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 C. Stephen Tusa - JP Morgan Chase & Co Robert Cornell - Barclays Capital Steven Winoker - Sanford C. Bernstein & Co., Inc. Ajay Kejriwal - FBR Capital Markets & Co. Jeffrey Sprague - Citigroup Nigel Coe - Deutsche Bank AG

Good day, ladies and gentlemen, and welcome to Honeywell First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Elena Doom, Vice President, Investor Relations. You may begin.

Thank you, Stephanie. Good morning, and welcome to Honeywell's first quarter 2011 earnings conference call. Here with me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson. This call and the webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note that elements of this 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 first quarter, as well as share with you our expectations for the second quarter and our revised guidance for 2011 and, of course, allow time for your questions. With that, I'll turn the call over to Dave Cote.

Thanks, Elena. As you saw from our press release last night, lots of cabbage this quarter. We had a tremendous start to 2011. We had better-than-expected performance across the portfolio yielding EPS above the guidance we provided you early last month. Sales of $8.9 billion were up 15% and above the high end of our guidance reflecting continued improvement in our end markets, growth from new products and geographic expansion. We generated EPS of $0.88 reflecting an impressive 40% increase over 2010, which was also good as you'll recall. Segment margins expanded 120 basis points to 14.5% in the quarter, reflecting margin expansion in every business. This really reinforces the quality of our earnings performance, volume leverage and continued cost controls while maintaining our growth investments, our seed planting for the future. We generated $433 million of free cash flow in the quarter excluding the $1 billion pension contribution made in January. In the quarter, we had a higher segment profit partially offset by higher working capital to support the sales increases we're seeing in the businesses and the higher CapEx as planned. Given the strength of our first quarter financial performance and improving end market conditions, we are raising our full year guidance. We now expect earnings in the range of $3.80 to $3.95 a share, reflecting a 27% to 32% increase in earnings over the prior year. The strong momentum we've seen across our end markets is being supplemented by the results of our seed planting initiatives throughout the portfolio. While our early cycle businesses including the Advanced materials, ACS products and Turbo continue to show record growth, our longer-cycle businesses including Process Solutions and UOP are really kicking in with double-digit growth in the quarter. Aerospace's commercial aftermarket saw spares orders increased 28%, significantly outpacing flight hours. Further, our investments and focus in emerging regions are really paying off. Sales in Asia-Pacific were up strongly, reflecting good growth in China and minimal disruption from the situation in Japan in the quarter. Fortunately, all our employees and sites are okay, and while we have virtually no direct impact in our businesses from Tier 1 supply chain issues affecting our production, we continue to monitor potential future risks from the electronic components that could impact global automotive OE and aircraft production rates. Our strong quarterly performance and improved outlook for 2011 reinforce that our strategy is working. Having great positions in good industries, the power of One Honeywell, our consistent focus on improving every year in each of our 5 initiatives, the seed planting, it really does make a difference. With that, I'll turn it to Dave.

Great. Thanks very much. Good morning, everyone. Let's go to Slide #4 entitled Financial Summary. To start at the top, again, reported sales of 15% to $8.9 billion, 11% organic growth in the quarter, so another strong organic growth quarter for Honeywell. We saw greater-than-expected growth in every region, the Americas and Europe were both up 10%, China and India were up 23% and 43%, respectively. Acquisitions in the quarter contributed 3% growth. Currency was a slight tailwind that rounded to just 1%. Segment profit up 25%. Segment margins just terrific, 14.5%, reflecting good conversion in the quarter. And as I take you through the business highlights, you'll see the businesses are doing a terrific job managing in this higher inflationary environment, while also continuing to invest for growth. Earnings per share at $0.88 were up 40% over the same period last year, considerably higher than the estimate that we gave you back in March. And just a couple of comments on that. The better-than-expected earnings performance was driven by higher sales, better conversion in the quarter, primarily in Specialty Materials, also Commercial Aerospace and our short cycle ACS products businesses. Repositioning spend in the quarter was $44 million net. That was 100% funded by below-the-line gains, mainly the sale of the Automotive Sensors business. In addition, we absorbed a $29 million charge in the quarter related to the early redemption of debt that otherwise would have matured in 2012, a smart move lowering our overall interest expense carry, and you saw the evidence of that in the very successful bond offering in the first quarter. Free cash flow came in as expected. Dave mentioned that $433 million in the quarter reflecting higher working capital to support online growth and also higher CapEx investment. Dave, I think it's probably fair to say the only thing we would say that was disappointing to us at all in the quarter was just inventory, and that we've got opportunities as we go through the year now that we know that's going to work itself out.

Convert that to sale.

