segment highlights, you'll see the impact of these policy-related actions affecting the year-over-year margin comparisons in the fourth quarter consistent with what we guided for the quarter. However, just to remind you on a full year basis, three of the four businesses had terrific good sales conversion and expanded their margins in '10. Pro forma earnings for the quarter, EPS, up 5%. Of course, that excludes the impact of the fourth quarter pension mark-to-market adjustment, which turned out to be about $0.40, so reported EPS of $0.47 in the quarter. And as you can see the MTM adjustment is considerably lower than the estimate we gave you back in November, due primarily to higher asset returns and also a higher discount rate at year end versus the original assumptions that we shared with you in November and then also included in our December guidance. The better-than-expected earnings performance was driven by higher sales, better productivity with repositioning and other items flattish on a year-over-year basis. Free cash flow, which includes $600 million cash contribution to the U.S. pension plan in the fourth quarter was really solid. I'll take you through the full year numbers on the next slide. But as Dave mentioned, we have another year of record free cash flow, reflecting higher cash earnings and also record working capital turns. Let's go to Slide 5 entitled Full Year 2010 Results. The 2010 sales, up 3% to $33.4 billion, reflecting again good organic growth, as well as margin expansion. Aerospace, which we're going to cover in a minute, absorbed over $100 million in payments to BGA OE customers in the year to offset pre-production costs on major platform wins. For the year, we had 7% organic growth, reflecting improving end market conditions and terrific execution across each of our businesses. Segment profit for the year increased 13%, which really underscores the organization's ability to leverage our fixed cost base, as Dave referenced, by expanding our margins 50 basis points over '09 despite the labor inflation headwinds. Pro forma net income, that is excluding the impact of the pension mark-to-market, was up 15%, including funding $151 million of net repositioning in the year. And of course, all of this is funded through operational performance as well as gains, and that's going to provide terrific support to us throughout 2011 and 2012. Pro forma EPS increased 12% to $3. We generated $3.6 billion in free cash flow or 152% of net income, again, reflecting very high quality of those earnings. So let's now go through each of the segments. Let's start with Aero on Slide 6. Aero sales as you can see were up 6% in the quarter, higher Commercial and Defense sales volume. Segment profit for Aero, up 5% with margins down 20 basis points to 18.4%. Now importantly, if you exclude the impact of pre-production payments to the BGA OE suppliers that I mentioned earlier, if you exclude that, those payments this year that is in '10 and as well as in '09, segment margins would have been approximately flat in the quarter. Aero margins were also negatively impacted by the absence of last year's labor cost actions not repeated this year, which offset sales growth and also productivity actions. Now if we look at the components of Aerospace, total commercial sales that is, the sum of ATR and BGA were up 8% in the quarter, reflecting continued good recovery in commercial Aero. The OE sales were up 6%, driven by increased ATR and BGA deliveries, partially offset by the impacts, as I mentioned earlier BGA OE, customer payments, pre-production payments, which were $46 million in the quarter. Commercial aftermarket sales were up 9% in the quarter, reflecting higher aircraft utilization rates and software upgrades. Let me just give you a couple of highlights regarding again, the Commercial segment. Air transport and regional flight hours very positive course for the year. Flight hours, total global flight hours up 7% in the quarter, 6% for the full year, confirming the recovery that we saw initiated earlier in the year. 2010 flight hours and to put it in perspective, 2010 flight hours of 64 million were above the peak level of 2008 of 62 million. Obviously, partly as a function of robust delivery schedules. But importantly, really reflecting increased utilization of existing fleets. Now you recall, we're estimating another 4% to 6% increase in global flying hours in 2011. Now commercial aftermarket spares were up 25% in the quarter off the depressed 2009 levels. Spares orders continue to outpace maintenance activity across the Mechanical and Electronics business of Aero. Initial indications of orders signal spares activity continuing to trend above flight hours in early 2011. And it's also important to note we had another quarter of double-digit growth in Business and General Aviation aftermarket sales, largely driven by increased software or in new sales of newly launched enhanced navigation and satellite communications packages. It's a high margin contributor and with revenue per shop visit expanding, this bodes well for the segment in 2011. Defense and Space sales were up 4% in the quarter. We had good growth in the T55 helicopter engines, as well as government services. These increases were partially offset by the TIGER program continued ramp down. So a good finish for Aero as we prepare for further U.S. defense budgetary pressures and reprogramming. And we'll talk about that a little bit more as we progress and talk more about 2011's update. Let's turn now to Slide 7 with some of the highlights for Automation and Control Solutions, ACS, for the fourth quarter and the year. ACS sales fourth quarter 2010 up 15%, 9% organic, reflecting even better organic growth than we saw in the third quarter. Acquisitions of course, mainly Experion were also meaningful in terms of their contribution to sales adding 8% growth versus the fourth quarter of 2009. ACS had good geographic growth with 7% or higher organic growth in every region. Now as guided, segment margin for ACS was down 160 basis points in the quarter to 13.1% again, reflecting the absence of 2009 labor cost actions that were not repeated in the recovery this year. It also reflected the margin rate for ACS which in the quarter, reflected the dilutive impact of M&A as well as summary investment for growth across their portfolio. Partially offset by strong volume and projects sales resulting in lower-than-normal sales conversion in the quarter, ACS segment margin for the full year, 12.9%, up 30 basis points. Now a little color in terms of the makeup, the Products and Solutions portions of ACS. The Products businesses were up 19% in the quarter on a reported basis, 8% organic. Businesses linked to industrial production saw both orders and sales growth