Mark Macaluso - Vice President, Investor Relations David Cote - Chairman and Chief Executive Officer Tom Szlosek - Senior Vice President and Chief Financial Officer

Scott Davis - Barclays Capital Joe Ritchie - Goldman Sachs & Co. Nigel Coe - Morgan Stanley Steven Winoker - Bernstein Jeffrey Sprague - Vertical Research Partners Stephen Tusa - JPMorgan Howard Rubel - Jefferies Christopher Glynn - Oppenheimer & Co. Inc. Deane Dray - RBC Capital Markets

Please stand by. Good day, ladies and gentlemen. Welcome to Honeywell’s Second Quarter 2015 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mark Macaluso, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lisa. Good morning and welcome to Honeywell’s second quarter 2015 earnings conference call. With me here today are our Chairman and CEO, Dave Cote; and Senior Vice President and Chief Financial Officer, Tom Szlosek. This call and webcast including any non-GAAP reconciliations are available on our website at www.honeywell.com/investor. Note that elements of this presentation 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 ask that you interpret them in that light. We identify the principle risks and uncertainties that affect our performance in our Form 10-K and other SEC filings. This morning we will review our financial results for the second quarter and share with you our guidance for the third quarter and full year of 2015. Finally, as always we’ll leave time for your questions at the end. With that, I’ll turn the call over to Chairman and CEO, Dave Cote.

Good morning, everyone. As you’ve seen, Honeywell delivered another quarter of double-digit earnings growth capping off a strong first-half to the year and positioning us well to achieve our fully year outlook as we head into the back-half. Reported earnings per share of $1.51 increased 10% normalized for tax coming in at the high end of our guidance range for the quarter. Sales of $9.8 billion were up 3% on a core organic basis. We saw organic growth accelerate in both the short- and long-cycle businesses within Aerospace, continued growth in our commercial and industrial businesses within ACS, and higher volume across our Advanced Materials portfolio, particularly in Fluorine Products. Each of our business segments achieved the sales estimates we provided in April and we expect that the sales acceleration we enjoyed this quarter will continue into the second-half of the year. The absence of friction materials, strengthening of the U.S. dollar and raw material pricings in Resins & Chemicals drove the difference between reported and core organic sales growth. Segment margin expanded 170 basis points to 18.4% in the second quarter and similar to last quarter large portion of the margin expansion came from improving gross margins. Strong execution across portfolio drove margin expansion in each of our three segments at or above the targets we communicated in April. Our Enablers and key process initiatives continue to deliver growth and productivity benefits and our previously funded restructuring actions provide the runway we need to continue improving our operations and cost base. We’re keeping that pipeline full, which is critical to supporting our continued margin expansion into next year and beyond. We proactively funded about $39 million of new restructuring in the quarter building on a healthy pipeline of new projects. While managing cost is critical, we’re also seed planting, and that is investing in capacity expansion, new products and technologies and resources in high-growth regions to drive future growth. We also continue to benefit from the strategic portfolio decisions we’ve made in the past, and we’re well-positioned and aligned to favorable macro trends with significant runway to grow. There continues to be a lot of exciting activity across the portfolio driving our strong results, so I can’t help, but highlight a couple. In June, our Process Solutions business hosted their 40th annual Honeywell Users Group or HUG, America symposium. A forum that provides users of our process control and industrial automation systems an opportunity to exchange technical information and provides feedback on their equipment service needs. The sentiment was decidedly positive and the turnout of over 1,200 channel partners, end users, and Honeywell sponsors from over 300 different companies was our largest ever. Customer interest in Process Solutions that drive increased safety, reliability, and greater efficiency was noticeably higher than prior years. In addition, Process Solutions announced a partnership with Intel Security to help bolster protection of critical industrial infrastructure and data combining the latest advances in cybersecurity technology with Honeywell’s unique industrial process domain knowledge, another example of our smart investments and commitment to growing our software capabilities, which we see as a key differentiator. In Aerospace, we announced last month an agreement to supply our advanced Primus Epic cockpit technologies to Dassault’s newly unveiled Falcon 5X. The new plane combines the latest features for safety and performance, including smartview synthetic vision, next generation flight management system, interview weather radar, and smart traffic collision avoidance, while achieving the lowest fuel consumption in this category. Our Aerospace team in Dassault developed the next generation cockpit with the future in mind, giving pilots and operators advanced communication, vision, and awareness features that simplify their jobs. And in PMT, our Fluorine Products [Technical Difficulty] additional $600 million in orders, with key OEMs for our Solstice low-global warming suite of products, bringing lifetime value of signed agreements to approximately $3.2 billion. We also have an additional $200 million in agreements currently under negotiation, which we anticipate finalizing by the end of the year. Our Solstice product has global warming potential less than CO2, making it a terrific choice for products and for companies seeking to reduce their carbon footprint. EPA phase-out rules restricting the use of high-global warming hydrofluorocarbons or HFCs in a variety of applications, including refrigerant, aerosol, and foam insulation blowing agents, coupled with approvals for the use of two additional Honeywell Solstice refrigerants as replacements for high-global warming HFCs continue to show that we are invested in the right place. The demand and adoption of Solstice products continues to be a great story for Honeywell. As we look ahead, we’re not counting on a significant uptick in the current macroenvironment. But we are confident in our ability to deliver continued sales growth and to leverage that growth drive further margin expansion. As a result of our strong first-half performance, we are again raising the low-end of our full-year 2015 earnings guidance range by a $0.05 to a new range of $6.05 to $6.15, up 9% to a 11% versus last year. We have a fantastic portfolio and we’ll continue investing in high-growth regions, high ROI CapEx, and new products and technologies, while maintaining our cost discipline and ensuring we deliver the savings from restructuring projects funded over the past few years. We’re in the midst now of our strategic planning reviews of each of the three segments, and we’re excited about each business’s innovation pipeline and growth opportunities. Over the next planning period, you can expect us to build on our track record of outperformance through the consistent execution you come to expect from Honeywell. We continue to enhance our focus on each of the 74 HOS Gold Enterprises, which we believe will make us more entrepreneurial and nimble versus our competitors by identifying breakthrough strategies and moves into smart new areas and adjacencies. I look forward to sharing more with you, of course, as the year unfolds. So with that, I’ll turn it over to Tom.

