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Following is the full transcript of CNBC's exclusive interview with David M Cote, Executive Chairman of Honeywell at the 2017 Singapore Summit. This interview broadcasted in Asia on Monday, 18 September.
All references must be sourced to a "CNBC Interview".
Interviewed by Amanda Drury, Contributor, CNBC.
Amanda Drury (AD): Ok so Dave, tell us first of all how the new found aggression and provocation by North Korea is helping your aerospace and defense business.
David Cote: I'd have to say overall because if we take a look at our defense business for example that's only like eight per cent of the company, so it's not a huge number for us. So if I take a look at it first from an overall Honeywell standpoint it's not a good dynamic – anything that starts people focused on spending money on defense as opposed to spending money commercially and improving the lives of their people is just not a good dynamic. We fully expect though that it'll help the defense side of our business because as you've pointed out in the past, Japan, South Korea or others are going to want to protect themselves and be a lot more careful because who knows where something like this can go. Now I would say the general business hope is that this all gets resolved and that they sort this all out and that there's nothing screwy that happens here. And this is where China, the U.S., Japan, South Korea are going to have to work together to contain a significant threat. And we all recognize it's a threat and they're all going to have to work together to figure this out.
AD: So have any of those countries that you just mentioned or even other approached you at Honeywell and said we want to beef up defense capabilities because of North Korea?
David Cote: I would say in general that's a trend that's been going on for a while because it's not like the North Korea trend or the threat is new. Everybody's seen this one coming for a while – so this is just kind of continues on a trend that was already established.
AD: I understand that there are some shareholders at Honeywell pushing back against Third Point the activist investor's efforts to try to spin off the aerospace division because it hasn't perhaps been doing as well as some of the other divisions. Do you think that now, with North Korea in the mix, that perhaps that is your argument to keep the unit?
David Cote: Well we're in the middle of a strategic review of the entire portfolio and this is something typically that happens when a new CEO comes in and Darius was appointed COO a year and a half ago, CEO six months ago, so he started this effort a year and a half ago, looking at everything – aerospace, all of our businesses to see what's the right construct of a portfolio going forward. And we actually have a pretty good track record of, as I put it, improving the overall growth profile of the company. So we used to have a growth profile that looked like this, now we have one that looks like this because we add to the top with acquisitions and we've done over 100 of them and we take off from the bottom with divestitures – we've done about 50 of those. So that's kind of ongoing. Aerospace will be viewed in that process and Darius has talked about doing, making having an announcement of some kind in the fall just because that's what investors are expecting and you want to provide an answer. But I would say overall we're actually pretty impressed with our aerospace business. We would disagree generally that it's been underperforming and if you take a look at margin rates it's gone from like 13 per cent to over 20 per cent today. The sales growth rate hasn't been as good as we would have liked, but some of that was because we hadn't really invested in new platforms. In the last five or six years we've invested in a pile of platforms.
AD: So as we await the results of that review that your new CEO is undertaking, where do you personally feel that the greatest growth is going to come from in the business? What do you think might be up for review because it's perhaps lagging more than it should?
David Cote: Well I'll let Darius answer that question when he makes his pronouncer. Nice try though it was worth a shot.
AD: OK well let's talk about your earnings because you had a couple of great quarters.
David Cote: More than a couple Mandy, more than a couple.
AD: So just in recent history just sort of looking at the last couple of quarters of you know it's been a great start for the new CEO. Do you feel therefore that you're in a strong position to perhaps deliver more in terms of dividends for the company?
David Cote: Oh absolutely. We've committed to increasing the dividend at a rate greater than earnings for the five-year plan that we promulgated in I want to say it was 2014 I think. And we've been doing that pretty consistently. So while we've been growing earnings at about 10 or 11 per cent a year we've been growing our dividend about 15 per cent a year. That'll continue for that five year period. Darius I'm sure we'll revisit that as part of his overview of the portfolio and what's he want to do with everything. But yeah we've been actually very good dividend-paying so we've been a very good return stock. We've exceeded the S&P 500 by two and a half times over a 15 year period. So and that's not going to stop, we're still undervalued on a P/E basis.
AD: I see that when you were CEO for the period of 15 years have the facts and figures here. Total shareholder return of 579 per cent, shares started the year around 116 they're now around 139. So you are going to say that you are in a strong position to increase that dividend come October?
David Cote: Oh yeah we can't commit to it of course. And I would just say that our history has been and what we committed to do is in that five year period increase our dividend faster than earnings.
AD: Let's talk about your priorities here in Asia. How important is China to you?