supported by increases in manufacturing production and the favorable impact of increased safety regulations. China and India led growth in Asia Pac, up 20% and 21%, respectively. And despite continued weakness in commercial construction end markets, we continue to see North American HVAC controls, fire and security systems holding up well, with moderate growth in these businesses given their focus on energy efficiency and also the uptake of important new products. The Solutions businesses for ACS were up 8% in the quarter reported, 9% organic, reflecting double-digit growth in Process Solutions as they execute on their large global project wins. Building Solutions continues to build backlog with retrofit activity across the commercial and institutional verticals still robust in leveraging ACS' premier energy efficiency and Smart Grid portfolio of technologies. In total, Solutions ended the year with backlog up approximately 20% compared to the same level at year-end 2009. Now the key thing for ACS from our December guidance call remains unchanged for 2011. The business is poised for another terrific year, expecting to outgrow the softness in both commercial and residential markets in the developed regions continue their impressive ramp up in emerging regions. And further, ACS has a robust backlog of projects to execute with both Process Solutions and Building Solutions being big movers for 2011. Let's turn now to Slide 8 and look at Transportation Systems, which had another terrific quarter, finishing a very strong year. Transportation Systems sales were up 18%, as you can see, including the unfavorable impact of foreign exchange. If you exclude the foreign exchange impact, sales were up 22%, driven by volume increases primarily at Turbo, but also a strong quarter at CPG. Sales for the full year for TS were up 24% reported, 26% on an organic basis, outperforming the industry rebound in '10, which saw 13% year-over-year growth in European light vehicle production and a six-point increase in diesel penetration in Western Europe. Turbo's performance, of course, reflects their high win rate on attractive new gas in Turbo and diesel platforms, as well as flawless execution of new launches globally. And then we expect that theme to continue through 2011. CPG, the sales were up 14% in the quarter driven by pressed on volume, pass-through impact of higher raw material pricing and continued traction on growth initiatives. They had a record profitability year, reflecting the reinvigorated sales in commercial excellence plan, as well as execution, good execution on key operational productivity actions. Overall for TS, the segment profit was up 94% in the quarter or $68 million, taking segment margins to 12.2%. And of course, given the high contribution margins associated with the Turbo business, as well as the progress the Transportation Systems team has made on productivity initiative, all of that's being reflected in terms of their sales conversion and volume leverage on a year-over-year basis. For the full year, Transportation System segment margin was 11.2%, up 600 basis points from 2009. So now let's take just a moment on CPG just to add a little bit to the introductory comments of Dave prior to talking about the highlights for the quarter and the year. So I'm obviously pleased announce today the sale of CPG to Rank Group for cash proceeds of approximately $950 million. CPG, of course, is a very solid business with leading brands and a talented management team. This is simply a good opportunity for them in terms of becoming an acquired company of the Rank Group. In 2010, CPG had sales of $1 billion roughly, margins of about 11%. We expect the deal to close in the third quarter and once we were to see regulatory approval, we expect to account for CPG as discontinued operations. And as we've done in the past, we expect to smartly redeploy the gains and proceeds to offset the ongoing loss of earnings. We expect to utilize approximately the after-tax gain of approximately $200 million to fund both repositioning and other actions. We're also planning to officially and accretively deploy the proceeds first to fund the U.S. pension plan with approximately $400 million, or to the extent that it offset the cash taxes on the sale. This would bring our assumed 2011 cash pension contributions to approximately $1.4 billion and the funded status globally of our plans to approximately 90%, which we think significantly closes the gap on any future funding obligations. And we'll have more to share with you at our March Investor Day. Overall, very, very good news in terms of the cash opportunity and the cash deployment. The remainder of the proceeds, approximately $550 million, is expected to be reinvested to offset further share count growth relative to where we ended the year in 2010, roughly 795 million fully diluted shares. Specifically, we plan to buy back in the range of 10 million to 15 million shares. And in the year 2011, with an average fully diluted share count close to that 795 million. Moreover, we're planning to keep that share count flat on a perspective basis. Given the timing of the close, the share repurchases are expected to offset a portion of the loss of CPG earnings in the second half of the year, again, anticipating something between in August and the December close on the transaction. So in summary, a great transaction for Honeywell shareholders, Rank and CPG customers and employees. And also, we believe, smart deployment of the anticipated CPG sale proceeds, as well as the expected transaction gain. So with that highlights, let's go now to Slide 10, Specialty Materials. As you can see, SM also had a strong finish to 2010 with continued strong demand in Advanced Materials businesses and also positive momentum building in UOP. Fourth quarter revenues were up 12%, segment margin was 14.8%. Segment margin in the quarter was negatively impacted by the labors policy actions we've highlighted throughout today's discussions. This was partially offset by higher sales, strong commercial excellence and the continued cost discipline with fixed cost as a percentage of revenue down three points year-over-year for the segment. For the full year, Specialty Materials segment margin was an impressive 15.8%, up 120 basis points over 2009. In the quarter, sales at UOP were up 4%. Growth in projects revenues more than offset lower count of sales due to project mix and timing. So as we've said before, a transition year for UOP as we've seen markets stabilize in '10 and a healthy order book in growing pipeline of global energy projects. Importantly, UOP backlog ended the year 2010 at a record backlog $1.7 billion, up 27% from the level of 2009 year end. Advanced Materials saw sales of 17%, with revenues across the