Thanks, Dave, and good morning. I’m on Slide 4, which shows the second quarter results. Sales of $9.8 billion were up 3% on a core organic basis, each of our segments met or exceeded the top line guidance we provided in April, led by our Commercial Aero – the commercial and industrial businesses within ACS, and Advanced Materials. And I’ll talk about each of these more on the business slides. We’re encouraged by the acceleration from Q1 and the momentum we have exiting the second quarter bodes well for the second half. As Dave mentioned, the Friction Materials divestiture, foreign currency and the raw materials pricing in Resins & Chemicals, all resulted in the reported sales decline this quarter. Segment margin expanded 170 basis points to 18.4%, that’s 20 basis points above the high-end of our guidance. Each segment is contributing to the impressive profit growth and margin expansion this quarter, and good volume and strong operations are playing a big part. On the volume side, our continued investments for growth in sales, marketing and new product development drove higher volumes in the quarter. On the operating side, we continue to drive improvement in our gross margin rates and continued moderation of our G&A rates through HOS Gold deployment, and our focus on commercial excellence, new product development, functional transformation and strong cost controls. Items below segment profit were favorable on the year-over-year basis as we had anticipated. Higher pension income was largely offset by additional restructuring. New restructuring projects funded this quarter were approximately $39 million building on our over $300 million plus pipeline as of the end of Q2, which positions us well for continued margin expansion throughout our five-year plan. We delivered the high-end of our EPS guidance range with earnings per share of $1.51, up 10% normalized to our expected full year tax rate of 26.5% in both periods, once again achieving double-digit earnings growth this quarter. Finally, free cash flow, $1.2 billion, 5% higher than 2014. Free cash flow conversion was 98%, and we expect to be in a net cash position of between $1 billion and $2 billion by the end of the year, there is no significant M&A activity. Overall, we continue to generate strong results in a relatively slow growth environment. Let’s turn to Slide 5. Our segment margin rate expansion was again very robust this quarter, as you can see a majority of the improvement is coming from our operating initiatives. The benefits of HOS Gold are paying off and we’re seeing that in every segment’s gross margin rate. We have attractive products with differentiated technologies and a software focus. Our factories and supply chain are well run and our back-office continues to get more and more efficient. In addition, new product introductions and further penetration in high growth regions, particularly at ACS, where we grew close to 10% in China, and greater than 15% in India during the quarter, are also big part of the story. The previously funded restructuring as well as new restructuring actions enable us to continue to improve our overall cost position. Also our segment margin rate was positively impacted by the Friction Materials divestiture, our foreign currency hedging approach and the Resins & Chemicals pricing model, collectively to the tune of approximately 60 basis points. We sold Friction Materials in July of 2014, so we will lap this benefit in the second-half of 2015, but this is a permanent improvement to our margin rate from exiting a business that did not meet our great positions in good industries criteria. On foreign currency, our hedging strategy as you know is to protect our operating results even as sales do fluctuate with changes in currency, another solid quarter of margin improvement driven by our operating system and key process initiatives. Moving to Slide 6, in the Aerospace results, sales up in the second quarter 3% on a core organic basis, above the high-end of our guidance range driven by good volume growth and execution. Commercial OE was up 6% on a core organic basis, driven by double-digit improvement in Business and General Aviation engine shipments. Engine demand continues to be robust and we expect to see continued Commercial OE growth in the second-half, particularly in BGA. Air Transport was flat, a reflection of the pluses and minuses in our customer build schedules for the quarter, while on the Regional side we saw lower sales volume overall. Importantly our installed base continues to grow in both ATR and BGA, which is a good sign for our future aftermarket business. And to that point, Commercial Aftermarket saw a nice improvement from the first quarter. Sales were up 3% on a core organic basis, driven by continued strong growth in repair and overhaul activities, and ATR spares sales, partially offset by lower BGA RMUs, or Retrofit, Modifications and Upgrades, in many cases, software based. RMU sales growth can be lumpy based on the timing of new product rollouts, and as you recall 2014 was an extremely strong year for RMU sales. And looking forward, we’re excited about our new product pipeline in this area. Overall, we saw a good growth in the aftermarket and anticipate further improvement in the third quarter and through the second-half of the year. Defense & Space, sales were up 1% on a core organic basis, driven by near double-digit growth in our international defense business. Here we continue to see strong demand in the aftermarket, and for our training propulsion engines and missile navigation products in South Korea and other high growth regions including Turkey. Well, in the U.S. our sales were slightly down. Finally, Transportation Systems sales increased 5% on a core organic basis due to new platform launches, strong volume growth in light vehicle gas applications globally and growth in diesel applications, particularly in North America. This was partially offset by lower commercial vehicle volumes. On reported basis TS sales declined 25%, reflecting the Friction Materials divestiture and foreign currency headwinds. On segment margin, the favorable impacts of the Friction Materials divestiture and our foreign currency hedges were drivers of the 140 basis points expansion in Aerospace, along with commercial excellence and productivity net of inflation, partially offset by the margin impact of higher OE shipments. TS was a major contributor to the margin enhancement in Aerospace this quarter. Not coincidentally, that’s a business where we see the greatest advancements in our HOS Silver certifications in our plants. Let’s turn to the ACS results on Slide 7. ACS sales were up 4% on a core organic basis in the second quarter, continuing the positive core organic growth trends we saw in the first quarter. High growth regions continue to stand out in ACS and we have good momentum heading into Q3 based on recent order trends. The margin expansion was robust and we once again exceeded the high-end of our margin guidance range. ESS, the products business, sales were up 5% on a core organic basis in the second quarter, driven by strong performance in our Scanning & Mobility, Fire Safety and Security businesses. Scanning & Mobility achieved its third straight quarter of double-digit core organic sales growth, driven by volume from recent wins, most notably the U.S. Postal Service agreement, and new product introductions in China where we continue to build on our Easter-East [ph] pipeline to support future growth. We anticipate similar