Honeywell International Inc. (HON) Earnings Call Transcript & Summary

Well, good morning, everyone. This is Mark Bendza speaking, Vice President of Investor Relations for Honeywell. Welcome to the fourth quarter 2020 installment of the Honeywell Leadership Webcast Series. As a reminder, this conference is being recorded. [Operator Instructions] The purpose of these webcasts is to provide our investors with the opportunity to hear from a wide range of Honeywell leaders on topics of special interest. The focus of today's discussion is the Honeywell value creation framework, including our approach to building high-margin, innovative and scalable businesses, continuous improvement of our operations, financial outperformance in all environments, capital deployment and corporate responsibility. Joining me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; Senior Vice President, Business Development and General Counsel, Anne Madden; and Steve Tusa, Senior Analyst at JPMorgan. Darius, Greg and Anne will begin the webcast with a presentation, which will be followed by a fireside chat with Steve. 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. Unless otherwise noted, the cost action plans described herein are not final and may be modified or even abandoned at any time. No final decision will be taken with respect to such plans without prior satisfaction of any applicable requirements with respect to informing, consulting or negotiating with employees or their representatives. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. Darius, Greg, Anne and Steve, thank you for participating in the webcast today. Before we commence the fireside chat with Steve, let's begin with the slides we have prepared on the Honeywell value creation framework. With that, I'll turn the webcast over to Chairman and CEO, Darius Adamczyk.

Thank you, Mark, and good morning, everyone. Let's begin on Slide 2. Honeywell has a long track record of generating long-term shareholder value by executing on our value creation framework, which is based on 7 key points. First, we are deep experts in the domains where we operate. We've built an expansive installed base over the past 100-plus years through which we drive connected software, recurring and serving -- and services revenue streams. Second, we are innovators of scalable technologies. We developed high-margin, innovative technologies that we then scale commercially by leveraging our expansive installed base. We also leverage our installed base to grow our service and software business. Third, we are leaders in high-growth regions, and we have a successful track record of driving growth around the world through our local-for-local approach. We have decades' worth of experience in some of the high-growth regions like China, India and the Middle East. We have also developed our local management team and the use of expats is minimal. Fourth, we are rigorous operators focused on continuous improvement driven by the Honeywell Operating System or HOS. HOS is the point of differentiation for Honeywell. Fifth, we are disciplined financial stewards delivering consistent performance on key metrics, including organic growth, margin expansion and cash generation. Sixth, we are effective capital managers who developed a disciplined capital deployment strategy where we actively manage our portfolio to ensure it is best positioned to drive shareholder value. We've demonstrated superior shareholder returns over the short, medium and long term. Finally, we are responsible corporate citizens. We highlighted our commitment to sustainability on our last earnings call, and this commitment extends to all parts of ESG, environmental, social and governance. Let's turn to the next slide to demonstrate the long-term value this framework has created over the past 10 years. As you can see on the chart, we have consistently outperformed both the Dow Jones Industrial Average and the XLI over each of the 10-, 5-, 3- and 1-year time periods. Our total shareholder return has outperformed our industrial peers in the XLI by almost 2x over the past 10 years. Even in this past year, which has certainly been challenging, the total return we have delivered to our shareholders over 3x that of the Dow Jones Industrial Average and nearly 2x that of the XLI. Over the past 10 years, we also created shareholder value by increasing our dividend 11 consecutive times, including during the COVID pandemic this year. Our dividend has increased at a 12% compounded annual growth rate since 2010, driving by a stretch of 10 consecutive double-digit increases. In summary, we've consistently outperformed over the short, medium and long term, making it clear that our value creation framework is effective. It provides investors the comfort that Honeywell perform in all economic cycles, and timing of the markets is not required in terms of investing in the stock. It is your invest-and-forget stock, which will continue to perform. On the next slide, we recently celebrated 100th anniversary of being a publicly listed company, which is a significant milestone and highlights our long history of innovating and providing new technologies and solutions for the ever-changing world. In doing so, we built an expansive global installed base. We have developed deep domain expertise over the past 100-plus years. You can see many examples on this slide of how our installed base of systems, software and technologies are used around the world. To name a few, our installed base spans approximately 