group up double digits. Resins and chemicals were up 28% on robust Asia sales, as well as tight industry supply dynamics. Flooring products were up 12% driven by commercial excellence and continued strong demand for refrigerants and industrial applications. Specialty Products were up an impressive 13% with above market growth led by penetration and new product introductions in specialty additives, advanced fibers and also industrial products. So another great year for SM, and it's a credit to the team deploying their commercial excellence, investing in innovation and with the globalized sales force and reliable plant force all contributing. Now let's go to Slide 11, the financial guidance summary for 2011. On top of Slide 11, we've summarized our revised guidance reflected to the positive as well as negative variances since our December 15 call. Let's walk through some of the specifics starting with pension. Ongoing pension expense for 2011 is now expected to be about $110 million, down from our original estimate of about $200 million, primarily reflecting higher asset values at year-end 2010 and also our $1 billion contribution to the plan that we've made in the fourth quarter of this year. Given the strength of the fourth quarter of 2010 and with global economic conditions more favorable, as Dave referenced, we're also increasingly confident in our sales outlook for the year of $35 billion to $36 billion, which excludes the impact of the discontinued operations accounting treatment that we anticipate for CPG later in the year. In our revised earnings guidance, we've also removed some of the FX contingency we were holding in segment profit. So we're now planning the euro in the range of €1.30 to €1.35, which is also contributing to our upside view. Lastly, given Secretary Gates' announcement on January 6 and further risk to the U.S. defense budgets due to budgetary pressures and reprogramming, some things will undoubtedly continue to shift. And as we get better clarity in budget firming, we'll continue to update you on our outlook. But Defense and Space sales for the year 2011 are now expected to be at the lower end, down approximately 4% of our original guidance of down 2% to 4%. So when you net the risk and opportunities, we are very confident in our revised 2000 EPS outlook. Taking that outlook up $0.10 to $3.60 to $3.80, even including the loss of CPG earnings, which are expected in the latter part of the year. So with that background, let's take a high-level look at the first quarter of 2011 on Slide #12. We're planning for total sales, as you can see in the take away on Slide 12, in the first quarter to be up in the range of $8.5 billion to $8.7 billion, up 9% to 12% from prior year, reflecting continued good organic growth. We're expecting EPS for the first quarter of '11 to be in the range of $0.76 to $0.80, up 21% to 27% on a year-over-year basis. Now quickly on each of the segments. We anticipate Aero sales to be in the range of $2.5 billion to $2.6 billion, reflecting continued commercial strength, including the revalued air transport aftermarket and BGA OE, partially offset by lower sales in defense. For ACS, we expect sales in the range of $3.5 billion to $3.6 billion, extending the positive momentum from the fourth quarter with continued organic growth across the portfolio. At Transportation Systems, sales are estimated to be in the range of $1.1 billion to $1.2 billion. While European light vehicle production has continued to be strong and diesel penetration rates are higher, the double-digit growth we're anticipating in this segment is primarily driven by the benefit of our new Turbo launches. At Specialty Materials, we anticipate sales in the quarter in the range of $1.2 billion to $1.3 billion, with growth driven by projects growth in UOP, which includes the large Petrobras win that Dave referenced earlier. We also anticipate healthy end markets in Advanced Materials, robust growth out of Asia in floorings and also Resins and Chemicals. So in summary, anticipating a strong start to the year with sales and earnings tracking a normalized linearity profile consistent with what we've seen in normal recovery periods. Again, this includes a slight FX headwind based on our planning assumption of the euro in the range of €1.30 to €1.35. So now let's summarize on Slide 13. 2010, obviously, a terrific year for Honeywell. There's no question we built momentum to the year, which is reflected in the stronger-than-expected operating performance. What's even more impressive, of course, is that delivery was done while sustaining our growth investments we're seed planting for the future. With the strength of the fourth quarter and the improvement we're seeing in the global economy, that gives us confidence in our increased earnings outlook for 2011. We're expecting good organic growth, strong sales conversion, continued traction on commercial and R&D effectiveness, all while still controlling our fixed cost through OEF, layering in approximately $200 million of additional benefits for repositioning actions that we took in '10 and prior periods. Putting this into perspective, we're targeting 20% plus earnings growth in '11, underscoring the organization's ability to be a top-tier performer with a balanced portfolio of short and long-cycle businesses, delivering above average growth and continued margin expansion. Finally, we're looking forward to our upcoming Annual Investor Conference in New York City on March 9. You'll hear more from Dave, of course, about how we've emerged from the downturn as a stronger, smarter company, well positioned to capitalize on the megatrends of energy efficiency, safety, security and productivity. Our playbook for the long-term value creation is very much intact. We intend to showcase key growth drivers, a robust technology pipeline, as well as our continued expansion in emerging markets. We also tend to demonstrate how the results of these investments are showing up in new technology wins, share gains and profitable growth. Or said differently or summarizing that, the fact that our strategies are working. We'll also update you on the momentum we've got towards our long-term targets. When you take 2010 and 2011 outlook into account, we're tracking down the middle of the revenue growth target of 6% to 8% that we established last year. And more importantly, looking at margins, we're outperforming the margin targets, achieving an average of 70 basis points of expansion per year since '09 versus the target of plus 60 basis points per year. So terrific execution across the Honeywell portfolio. The business leaders, Dave and I, all look forward to seeing a number of you in person at our Annual Investor Conference. And with that, let me turn it over to Elena for Q&A.