volume growth in the third quarter and will discuss in more detail shortly. The rest of ESS also continues to benefit from new product introductions and further penetration in high-growth regions. From a regional perspective, China was up high single-digit, while in India sales were up over 15% with broad-based strength across the ESS portfolio. Building Solutions & Distribution, sales were up 3% on a core organic basis in the second quarter with continued strength in the America’s Fire and Security Distribution business. We saw continued organic growth in our project backlog and service bank this quarter, driven primarily by the Asia-Pacific region, which will help support a modest acceleration in the back-half of the year. ACS margins expanded to 120 basis points – by 120 basis points to 16% in the quarter. The business continues to benefit from good conversion on higher volume and significant productivity improvements net of inflation. We also continued our investments for growth, particularly in new product development and in high-growth regions. Our efforts to drive the more connected ACS, which Alex spoke about at our March Investor Day provide a runway for accelerating growth and continued margin expansion as we drive incremental synergies among our businesses through supplier rationalization, footprint consolidation and back-office improvement. So in total another strong quarter of sales growth and margin expansion in ACS and continued outperformance in their key high-growth regions. I’m now on Slide 8 to discuss PMT results. PMT sales in the quarter, $2.4 billion, down 1% on a core organic basis consistent with the guidance we presented last quarter. And we exceeded the high-end of our segment margin guidance by 70 basis points driven by strong execution and productivity action. Starting with UOP, sales were down 8% on a core organic basis due to declines in our Gas Processing, and Equipment and Engineering businesses, and the timing of catalyst shipments which we had previewed. Orders were down in the second quarter throughout the business, which is adversely impacting backlogs. However, activity in our Gas Processing business, both domestic and international is encouraging, and we expect orders in that business to accelerate in the third quarter, which along with the timing associated with catalyst reloads, lots of some of the softness we are seeing in UOP. In Process Solutions, our portfolio is broader and more diverse than our competitors. We have a unique combination of automation technology, field instrumentation products, and aftermarket offerings in the form of contracted and spot service, software, and consultative solutions that our competitors do not have. So while our short cycle field instrumentation business faces headwinds like many others in the industry, we are seeing sales growth in our high-margin software and service businesses. Customers are looking to our optimization solutions for productivity enhancements to their current asset base. So overall, HPS core organic sales were down 4% and our orders were down only 2% in the quarter. Our large projects business had strong orders in the quarter, particularly in the Middle East, where we see infrastructure investments continuing. The HPS backlog is solid and increased over 15% organically, which gives us confidence in our growth projection. Advanced Materials sales were up 8% on a core organic basis, the growth was broad-based across the entire portfolio. Fluorine Products grew double-digit for the fourth straight quarter, as demand for Solstice low-global warming products continue to escalate. As Dave mentioned, we presently have roughly $3.2 billion of signed agreements and another $200 million under negotiation. To-date in 2015 alone, we signed over $900 million in new orders. In addition, sales in both Resins & Chemicals and Specialty Products grew on a core organic basis on higher volumes as new product introduction here continue to drive results. On segment margin, the PMT leadership team got out ahead of the market pressures to ensure we deliver the 2015 commitments. Q2 segment margins exceeded our guidance and were up 330 basis points to 21.3%. This was driven by a significant productivity action, net of inflation, commercial excellence, and the impact of raw materials pricing in Resins & Chemicals, partially offset by continued investments for growth. PMT continues to aggressively pursue further cost reduction opportunities, which should help sustain the strong margin expansion we’ve seen in the first-half of 2015. I’m now on Slide 9 with a preview of the third quarter. We’re expecting total Honeywell sales of $9.7 billion to $9.9 billion, which would be up 3% to 4% on a core organic basis. Segment margins are expected to be up again approximately 120 basis points to 140 basis points, and we expect our margin rates to benefit from operational excellence and good execution similar to the first-half margin expansion. EPS is expected to be in the range of $1.51 to $1.56, which is up 6% to 9% normalized for tax at 26.5% in both years. Aerospace sales are expected be up 3% to 4% on a core organic basis. In Commercial OE, we expect that core organic sales will be up mid single-digit driven primarily by continued healthy engine demand in the mid-to-large cabin business aircraft. In commercial aftermarket, we expect core organic sales to be up low-to-mid single-digit with continued repair and overhaul and ATR spares growth, partially offset by modestly lower BGA spares sales. Defense & Space sales are expected to be up low single-digit on a core organic basis driven by continued strength in the international business, where we anticipate double-digit growth, offset by a slight decline in the U.S. Transportation Systems sales are expected to be up low to mid single-digit on a core organic basis driven by both light-vehicle gas and diesel turbo volumes. We expect Aerospace segment margins to increase 80 basis points to a 100 basis points in the quarter, driven by commercial excellence, further productivity improvements, and the favorable impacts of the Friction Materials divestiture, which will realize through July. ACS sales are expected to be up 4% to 5% on a core organic basis with mid single-digit core organic growth in ESS and low single-digit core organic growth in BSD. We expected growth in ESS will be driven by our scanning mobility, fire safety, and security businesses along with the benefits from new product introductions and high-growth region penetration. ACS margins are expected to be up 50 basis points to 70 basis points, driven primarily by good conversion on higher volumes and continued productivity net of inflation. We will continue ramping up investments in new product development in adding feet on the street in high-growth region. PMT sales are expected to be flat to up 1% on a core organic basis. We’re expecting UOP to be down mid to high single-digit on a core organic basis, primarily due to licensing and equipment declines and difficult year-over-year comps in our catalyst business. But partially offset by modest growth in the gas processing business. In HPS, we’re expecting core organic sales to be slightly better than the second quarter as growth continues in our higher margin software and service businesses. And we see a modest uptick in our process technology business driven by a conversion of large projects in the backlog. HPS continues to be a strong contributor to the margin rate improvement in PMT, driven by sales growth