David Cote: Huge. Huge. China today is our biggest country for sales outside the U.S. and this is a huge change from where we were 15 years ago because at the time we were absolutely nowhere in China we only had about a thousand people there. And quite honestly we weren't doing that well. And we focused intensely on how do we grow organically. Today we have 13,000 employees in China – biggest country for sales outside the U.S.. Only 75 of those 13,000 people are expats. In other words everybody is homegrown within the country. You come into the company as a salesman or an engineer, you can look at it and say I can get the top job because there's a Chinese guy there and I just think China is one of the big three 21st century trends – the continuing emergence of China, and it is really important for companies to establish a strong presence in China where they get viewed as a Chinese company right from the very beginning. So it's a huge deal for us.
AD: I think there was always this idea that China was like the Mecca, you know the land of opportunity for non-Chinese companies to go in, like American companies to go in. And yet when I talk to a number of American companies based in China, they say it's not always a level playing field against the local players. And now of course in the mix you've got somewhat of a tense trade tit-for-tat going between China and the United States. Does this affect you at all negatively?
David Cote: I think it depends a lot on what industry you're in. So if you're in the financial services industry yes it's going to be difficult because China is going to work to control that. If you're in the software or tech, information technology industry yes it's going to be difficult. It's – China's going to want to maintain their controls there. If you're on the industrial side like we are, it's actually been pretty open and we've actually gotten a lot of help from the Chinese government when we've had IP theft for example or copyright theft and they've actually been quite supportive of us. So we've grown very well, profitability is very good and we really haven't experienced those kinds of problems. I mean you do run into them sometimes – you'll have a SOE company that is required to buy from another SOE company even though this SOE company wants to buy from Honeywell – you know the government won't allow it. So yes we do run into that, but not so that it's so significant that we can't do well.
AD: What do you think of Mr. Trump, President Trump?
David Cote: Well we'll see what happens. You know there's a lot of people who like measuring progress based on words and what people say. I've always said well it's different that we want to see what actually happens what actually gets done. So far other than the Supreme Court justice appointment, there's not a lot to really talk about at this point. I thought the debt ceiling and hurricane relief was masterful, getting that done the way it did because we've created this kind of foible within our system where the government votes for a budget and then at the same time they don't vote to authorize borrowing the money to support that budget, they make that a separate vote. So they all vote for the budget and then a bunch of them don't want to vote to borrow the money to support the budget which is screwy. So I thought the deal he cut was actually pretty smart. So so far I mean it's tough for me to point to a lot of negative things that have happened. We can point to a lot of words that we would have preferred wouldn't be said. The climate change – Paris climate change agreement – would be one negative I suppose. But if you take a look at that, our actual performance as a country was quite good against those Paris accord of standards. So I'd say let's see what actually happens.
AD: Because he's got a lot of American Inc. offside, a lot of captains of the country offside. As a captain of industry, as a huge company that is a big contributor the American economy, what would you like to see from the tax package?
David Cote: Well first of all I'm one of the guys that believes it needs to be revenue neutral. We have – and there's but there's a lot of stuff they can play with in there – and I was on the Simpson-Bowles commission that the, I guess it was the fiscal responsibility commission or something like that, but Simpson-Bowles was the nickname for it, and the tax package we pulled together I thought made a lot of sense, which was eliminate a bunch of the deductions that people take and just give everybody a lower rate, and then stop fooling with the system by encouraging various expenditures that the government may like at a moment, but really is kind of market-influencing in a way that you don't want. I still would love to see something like that. I don't know that that's going to happen but I would love to see that. The second one is going to a territorial tax system. The system we have in the U.S. is unique and again totally screwy. So that as we try to be a multinational company, so for example try to grow in China or in Europe or in Australia to the extent that we generate profits there, they have to stay in the country – if we bring them back to the U.S. we have to pay U.S. tax on it. So it causes all of us to keep our money outside the U.S.. So if you looked at Honeywell for example we have about $9 billion in cash. Almost all of that is outside the U.S.. And we have about $14 billion in debt, all of it inside the U.S.. And we're not alone and it makes absolutely no sense.
AD: Is there anything else you'd like to add about what you're doing here in Asia?
David Cote: Oh I'd say this is my I think third trip here this year. I'm a big fan of what's going to be occurring in Asia and what I think China can do to help the entire world develop in this 21st century. So I've always spent a lot of time here and committed a lot of time here because it's going to be important for the region, important for the world, but also important for Honeywell. And that's why we spend so much time here. And quite honestly why we've done so well outside the U.S. and in particular in Asia. So I'm a big fan of the region we're devoted to it and it's been a big part of our success these last 16 years.
AD: Which country is your biggest growth opportunity?
David Cote: Still China. China is just doing all the right things generally. I mean there are some things — I wish they'd focus on their SOEs more for example, but they're growing at a pretty good rate off a very big base. And when you look at that kind of growth, just the amount of growth dwarfs the combined growth of a lot of other countries. So it's still China is the place that you got to figure out.
AD: Fantastic great. Dave Thank you so much.