Thanks, Dave. Diana, can you open up the lines for our first question?

[Operator Instructions] We'll hear first from John Inch with Merrill Lynch. John Inch - BofA Merrill Lynch: Dave, the guidance and the $0.10 raise, if you compare the financial summary that you provided with the December financial summary, the numbers all actually look the same. What's different is the below the line the December 15 pluses and minuses. So it kind of looks like pension is $0.08 to $0.09 of positive, right, with the lower costs associated with it? What are the other -- can you give us a little color on what are the other puts and takes? It's just not really apparent what else has changed get to the $0.10, including CPG dilution.

Let's start with CPG dilution. Depending obviously on whether August or September, and that's our best judgment at this stage given the regulatory approval process. We would anticipate $0.04, $0.05, John, of dilution this year from the sale of CPG. Offsetting that, of course, on the positive side as you've mentioned, is the lower guidance now relative to the ongoing pension expense. So that's about $90 million of difference or $0.08 to $0.09 of favorability. We're going to pick up some improvement, obviously, as a result of our change in foreign currency. And then overall, we feel that between the actions we'll take as a result of the deployment, if you will, of the FX gain on CPG, our revised plan relative to share count and then just the continued strength that we see across our businesses, all of that gives us confidence to be able to more than offset that dilution and to be confident to take the guidance up by $0.10 and be in that $3.60 to $3.80 range. John Inch - BofA Merrill Lynch: Dave, given that you've kept the revenue range intact, is there any one segment within the portfolio that's looking much better today versus sort of when you provided the December guide? And if not, does it sort of imply that we should just be thinking maybe toward the higher end of these ranges? Because the ranges are basically the same.

Yes, the ranges are the same for the revenues and to the point. Obviously, when we pullout CPG on the discontinued office spaces, we'll be recasting 2010. So the $33.4 billion that we just reported for 2010 will be closer to $32.4 billion for 2010. And the guidance, the $35 billion to $36 billion revenue guidance for 2011 will be in a range of $34 billion and $35 billion. Same percent fee is 5% to 8% on a reported basis on a year-over-year basis in terms of the guidance. And puts and takes, I mentioned defense. Now we're looking at as a result of recent reprogramming and some of the intended budgetary changes, budgetary cost changes that Secretary Gates has announced, we would anticipate being at the lower end, as I mentioned, of that 2% to 4% down for Defense and Space in 2011, closer to the 4%. Offsetting that, of course, is the strength that we saw in the finish in both Transportation Systems and ACS as we finished 2010, and we see that continuing in terms of their positive performance into 2011. So those are kind of directional at this stage. It's very, very early in the year. A point change in Defense and Space numbers is worth about $50 million. So it's not really significant changes at this point in the year. Dave, anything you would want to add to that in terms of how we're looking at the top line?

No, I think that is the right way to look at it. And I do think you could point to the pension piece, I suppose, John. But the way I would look at it is we're selling CPG, we're getting the proceeds and we're covering that. And for us to be taking up guidance at this point in the year is generally unusual. John Inch - BofA Merrill Lynch: Turbo had very strong results and as you look ahead this year, how are you thinking about Europe? Because obviously, you've got perhaps a little bit more of a punked auto star there versus rest of the world. Like how would you, say, provide a little color on Europe Turbo next year or this year versus rest of the world?

I would say Turbo Europe maybe, Dave, just take a quick shot at that and then hand it over to you. I would say Turbo Europe, as I mentioned in the -- in my remarks, is going to be a good year for us in 2011. Ranges in terms of estimates of light vehicle production in Europe somewhere in the 1% to 4% kind of range. Yes, you see a broader range in that from some of the analysts but we did consensus estimates -- sort of converge in that 1% to 4% kind of range. We think that's reasonable. We'd say that there's still some potential positive momentum on the diesel penetration. But the important point and the important take away for us is the anticipation of continued nice growth in our European Turbo and Global Turbo business as a result of new launches. It's really a new launch story, John, that's going to drive the growth. David, do you want to add to that?

Yes, I'd say as we look around the world across China and India, Middle East we're still expecting we're going to do well. We think U.S. will do well. Europe, we're counting on it being a generally slower environment. To the extent that it's better than that, then most Turbo numbers will be better than what we've projected because as Dave pointed out, we're really just counting on new launches at this point and diesel penetration within an existing market. So I'm actually -- I love our Turbo platform. I think there's a lot of goodness to come there for a lot of years. John Inch - BofA Merrill Lynch: Just lastly, raw materials. I noticed in the prepared remarks, you didn't call out raw materials as an advanced or item for ACS. It's maybe the one business I'm thinking that could have an impact. The margins were a little tad lighter this quarter. I mean, obviously, it's been a source of focus for you guys to get the margins higher over time. I mean how are you thinking about raws either within ACS or the year as it pertains to your guide?

Maybe comment just very quickly on the ACS core margins for the quarter, really, influenced by labor cost actions which you're very familiar with, as well as obviously the dilutive impact of now Experion. So on an adjusted basis, actually good margins for ACS in the quarter. Relative to commodity costs, John, a couple of points. Number one, no real change for us relative to what we assumed when we provided our initial guidance for 2011 back in December, on December 15. There's been some puts and takes with some general inflationary pressure but nothing that would change come to the surface in terms of any influence in terms of our margin expectations for ACS or other businesses for 2011. Now importantly, you'll recall that about 75% of our commodity buy is we really have, call it, natural hedges. That is both through our customer contracts as well as our supply agreements. We have provisions that really protect us in terms of any significant volatility in terms of commodity costs. So we think we're smartly positioned. The only commodity that tends to move more on a mark-to-market basis is copper. And frankly, as it is embedded in most of our products, there isn't anything that's a significant swing there. We've also seen, as you know, just a little bit of recently relief from copper going from I think, it's gone from about $4.40 to about $4.10 in the last six or seven trading days. So we're comfortable with the commodity outlook and the assumptions that we've used.