in our higher margin software and service businesses and productivity initiatives. In Advanced Materials we’re expecting high single-digit core organic growth, principally driven by continued strength in Fluorine Products, as well as improving volumes in Resins & Chemicals and Specialty products. Overall, PMT segment margins in the quarter are expected to be up 230 basis points to 250 basis points, driven by strong productivity net of inflation and the favorable margin rate impact of the market-based pricing model in Resins & Chemicals. While second half of the year will be built – will be challenging for PMT, the strong growth in our Advanced Materials portfolio and our disciplined cost management and productivity initiatives give us confidence in our forecast. Let’s turn to Slide 10 to address the trends we’re seeing in our key end markets and discuss how they’re impacting our outlook. On balance, you can see an overall positive perspective, beginning with nonresidential portion of ACS. We expect the acceleration in commercial construction spending and our positive outlook for the year, the full year remains intact. We saw strong growth in our short-cycle businesses in Fire Safety and Security; and expected new wins, commercial excellence, and initiatives in high-growth region as well as positive end market trends will continue to drive growth in these businesses. As for building solutions, the firm backlog in our projects business and growth in our service bank supporting improvement for the remainder of 2015. On the industrial side, we continue to benefit from the demand for productivity solutions and increasing safety standards across the globe, as activity picks up in both the U.S. and in our high-growth regions. So overall, good momentum as we head into the third quarter after solid core organic growth in the second quarter. In Aerospace, our outlook on the commercial aftermarket continues to improve. Flight hours for Air Transport and Regional are expected to grow to approximately 4.5% in 2015 slightly above 2014. And on the business jet side, we expected flight hours for large cabin aircraft will continue to grow in 2015, up mid-single digit, reflecting continued healthy demand. We anticipate that the good growth we saw in R&O this quarter will continue in Q3 and Q4, while sales of BGA’s – spares will also improve, in part driven by the RMU portfolio. So overall, we expect a modest acceleration in the second-half of the year for Aerospace – Commercial Aerospace that is. In Defense & Space, we’re seeing strong international demand as defense budgets continue to grow. This is supported by the high single-digit core organic growth we experience in our international business in the second quarter. And our strong backlog, although still a modest headwind associated with lower governments funding levels, we expect the U.S. portion of the business to stabilize consistent with U.S. DoD budgets. Overall, we remain on track for low-single digit core organic growth for Defense & Space in 2015. On oil and gas, we actually are seeing a very robust level of proposal activity in both UOP and HPS. And in some pockets orders are expected to accelerate, such as in the UOP gas processing business, where we expect a reasonably strong third and fourth quarter for modular equipment offerings outside the U.S. But on the balance, we’re not expecting a broader recovery for UOP order rates in the near term. In Process Solutions, we anticipate continued growth in orders in the second-half in our solutions in software businesses and expected a good portion of the large process technology orders booked in the first-half will also convert to sales. Activity in the Middle East continue to be strong, while in other regions including China and Southeast Asia we anticipate a continued slowdown in order activity for Process Solutions. As for the rest of the Honeywell portfolio, Commercial OE, Transportation Systems, the Residential Businesses in ACS, and Advanced Materials, we’re expecting continued good growth in the second-half. Our installed base in Commercial OE continues to grow with good wins on the right platforms. Global penetration of turbo technology particularly for gas engines will continue and our track record of flawless launches in TS remains a key differentiator. On the residential side, we expect growth to continue as we accelerate investments in the connected home space and build on our strong position. And in Advanced Materials customer demand for our low global warming suite of products is increasing and we are encouraged by the continued adoption of Solstice on a global basis. I’m turning to our full year guidance on Page 11. As Dave mentioned, based on our strong first-half performance, we’re raising the low-end of the full year EPS guidance range with a new range of $6.05 to $6.15. Everything else is pretty much intact as we head into second-half of 2015. We’ve demonstrated our ability to perform in a challenging environment. We’re highly confident we can do the same again this year. Full year sales expectations remain in the range of $39 billion to $39.6 billion, up approximately 3% on a core organic basis. There are some puts and takes among the businesses, but overall remain on track to the full year guidance we provided in April. On the segment margin, we’ve increased our full-year guidance by 10 basis points on the low-end, as our deployment of HOS Gold continues to drive a better more efficient operating system both in our plants and in our back-office. We now expect segment margins of 18.4% to 18.6%, that’s up 140 basis points to 160 basis points versus last year excluding the impact of the fourth quarter $184 million Aerospace OEM incentives. On EPS, the new guidance range results in 9% to 11% increase from 2014. Again, we’re planning for 26.5% tax rate in third quarter, with fourth quarter tax rate a bit lower to get to our full year planning assumption of 26.5%. Finally, we continue to expect free cash flow in the range of $4.2 billion to $4.3 billion, up 8% to 11% from 2014 even with CapEx investments rising to roughly twice that of depreciation. Each of the businesses remains focused on driving further working capital improvement in the second-half. So overall, we’re forecasting another very strong year, solid organic sales growth and strong execution that yield excellent segment margin and free cash flow outcomes, and another year of double-digit EPS growth which would mark our sixth consecutive year of having done so. Let’s turn to Slide 12, and in summary – for the summary, we had a solid first-half and with second quarter performance again at the high-end of our expectation, adding to our strong performance track record and creating momentum for the rest of the year. The uncertainty in the macro-environment is not new for us. We have and will continue to plan conservatively. We’ll continue to focus on executing sustainable productivity actions, including delivering on strong restructuring pipeline we’ve already funded. Innovation and new product introductions remain a key priority, as well as the investments we’re making to further penetrate high-growth regions and expand capacity. We’re in the process, as Dave mentioned, of planning for the long-term including 2016 and beyond. And our management team is focused on execution. We feel confident that with our balanced portfolio mix, alignment to favorable macro trends and focused cost disciplines, we’ll continue to outperform. So with that, let’s move to Q&A.