70% of Fortune 500 companies and 35 global industries. Our systems, software and sensors are integrated to 10 million buildings, 50,000 aircraft and 11,000 industrial plants, making them safer and more efficient. Our technology is used to provide approximately half of the global renewable fuel supply and 90% of the biodegradable detergents. We've built the world's most powerful quantum computer. Our expansive installed base and domain expertise provide us with significant opportunities to understand our customers' needs, to develop ever more sophisticated solutions to serve our customers and to generate new sources of sales growth globally, including in recession-resistant software and services all at accretive margins. To do this, we make high-return investments in 3 areas: R&D, growth CapEx and M&A to build business around technologies that make our role safer, more efficient and more sustainable. Let's turn to Slide 5 to discuss our organic investment framework, which drives R&D and growth CapEx investments decision. Later, Anne will discuss our inorganic growth investment framework. We focus our organic investments on innovative next-generation products and services and breakthrough initiatives with an emphasis on software and services that generate recurring revenue growth. Our framework ensures that we're driving investments in differentiated technologies and addressing new markets with a scalable go-to-market strategy. For instance, we're building our R&D strategy around disruptive trends that will shape the global economy for years to come, including, as an example, advanced computing, integrated mobility, urbanization, contact-free economy and sustainability. Through our Z21 process, we moved very quickly and seamlessly from the discovery stage to engineering and development with a high degree of iteration with end customers to generate successful commercial launches, a standardized set of steps designed to ensure a gated investment process and speed to market. We have 2 categories of new innovations, BTIs or breakthrough initiatives and NPIs or new product introductions. Each of our breakthrough initiatives must have a sales target greater than $100 million with 3 years of interim execution. To give you an idea of the size of the opportunity here, the total addressable market for our current portfolio of BTIs is greater than $200 billion. And these breakthrough initiatives represent a diverse portfolio of accelerated growth opportunities for 2021 and beyond. A key metric we use to measure the success of our new product introductions is NPI Vitality, which is the percent of total sales generated from organically developed new products introduced in the last 3 years. We've been steadily increasing NPI Vitality. And in 2019, the percent of sales generated from our NPIs from the previous 3 years was 28%. A couple of examples of current NPIs are our Experion PKS, our highly integrated virtual environment or HIVE solution; and Momentum, our warehouse execution software solution. Experion PKS HIVE is a transformational new approach to control systems that reduces project cost and cycle time. Our Momentum warehouse execution system is a game-changing, decision-making engine for controls, fulfillment, replenishment and more. Let's turn to the next slide for specific examples, the next frontier of our technologies and the diversity of our growth investment opportunities available to us over the next several years. With investment priorities focused on driving uniquely innovative and differentiated technologies, we are confident in the products, services and software we have on the horizon that are addressing the world's increasing demand for digital transformation, process technology and sustainable solutions. We are cultivating a diverse portfolio of innovations that vary both in terms of technological maturity as well as market readiness with Quantum Solutions and UAS/UAM in the early days of unlocking their full commercial potential to Honeywell Aclar Edge already providing innovative packaging solutions for therapies and vaccines and Honeywell Healthy Buildings responding to key COVID-19 safety concerns and remote management needs for buildings around the world. The list provides only a snapshot of the areas we're making high potential investments in R&D, growth CapEx and M&A to capture hundreds of billions of dollars in additional TAM. Now on the next slide, I'd like to focus on Honeywell Forge, which underpins our Honeywell Connected Enterprise as an asset-light recurring revenue solution addressing a $100 billion market in the industrial Internet of Things. As seen on the previous stage, Honeywell Forge operates in the most advanced intersection of technology maturity and market readiness. We have a unique approach to serve the $100 billion TAM of our customers looking to digitally transform their operations. Conversations with customers have revolved around a consistent set of objectives: greater productivity, safety, efficiency and generating more with every possible dollar. It is the way we address this and has begun to shift from what the hardware can do for our customers to what software can do for customers. We created Honeywell Forge to address this opportunity. Honeywell Forge is revolutionizing operations the same way Salesforce.com revolutionized the front office or SAP to back office. Honeywell Forge is an enterprise performance management software as a service solution that helps to ensure our customers' operations perform