Absolutely. Let's go out now and go to the businesses. Let's start with Slide #5 with Aerospace. Aerospace sales were up 8% in the quarter to $2.7 billion, driven by strong commercial growth primarily offset by lower Defense and Space sales. Sales in the quarter were approximately $100 million higher for Aero than our latest forecast, with much of the overdrive driven by higher airline spares and also OE selectables in the quarter. And I'll talk a little bit about that in just a moment. Segment profit for Aero up 13% with margins up 80 basis points to 17.3%. Now Commercial OE sales increased an impressive 25% driven by robust ATR build rates and also the higher win rates that we've had with airlines on buyer finished equipment or BFE selectables. We have also benefited from a rebound in BGA from near trough levels last year. So BGA was up over 50% in the quarter from the very depressed first quarter 2010 levels driven by strong positions in our mid-to-large cabin class airlines. The Commercial aftermarket sales were up 14% for Aero in the quarter. That reflected higher aircraft utilization rates and also continued strong spares orders. Just a couple sub-points on that. First, air transport regional flight hours were up approximately 5.8% in the quarter, 1 point higher than our original forecast. Now we don't expect that pace of growth to continue through the rest of the year given the lingering effects of higher oil prices and also the Japan disruptions, but we still expect flight hours to grow about 5% for the year, partly a function of robust delivery schedules, again, also the increase in utilization of the existing fleets. Regarding spares, the Commercial aftermarket spares are up 28% in the quarter following the fourth quarter increase of 25%. Spares orders continue to outpace flight hours given the deep declines we saw during the recession time frame. However, we expect the year-over-year growth rate to start to moderate over the course of the year due to comps. R&O for the quarter was up 6%, in line with utilization rates. And more importantly, we're starting to see engine events increase year-over-year and expect to see more repairs over the next couple of quarters. Defense and Space sales were down 3% in the quarter due to lower T-55 helicopter engine sales internationally and also various program ramp downs as expected, partially offset by higher engineering sales in the quarter. Now given the recent headlines, we continue to plan, and this is just a reiteration of what we've talked about before, for further U.S. Defense budgetary pressures and reprogramming, and we reiterate our forecast for low single-digit Defense and Space revenue decline in 2011. So that's the summary of Aero. Let's go to Slide 6, Automation and Control Solutions. As you could see ACS sales up 17% in the quarter, slightly better than expected, 7% organic, reflecting 4 consecutive quarters now of consistently strong organic growth for ACS of 7% plus. Acquisitions, mainly Sperian, had foreign exchange contributed to sales adding 10% growth versus the first quarter of '10. ACS had good geographic growth of 7% organically in the Americas and 30% plus in China and India. Now as guided, ACS sales conversion in the quarter was 14%, growing segment margins 20 basis points to 12.6%, reflecting strong volume increases in productivity, partially offset by inflation and the investment for growth across the portfolio and the dilutive impact of M&A, including ongoing factory transitions affecting manufacturing yields. In the second half of '10, when the recovery in our end markets really started to take shape, ACS increased their investments in line with increased orders in the second half of 2010, and ahead of the subsequent sales curve on longer cycle projects in building solutions, as well as further seed planting investments to pursue an array of new global energy efficiency projects. All of these are expected to yield incremental top and bottom line benefits over the remainder of 2011. So as we lap these investments in the second half of the year, we expect to see sales conversion for ACS of approximately 30% or in the range of 20% to 25% for the full year and, again, consistent with prior guidance. Just a couple of points on the mix of business within ACS in the quarter. The product sales were ahead of expectations. They were up 21% on a reported basis, 9% organic, reflecting strong performance across the products portfolio. Businesses linked to industrial production saw continued strong orders and sales growth, supported by increases in manufacturing and also the favorable impact of increased safety regulations. China sales were up 30% organic led by HVAC and lighting controls. India saw 47% growth, and the biggest gains in security and fire systems with increased reach to Tier 2 in 3 cities. And despite continued weakness in the residential and commercial construction markets of ACS, we are encouraged by the rebound in the North American Fire Systems business, the HVAC Controls business and also the Security business with good uptick of new products in, particularly, on the retrofit side of the business. Now the Solutions businesses were up 10% reported, 4% organic in the quarter. They have double-digit reported growth in Process Solutions as we execute on large global project backlog. The Building Solutions business continues to build backlog with retrofit activity across both commercial and institutional verticals. HBS, the Building Solutions business, continues to leverage ACS' premier energy efficiency and Smart Grid portfolio to expand in new markets having won 2 Smart Grid projects now in China. In total, the Solutions business backlog, the entirety of the process of Building Solutions backlog in the quarter was up over 20% year-over-year. So given that review of HBS, let's go to Slide 7, Transportation Systems. In the quarter, TS was up 19%, driven by volume increases primarily Turbo and friction, partially offset by a slightly lower sales in CPG. Now Turbo continues to outperform the quarterly industry macros of approximately 5% growth in European light vehicle production and a 7-point increase in Western European diesel penetration. Honeywell Turbo's performance reflects their high win rate on attractive new Turbo gas and Turbo diesel platforms and the flawless execution of these new launches globally. To put it in perspective, in 2011 we expected about 1/3 of Turbo's growth to come from favorable industry macros and about 2/3 to come from new launches. We expect growth trends in Turbo to continue strong, although moderating over the course of the year, despite supply chain issues, minor supply chain issues, affecting the second quarter and affecting global automotive OE production. And we have accounted for these minor disruptions in our guidance in the second quarter, that I'm going take you through in just a moment, as well as for the rest of the year. CPG sales were down slightly driven by lower Prestone sales due to more inclement weather conditions during the first quarter. Overall segment profit was up 50% for Transportation Systems. Margins up 240 basis points to 12%, again, driven by volume increases at Turbo, partially offset by higher commodity cost. Let's now go to SM, Specialty Materials. They just had a phenomenal quarter. Tremendous start to 2011 for SM due to continued strong demand in the Advanced Materials business and also double-digit growth in the quarter in UOP. The first quarter revenues were up 19%. Segment margin was at an all-time record of 21%. Now the substantial increase in segment margin was driven by higher sales, reflecting favorable price over raw material spreads, strong commercial excellence, as well as continued productivity across the business. Now given the volatile commodity markets, SM is benefiting from price increases commensurate with rising raw material input prices that began significantly in the second half of 2010. Now as we lap these increases in later quarters, we're going to see lower sales conversion. So given these dynamics plus the normal seasonality of the Refrigerants business and the lumpy mix of business at UOP, we're planning SM margins in the range of 17% to 18% for the year. And I think already that compares to previous guidance of 16.4% to 16.7% for SM. We're also planning for SM to continue to invest for growth in strong reliability, which will also affect their second-half sales conversion. In the second quarter, sales at UOP were up 13% with higher licensing revenue, recovery and refining catalysts and also growth in services related to the start up of the front-end engineering and design work or FEED work for Petrobras. UOP is expected be one of the company's key contributors. As we proceed in 2011, we'll be one of the key contributors to organic growth for the company with growth in the upper teens driven by a strong order book and also its growing pipeline of global energy projects. Now the Advanced Materials business at SM, revenues in the quarter up 22%. Revenues across the group are up strong double digits. Just