Okay. Operator?

Thank you. The floor is now open for questions. [Operator Instructions] We’ll pause for just a moment to give everybody the opportunity to signal. Okay. And we will take our first question from Scott Davis from Barclays.

Hi, good morning, guys.

Hey, Scott.

Hey, I’m going to say the usual congratulatory language, Dave, you’ve…

Well, thank you. It’s still nice to hear it, Scott.

Yes, I know it. Well, it’s good…

I know it kills you too.

It does. It does. Anyway, Dave, help us, I was going to ask about capital allocation, but I think that’d be a wasteful question at this point. Well, what are you seeing in the world, Dave? And the reason why I asked that question is, last quarter you had 2% core growth, I think it was this quarter 3% core growth, next quarter you’re kind of guiding to 3% to 4%. So you’ve been sequentially improving or at least talking about sequential improvement. But the world seems like it is almost going the other direction that sequentially and maybe degrading. Are you not seeing that or kind of help us understand how the macro lines up with the guidance?

Well, I wouldn't say, we’re seeing a boomlet and that’s not what we try to convey, but all in all, I think starting off with what was generally a slow first quarter for everyone when it came to sales growth, things have in my view improved a bit since that time. And I’d say a lot of this is coming more under what we are able to control and what we are able to do, and we’re seeing better performances in our businesses being able to take advantage of the growth trends that do exist. I would also say Scott, we benefit some from this diversity of opportunity that you hear me talk about. So that, yeah, okay, we've got some oil and gas exposure, but we we’re able to manage that, and it doesn’t have such a deleterious effect on our performance that we can’t manage above it. So I’d say it’s more a combination of things and saying that it’s slightly better than it was, but it’s still not a boomlet. Tom, I don’t know if there’s anything you want to add there.

No, I would agree with that. The only piece of color to maybe provide is that the, when you look at the month sequentially, April was definitely the lowest from a growth perspective, up slightly where – whereas the momentum picked up in May and June, and got us to that 3%.

Okay, that’s helpful. Guys, how do you think about the interplay between growth and margin? And what I mean is I mean, you’ve been crushing in on margins, core growth has really been in pretty much in line with the group now for most of the last couple of years, give or take a point. Is there – are there conversations you have internally around that going after margin might be hurting price in some – I’m sorry, might be hurting growth to some extent, or is that just not related at all?

Well, the two are interconnected, but I look at it differently. And if you go back to the beginning of my tenure here, I’ve always said growth and productivity go together that as you grow, you become more productive, because you have more volume leverage, you’re able to leverage your fixed cost better. By the same token the more productive you become, the more money that gives you to reinvest in the thing you’d like to do. And as you know, I’ve always been big on this concept of seed planting. And that was pretty costly in the early years, because we pretty much had an empty pipeline on everything whether it was high-growth regions, new products, new strategies or technologies, we really had to fill the pipeline, so margin expansion was a little more muted back then, because we had to fill the pipeline on everything, and it took us five or six years to do, which unfortunately took us right into the recession when, yes, we were getting benefiting from some of that, but it was just a hell of a lot less visible. Well, now that we’re able to get some of the sales growth that we do, we’re much better we’re able to have get that sales leverage as minimal as it might seem in today’s environment, we’re still able to get leverage from that. And we’re able to, I’d say finally, start seeing the benefits of HOS and some of our other initiatives on the gross margin side. And that’s where we’re seeing the real leverage here. The two go together and I can promise you we’re certainly not under investing whether you look at R&D or CapEx, or new product programs or commitment to Huey is certainly not a case under investment, because we want to make sure we make not just this quarter, but this same quarter three years from now and six years from now.

Makes sense, the track record is there. So thanks, guys, and good luck, and have a great rest of summer.

Yes, thanks. You too.

We will now take our next question from Joe Ritchie from Goldman Sachs and Company.

Thanks. Good morning, guys. Nice quarter.

Hey, Joe, thanks.

Good morning, Joe.

It’s nice to hear, it stated with no reluctance at all, Joe. Thank you. I’d like to go ahead.

Yes, we differ in that way.

Just that way.

The first question I have is really around China, and you guys seem to still be doing incredibly well there growing at double-digit, and you’ve had some of your European peers come out and talk about the credit issues recently and peers are starting to intensify a little bit more around the region. I’m just wondering what you’re seeing specifically in a region whether trends deteriorated at all during the quarter?

Joe, good, I’ll take that one, Dave. The – yes, China was a very good story for us in most of the pockets. I mean, ACS as we said was near double-digit. Really the changes that we’ve made to connect all of those businesses in China, and get to Tier 2, Tier 3 cities and make investments to help all the businesses in portfolio, running it as one portfolio, really having a huge impact. And, in fact, we expect that to continue. We expect very strong growth rates in Q3 and Q4. In fact, for China, some of our orders are actually – we use sales as a surrogate for orders. But in some cases we actually do have the orders and what we’re seeing really gives us good encouragement for the rest of the year in ACS. Aero was also strong. As you know, it’s mostly in spares and R&O business there in China for us right now, up mid single-digits and we do expect that to continue. TS is a little bit smaller. The commercial vehicles segment in TS was challenged. So we were down in China for Transportation Systems. And then when you look at PMT, some challenges, particularly with cyclicality in UOP, the cat shipments are quite lumpy, can be lumpy from year-over-year. In Q2, we had significant cat sales, so tough quarter from that perspective but we see that improving as we go forward into Q3. So I think all of the businesses are expected to continue to grow and improve from Q2 to Q3, so we’re encouraged by what’s going on.

