WHEN: Today, Wednesday, March 2nd
WHERE: CNBC's "Mad Money w/ Jim Cramer"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Honeywell CEO David Cote on CNBC's "Mad Money w/ Jim Cramer" (M-F, 6PM-7PM ET) today, Wednesday, March 2nd.
All references must be sourced to CNBC.
Jim Cramer: Dave you have never minced words in all the years we have known each other first page of your gigantic meeting is Honeywell United Technologies combination. It made me think there's no way this could be over if this is the first page of your report.
David Cote: Well I view it differently I just know that it is on a lot of people's minds just because I have said ok it is done we are disengaging that there is still a lot of people out there that want to know wait a minute tell us a little more, why and they just want more color commentary.
Jim Cramer: Well why don't you tell us give us the timeline because this is very clear that you did not go to Greg Hayes the CEO who had been there for a year and say you know what we have to revive the talks that started by you guys because this is a great idea. That was not the narrative.
David Cote: No that's correct. In fact this actually the more recent pass started about four years ago I want to say about 2011, 2012 when Louie approached me and at the time we didn't do it. Then Greg raised it with me in a meeting we were out he asked if he could speak with me afterwards and we did and this was I want to say April 2015 or thereabouts. And he made a proposal. We made a counter proposal in September/October and they responded vehemently that they wanted nothing to do with it and then we revived it two weeks ago.
Jim Cramer: Now when he came and approached you he must have given you some assuredy that he looked at Boeing, he looked at Airbus, he looked at the EU all the different reservations and told you they were solvable or he wouldn't have approached you.
David Cote: Yeah as you might imagine for me this has been an interesting dynamic during this process when they are approaching us and none of these things are a big deal antitrust not a big deal, the customer issue not a big deal and then all of a sudden when the approach goes the other way it is like whoa.
Jim Cramer: The history of this is that at one point their market cap was almost double yours by the time that it got to the most recent your market cap was bigger. Influential in terms of who should run the company given the fact that your company became the bigger market cap.
David Cote: Yeah I'd say that has an impact. Trying not to sound too egocentric or self-aggrandizing about it at the end of the day if you are putting together two companies that big and I also thought if you did that you could get not just synergies which you heard us talk about
Jim Cramer: Which you were talking about some very big numbers.
David Cote: But by slimming down you could end up with something that gave you a really nice core growth portfolio and it seemed to me that just reputation wise investors would feel more comfortable if I was doing that. And I said I would be willing to do that even though I am 63 and a half.
Jim Cramer: You would be the CEO.
David Cote: Yeah.
Jim Cramer: Now there's an important slide in your very comprehensive presentation today. Plane supply is bid in pieces not in total. And this made it very clear that if you wanted to look at this thing on a case by case whether Boeing or Airbus could complain you don't bid together it wasn't like you take the cockpit you gotta take the engines not like that.
David Cote: Exactly. A plane is bid in a bunch of different pieces and if you look at the chart there is a lot of competition in every one of those pieces and as you probably saw at the top upper right there is this red section where overlaps were identified where there is no overlap
Jim Cramer: So that's more like I use the example Exxon Mobil it is more like Glaxo Smith Kline you talk about it is kind of like JPMorgan Bank One but those are a little more fragmented industries than your industry
David Cote: Well that was also an attempt to assuage investor concerns about has a deal this big ever been done and been successful and the point is yeah maybe not in industrials but in a bunch of other areas it has.
Jim Cramer: Forty two in cash is what we have been hearing 108 dollars but you care passionately about your credit you always cared about your credit rating. Could you go to 118 without a problem?
David Cote: If it is done with stock yeah of course you can certainly we could pay it I don't want to though because at 108
Jim Cramer: Right but to get it done given the incredible cost synergies it could work.
David Cote: Perhaps but I can say at 108 this is already an incredible deal or I should say was an incredible deal because UTX shareholders would have got .6 shares of Honeywell they would have got a better growth portfolio with what's occurring at Honeywell. Three and a half billion in synergies I think a good shot at a better multiple there was a lot of value there already but if they don't want to do it they don't want to do it. There is no point.