to give you some color on that. Resins and Chemicals up 25% on strong global demand for caprolactam and resins. Fluorine products up 25%, driven by strong demand for refrigerants, tight industry supply conditions and also strong plant performance. And Specialty Products was up an impressive 15% with above market growth led by penetration of new product introductions in advanced fibers, specialty additives, as well as in industrial products. So a great start to the year for Specialty Materials. It's a credit to the team. They're deploying commercial excellence. They're investing in innovation, their globalized sales force and also reliable plant performance. Now given the significance of SM to the quarter and our assumptions for the business for the remainder of the year, I'm going to come back, spend a little more time on that when we review the updated guidance for Honeywell overall in a moment for the full year 2011. First, though, let's go to Slide 9 and talk about our outlook for the second quarter. We're planning for total sales in the second quarter to be in the range of $9.1 billion to $9.4 billion, up 12% to 16% from last year, reflecting continued good organic growth. Earnings per share we expect to be in the range of $0.94 to $0.98, up approximately 29% to 34% year-over-year. We expect Aero sales in the quarter -- in the second quarter to be in the range of $2.8 billion to $2.9 billion, reflecting continued commercial aftermarket strength and also the ongoing rebound in BGA OE. Now these, of course, are going to be partially offset by lower sales in defense. For ACS, we expect sales in the range of $3.8 billion to $3.9 billion, extending the positive momentum from the first quarter with continued organic growth across the portfolio, the execution of solutions' strong backlog and a continued benefit of the Experion and Matrikon acquisitions that we made in 2010. For Transportation Systems in the second quarter, sales are estimated to be $1.1 billion to $1.2 billion. It reflects the continued momentum of new launches from the first quarter, as well as our estimate of global automotive supply chain disruptions emanating from the Japan crisis. Now we conducted -- just a little bit of color on that, we've conducted a thorough review of our potential exposures by OEM, and we're confident that the impact in the quarter, the second quarter for Turbo, will be very minimal, and the risk is reflected in our volume forecast in the quarter. So we think very manageable and incorporated in our outlook. With that in mind, we are expecting TS sales growth in the range of 12% to 16%, and we'll continue to monitor, of course, the business as we go forward. At Specialty Materials, we anticipate sales in the range of $1.4 billion to $1.5 billion, driven by growth projects, services and catalysts sales at UOP. We also expect, anticipate, continued healthy end markets in Advanced Materials with continued growth, good growth, out of Asia both in fluorines and resins and chemicals. So another strong quarter anticipated with sales and earnings delivering a similar growth profile as we just delivered in the first quarter. Let's go now to Slide 10. The financial guidance summary for the full year. Here we've got summarized our updated guidance reflecting the strength that we've experienced in the first quarter and, again, our best view of the balanced set of risks and opportunities that are ahead of us for the remainder of the year. Let's go through a couple of the highlights. As Dave said, we've increased our sales outlook for the year to $36 billion to $36.6 billion. This excludes the impact of a potential discontinued operations accounting treatment for CPG that we anticipate later in the year. Now regarding the CPG divestiture, we're anticipating a third quarter close. So for planning purposes, and to kind of keep it simple for tracking purposes, we're assuming CPG is in our revenue and our earnings numbers for the first 6 months of 2011 and out of our numbers for the second half of the year. Our revised earnings guidance also reflects a higher euro assumption. We're now looking at a euro to dollar in the 1.35 to 1.40 range. This has added approximately $350 million to our full year of sales estimate at this time. So what that translates to is an organic increase of approximately $500 million. That's the spread, and that's spread across all of our business segments. Now with respect to Specialty Materials, we expect to see normalization and more normal supply-demand condition in the Advanced Materials business as we progress through the year and, therefore, pricing and spreads in the second half to come down lowering both SM's organic growth, as well as the very high sales conversion that we experienced in the first quarter. So given the dynamics we've highlighted in SM in the first half, as well as the absence of CPG in the second half, these two clearly cloud the normal linearity that we would have for Honeywell in 2011. So with the organic growth profile we've laid out for the remainder of the year and the majority of our businesses having recovered to prerecession levels, we're confident in our revised outlook for the year. And it's important to point out again, that we'll continue to assess the uncertainty surrounding the global macro environment, the situation in Japan, the volatility in the commodity and foreign exchange markets. But as we sit here today, we feel we're appropriately balanced in our planning assumptions, assuming minimal impact from supply chain disruptions, as well as higher material input prices as we progress through 2011. Now as we've discussed before, we're targeting a weighted average fully diluted share count of 795 million shares for the year. This reflects our latest share repurchase estimate for 2011, which is in the range of about $1 billion and, of course, also reflects the higher share price assumption for those share buybacks. So basically we're aiming to keep share count flat with where we ended the year 2010. And as always, we'll continue to evaluate our capital deployment preferences in light of the highest and best value alternatives. Now given the first quarter's momentum in sales, orders and operating leverage, this allowed us to confidently take our guidance for 2011 up $0.20 on the low end and up $0.15 on the high end to the new range of $3.80 to $3.95 per share for the year. In addition, we're confirming our free cash flow outlook for the year in the range of $3.5 billion to $3.7 billion prior to any planned U.S. pension contributions. So let's now just summarize on the last slide. Obviously, a lot of good news for Honeywell today and a terrific start to 2011. We saw, as Dave said, positive upward trends in the orders for all of our business segments. We're encouraged by the rate of improvement and uptick in Commercial Aerospace. Both OE and aftermarket orders or spares orders sustaining well above flight hours. General industrial recovery in the emerging markets continue to be bright spots, fueling strong double-digit growth. Turbo is continuing to benefit from their strong industry position from new platform launches. However, growth, as we've said, will slow in Turbo and over the course of the year given the projected decline in OE production schedules for the remainder of the year. And our long-cycle businesses are continuing to accelerate with both Process Solutions and UOP in double-digit growth territory. We're making further progress obviously on the execution of our strategies in sustaining our growth investments. We're expecting continued good organic growth, strong sales conversion, continued traction on commercial and R&D effectiveness, all the while still controlling our fixed cost effectively through OEF and other disciplines. So to put this in perspective and capsulize, we're now looking at about a 30% earnings growth in 2011, the midpoint of our guidance, underscoring the organization's ability to be a top-tier performer with a balanced performance from both our short- and long-cycle businesses. All of that delivering above-average growth and continued margin expansion. We think the revised outlook for the year reflects a balanced view of the global economic environment, including where we see strength and where we see opportunities, continued opportunities, across the portfolio. So our operating strategies are working. Our capital deployment plans, including the share buyback that we talked about, further strengthens the company's outlook for 2011 and, obviously, continues to build a very solid foundation for terrific future growth for Honeywell. So in closing, a terrific quarter, a very positive update to the full year with earnings expected in the range of up 27% to 32% over last year. Clearly, the second half will have quite the same profile for a variety of reasons. However, we feel our sales margin and EPS guidance that we communicated today is very strong and represents again a terrific performance and terrific outlook for the company for the year. So with that, Elena, let's turn it back over to you for Q&A.