at their best day and night and enables every worker to be an expert. Our customers want help in driving digital transformation of their operations, whether it is manufacturing or supply chain or frontline worker. They want a way to combine data from physical operations to their business operations and to put the next best action in the hands of decision-makers in a timely way. Honeywell Forge is our suite of SaaS applications that drive operational excellence and are essential to the day-to-day management of company's complex operations. Forge is agnostic to hardware that works with Honeywell and non-Honeywell equipment alike. This is why Honeywell Forge is not a platform. To use a metaphor, Honeywell Forge is a house at the end of a cul de sac with a front porch. Customers can decide they want to add a swimming pool or paint, but we're delivering a complete application, not just the hammers and nails needed to build a house. That's what platform as a service does whereas our strategy is to deliver end user SaaS. Honeywell Forge is engineered to deliver key outcomes that customers expect, including 20% to 40% productivity gains, 20% to 30% yield optimization, remotely enabled operations and 25% reduction in carbon footprint. Honeywell Forge has all the necessary dedicated resources to address these critical customer needs, including its own sales team, product managers and engineers, leveraging the best of Honeywell. A key point is that substantially all of our connected software is self-developed, representing about 97% of sales with only a small third piece of mostly cyber-related sales, who are delivering double-digit recurring software sales and connected software margin that is accretive to overall Honeywell segment margin. Despite COVID-19, software sales continue to grow, and we are well positioned with strong customer momentum and large scale deployments. Let's turn to Slide 8, where we'll illustrate customer traction within HCE that is built on our existing installed base. The Honeywell Forge focus is on verticals where Honeywell has a strong domain expertise and best installed bases. We've been seeing strong customer momentum in our approach to transforming our customers' operations. We can't always name our wins, but to give you an idea of the scale, we win large-scale deployments in the high 7- to 8-figure range. In buildings, our customers are seeing higher uptime and 20% to 30% reduction in energy spend with particular traction noted here in higher education with the National University of Singapore and Hamdan University. For example, Hamdan University looked to reduce energy consumption, carbon footprint and operating costs across its campus. They need a solution that could integrate easily with third-party systems to minimize capital expenses. Honeywell Forge energy optimization enable a quick and secure integration to a cloud-based, autonomous energy solution across their entire campus, delivering 10% energy savings, analytics on occupancy and equipment health and automated the controls to not require any work or intervention. In industrial, our customers expect reliability and to better understand their asset health while in cyber, our customers expect the ability to operate remotely and securely. In both these businesses, we're diversifying outside of our core oil and gas offerings to address mining, chemicals and pharmaceutical customers because we are able to solve similar issues across process and batch manufacturers. Worker productivity and safety is paramount. Our solutions with Cairn, Wood and other large industrial customers are seeing the benefit of our worker SaaS solutions. For example, our Honeywell Forge workforce productivity solution provides an average 60% of savings for inspection rounds compared to manual systems. We have also noted our partnerships with SAP and Microsoft. By creating Honeywell Connected Enterprise, we're able to work closely with other software companies and find new ways to innovate and accelerate go-to-market. These partnerships are a step towards convergence of OT and IT data on behalf of customers, which is quite differentiated in the market. Our partnerships have very different structure, so I'll just choose SAP as an example. We are jointly developing a new solution for real estate owners and operators with SAP. This partnership brings together the best of the IT data from the SAP cloud for real estate offering with the operating data from Honeywell Forge to a single dashboard. Customers own both Honeywell Forge and SAP separately, where we share the sales of the joint product. Now let's turn to the next slide and discuss a different type of a success story, one based on breakthrough R&D investments and a sustainable product that created follow-on opportunities to invest capital into high-return growth CapEx. An excellent example of one of our scalable and sustainable technologies is Solstice, which is the family of 3 ultra-low global warming molecules that we invented to reduce carbon dioxide emissions. Solstice replaces hydrofluorocarbons or HFCs, which offer functionality but have a very high global warming impact. During the innovation stage, we invested $1 billion in R&D and growth CapEx to create the Solstice technology, which was roughly split 40% for R&D and 60% for CapEx. The original applications include auto AC systems, high- and low-pressure chillers, liquid and gas foam-blowing agents and aerosols. We have now expanded dramatically with Solstice N41 breakthrough