Jim Cramer: How many times did they meet with you even as they now say they didn't have any real interest and it would have been irresponsible. Mr Hayes said to me that it would have been irresponsible deal. How many did he meet with you on this irresponsible deal?
David Cote: Well on the first pass if we go back to April it was three or four times
Jim Cramer: Did he ever mention it was irresponsible then?
David Cote: No.
Jim Cramer: Ok. Alright just asking.
David Cote: No it was a good idea back then.
Jim Cramer: Ok.
David Cote: Then that was very funny.
Jim Cramer: When did it become irresponsible? When you wanted to become CEO. There was a tipping point of irresponsibility and I am trying to nail it down Dave.
David Cote: Well I think that tipping point is when we said tell you what here's the offer we are willing to make and that was back in September of last year. And then I just recently made an approach this would have been like two weeks ago I called him on a Tuesday on Friday I met with Greg and his Chairman. This was like two Fridays ago I don't have the exact date I want to say the 19thor something like that and Monday it became public I actually called Greg to say I have no idea how the heck this happened.
Jim Cramer: But it did get ugly and it seemed like it was about to get uglier is that a reason why the deal was dropped?
David Cote: Well I have got to say you have to have someone who wants to negotiate on the other side if you don't and it is very clear they want I think it was on your show wasn't it "no way no how."
Jim Cramer: Yeh "Jim it is never going to happen." To give the quote. And never going to happen mean there was no way that you were going to go hostile.
David Cote: Well I've always kind of viewed it as I want to do stuff that is smart for shareowners we have always done it that way. Going hostile I don't think makes sense. I was pretty clear from the beginning with investors that I am not going to do that. This deal makes a lot of sense. Both sets of shareowners can make a lot of money here but if they don't want to do it, they don't want to do it. We have plenty of other opportunities you'll here we got a great story today and for anybody who is concerned there were problems at Honeywell I can say with time and they say gee that's a good quarter and another good quarter and another good year.
Jim Cramer: After 14 years you say on the call when are they going believe because you have the great dividend growth, you do not mince words you have a BTW shares sale question I was saying to my colleague David Faber I have to ask about why he sold half of his stock you bring it up why did you sell?
David Cote: Sell what?
Jim Cramer: Why did you sell so much stock?
David Cote: I thought you said sell half.
Jim Cramer: No.
David Cote: I didn't sell half.
Jim Cramer: It was a percentage. Some of the press reports said that it is not true. You sold some of your stock. Why then?
David Cote: While I always knew this I have to say I have been impressed with the press' ability to take little things and kind of blow them out of proportion. It is really quite impressive. So this is an example. I have sold let's say in that sale less than 10% of my overall holdings of Honeywell. Less than 10%. I own over 60 times my salary in shares today. I hold all of my options for the full 10 year term I exercise in the tenth year then I require we have to hold the shares for a year so I first sold shares I want to say was last February and this because when it comes up
Jim Cramer: I know that's when you have to do it.
David Cote: So I did the same thing this year. It was all approved by counsel and by the way.
Jim Cramer: It's a pattern.
David Cote: Well it is a new pattern because I got through the ten years and the 11thyear and by the way this has been a great strategy right.
Jim Cramer: This combination I want to go back to this had nothing to do with what I thought was an unbelievable 2015 set up for 2016 which you say is going to be better and a 2017 that makes me feel like why bother with this you have so much Dave. There are you have the Elster deal, you have got the turbo really rolling, you have solved the problems whatever with oil and gas. You have aerospace that is terrific. Why even waste your time with this Dave. So much is going right at Honeywell.
David Cote: oh it is all going right but just because it is it doesn't mean there's not the possibility to do more and add even greater value for shareowners so this is one where we looked at and say hey we have a great thing going here but wow if we could make this happen that would be great for everybody.
Jim Cramer: And he is a very hot engine so to speak. They were a 100 billion dollar company they did lose a lot of market cap is this taking advantage of what could be a gap year. 2017 could be a much bigger year for United Techonologies.