Great, Dave. Thanks. Stephanie, if you can open the line. We'll take our first question and would ask that we try to answer as many Q&A as possible, and we'll plan to stop at 10:30.

[Operator Instructions] Our first question comes from Scott Davis from Morgan Stanley. Scott Davis - Morgan Stanley: Not too much to pick on for sure, solid quarter overall. I just wanted to focus a little bit on the working capital and the inventory issue. And I think the heart of my question relates more to HOS, and that's when you put up an 11% core number, which is probably the highest you guys have had in 20 years, does it put a lot of projects on hold and make it really difficult to manage working capital and push HOS forward? Or is this more of a strategic decision to just build inventory ahead of price increases and obvious demand that's going to pull through the rest of the year?

I think it's more of a case, Scott, where we might just got a little ahead of where we see the sales going. And I fully expect all this to convert and then will get us get -- as they do a better job there than we did in this first quarter. So that's all it is. HOS is still going along swimmingly. Scott Davis - Morgan Stanley: So HOS isn't harder to do in a higher-volume environment? Is that fair to say?

Yes, it's not going to -- I suppose you could say it puts some pressure on having to do 2 things at the same time. But it's not the first time our guys have been confronted with something like that. Just like you could say is the recession a tougher time to be getting HOS done because you got all kinds of cost pressures. We did it then. It's just a different kind of problem you have to manage. That's all. Scott Davis - Morgan Stanley: Sure. Guys, your Specialty Materials business was the biggest delta versus our model, and that business has just been -- it was not many years ago, I was telling people it would never be a 10% margin business, and now you're over 20%. So...

I need to revisit some statements you're making today, Scott? Scott Davis - Morgan Stanley: You know how to answer. Right sometimes, wrong more often. I wanted to get into UOP a bit, and my question is both I need to be educated and also just to understand what's going on here. I mean, it's up 13%. You made a comment later in the presentation that the project business part. I assume that's a little bit of a lower margin than the reload. I mean, is there a full-fledged catalyst reload cycle that's beginning here? Is that what you're seeing? Or is there something -- or something else? I'm trying to get a better feel for visibility on UOP.

I would say we are seeing in particular the refining catalyst in particular. It's been pretty robust. And we said once before that -- or I guess when we were in the recession, that a lot of those reloads were being extended. You're starting to see some of the benefit of that. Dave, is there anything you want to add to it?

Well, I think we saw a good contribution from reloads. It was the majority of the catalyst sales in the quarter. It's about 2/3 of the catalyst sales in the quarter. And I think that trend's going to continue. And I think standing back from the reloads and just kind of reinforcing what the themes for today is, we had good growth in UOP in the quarter, but we're going to have even better growth in UOP as we progress through the year.

Yes.

So it's really going to be a leader in terms of when you look at our organic growth. That's going to be a strong contributor to our organic growth profile over the rest of 2011. Scott Davis - Morgan Stanley: Okay. That's exactly what I was trying to get. All right, I'll pass it on. Thanks, guys.

And I'll quibble with your headline later, Scott. Scott Davis - Morgan Stanley: You got it.

Our next question comes from John Inch from Bank of America Merrill Lynch. John Inch - BofA Merrill Lynch: Dave Anderson, just want to sort of square up some of these nonoperating items. So, I think, firstly, how much was the Sensotec gain? And I think you said repositioning was $44 million. What are sort of the other moving parts because repositioning line obviously is $133 million. Is that where the $29 million of charge was absorbed for early debt retirement? Just, maybe, you could square off some of these moving parts for us.