We also assume that, John, even with the advent of the recession and the crash in commodities prices, we assume they would come back up with a recovery because there wasn't a lot done on the supply side. And as demand started to come back, we track these 10-year curves on commodities cost so we had a pretty good sense for it. And we don't think this recovery in commodities prices is unusual and it was very forecastable, which we did actually. We assumed it would be going back up and we planned that way.

We'll take our next question or from Jeff Sprague with Vertical Research Partners. Jeffrey Sprague - Citigroup: First on CPG, that sounds like a slow close for just kind of a random business like that. Why is...

Just has to do with the regulatory approval process, John (sic) [Jeff]. And just our expectation of what the Rank Group will go through given there are other holdings. What they will go through in terms of the necessary HSR process. I think that's a reasonable time frame. Jeffrey Sprague - Citigroup: So they have a lot of other auto assets.

They have some to more of what we think will be a review of four to five to six months. We don't anticipate any issues whatsoever. But from a timing standpoint, we think that's prudent timing. Jeffrey Sprague - Citigroup: I'd like to explore a little bit how to think about operating leverage in Aero and ACS now that we're starting to normalize on this labor and other swings. On Aero, I guess we're going to be an aftermarket spike still for a half or so. But as we get into kind of a stronger OE schedules and maybe moderating aftermarket, just some thoughts on incremental margins there. And then the same thing on ACS now that maybe some of these unnatural swings are moderating.

Well, I think you're going to see nice margin progression in each of those businesses, Jeff, in 2011. As we've talked about before, we're going to see the benefit, obviously, in Aerospace of the continued growth in the Aftermarket business. More of a coupling in terms of that rate of growth with global flying hours, but continued nice progression there. The other thing for Aerospace and generally, obviously, across all of our businesses is we'll now be transitioning in terms of those labor cost headwinds that affected in particularly, the second half of 2010 reported numbers, reflected our reported results in terms of margin rates. So we'll see very nice conversion rates in Aerospace. Those will begin. You'll start seeing some of that in the first quarter going to really progress over the course of 2011, quarterly over the course of 2011. For ACS, also nice conversions at or above their historic levels. And again we'll see the benefit of strong products businesses, the absence of conversion costs. And we'll also see more of the integration savings and the lift through of the Experion integration savings and cost synergies benefit, as we progress through the year and not mitigated by the cost to achieve those synergies. So early on as we go into aggressive restructuring and integration savings with our acquisitions, the cost to achieve mass, the actual benefits. You'll see that flow through in the second half of 2011 and see very nice rates of progression in terms of conversion for ACS.

But I'd add that's going to be true for SM and TS also. Margin rates are going to be improving in all four businesses as we pursue that. I know it's a simple strategy, but it sure works. And that's to grow sales faster than your markets and then grow fixed costs slower than your sales, and you get unbelievable leverage from that. And that fixed cost focus we have with our OEF effort I mean, again, it sounds simple, but it really works.

We'll take our next question from Bob Cornell with Barclays Capital. Robert Cornell - Barclays Capital: I listened to your answers to John and Jeff. I mean, it occurs to me that the guidance does sound a little conservative. I mean, you're entering '11 with a lot of momentum and it sounds like you're going to give solid contribution margins. I mean, sounds like we're all going to be a little more optimistic than you are. Is there a final comment there before we get onto something else?

Well, I think one comment to make is we're looking at 20% to 25% -- 27% growth in terms of earnings on a year-over-year basis. I think if we said 15% to 18%, we'd certainly jump on the wagon with you in terms of the conservatism of our outlook. But we're starting, Bob, as you call, with a very strong outlook. So what we're really doing here is some fine-tuning at the front end of the year to give you our best judgment in terms of the upside that we see as a result of events as we know them. So I would say we continue to look at an aggressive 2011, one that we very much think is also achievable.

We like our prospects, Bob. Robert Cornell - Barclays Capital: Could you flesh out the comment on the $0.04 to $0.05 dilution from the CPG? What's the gross number and what are some of the offsets? I mean, how is that $0.04 to $0.05 get put together?

Well, the $0.04 to $0.05 gets put together just simply CPG is a little over $1 billion of revenues in '10. So just think of that in terms of continuation of that top line for '11 generating margins of about 11%. So if you look at that on an EBIT basis, we're talking something in the $100 million, $110 million kind of range in terms of segment profit contribution. Obviously, we're going to lose that to four to five months of that, Bob, in the latter part of this year. So that's the $0.04 to $0.05 of dilution that I mentioned depending on the 8 1 to 9 1, which is our sort of best judgment at this point in terms of a close. So offsetting that, as we've mentioned, is the smart redeployment of the approximately $200 million after-tax gain that we anticipate on the transaction, as well as the smart strategies that Dave referenced around the redeployment of the cash proceeds. So we think between those two, it'll help offset the $0.04 to $0.05 dilution in 2011. But importantly, we'll fully offset that dilution on an ongoing basis. So 2012 and beyond, the run rate benefits that we'll see as a result of both the redeployment of the gain and the smart redeployment of the after-tax cash proceeds on the transaction will really show up for shareholders. That's something you'll be able to track and see in our forward earnings. Robert Cornell - Barclays Capital: So when you put it into disc op, you're not going to restate the first half in '10 for these businesses at disc op?