David Cote: Well I think I was on your show that Greg said this is not about this year or 2017 for UTX this is about 2018 and beyond.
Jim Cramer: And I totally disagree with him because it is very clear that he is making it 2017 that he will talk about but that's alright.
Jim Cramer: I always regard it as the new Honeywell. I see an internet of things Honeywell, I see devices that we only dreamed about in terms of being on our handheld, coordinating with our residential. I also see devices that are clearly about sustainability and energy. This is about a Honeywell that is addressing climate change, isn't it? Long term.
David Cote: Well this is about a lot of things for us. So, we've talked a lot about software in the past.
Jim Cramer: Yes.
David Cote: But, we've also talked about the sales inflection that was coming. And I've been telling everybody that it was coming towards the end of this year. And you'll see that one of the things we put in the pitch this year is an actual commitment as to what is 2017 going to look like, so that they can see that when it comes to what we are doing in performance materials and technologies, what we are doing in aerospace. That all of those investments we've made really start to come to fruition in 2017. So, we are pretty psyched about that, the software story – and you've heard me say before that almost half of our engineers are developing software today. And that is why you hear me talk about this CMMI level 5 – Computer Maturity Model Index.
Jim Cramer: Yes.
David Cote: This is a huge deal. We are the first large western company to be totally CMMI level 5 compatible. This is very different than what they are doing out in Silicon Valley where you have the digital to digital experience – you're just connecting with an iPhone and a website. When you are in a digital to physical environment, which is what we deal with, whether it is a home, a building, a factory, a refinery – stuff's got to work. You can't say, well sorry, that bug that just shut down your refinery for four hours, we will get you an update on that in two weeks. You can't do that. Stuff's got to work.
Jim Cramer: About Silicon Valley now, Google, now Alphabet, has Nest. There are reliable – the reliability of Nest versus your products seems to be divergent.
David Cote: That is a very nice way of saying there stuff is not doing so well.
Jim Cramer: Well. But you're winning head to head, right?
David Cote: Yeah. In fact if you go to – I haven't done this recently, but it used to be if you went into Home Depot display and saw them side by side and saw what the sales picking was, that everybody was leaning towards the Honeywells because they work.
Jim Cramer: Yeah, I know. Mr. Blake did come on Mad Money and say he felt that Nest was hot, but there are quality issues. And quality issues is not something that has happened necessarily at Honeywell.
David Cote: Yeah.
Jim Cramer: You did not get to talk on your conference call about Elster. A $5 billion acquisition that dovetails correctly with so many of your products. You've now got a month. How is Elster doing versus say six months ago?
David Cote: Well, I'm psyched about this one. I really think this one is going to be great. There's a couple of themes, a couple of macro trends that are going to be important. One is, metering of all kinds is becoming more and more important, especially as you look at high-growth regions where there is so much theft of whether it is gas, water, electricity in particular, and they want to understand what is going on. Another one is this ability to variable price. A third is the ability to start connecting all of these devices so that a utility with a software that we have as part of Elster can start to manage this better and improve their own performance. Then the fourth one is just the whole focus on gas. And this is between the gas meters that we have on industrial basis and residential basis. Gas is going to become more and more important because there is an awful lot of it and we are right in the middle of it.
Jim Cramer: Now, I want to dovetail that with what you were talking about when on the conference call where JCI merging with Tyco. And it sounded like after subsequently, that the building controls business for Honeywell may not be integral. And yet, that sounded like Elster to me.
David Cote: Well, I think this was a rumor that was in print and it talked about building controls –
Jim Cramer: A lot of rumors get printed these days. Kind of interesting.
David Cote: Yeah, like I said, I'm not –
Jim Cramer: Do they check them off of someone in your organization or is it just kind of a great thing to throw out – maybe the facts shouldn't get in the way of the story.
David Cote: I think on that one – that's very good.
Jim Cramer: Thank you.
David Cote: I think on that one we said no comment.
Jim Cramer: Oh, ok.
David Cote: Building controls are –
Jim Cramer: It's integral.
David Cote: Yeah. That is a big deal for us.