Yes, well, what we had was we had about a $40 million gain, pretax gain, on Automotive Sensors business. We also had another minor, minor gain during the quarter. Essentially think of it this way, John. Those gains on sales on nonstrategic business essentially funded the repositioning. That's sort of a 1-for-1, so just think of it that way. And then obviously in addition, the other thing that we had during the quarter was the debt retirement that we spoke about, which is a net positive, will be a net positive for us. When we look forward in terms of the interest expense guidance for the full year, we'll benefit from that. So that was also in the non-operating piece of the quarter. There really -- Elena, I think there was much movement beyond that from the other pieces.

So, John, in the repositioning in other line item, in addition to be $44 million of repositioning that Dave talked about, we also had our normal run rate expenses for asbestos and environmental, which comprised the $133 million. And then the gains on sale of businesses were partially offset by the debt redemption costs.

Our strategy hasn't changed here, John. Onetime gains we always use -- we always redeploy and use as a way to make the business better in the future.

I think a good way, John, to think about that ,below the line is very clean. John Inch - BofA Merrill Lynch: So was the $29 million of debt refinancing, was that -- I mean basically, was that naked? In other words, if you hadn't done that, would you have earned $0.91?

I think that's accurate. John Inch - BofA Merrill Lynch: Okay. Is the reason Turbo is not affected by Japan even though Japan's creating some global automotive disruption because, basically, Japanese vehicles aren't really designed with turbochargers? Is that really the issue? Or is there some other factor going on here?

I think that's a key contributor, John. I mean, that's a very, very good point. I think the other thing, and to the degree that we can't really quantify this, but it just makes sense, that to the degree that Japan built automobiles were in shorter supply. Obviously, that has created an opportunity for some of our customers, more significant in terms of Turbo customers, to sell their products. So we're going to see some of that actually as we progress through the second quarter, which will mitigate some of the supply disruption that we saw. The other thing is, it's against the backdrop of improved macros, overall automotive production up nice, a higher diesel penetration, stable diesel penetration particularly in Europe and very successful consumer pull, very positive consumer pull, for Honeywell products. So automobiles with Honeywell turbochargers. So we had a number of factors working in our favor, and we think will continue to work on our favor. As I mentioned, we're looking at minimal disruption we think in the second quarter, probably Elena, something like 100,000 units would be our best estimate.

Yes. So, John, to build on that comment a little bit, turbo penetration in Japan is really less than about 10%. So reduced production rates at the major Japanese OEMs, which is primarily where you're seeing the disruption in the OEM build schedule, isn't going to affect us.

I'd say, John, another thing we don't know yet that we did talk about in the earlier comments, just to reinforce is, you don't know to the extent that somebody is a Tier 3 or Tier 4 supplier in Japan, the Western auto manufacturers, and we don't know that yet. I mean, we don't think there's an issue there, but we don't know yet. John Inch - BofA Merrill Lynch: No, that's reasonable. Can I switch gears to Specialty Materials? Is there an issue that the business, kind of, is able to price as you suggested because of rising raw costs, but it's the near term or it's the current market pricing within higher feedstock prices roll through the pressure margins? Like, do you really see sort of that reversal kind of -- especially if oil prices, say, stop going up or at least seem to have paused but then you get the -- do you get the lagging impact of the raw drive through? Is that what's going on? Or is that not the way to think about it?

Well, we think about it just a little differently. The way that I think about it is that we have a fairly significant surge in input costs in the second half of 2010. This is particularly in our Fluorines Products businesses. And we smartly procured in advance of or concurrent with those increasing costs. So we were in a good position coming in the first quarter. We had an imbalance in terms of supply-demand conditions, overall, for finished product, and that was really on a global basis. And so we were very well positioned. We were well positioned in terms of ability to supply into that market. It gave us particular strength, and the imbalance, if you will, created, we think, a non-sustaining -- a level of conversion, revenue conversion. So that's going to be normalized as we progress through the course of 2011. And what it's going to translate to, as we said, John, is margin guidance for Specialty Materials in the range of 17% to 18%. Very attractive. I mean, still very good run rates, but much more where we would have expected. So it's really that phenomena that really characterized the very positive performance in the first quarter, and we hope to see that sustaining. John Inch - BofA Merrill Lynch: And just my last question, I guess. It's going back to Japan. I mean, you guys are very large -- between your 2 businesses, Norcross and Sperian. You're a very large supplier of the personal protection gear and so forth. As horrible as the tragedy has been, is there an incremental opportunity that's potentially meaningful that you could sell some of these products into the Japanese market or make some penetration gains or something like that? I'm just curious if there's any sort of -- you talked about sort of the Turbo somewhat benefiting directly. What about on those businesses specifically?

I would say if there's something there, John, it's not enough to move the needle. I would say it's given us some very nice publicity for our T-Hawk,, that remote-controlled helicopter, which, as you know, has been used extensively there now to be able to take pictures and do it in high radiation areas. And I think we're going to see more attention there. But even there I wouldn't say it's going to move the needle. John Inch - BofA Merrill Lynch: Okay. Thanks, guys. Appreciate it.

You're welcome.

Our next question comes from Jeff Sprague from Vertical Research. Jeffrey Sprague - Citigroup: I was wondering if we could just drill a little further into Aero. The first part of my question is just thinking now as we're kind of on the eve of a pretty significant ramp now in large commercial OE volumes, how to think about how margins play. Obviously, you've got underlying structural cost improvements, but that aftermarket OE mix starts to work against in the not-too-distant future. Should margins still be able to drift off in that environment?