So if I could add to that, Joe, you’d have to say, overall, clearly the Chinese economy is straining [ph] a bit more than it has in the past. But that being said, it’s still pretty good and we see the oil and gas side, Tom’s point, but on balance between the growth that does exist there, plus our own strength as we develop more China-based products, I think puts us in a pretty good spot.

That’s helpful, guys. I guess, maybe following up on oil and gas, and specifically the margins this quarter, they were pretty phenomenal. And I’m just wondering if you can help parse out, the 330 basis points, you can clearly still expect oil and gas margins to continue to be good in 3Q, despite a deteriorating backdrop. And so just help us get a little bit more color into that?

Yes. As you know – thanks for pointing that out, Joe. PMT margins were up to 21.3% with their 18% last year, so really nice 330 basis points. We had great contributions from – some volume in Advanced Materials that we talked about, very good productivity, strong cost controls, lower indirect expenses, but also at the same time, as Dave said, continuing the investments. So productivity was definitely a big driver. We’re also seeing good results in terms of the pricing. That seems to be holding up well. And as I said, there are some things that have driven that down a little bit. The catalyst comps year-over-year, little bit of a tougher story. And then, the overall volume declines that we mentioned in UOP and HPS will drag. So to summarize all of that, it’s a good commercial excellence, good performance on the commercial side, tough from a volume perspective, but really nice work on productivity.

All right. Great, thanks, guys, will get back in queue.

Thanks.

And we’ll take our next question from Nigel Coe from Morgan Stanley.

All right, Dave, a very enthusiastic great quarter.

Thank you. I liked your appreciation.

Could you feel that coming through?

I liked it.

Okay. So, obviously, this full year plan pretty much intact, little bit high at the low-end – on the margin line. Just reading through the commentary, it feels like Commercial Aerospace is a little bit better in the plan; perhaps, PMT a little bit weaker. Is that a fair comment to pass it on?

Yes, it is. I don’t know that – I guess PMT might be a little weaker than what we thought because oil and gas had a slightly bigger impact than we thought at the beginning of the year, but still pretty much within the forecast. And I’m pretty sure – I think all three segments beat their sales numbers based on what we had committed anyway.

Yes, for the quarter.

Yes.

Okay. So pretty much – the mix is pretty much as you expected, okay.

Yes.

That’s great. Then just switching to the Solstice backlog, $3.2 billion, that’s obviously a very impressive number given the size of that business right now. Do you have any – can you give us any sense on how that backlog is aging and how much of that backlog converts for the next couple of years?

Most of it is all forward. We’re not going to age the backlog, but I would say, it’s going to be a good contributor to us over the next two or three years, especially as you think about that PMT inflection that we talk about, it’s going to be driven by the UOP MTO stuff and the Fluorines capacity, both of which we’re investing in today.

Yes, okay. And then just the final one, I think Tom you mentioned 3Q to TS up low single-digits, and I think the expectation is that European volumes might pickup in 3Q. So I’m wondering, number one, do you see that coming through in Europe? And then secondly, are we seeing a big offset from the commercial weakness there?

Yes, I think in the second quarter, TS in Europe was, you’re right was pretty strong from an organic basis in the mid single-digits, as we said in line with overall TS, and we see that continuing for the third quarter. I mean, the – it’s a mix of some platforms expiring and new platforms coming on, and there are some offsets that that also come into play. The commercial vehicles overall for both in China and the U.S. as we talked about has been kind of one of the challenges we’re dealing with. But overall, Europe should be up mid single-digits or even higher for us in the third quarter for Transportation Systems.

Okay, that’s great. I’ll leave it there. Thanks a lot, guys.

We’ll take our next question from Steven Winoker from Bernstein.

Thanks, and good morning all.

Hi.

Hey, Dave, the only thing I can say is that the share price is thanks enough. So I’ll leave it there.

Well, we want to keep everybody comfortable, Steve.

It’s important Dave, we need these results. So let me just ask quickly on the quarter for Q3 guidance. It looks like, it’s up, I guess, 5% year-on-year, which implies the fourth quarter has got to be up like 15%. Maybe talk about the cadence there, and particularly within aerospace as you’ve got lower margin expansion on higher core growth than you did before. And is that just, even though, that’s a strong 80 basis points to 100 basis points number, is that just makes offset or what are the headwinds there?

Well, first of all, I don’t think the b-percents [ph] are quite as dramatic as you indicated. But I’ll turn it over to Tom.

Yes, I mean, the – we will have a strong – very strong fourth quarter. There are some nice inflections coming in PMT. As an example, we have, again, there’s some lumpiness in the gas business. But we think that in PMT, we’re going to see some nice growth coming through in those businesses in the fourth quarter. And overall the – it is our highest quarter from a volume perspective. So there’s – the base is really driven by what we see the visibility that we have to the sales pipeline.

And in the margin – the margins in Aero even though it’s 80 basis points to 100 basis points, again, the core growth is looking strong and you did more before, is that, what are the headwinds there?

Say it again, Steve?

Just in Aerospace, what are the headwinds you are not putting up even higher aerospace margins in Q3?

Well, we get more comparability on from a FX perspective and, of course, Friction Materials is in that – is in the business as well, so that the two of those temper the significance of the margin increase. So if you go back to that page, I think it was page five in our slide, you see the big impact from those three factors. Those tend to subside as we get further into the year, particularly the FX and the Friction Materials.

Friction Materials is mid-July last year.

Yes, but operationally, I mean, all the factors we talk about from an operational perspective, still should hold in pretty firm.

And how is the cash flow progress in aero? Is that improving in, as you see that improving, Dave, you’ve talked about a lot of opportunity there going forward?

We’ll, the cash flow is still good. They just need to do a significantly better job on inventory than they have in the past…

Yes, okay. Okay. All right, and maybe…

…which would be upside.