Jim Cramer: Alright. Now, Turbo. I thought that Turbo was played out. I was shocked to see in your most recent presentations. Turbo is early still.
David Cote: Oh, yeah.
Jim Cramer: So explain why that is early and what it does.
David Cote: I'd say there are two reasons that I would say this is still early stages. If you take a look at what a Turbo does kind of simply, it allows a V-6 engine to perform like a V-8 engine.
Jim Cramer: Ok.
David Cote: So in terms of power. But using V-6 type energy. So you get V-8 kind of power, V-6 kind of energy usage.
Jim Cramer: Everybody will want one then.
David Cote: So it is just an easy way to understand it. If we take a look at Turbo penetration, Turbos are penetrated to like, 25 or 30% of the total industry.
Jim Cramer: I was shocked to see it was that low. I do not understand why it is that low.
David Cote: It will take 10 to 15 years for it to get to 90%.
Jim Cramer: Right.
David Cote: It probably ought to go to 100 at some point. And if you just keep looking at all of the regulatory side of this – whether it is café, or EU5, 6, etc., that is going to keep happening. Because as the world becomes more wealthy, and you get more cars, people are going to want to say how do you use less energy to do this?
Jim Cramer: Right. That is a way to do it.
David Cote: Electric cars are interesting, but it is not going to take 100% of the stock that is out there. It's just not. So this is going to be – Turbos are going to be a great industry for a long time. And we are advantaged because a Turbo is really just an offshoot of a jet engine. We are the only Turbo manufacturer that has a jet engine business.
Jim Cramer: Right. Now, you are always straight forward when you get something wrong. In oil and gas, you admitted that the decline may not be that impactful and that that was wrong. Why is that wrong given what we see in the crisis now of oil and gas? And why do you think by the end of the year this will be almost neutralized?
David Cote: Well, actually, I parsed it into two comments that I felt I made. The first one was I kept saying that the oil and gas decline wasn't going to affect us as much because we were more mid and downstream, that this was going to put more money in consumers' pockets, which meant more spending, better economy, more pull on mid and downstream products.
Jim Cramer: And industrial because you also made the point that there will be plants built because of this. Which has already been good for you.
David Cote: Well, and it was although geared off of that increased demand because consumers would spend. Well, consumers didn't spend.
Jim Cramer: They didn't.
David Cote: So I had that one wrong.
Jim Cramer: Right.
David Cote: So it did hit us more than I expected. The point that I'm trying to make with investors where I was right – and I want to make sure they don't miss – is you've heard me say before that I don't want any one thing to be so big that, yeah ok, it is making the company. But by the same token, when it doesn't work, it kills the company. And I think we were able to show with our performance last year that despite that oil and gas problem, our earnings were up 10%.
Jim Cramer: Yeah. It did not. You couldn't see it.
David Cote: At a time when they significantly outperformed the entire industrial sector and we say, ok, that is just one of the things we manage. Sucks when it is happening, no doubt about it. But it is one of those things that you manage.
Jim Cramer: Airplane connectivity is underestimated by almost every semiconductor and tech company.
David Cote: Yeah.
Jim Cramer: Why is that? Because it seems like airplane connectivity may be the big story for 2017 for Honeywell.
David Cote: Well, you are going to see a lot more about that in our exhibit and the big thing is with what we have been able to do with Inmarsat for Ka-band – so if you take a look at it, you've got like L-band, Ku-band, Ka – by the time you get to Ka, you end up with something that is about 5% of the cost and is about 100 times faster. So with this Ka-band, what we call JetWave, that you will see this year, you can download a movie while you are in the air in two minutes. You could live stream –
Jim Cramer: Could you download the Super Bowl that I didn't get to see?
David Cote: You didn't watch the Super Bowl?
Jim Cramer: I was on a plane. Go-go didn't have it. Now, that's a crime. Isn't it?
David Cote: Yeah, that is more than a misdemeanor.
Jim Cramer: Well I think people will want to know that they are onward and upward. Dave Cote, Chairman and CEO of Honeywell. Always great to talk to you.
David Cote: Nice talking to you too, Jim.
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