Yes, I think so. And we're holding guidance obviously for the full year in terms of Aero, overall. What we're going to see I think, John, is that in the Aerospace, it's actually in the near term, we're going to see the continued benefit of the continued recovery in the Aerospace commercial aftermarket. That's going to be a tailwind for us. As we progress through the year, we're going to also be spending a little bit more in terms of R&D as a result of the major program wins and the success that we've have. So the balance of those two is really what translates to the consistency in terms of the margin rate expansion that we think will be there or the marked consistency in terms of margin guidance that we've given you for the full year. The other thing that we'll have when you look at it on a year-over-year basis, as you will recall we had fairly sizable launch contributions in business aviation in the second half of last year. It will be -- within the second half of this year, we will be lapping that period. We won't have those. So first quarter, there was essentially no change, first quarter of '10, first quarter of '11, no change in contributions for BGA, and we'll have that as a positive as a tailwind as we progress through the year in Aerospace.

I'd also add, Jeff, that like all our businesses, there's opportunity to get operationally better here, and each business continues to just get better and better, quarter-by-quarter. Jeffrey Sprague - Citigroup: And then just thinking about the aftermarket, specifically. Obviously, there's a lot of analysis done by you guys during the downdraft kind of nailed down the disconnect between flight hours and inventories at the airlines. You said R&O has kind of equalized. Do you think actual physical spare parts have now kind of equalized the inventory levels that make sense relative to what flight hours are?

Well, I think what we're seeing is -- let me give you maybe a little bit of or complicated answer to that question. Number one, as we said, Commercial Spares were up 28% in the first quarter, and we're expecting Commercial Spares to be up about 20% for the full year. And that's against the backdrop of an estimated 5% growth in flight hours. So I would say we're still seeing the recovery and the rebound on the spares side, Jeff. On the other hand, when you look at inventory levels compared to overall revenues of the airlines, while compared to profitability of the airlines and use that index against historic levels, it's not rising. So what we're seeing is there clearly is a need, a catch-up need relative to utilization that we're going to see through the course of this year. Jeffrey Sprague - Citigroup: Great. And then, Dave Cote, can you just speak a little bit more about just the appetite for M&A here? And also you do have share repurchase, obviously, on the boards for this year. You didn't do any in Q1, I guess because of kind of the working capital dynamics in the quarter. But just how should we think about that balance and how you might toggle between the two over the course of not even just a year, but the next 12 to 18 months?

I think the way to think about it is the way we always say is it's going to depend upon where the opportunities are. And if M&A is too rich, we're not going to do it. We haven't lost our discipline there. And to the extent that we have the reserves and we don't see opportunities, then share repurchases come into play. But at the end of the day, we're always going to be opportunistic about what makes the most sense for the company and the share owners. Jeffrey Sprague - Citigroup: You always have a pretty big funnel. I mean, is the funnel looking rich? Or is there still things that can get done in this environment?

Well, the funnel always looks good. We work pretty hard at keeping up a good-sized funnel. As we pointed out at the investor conference, one of the things that makes us, I'd say, more adept when it comes to not overpaying is making sure that you have lots of other opportunities. That being said, we're going to continue to be very cautious because it's an area where we like being 10 for 10. Jeffrey Sprague - Citigroup: Great. Thanks a lot.

You're welcome.

Our next question comes from Nigel Coe from Deutsche Bank. Nigel Coe - Deutsche Bank AG: Thanks for releasing those results last night. That was more help than you can imagine.

Nigel, all that credit goes to Elena. Nigel Coe - Deutsche Bank AG: Yes, it's a big help. So I think your inference from the release was that March was a bit much stronger than you expected. And I'm actually wondering -- obviously, there's a lot of chatter about supply chain shortage, and I'm wondering if there's any companies building safety buffers in their inventories that might have helped to contribute towards that strength. I mean, are you seeing any -- that companies and customers are starting to build inventories or were building inventories?

In other words, I think, Nigel, maybe just rephrasing your question making sure we're capturing it. Was there any phenomena of the higher-than-anticipated sales, particularly, as we -- in March as we closed the quarter, that could have been driven by or influenced by our customers building inventory? Is that -- did I hear that correctly? Nigel Coe - Deutsche Bank AG: Absolutely, yes.

Yes. I would say, no.

No. And, certainly, we don't encourage that. I would say that one of the commercial practices we've worked very hard to purge throughout the company going back 8 or 9 years ago. So we don't encourage that with either terms, price, anything else. We certainly don't encourage it, and we haven't gotten that sense from our customers.

Our view, I'd say probably, David, it's fair to say a strong view, is that we just had underlying very good demand across the portfolio. You've heard some of the numbers, Nigel. I mean, it's across all of the regions. Nigel Coe - Deutsche Bank AG: Yes, I mean, it's something I've seen a couple of companies lose inventories. So I was wondering if those -- maybe even small impact, but that's good to hear. And then second, just coming back to SM, just looking at obviously 1Q, you just had started lining up. That was great. But as you go into 2Q, I mean, do you expect margins to still be above that 18% range? Or do you think you'll be more -- able to get closer to that higher range?

Well, as you know, we don't provide specific quarterly guidance in terms of individual business units, and we provide, obviously, provide you with full year guidance. But I think we're going to continue to see pretty good numbers out of SM in the second quarter. And I would suspect that what we're going to be seeing for SM for the remainder of the year is close to that full year range, that 17% to 18% range guidance that I provided you, Nigel. Nigel Coe - Deutsche Bank AG: And then finally, you got a big gain coming up on CPG probably in 3Q. You mentioned earlier in the call that your policy is to offset gains with the repositioning. Do you have enough opportunities and programs to offset that kind of gain?