product, which is the first nonflammable low global warming product alternative for residential air conditioning units. We're also expanding into other new verticals, including personal care, life sciences, construction insulation and eCooling. This expansion represents a $10 billion TAM, demonstrating our success in scaling our technology. The impact of Solstice has been incredible from a sustainability standpoint as well as a financial standpoint. Adoption of the Solstice molecules has resulted in the elimination of over 194 million metric tons of carbon dioxide equivalent or equal to removing over 40 million cars from the road. Financially, our $1 billion investment in R&D and growth CapEx was recouped within 5 years of the first commercial sale. Annual Solstice sales are approaching $1 billion, and we'll continue to find new markets to apply these remarkable molecules. Solstice is just one successful example of our track record of commercializing and scaling our technologies and our commitment to developing sustainable solutions. Now let's pivot to the next pillar of our value creation framework, which is our leadership in high-growth regions. We have a proven playbook in high-growth regions that started back in 2005 when we empowered our business leaders in China to make decisions locally and endowed them with the resources and supply chain to serve customers locally. This local operating model is the foundation of our durable sales growth in all high-growth regions. Since 2005, we've increased the number of sales, marketing and engineering employees in high-growth regions by 160%, and we have strengthened our HGR footprint by increasing the number of HGR countries with Honeywell facilities, offices and labs by 73% from 30 to 52 over that same period. This local-for-local approach has worked well for us. With competitive mid-segment portfolio and expansive sales and distribution network and strong local project delivery capabilities, we continue to win HGRs by addressing global megatrends and local demand. Our prospects for the future are bright. We've prioritized regional growth strategies to position ourselves for the post-COVID world. We are driving business recovery through demand generation in key verticals. In China and India, we have accelerated our offerings for the growing mass mid-market. In the Middle East, India and Central and Eastern Europe, we're expanding our digital offerings in connected solutions. Across HGRs, we're growing key accounts of HGR country presidents owning the C-suite relationships. We are investing in local innovation and further cultivating local partnerships and ecosystems. High-growth regions have been and remain a growth engine for Honeywell. 2019 HGR sales of approximately $9 billion were 3x 2005 HGR sales. HGR sales have grown from 11% of total Honeywell sales in 2005 to approximately 25% of total annual sales in 2019. And in high-growth regions, we have contributed over 50% of incremental growth in Honeywell since 2012 and achieved great success serving customers around the world. We expect this momentum to continue as we expand our global presence and customer reach. Now let's turn to Slide 11 to discuss our disciplined operating system. This year has truly showcased our strategic, operational and financial agility, both on the innovation side, bringing new products to the market that address the pandemic and on the cost side, taking swift actions to structurally reduce our fixed cost base. We're able to take decisive action quickly because we have a clear operating system that drives operational rigor, strategic alignment and efficiency. The Honeywell operating system or HOS can be thought of as a framework and operating model, with each part providing a toolkit in each functional area to ensure the appropriate outcomes are reached. These toolkits evolve and expand over time to continuously support our business needs and ensure operating strength. HOS provides the tools required to make data-driven decisions and to create operating efficiencies, which ultimately drive our financial performance. All of our general managers and functional leaders use these tools to drive execution. Everything we do is underpinned by a monthly centralized operating rhythm, which ensures the effective use of these tools. Let's turn to Slide 12 to dive deeper into the supply chain piece of the HOS framework. The supply chain transformation initiative we introduced last year is well underway and already making great progress. We previously had a complex supply chain resulting from a series of acquisitions over many years. Torsten and his team are working to simplify and to optimize our ISC footprint. Since 2018, we reduced our manufacturing square footage by 9%. We're also investing in robotics and automation to streamline our processes, minimizing waste and maximizing yield. This year, we have invested $23 million in automation and plan to invest more in 2021 to drive a year-over-year quality improvement of over 50%. We're fully embracing digitization to create end-to-end visibility of our supply chain, which makes us more agile and lean. So far, 25% of sales are deployed to digitize the planning system and we'll continue to increase this number. Additionally, we are leveraging Honeywell Forge for industrials to gain insight into manufacturing processes that can drive further improvements. These actions are helping to accelerate achievement of improved results for key metrics in our supply chain, including $750 million of