And maybe just lastly on gross margin just a little bit bigger picture question. So this is the highest Q2 gross margin we’re obviously seeing in very, very, very long time. So as you see that crossing 30% now, Dave, from a pricing and business model perspective, you think it can continue with that same pace, you think it can accelerate, decelerate, how are you thinking about that?

Oh, yeah, I think this is going to be an ongoing phenomenon for us. I’m not going to commit what it’s going to get to at some point. But, certainly, it’s going to be an important factor as we continue to grow our overall operating income percentage.

Right. Okay. All right, thanks.

See you, Steve.

And we will take our next question from Jeff Sprague from Vertical Research Partners.

Thank you. Good morning.

Hey, Jeff.

Dave, the 40th anniversary, Honeywell Users Group, did you guys print up some shirts like, give me a hug or something like that you could send around?

Only for you, Jeff.

Okay. I’ll be checking my mailbox. Hey, just a couple of things. Actually, first, thinking about business jet and strictly large cabin, there’s some crack showing up in what some of the OEs are saying, pressure from wealthy developing countries and the like, sounds like you’re pretty constructive on the back-half. But do you see any reduction in the order books going forward there?

Not for us. I would say, while they may be seeing some softness which will get reflected for us also. It’s going to be more than offset by all the gains we’ve had. So…

Both on the equipment side and on R&O, I mean, strong R&O performance as well in the BGA. And it looks like that will hold up for the rest of the year.

Okay. And then on gas processing getting firmer, is there – I guess, you pointed to emerging markets. Is there something really specific driving that? Is there some share gains or what’s actually the driver behind that?

Well, if you go back to the premise of the Thomas Russell acquisition that we did then, it was primarily a U.S. based business. We said at the time that our intent was to grow it more internationally, which it takes some time to make happen, but you’re starting to see the benefit of a lot of that from all the seed planting that we did over the last two or three years to make that happen. And that’s mostly the effects you’re getting.

And then, finally, maybe for Tom, I was just wondering on the hedges. Have you done anything new there, rolled it forward or are we kind of making the bet here, kind of this whole euro trade has played itself out and we’re going to – you’re going to let things roll-off? What’s the thought process there?

Well, we’re not betting first of all, but we – what we told you at the end of the first quarter, we pretty much – it’s pretty much consistent with where we are right now. So you know the story on 2015, pretty much fully hedged for the rest of the year. 2016, we got the euro hedged probably about three-quarters of the exposure, and some selective hedging in some of the other currencies. We keep our eye on it. We talk about it every week and we’re all closely interested in seeing how that plays out.

What’s the exchange rate on the hedge for 2016?

As we said, for the euro it’s $1.10.

$1.10, okay, thank you very much.

See you, Jeff.

Thanks.

We will now take a question from Steve Tusa from JPMorgan.

Hi, good morning.

Hi, Steve.

Congratulations on the use of the word deleterious. It’s a bit more, it sounds more like Harvard than UNH, but so – it’s a good work on that.

You have no idea of what UNH is capable of, Steve.

On PMT, the UOP business, Thomas Russell, how bad was it in the quarter? And do you think that there is enough out there that you can confidently say that you may be able to kind of fill this domestic hole and actually hold the business flat next year?

We’re still in the process of planning everything for 2016, but overall, I think Tom alluded to this earlier, is that we’ve got pretty good quote activity going in both, oil and gas, UOP, and process controls. So we’d like to think, now, that’s – quote activity is not synonyms with an order. But it’s certainly a nice, hopefully, leading indicator of where things could go. That being said, that’s too early to declare victory.

Yeah, I mean, sequentially we’re seeing improvement from first quarter, second quarter, and third quarter expectations on orders in the gas business, so – and there’s is a reasonable degree of visibility to some of the revenues that we expect to see in the second-half. So, as Dave said, we’re watching it closely, but there are some positive signs for that business.

Is there another part of PMT? Are there benefits from what’s going on in downstream margins globally? Or – it seems like a lot of this stuff is much more UOP-specific, so little bit tougher to call, by looking at just the macro. I mean, is that the right way to think about it? And, I guess, are you still in a growth mode again for UOP in 2016? I know you guys talked about that last quarter that you expected to grow in the 2016.

I guess, a couple of things that I mention is, one of the things we’ve said in the past is that you have to kind of break out that oil cycle between the exploration side that’s more price driven and the refining petrochemical side that’s going to be more driven by economic activity. And you’re seeing a bit of a drag on that second part, because of how people have reacted to the first part. But, overall, their margins as you know look pretty good. And we think over time that investment begins. When it comes to UOP, they still got the capacity expansion that’s coming and that stuff, we got to complete that plant on time, because we need to ship, and the projects are already being built. So I certainly feel more than okay about it.

And you still pretty – you still feel pretty confident with the fluorine stuff coming on with that revenue – incremental revenue chart you guys put up in March with I think it was like $1 billion in incremental revenue in 2017. Even with the oil and gas macro-headwinds out there that you are – there is kind of no changes to that view.

Yes.

Even better, I mean.

Even better with the Fluorine Products [indiscernible]. And then one last question, any degree of evolution at all on the balance sheet? I mean, you guys are clearly executing well. So you don’t necessarily need to – there is really not a need for significant urgency around the balance sheet, but any of these properties that you covered loosening up at all with what’s clearly a more – a tougher micro-environment out there or no change?

Well, I would have to say, the strategy hasn’t changed. And like I’ve said with the retail store, you never know when these things are going to hit. You never know when the customer is going to walk in. So, we’re armed and ready.

Okay, but no big buyback near term?

Strategy, still the same.

Okay. Thanks a lot guys.

And we’ll now take a question from Howard Rubel from Jefferies.