Well, we will. We'll restate revenues and segment profit. So we'll see the first eight months or nine months, again, depending on the timing of the close. Also reduce our reported revenues and segment profit for the year by using the disc ops, let's say, all of 2010, CPG will be subtracted from 2010. So you have $1 billion of revenues coming out, and $110 million to $115 million of segment profit coming out in 2010. So on a comp basis, on a year-over-year basis, you really won't see the fee percents change in the absolute change, but the fee percent's going to change. And on an EPS basis, still be the lift through on a consolidated pro forma EPS basis will still be the lift through of that $0.04 to $0.05 of dilution in '11. Robert Cornell - Barclays Capital: Just to be clear, so the guide on earnings up $0.10 includes CPG as a disc ops for all year?

Yes. Robert Cornell - Barclays Capital: You talked about the investment emerging markets in...

I'm sorry, $0.04 to $0.05 is for the four to five months. And the numbers I mentioned in terms of revenues and segment profit includes disc ops for the entire year. Robert Cornell - Barclays Capital: Just a comment on the investment emerging markets. I mean, I think Dave mentioned in the preview but maybe just give us a little more color on where and how much and what sort of impact?

This was again on, sorry, can you repeat the question, Bob? Robert Cornell - Barclays Capital: Well, just that you're talking about some of the strength in the company as a function of expanding the footprint in emerging markets, China and India and thereabouts?

Sure. Let me talk a bit about that. We saw very good growth as I mentioned to you in ACS, TS and Specialty Materials in the quarter. We saw ACS revenues in the fourth quarter were up, I think, it was 20% in China, 21% in India. We saw in Transportation Systems, 27% growth in emerging regions in the fourth quarter. And in Specialty Materials in China notably, up 23% in the fourth quarter. So for the full year, ACS China just to cite a number, up 20%, Transportation Systems up 28% and Specialty Materials up 10%. So very good double-digit growth in those markets and basically we looked at India, you'd be looking at very comparable kinds of numbers in terms of percent changes on a year-over-year basis. And importantly, emerging regions has continued to increase as a percent of total Honeywell revenues, and we're marching smartly toward up to 20%. We're in the 17% range in 2011 in terms of emerging region as a percent of total revenues.

We'll take our next question from Scott Davis with Morgan Stanley. Scott Davis - Morgan Stanley: I think it's interesting to try and get a sense in your guidance for Aerospace and ACS, you're talking about 25% incremental margins last couple of quarters has come in far short of that. But can we talk a little bit about in this quarter, what was the actual BGA OEM payment? And I think you said for full year it's $46 million. What was it this quarter? And can you talk about that number a little bit? Is that something that goes on into 2011?

We had $46 million was the number actually for the BGA launches, the pre-production costs paid to OEMs in the quarter. We had over $100 million for the year, and we're looking at a lower number, Scott, in 2011. These things get launched a little bit lumpy year-over-year. So we'll see some benefit in terms of reduction of launch contributions in 2011.

And they're more weighted to sort of second and third quarter.

But the bigger issue, Scott, to the question you're raising is labor cost actions that we took last year that aren't repeated this year or were done in '09 that were not repeated in 2010. And that's the biggest driver of that lower conversion you're talking about. The conversion is actually quite good in both businesses and it's why we're still pretty darn good about 2011. Scott Davis - Morgan Stanley: Without us knowing the exact number, it's just kind of hard to figure out because if you take a look at spares of 25% and then conversion margin of spares is normally pretty high, you would have expected at least from my math, at least a 19% margin this quarter and it came in 18.4%. So trying to just get a sense of that delta. And maybe another way to ask the question is are there a lot of fair amount of investments and more discretionary expenses that were pulled forward into 4Q that won't repeat in 2011 that gives you confidence in the guidance?

Our biggest issue is those labor cost actions really. I mean, for both businesses in the fourth quarter. If you go back to the fourth quarter of '09, we had reversal of bonus accruals and we took a lot of furloughs. And that was just -- not only did we cover that in 2010 in the fourth quarter, but we increased margins on top of that. So if you look at the margin rate increase excluding covering those labor cost actions, it's quite substantial. Scott Davis - Morgan Stanley: Switching to Transportation Systems and can we talk about Turbo? You picked up a fair amount of new business. Are you adding capacity around that? And will there be upfront expenses that hold back those incrementals when you think and particularly, when you're servicing the U.S.?

You're talking about the Transportation Systems business now? Scott Davis - Morgan Stanley: Yes, TS Turbo.

The capacity that we'll add over the next year is really going to be driven by launches. And smartly, what we'll do is add that capacity in emerging regions, which is really where a lot of the growth is that really serve those markets. So I don't see that as affecting incremental margins in that business. We're just going to continue to benefit from volume leverage and fixed cost leverage in the Turbo business. I don't see that. If that's your point, I don't see that's detracting from or mitigating the outlook for margin expansion in Turbo. Scott Davis - Morgan Stanley: And lastly, just the pension contribution. Does that indicate that M&A will slow a bit this year?

No. Scott Davis - Morgan Stanley: So you have full capacity?