I think the answer is yes. And as we've done in the past, and as Dave is really -- another discipline that he's built into the organization is really ensuring that we're doing high payback on funding. We really look at things smartly in terms of those -- that redeployment. And, obviously, in this case, we've had some time to think about it, to review different options. We're still going through that. But you should expect a smart redeployment, overall of those games and looking forward then how that will translate to continued growth, continued earnings momentum in a stronger business for '12, '13, et cetera. Nigel Coe - Deutsche Bank AG: And what kind of payback would you expect from that investment? And, obviously, as you do more structuring to get you through the cycle, the payback period extends. I mean, are we looking at -- do you have 2-year paybacks or maybe a bit longer?

It will vary. It will vary by project. It will vary by specific item. But we'll provide you with clarity so that you'll be able to translate that into your '12 and '13 thinking. Nigel Coe - Deutsche Bank AG: Great. Thanks, Dave.

You're welcome.

Our next question comes from Steven Winoker from Sanford Bernstein. Steven Winoker - Sanford C. Bernstein & Co., Inc.: So roughly the 1 question I'm going to have time for is around maybe if you could quantify the material inflation, Dave Anderson, including component, not just raws. And if you actually think about excluding it, I don't know if you can do it, the SM benefits from the contract escalators. I just, what I'm trying to get at is, what was the real inflation headwind that you faced that you offset with pricing and productivity and other bits and how to think about that going through the rest of the year?

Well, it was fairly significant in the quarter. So in total, if you take SM included, and I know Steve you'd like to exclude it, if you took SM in total plus TS for the quarter, you're talking about over $200 million in terms of inflationary headwind. So it was an important element to the quarter to be able to manage that and to be able to offset that in terms of our productivity actions, as well as our pricing actions in the quarter, to deliver the uptick that we did in terms of segment profitability. Steven Winoker - Sanford C. Bernstein & Co., Inc.: And that you said that -- I heard you say Specialty and Transport for the $200 million. So I assume that's also Aero and ACS? Or is that separate?

Yes. Steven Winoker - Sanford C. Bernstein & Co., Inc.: That's all in?

That's all in. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Okay. All right. And are you seeing things get harder as you move through the quarter?

Yes. I think we'll see even more challenges. As we talked about earlier, we've got a steepening curve, if you will, in terms of inflationary pressures. And in some cases, you go back to SM and that's sort of the prominent one, we won't have the same supply-demand, if you will, imbalance that characterized the first quarter. It's still going to be very attractive, but it won't be at that same level that we experienced in the first quarter.

I would add, though, Steve, across the board, we're not seeing anything that we didn't anticipate.

Right, very good point, Dave. Steven Winoker - Sanford C. Bernstein & Co., Inc.: All right. Great. Thanks, everybody.

You're welcome.

Our next question comes from Bob Cornell from Barclays Capital. Robert Cornell - Barclays Capital: You guys referenced the developing strength in the long-cycle businesses, in the process building, you mentioned North American Fire. You gave us some color there, but everything's going by so quickly. Maybe you just go back over the prospects there for process building in North American Fire, and are you suggesting the North American non-res businesses are going to show signs of life? So maybe just a little more color there on those businesses.

Elena, you want to just give us a little bit of detail on ACS?

Sure. So, Bob, I mean, I think, what we're seeing is an improvement in residential retrofit, primarily in ECC driven by some pent-up demand given that we're in the crux of the home renovation season, which really stalled in 2009 and even in the beginning of 2010. And, in addition, we're benefiting from some of our share gains on the Combustion Valves business and also in the Security Products business, which is contributing to growth in the quarter, Bob, and we see that, obviously, sustaining itself. And then lastly, I think you're seeing, obviously, the benefit on the commercial retrofit side from favorable macro trends in energy efficiency with good pull-through of new products.

It all looks good, Bob, right across-the-board. Robert Cornell - Barclays Capital: Yes, we'll get back into that in more detail after the call. But, actually, I was wondering if you look at the 21% margin in Specialty Materials, I mean, is it fair to say that the Advanced Materials given Dave, your comments, Anderson, about the purchases and the price of the Advanced Materials hit the higher margins and the UOP hit the lower margins in the quarter?

Advanced Materials really led the quarter in terms of the sales conversion and was a major contributor to that outperformance, if you will. Robert Cornell - Barclays Capital: Yes, but if you look forward, I mean, UOP is going to start to have a ramp up, and I guess the big Brazilian project, I mean -- in the margin guidance in the second half, are you capturing the big ramp of what is probably a breakthrough project for UOP?

Yes, we've got that built-in. We had, as Dave mentioned, $40 million approximately from the Petrobras project in the first quarter. That's going to -- it's relatively linear over the course of the year, relatively even in terms of...

Just think about it as being about worth $150 million for the year.

Yes. So not quite the run rate of what we had in the first quarter, but close to it. And then UOP is going to as I mentioned, Bob, earlier, it's going to benefit as we convert its strong backlog to revenue over the course of 2011. We're actually going to see an increase in the top line growth. We had 13%, 14% growth in UOP in the first quarter. It's going to be well above that as we progress through 2011. Robert Cornell - Barclays Capital: So that will be a catalyst cycle that I think that Jeff alluded to earlier as well as the Brazilian job. And what else are being contributed to that acceleration in revenues?

