Honeywell International Inc.

Good day, ladies and gentlemen, and welcome to the Honeywell's fourth quarter earnings release and 2021 outlook. At this time, all participants are in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If at any point you find your question has been answered, you may remove yourself from the queue by pressing star 2. Lastly, if you should require operator assistance, please press star 0. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mark Benza, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Stephen. Good morning, and welcome to Honeywell's fourth quarter 2020 earnings and 2021 Outlook conference call. On the call with me today are Chairman and CEO, Darius Adamczyk, and Senior Vice President and Chief Financial Officer, Greg Lewis. These call-in webcasts, including any non-GAAP reconciliations, are available on our website at www.honeywell.com forward slash 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 based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. This morning, we will review our financial results for the fourth quarter and full year 2020, discuss our 2021 outlook, and share our guidance for the first quarter of 2021 and full year 2021. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Mark, and good morning, everyone. Let's begin on slide two. We finished a challenging year of a very strong quarter, driving sequential improvements from the third quarter in sales, segment margin, adjusted earnings per share, and robust free cash flow. In the fourth quarter, we delivered adjusted earnings per share of $2.07 flat year over year and $0.05 above the high end of our guidance rate. This result was up 33% sequentially from adjusted EPS of $1.56 in the third quarter. Organic sales were down 7% year-over-year, 4 percentage points better than the high end of our guidance range, and 7 percentage points sequential improvement in the 14% organic sales decline in the third quarter. We drove double-digit year-over-year organic sales growth in defense and space, warring products, and recurring connected software sales, as well as 27% organic growth in safety and productivity solutions, an outstanding result. Our cost plans delivered our full-year commitment of $1.5 billion in savings and helped us protect margins, limiting our decremental margin in the quarter to only 26% and improvement from Q3 29% decremental margins. Segment margin contracted 30 basis points year over year, which is significant improvement from the 130 basis point contraction in the third quarter. Driven by margin expansion in aerospace, annual building technologies, and safety and productivity solutions. We generated $2.5 billion of free cash flow in the quarter, up from $758 million in the third quarter, and 9% above Q4 2019, achieving 170% adjusted conversion. In terms of capital, we deployed approximately $2.8 billion of cash to dividends, growth capex investments, share repurchases, and M&A. We'll talk more about our recent M&A activity on the next page. For the full year, we deployed $3.7 billion to reduce shares outstanding by approximately 3%. With these strong fourth quarter results, we finished 2020 with $7.10 of adjusted earnings per share and then 11% organic sales decline, both above the high end of our expectations from October. For the full year, we generated $5.3 billion of free cash flow, resulting in adjusted conversion of 105%, or 16% of revenue, a very strong result. There's no doubt that the COVID-19 crisis created significant challenges for the business and economies around the world. I'm very proud of Honeywell's ability to rise to the challenge to deliver strong execution and sequentially improving results throughout the year. Next, let's turn to slide three to discuss our recent M&A activities. I'm pleased with the progress we made in actively shaping our portfolio, and our recent M&A announcements directly aligned our ongoing transformation into a premier software industrial company. In the fourth quarter, we completed three acquisitions and announced a fourth, all of which meet the rigorous criteria in our M&A framework, which ensures that transactions are aligned with our portfolio strategy and meet our return expectations. We have previously discussed the acquisitions of Rocky Research, and Ballard unmanned systems, which provide emerging technologies aligned to strategic initiatives in our aerospace business, as well as our strategic investment for Path to Full Ownership in Trinity Mobility, which supports our Smart Cities Breakthrough Initiative in Honeywell Building Technologies. In mid-December, we acquired Sign Group, a technology and software as a service, or a SaaS company, that provides visitor management solutions that are readily accessible for mobile devices. Sign's technology will enhance our connected building offerings and will also support a mobile platform for a broader portfolio of Honeywell Forge offerings. We will expand on Sign's features and solutions and make science products available to customers globally. Most recently, we announced an agreement to acquire Sparta Systems, a leading provider of enterprise quality management software, or QMS, for the life sciences industry for $1.3 billion. We previously highlighted the importance of the life sciences market as a breakthrough growth initiative. The acquisition of Sparta Further bolsters are software, controls, and analytics capabilities in this space. Sparta's AI-enabled SaaS offering will combine with Honeywell Forge to provide greater value to our life sciences and pharma customers. Additionally, Sparta complements our growth strategies for the automation and digitization business with Honeywell Process Solutions, enabling greater penetration in life sciences and the pharma market segments. Fardo will further bolster Honeywell's portfolio of accretive, non-cyclical, recurring, connected software sales. I'm excited about the new technologies and adjacencies we have unlocked through our recent acquisitions and investments. We've said before that we have an active M&A pipeline, and this series of acquisitions is further evidence that we are continuously developing our portfolio and investing in new opportunities. We also evaluate our portfolio for areas that are no longer core to our long-term objectives. Earlier this week, we signed an agreement to sell out performance in the lifestyle footwear business to a leading manufacturer of premium footwear and apparel, Rocky Brands. The transaction value is approximately $230 million and is scheduled to close by the end of the first quarter. Our SPS business will continue to provide industrial safety footwear for workers. M&A is just one important part of our broader capital deployment strategy, which also includes share repurchases, dividends, and capital expenditures. Let's turn to the next slide to view our total capital deployment. In 2020, we continue to demonstrate our commitment to identifying and investing in high return opportunities that help reshape the business for a software-oriented future. Over the past three years, we have consistently deployed more than 100% of operating cash flow to fund share repurchases, dividends, M&A, and capital expenditure. 2020 was no exception. Even during a global pandemic, we deployed $7.5 billion of capital, essentially equal to the prior two years, demonstrating our commitment to investing in high return opportunities in any environment. Now, let's turn to slide five, where Greg will discuss our execution record in a downturn.