In fact, Scott, maybe if we could just spend one moment on that. I mean, really, the good news is as follows: Number one, very strong cash from operations. So very strong free cash flow. Number two, strengthening of the pension funded status. We would anticipate with the contribution we made in the first quarter and a use of the portion of the proceeds from the CPG divestiture that we'd be looking at global pension funded status at 90% plus in 2011, assuming an 8% return on assets and a 5.25% discount rate with rates that we've used as our core assumptions and where we ended the year in terms of discount rates. So strong free cash flow, very healthy pension funded status, which really mitigates significantly the need for future funding. Ongoing, as I mentioned, share buyback to mitigate and eliminate share creep and continued growth in terms of dividend. And acquisition capacity as a result of the strengthening of the balance sheet and the significant diminution of the pension underfunded status. So it's actually a good news story in terms of the balance that it brings to our cash redeployment strategy and the strengthening of the outlook for M&A for Honeywell going forward.

Scott, going back to your question on the conversion, we do have the data. If you took a look at Aero in the fourth quarter excluding those labor cost actions, the conversion rate is more like 45%. And if you take ACS, excluding the labor cost piece and the onetime M&A items from Experion, it's more like 20%. So conversion rates are very consistent with expanding margins in 2011.

We'll take our next question from Nigel Coe with Deutsche Bank. Nigel Coe - Deutsche Bank AG: Just to pickup on your leverage question. I mean, isn't it just a function of the fact that you didn't cut headcount aggressively, so that put the cost flows back much quicker? But then once you get beyond this, your leverage will then hockey stick higher?

Well, I might say the same thing just a little differently and that is we preserved our industrial base so that we'd be able to respond quickly to the recovery, which we have figured would come. And we took out the furloughs that we did in the prior year and the IC or the bonus reduction that we took the prior year we’re not repeating this year. And so it's kind of same thing you just said. But just maybe a little different. And the key thing is it's covered in the year. So 2011, you still get the same kind of margin expansion and in fact, we think better given everything we did to reset the company in the recession. But at the same time, you don't have that offset that you do for reinstatement of those labor costs. Nigel Coe - Deutsche Bank AG: I mean, you sell consumables, part of your sensing [ph] business and now CPG. Are we now done? Or are there some bits and pieces within TS, maybe friction on ACS that we might care about?

Well, I would say there's always bits and pieces. It's a $35 billion company. So there's always stuff that you look at and say, it might fit better somewhere else. Let's come up with a smart way of exiting. But by and large, the big stuff's done. Nigel Coe - Deutsche Bank AG: Dave, maybe if you could just put a final point on the impact of Experion on ACS margins because the decline Q-to-Q, 3Q to 4Q is somewhat unusual.

Yes, if you look at the fourth quarter as we've talked about and as Dave just mentioned, there really is a big contribution both from the labor cost, headwinds and also Experion. So I think it works out to be about 50-50 between those two in terms of the impact on the margin rate for the business. And as Dave said, you'd see attractive incrementals but for those items in the quarter.

We'll take our next question from Steve Winoker with Sanford Bernstein. Steven Winoker - Bernstein Research: Are you guys retaining any liabilities in the deal of consequence?

There's a normal contract indemnifications. It's very, very clean in terms of what the structure of the transaction. Steven Winoker - Bernstein Research: And I'm sure you're getting tired of answering the ACS and probably the Specialty margin question, but it's the first year-over-year decline in nine quarters of ACS anyway. So if you take that $160 million you described the conversion given the conversion rates you just gave, the $160 million of labor action is not repeated then? I mean, are you able to even give us a rough break out across the four segments of that $160 million, and that would allow us to do the math ourselves?

Well, we don't provide that level of detail. But I will tell you that ACS is an important component of that just because of the nature, Steve, of the business, as you know, in terms of just the number of people that we have in ACS and the global nature of that business. So it's an important piece of the total, but we don't provide that level of detail. Steven Winoker - Bernstein Research: But headcount is a reasonable way to think about it?

Yes. Steve, I think a reasonable way to think about this is without those labor cost actions having to cover that, fourth quarter margins would have gone up in every business. Steven Winoker - Bernstein Research: And as you think about 2011 and you talk about HBS, the Solutions HPS and HBS coming back pretty strongly and sounds like possibly more strongly than the product side, what kind of mix impact are you anticipating on the margin front there? And then if you could also answer the pricing question inside of HBS in terms of that's been something that I'll say has been improving over the years. Is it still improving?

Well, let me just take the first part of it and maybe we could just make sure we're clarifying the second question that you had, I guess, it was regarding an HBS pricing. But on the first part of it, we are anticipating good growth out of the Solutions businesses in 2011. But we don't see that in terms of the mix impact that's going to in fact, negatively impact the margin progression for ACS, Steve, in 2011. Sort of the big headline for ACS for 2011 is going to be good growth across the products, as well as the Solutions businesses. The absence as we progress through the year that increasingly, the absence of those labor cost headwinds and as I mentioned earlier, the benefit of the lift through of the Experion acquisition operating income. That's really what's going to drive it. Those are the things I think you should think about in terms of driving pretty attractive incrementals for ACS in 2011. Steven Winoker - Bernstein Research: But you did say Solutions was going to grow faster than Products originally? Or did I miss anything here?

I said that Solutions was going to have good growth in 2011, but I don't think the difference is that great between the Products and the Solutions.

Solutions is also planning to expand margins in 2011, which... Steven Winoker - Bernstein Research: But it's got not going to get close to the Products side of the business, is it?