cumulative direct material productivity since 2018. We are on track to deliver our long-term ISC transformation initiative goals, including $0.5 billion of run rate benefits and a $1 billion reduction in inventory driven by the continuous improvement culture at the heart of our Honeywell Operating System. Let's turn to the next slide to discuss our progress with Honeywell Digital. Like the supply chain transformation, the Honeywell Digital transformation initiatives is well underway. We are standardizing our business models and deploying them on an enterprise-wide basis enabled by data governance and technology. Our strategy has been twofold: first, to leverage company-wide best practices and to use data analytics to optimize Honeywell productivity and substantially enhanced business outcomes; and second, to differentiate and enhance the customer and seller experience. On the bottom right, you'll see where we are, where we expect to end this year and where we are going in 2021. We're at the last mile in the journey from 148 ERP systems to getting the company down to the core 10, and these will be completed by the end of 2021. This reduction drives significant benefits due to greater transparency of information across the entire value chain, giving us real-time data, enabling much more real-time decision-making and providing us with a base to build our integrated IT architecture around beyond the ERPs. If you think about websites going from 1,500 to ending 2020 around 150 and being down to 50 in 2021, it has a profound impact on the customer experience as it enables cross-selling. Regarding application decommissioning, the benefit here is substantial simplification in our IT architecture, process harmonization across the company, retiring risk of technology debt and enabling one source of truth for more real-time decision-making. Our call center story is one of enabling our teams to create a substantially improved customer experience and that means growth. Shifting from 200 call centers to one cloud-based system has enabled us to harvest information about what customers need the most and aggregate these demands to set up self-service and different customer solutions. The investment cycle for the foundational platforms for the Honeywell Digital initiative will largely conclude in 2021. From there, we'll make further investments to complete deployment across the enterprise and then continue to invest in contemporary and disruptive applications to differentiate us in the marketplace or with our customers while we drive value from contemporary use of data analytics more broadly across the enterprise. We are on track to deliver the $0.5 billion of run rate benefits across sales, productivity and working capital improvements that we identified at our 2019 Investor Day. Now let's turn to Slide 14, where Greg will discuss how all of this translates to our financial performance and long-term targets.

Thank you, Darius. And let me just start by noting that while today's discussion is more long term in nature, as of this moment, we remain on track to deliver our financial guidance for the fourth quarter of 2020. Now as we widen the lens, our focus on building high-margin, scalable businesses and transforming our operations has led to strong multiyear financial results across the board, all while continuing our transition into a leading software industrial company. We have retained our hallmark margin expansion capability and enhanced our organic growth and cash-generating capabilities as we have executed on our 3 transformation initiatives and continue to leverage the Honeywell operating system. Our average sales growth rate over the last 3 years is 5%, at the upper end of our low single-digit to mid-single-digit target, which is approximately 400 basis points higher than the prior 3-year period, as we enhance our portfolio and increase our focus on building higher growth and less cyclical businesses. We also generated 60 to 70 basis points of annual margin expansion over the last 3 years, well above our 30 to 50 basis point long-term target. This is a testament to our organic growth investments, our productivity mindset and the focus on high-margin, asset-light recurring software and services business flow. Our cash generation is a key differentiator. We've improved adjusted free cash flow conversion from 89% during 2014 to 2017 to over 100% for the last 2 years. As a percentage of revenue, which we think is a more representative measure, we have changed the vector from 11% to mid to high teens in the subsequent periods. I want to just reinforce that we will continue to invest in our businesses organically to drive growth and not overmanage any one metric. We have accelerated our deployment of capital for each of the last 3 years as well, investing more than 100% of cash from operations to fund capital expenditures, share repurchases, dividends and M&A, all with an industry-leading annual return on invested capital. This speaks to our ability to optimize our mix of investment priorities between R&D, CapEx, M&A and share repurchases to generate consistently high returns. Our financial framework and commitment to delivering long-term results of low single-digit to mid-single-digit organic sales growth, 30 to 50 basis points of margin expansion and approximately 100% adjusted free cash flow conversion remains unchanged, and our confidence in delivering on that consistently is high. It goes without saying that 2020 was a unique year. And on the next slide, I'll