Thank you very much. You called – Tom, you called this out a little bit, but maybe you could elaborate a bit. SG&A was down substantially, I think it fell from 13.4% to 12.7%. Can you elaborate on some of the causes, some of it maybe FX, but a bunch of it is probably process changes?

Yes. I think the, Steve, when you – the percentage that you’re mentioning…

Howard.

Oh, sorry, Howard.

I do not want to get confused. I do not want to get confused with Steve, please.

Yes. I’m sorry about that, Howard. So I think when you look at the percentage you’re talking about, since the FX is affecting sales more than it is the cost numbers, you do get a little bit of a margin impact, but for us the initiatives that we’ve got going on, the continued work that we’re doing in functional transformation, the continued work that we’re doing in managing the indirect cost of those groups and function spend, the e-auction process that we’re using. All the initiatives are really having a solid impact and they’re coming through, so there is not one thing in there, just continued sustained momentum that we got.

And then, you talked a lot about one of the things that makes a difference at Honeywell has been new products. And we can see it in Fluorines and we can see it in a few other places. Is there – do you have a metric that you look at in terms of new sales, new product sales as a comparison to a year ago?

Actually, Howard, I’ve always tried to stay away from that, because if you want a metric that can be easily gained internally and externally that’s it. I go more by are we growing faster than our competition. And when I see things like the Dassault cockpit, and what we’re able to do with fluorines, and what ACS has coming, and Huey bases that everybody is using for it; then I know it is happening.

I hear you. And then if I could just go back…

In another words, if you said, jeez, we want to see 50% of your sales coming from products introduced in the last three years. My guess is every company can generate that metric for you, regardless of how they’re performing.

You have a fair point. And then the last thing, I think, a number of people before me have asked the same question in another way. It seems if in PMT the oil and gas expectations that had been laid out earlier have shifted to the right. Have you gone back in and examined exactly why or even have you kind of added some belt and suspenders to the process to make sure that, in fact, the second-half that that you’re looking for is going to play out the way you’d like?

We’re not counting on a huge second-half on oil and gas, it’s kind of static, maybe a little bit better, but we’re not counting on anything big.

I think, the – I think you’ll see an uptick in orders knock on wood for gas we’ve said, as well as for catalyst, but on balance, I don’t think, we’re expecting a major material change right now.

All right. Thank you.

Yes.

We’ll now take a question from Christopher Glynn from Oppenheimer.

Thanks. Good morning.

Hey, Chris.

Hey, Dave. Hey, Tom. So you talked about the inflections at aero…

Hello, Chris.

Yes, hello.

A question for you first. How is the ankle?

Oh, thanks, slow, but better than ski season.

Well, the rumor we heard is that you drank a six-pack and tried to jump into a dinghy, is that true?

I think it was a 12-pack but, so…

Just now you know we have fielders out there too.

I guess, you do. Now, that was a day with the kids, that was a clean day. So like all of them. So with ACS, you talked about the inflections of PMT and Aviation. So with ACS, if we look at a few more years where the macro remains in this way, can HUE and VPD actually drive some acceleration there, or is it 3% to 4% in this environment kind of the reflection of that?

I would say, we’re counting on – 3% to 4% is kind of like a nice steady grower in an industry, that’s going to be growing slightly. I do think to your point that kind of the Huey based onslot [ph] that they’re going to be showing over the next few years will make a difference, and there’s a potential for to be better than that. Tough to predict at this point, but I’m encouraged by what I see out of the ACS guys.

Okay. And used the word boomlet, I’ll complement you on that on. If you were to see a boomlet, what are – is an area or two where that could be. I mean, do you have drivers in there for commercial aftermarket or just as an example?

Well, I guess I got to be careful that Steve doesn’t put deleterious boomlet together. But at the end of the day, it’s the way I would kind of still describe it. And on the commercial side, I think it’s doing slightly better for us. And you’ll start to see an inflection as we go out into the future, because we’re finally going to see the benefits of all the wins and that starts building our installed base as Tom pointed out on the engine side, which all proves good for us. Tom, anything you want to add there?

No.

Okay. Thank you.

And ladies and gentlemen, due to time constraints, we will take our last questions from Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone. Thanks for fitting me in. Hey, Dave, I thought at some point you would have worked in a free-Brady [ph] into your remarks.

And I was expecting you to talk about [Technical Difficulty], Deane, so, I guess, we both were disappointed.

Yes, Dave’s spirit is still deflated on that one.

Understood.

Bad, very bad.

One of the bullish comments that you had was on non-res. So just may be expand a bit on the dynamics in the market, it’s kind of the data points, it’s just part of the boomlet that you would expect to see in the second-half?

Yes, I’d say, it continues to get better as we’ve talked about in the past. And I don’t think you’re ever going to see a boom in non-res construction, largely, because there was never a real crash. It was kind of that slow-in, slow-out kind of thing that we talked about with the recession. I think as we’re going to continue to see on the residential side, my guess is, you’re going to continue to see that do better, because rents have been going up and that will spur more activity. But I think for non-res, that’s the right way to think about it, it’s kind of slow and steady.

Yes. That’s where we’ve seen our best growth in ACS, particularly on the industrial side, industrial piece of the non-res, but commercial buildings as well, trends are very good, the products that we sell into there and ECC, fire and safety or security, all of them are doing well.

Great. Thank you.

And ladies and gentlemen, this does conclude today’s question-and-answer session. I would like to turn the conference back over to today’s moderator for the additional or closing remarks.

Thank you. Now, I would like to turn the call back to Dave for some closing comments.

Well, it certainly feels good to give all of our investors such good news as you look forward to your summer holidays. We’ve got a track record of outperforming our peers and we intend to continue that outperformance. We want all of investors to know that they can enjoy this summer, because they have their money invested in Honeywell. So from all of us here in Honeywell, have a fun and relaxing summer. Thanks, guys.

And ladies and gentlemen, this does conclude today’s conference. We do appreciate your participation. You may now disconnect and have a wonderful rest of your day.