No, it won't do that. But the mixed impact in terms of Products versus Solutions for 2011 for ACS is not going to be visible. It's really going to be -- the headlines are going to be the incrementals associated with the now full essence of labor cost headwinds, and the flow-through and benefits of lift through of the incremental margins and profitability from Experion.

And you can see that reflected in the ACS margin guidance that we gave back in December with pretty healthy increase in margins year-over-year. Steven Winoker - Bernstein Research: And my last question was on pricing on HBS. I was basically asking what kind of pricing headwinds or tailwinds are you seeing globally in HBS?

Nothing unusual. Steven Winoker - Bernstein Research: And I guess I should follow it up. On the pricing, you mentioned the material inflation headwinds in Specialty. Are you getting price there?

Well, you know, Steve, that we have an important piece of that business that is formula-based pricing. So that's one of the benefits that we have in terms of mitigating the inflationary impact of commodity costs. So the answer would be in those businesses, the answer is obviously, yes. But there's nothing that I would suggest in terms of the overall market conditions that would suggest there's any different into the outlook for 2011 for Specialty Materials versus 2010 relative to price realization.

We'll hear next from Shannon O'Callaghan with Nomura Securities. Shannon O'Callaghan - Lehman Brothers: One, just on the $110 million of ongoing for the pension. Does that reflect the -- or how is that going to be impacted by the $1.4 billion you're now planning for '11 as we look into '12?

It'll be a positive for us. That's a good question, Shannon. It's going to be a positive for us when we look into 2012 and it will be part of the, call it, accretive redeployment of the proceeds. That $400 million, which again is an estimate at this point in time that we're using, but a good sort of placeholder for you to think about in terms of the deployment of the cash proceeds of the sale. That will provide us with incremental earnings per share in terms of reduced ongoing pension expense, which will help offset then the full year dilutive impact of sale of CPG in 2012.

But the $1 billion is already contemplated in the $110 million guidance that we have. Shannon O'Callaghan - Lehman Brothers: So it's just the incremental $400 million. And then just on this labor inflation point, just remind me if there's any hangover into early 2011 in terms of the way things played out in early '10 and where your exit run rate was?

Yes, there's a little bit. We had some furlough action in the first quarter of 2010. And so there will be some headwind that'll show up in the early part of the year. But beyond that...

But nothing you're going to hear about.

Yes, nothing significant. Shannon O'Callaghan - Lehman Brothers: And just on UOP for next year, I mean, what were orders like in the quarter? And do you have any view into kind of the lumpiness in '11 terms of how the early part of the year or later part of the year might play out?

UOP is on a roll. Those guys are doing great.

The fourth quarter revenues were up significantly. We had, as you know, we announced the Petrobras order and that really is significantly added to the orders in the backlog. But even excluding the Petrobras order, orders were up over 36% in 2010's fourth quarter for UOP compared to the prior period. So as Dave said, the business is absolutely on a roll. Shannon O'Callaghan - Lehman Brothers: And I mean, as far as you know now, fairly even loaded across the year I know sometimes you can have a big quarter here and a weak quarter there. Do you have any visibility into that yet?

There's always going to be some lumpiness in UOP and you'll also see, obviously, the influence of mix as a result of royalties and license income. The important thing for you to think about I think is that not only is the backlog good, but what we would anticipate in terms of that mix of business going forward, '11, '12 also looks very good, Shannon. So UOP's poised very well, here for the next 12, 24 months.

Diana, we have time for one more question.

Thank you, and that will come from Peter Arment with Gleacher & Company. Peter Arment - Gleacher & Company, Inc.: Just on Aerospace and Dave, you mentioned that Defense is now trending towards the lower end of the range of down 4%, so it's down a point or two. But you indicated I think in your December outlook that growth was going to be up in a range of 1% to 5%. It sounds like though on the aftermarket side in the commercial and business jet side, we're seeing the cycle is kind of strengthening. Is that an offset here or we really have no change in the top line? How do we understand that?

I think for Aero overall, I think that's probably a pretty good way to look at it. And as we said, Peter, we'll sort of just stay tuned as the year unfolds relative to Defense. And the leadership team there is just doing a lot in terms of -- as we've talked about, in terms of resource allocation, opportunity pursuit, international opportunities, et cetera. But I think it's a good way to think about it. Peter Arment - Gleacher & Company, Inc.: So on the margin front related to that same question is, I think you kind of had hoped to see some margin gains at least 70 basis points on the lower end. Is that still a fair assumption, just given that the aftermarket strength can be a big driver here?

Yes, it is. That's still a good assumption.

All right. I'd Like to hand the call over to Dave Cote for any closing comments.

So a lot of good news for you overall today. The fourth quarter was strong, with strong orders rates going into this new year. And that allowed us to be able to take guidance for 2011 up $0.10, even as we cover CPG's departure towards the second half. And that sale of CPG and the deployment of the proceeds in a way that further strengthens the company but also more than offsets the dilution. So we think this is going to be -- just portends a terrific future for us. In addition, we continue to progress on all our strategies, and that's on every front. The seed planting that we've done and continue to do lays terrific the groundwork for continued and ongoing performance. Now early last year at our investor conference, we laid out five-year sales and margin rate targets that some considered ambitious. And we're excited now about the prospect of actually over achieving here because in the first two years of that five-year plan, we're actually ahead of the plan that we showed last year. So we think there's a lot more good news ahead for our investors, and we hope to see many of you at our investor conference in March. Goodbye.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.