talk a little bit about how our robust operating principles served us through this crisis. During our Investor Day in early 2019, we talked about our ability to manage through tough times. Our execution through this year's downturn highlights our ability to move quickly and decisively to ensure liquidity, drive growth, protect margins and position ourselves for recovery as we said we could. At the outset of the pandemic, we first acted quickly to address our liquidity and cost structure. Our balance sheet provides us with stability as well as opportunity for investment during challenging times. Through a series of quick actions to further bolster our financial flexibility, we boosted our cash and short-term investments from approximately $10 billion at the end of 2019 to $15 billion at the end of the third quarter, demonstrating our ability to access the capital markets efficiently during even the most disruptive times while protecting our debt rating. On the cost side, we responded fast and early to the crisis by identifying $1.4 billion to $1.6 billion in year-over-year fixed cost savings actions in 2 tranches, of which we have already realized approximately $1.1 billion through the third quarter. We curtailed discretionary expenses, took temporary actions to reduce costs, including reducing executive and Board pay, and removed significant structural costs through our repositioning programs. We are on track to deliver the $1.5 billion to $1.6 billion of fixed cost savings in 2020. And we estimate that 60% to 70% of these savings represent a permanent reduction to our fixed cost base or approximately $1 billion of permanent fixed cost savings. The resulting streamlined cost base positions us well for a 2020 recovery and will drive margin expansion across all 4 of our segments and capacity for investment as sales recover in 2021. Importantly, we also pivoted to adapt our demand generation tactics, bringing the full strength of Honeywell to bear to address the COVID-19 challenges of our customers around the world. We deployed additional capital into high-return growth investments to address urgent customer needs, particularly in personal protective equipment and warehouse automation, reinforcing the growth strategy Darius mentioned earlier. We expect to generate triple-digit IRRs on these investments. We are also helping the world cope and recover from the effects of the COVID-19 pandemic through our new portfolio of healthy solutions. We have a pipeline of approximately $1.7 billion for our healthy solutions offerings, and we already generated approximately $300 million in sales year-to-date through the third quarter. Much of this was made possible due to the strength of our digital capabilities and our global supply chain organization. We rely heavily on our new digital platforms to run the business, particularly in selling and customer experience, while much of our workforce was remote, which enabled our sales force to virtually connect with customers and leadership. Our global supply chain organization was also critical to our ability to manage through the crisis. The supply chain team stood up a global tactical operations center and utilized our digital platforms to manage continuity of operations in compliance with safety regulations, minimizing the impacts of operational constraints, including supplier risk management. As a result of our swift actions during this downturn, we're expecting decremental margins of approximately 22% to 23% in the fourth quarter, which is an improvement from 33% in 2Q and 29% in 3Q, protecting our margins during substantial declines in sales. We are clearly well positioned for a variety of outcomes in the recovery in 2021 and beyond, and our shareholders are benefiting from that with returns of approximately 20% year-to-date, which are nearly 2x greater than the XLI, as Darius mentioned earlier. Before I turn it over to Anne, I'd like to flip to Slide 16 to highlight some key points on capital deployment. The first big takeaway is that over the past 5 years, we have deployed more than our free cash flow, $34 billion, to grow the business and our earnings power. We strategically deploy capital to drive returns and to build our position -- to build and position our business for future growth. As you can see, organic growth CapEx is consistently our highest return tactically, anywhere from 20% to 100% plus, but we're disciplined in balancing that with both M&A and share repurchases. M&A is generally in the 10% to 20% range, and we've generated between 15% and 25% IRRs on our share repurchase program over the last 5 years. The result of that is our return on invested capital of 18% for Honeywell, nearly double our peer meeting at 9.9%, which speaks to our ability to identify and deliver on a broad portfolio of high-return investment opportunities. We will maintain that industry-leading return on invested capital by continuing to aggressively deploy into high-return opportunities such as asset-light businesses, including software and services with recurring revenue streams. Over the next 3 years, we have the capacity to deploy between $30 billion to $36 billion on a ratings-neutral basis into additional dividends, share repurchases and M&A as value-creating opportunities become actionable. M&A is a very important part of this as well as the third area of our investment strategy, along with R&D and growth CapEx. With that in mind, I'll turn it over to Anne on Slide 17 to talk about our M&A objectives and framework.