It's across the board. It's a projects business as well. As we mentioned we had a significant strengthening in the backlog of UOP in the second half of 2010. That backlog continued to grow in the first quarter of 2011. So it's across the full product portfolio, projects business as well as the products of catalyst business of UOP that we'll see the growth in the remainder of the year. Robert Cornell - Barclays Capital: Okay, thanks, you guys.

You're welcome.

Our next question comes from Ajay Kejriwal from FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co.: Just on emerging markets. You called out a very spectacular growth in China, India I think 30%, 47% growth numbers you have mentioned. So what's driving that? Any specific products or is it across the board in ACS? And then maybe an update on how should we be thinking about the growth rates there?

Well, the biggest growth that we had in those 2 markets really were ECC within the ACS business and also HPS, the process solutions business within ACS. Those were the really big contributors. But each of the businesses, actually, each had strong performance, emerging region performance in the quarter, which led to the kind of stellar numbers that we talked about. And emerging regions were up. In total, I think, it's around 20% in the quarter. So obviously, a key contributor and an increasingly important contributor to Honeywell's overall organic growth. I thought those 2 businesses stood out in terms of -- to your specific question, those really stood out in terms of the size and the growth. Those are, for an average, about 50% growers during the quarter. Ajay Kejriwal - FBR Capital Markets & Co.: And then the expectations?

Continue to be good.

We put a CAGR on it, right, in terms of 16% growth, and we're already tracking above that at the 20% clip that you mentioned, Dave.

Yes. Ajay Kejriwal - FBR Capital Markets & Co.: Good. One more on Specialty Materials, if I can. So the supply and demand imbalance in the first quarter, what was that related to? Was that any of the supply disruptions out of Japan? Did that influence it? Or how?

No. This whole phenomenon is just related to -- phenomena, specifically, Ajay, that I talked to is really related to our Fluorines business. It's kind of, most particularly, our Refrigerated Products businesses within the Fluorines business. And new products. That's a very good question, Dave. And the other thing is globalization of that business now, and what we're doing in terms of just growing our global customer base.

And the demand sent back has been much stronger than what we expected.

Yes, and by the way, Resins and Chemicals, not to ignore that, R&C had a very strong quarter. Continued growth in caprolactam and also ammonium sulfate was very strong in the quarter. Now we expect some of that to, again, demodulate over the remainder of the year, but still very, very nice numbers for that business. Ajay Kejriwal - FBR Capital Markets & Co.: And the reason I ask is that we've heard of supply disruptions in chemicals, BT-Epoxy, electronic materials. So you, obviously, have a very strong global manufacturing footprint. So any opportunity for you there as the market shares shift?

Yes, I'm sure there'll be some. Yes, that wasn't a significant driver in the quarter, but I think your point is a good one. Ajay Kejriwal - FBR Capital Markets & Co.: Thank you.

You're welcome.

Our final question comes from Steve Tusa with JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: On the second quarter, usually your margin is up sequentially. I understand Specialty Materials is stepping down, probably, a headwind of 30 to 40 basis points. But is your reported marking still going to be up in the second quarter despite that?

I think, again, we don't provide quarter-by-quarter guidance, but I would suspect, Steve, that we'll see something in the range of what we just experienced in the first quarter for Honeywell.

In terms of year-over-year.

In terms of year-over-year. C. Stephen Tusa - JP Morgan Chase & Co: Right. In terms of year-over-year? Okay.

And I think in terms of year-over-year, and I think actually in absolute. C. Stephen Tusa - JP Morgan Chase & Co: Okay, got you. And then for both of you guys, I mean, it's clear that this cycle you guys have come a long way over the last, I don't know, 9, 10 years. Last cycle, even though you kind of beat a few quarters here and there, several quarters, it seemed like there was a little bit more of a pension to kind of invest a way upside kind of load the next year for growth. Whereas this cycle, it would appear that you're letting it rip a little bit more, which speaks to the positioning you guys are in and how far you've come with this portfolio investment, et cetera. I'm just curious as to how you guys look at succession kind of the legacy there. And over the next couple of years, what do you think you need to do to kind of position Honeywell for the next 5 to 10 years? And is that a job that's in inning 4 or 5 or is it inning 7 or 8? I'm just curious, I guess, as to you guys, both of your tenures at Honeywell going forward. And, of course, Dave, your name has been in the news as far as potentially working with the government in some stage, and I'm just curious as to how long you guys are going to be around for.

Well, as far as I'm concerned, Honeywell is still on the top of the first. We've still got a lot of opportunity left to go. And, also, I like my job, and I'd say the difference you're seeing in terms of let it rip is not so much that as it is if you went back 6, 7 years ago, there really was no pipeline. We didn't have a pipeline of products. We really finalized our great positions in good industries. We didn't have a great geographic presence then. All those things have changed. And the thing I could promise you is the results you're seeing now are not a result of trying to shortchange anything for the future. If anything, we're accelerating that because we now have more resources to do it with. So [indiscernible] here we are and where we're going, and it's my intent to own my shares 10 years after I retire because things are just continuing to go well. C. Stephen Tusa - JP Morgan Chase & Co: Okay. Great. Thanks.

Thanks, Steve.

All right. Let's just hand it over to Dave Cote for any final comments you may have before we end the call.

Well, it was a wonderful start for the year, and I think a real validation of our consistent focus. Our strategy, our focus, our seed planting, none of this has changed. And I say this a lot, but relentlessly executing, day-by-day, quarter-by-quarter gets you to amazing places over time. And I think our first quarter performance and our total year commitment are really just terrific evidence of that point. Thanks for listening.

Thank you.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.