Thank you, Greg, and good morning, everyone. Let me just reiterate what Greg just said. M&A continues to be an important part of our portfolio management program. We are continuously evaluating our portfolio with a focus on growth and margin opportunities that can enhance the current portfolio. We have a proactive process to cultivate acquisition and investment targets, and we maintain a disciplined approach to ensure that we're delivering returns to all stakeholders. Our M&A framework is based on 4 key elements. First, we look for attractive bolt-ons that can enhance our existing offerings. Second, we look for technology and software assets that we can scale within and across our businesses. Third, we look for attractive adjacencies that would benefit from Honeywell's strengths. And finally, we use a proactive strategic framework through which we evaluate areas of the portfolio that are no longer core to our long-term vision and should, therefore, be considered for divestiture. In the fourth quarter, we completed 2 acquisitions and one strategic investment. Darius mentioned on the third quarter earnings call the 2 acquisitions, Rocky Research and Ballard Unmanned Systems, both of which provide emerging technologies in our aerospace business. Most recently, we made a strategic investment with a path to full ownership in Trinity Mobility, an India-based software company and provider of an enhanced smart city IoT platform. This investment supports our smart cities breakthrough initiative and expands our expertise in smart cities by leveraging Trinity's IoT platform, which can integrate information from multiple systems across the city into a common interface and allow city operators to better assess, operate and manage the community while providing a safer and more productive citizen experience. Let's turn to the next slide and review some of our key strategic transaction criteria. As we review M&A opportunities, we're focused on expanding our core differentiated platforms. We've listed a few examples on the slide, which include process controls, warehouse automation and cybersecurity, to name a few. In addition, we're looking for opportunities that are aligned to long-term trends such as AI, connectivity, anything as a service and sustainability. Finally, we're focused on enhancing our financial profile through opportunities that provide enhanced and sustainable sales growth, higher margins, recurring revenue streams or other financial benefits. It's important to note that we take the stewardship of our capital extremely seriously. And it's with this disciplined headset that we approach acquisitions. We stand down from transaction opportunities where we don't have a strong degree of confidence that we can acquire at the right valuation and execute against our value creation plan. As Greg described, we have a lot of firepower, but our desire to deploy capital to M&A always hinges on the reasonableness of the price when weighed with the attractiveness of growth and synergy, the opportunity and our ability to execute. Through this strategic framework and our internal governance structure, we ensure that M&A transactions are aligned with Honeywell's strategies and provide high returns. I want to share 2 examples of our rigorous M&A framework in action. So let's turn to the next slide to discuss the Xtralis strategy. Xtralis is an acquisition we completed in 2016 in the fire products space for Honeywell Building Technologies. The fire space has long been an attractive place for us to grow through acquisition. For example, acquisitions such as Novar have been instrumental to our ability to accelerate growth. The fire channel is strong. It's regulatory driven, which we love, and it's relatively acyclical. Our fire business has grown into a world-leading business with strong share of demand for its core fire detection products. Xtralis is a great example of a deal where we paid a respectable mid-teens EBITDA multiple, but we were able to achieve an attractive bought down multiple of approximately 10x EBITDA after taking into effect our cost and sales synergy benefits. At the time of acquisition, Xtralis' aspirating smoke detection or ASD technology was still a nascent technology. But Xtralis was the leading brand in this early-stage ASD technology. Though Xtralis was immature commercially, we knew we could take the cutting-edge technology, strong patent portfolio and strong R&D team and convert it into a growth machine for the Honeywell Fire business. We have the immediate ability to push Xtralis technology through our existing channel, which mitigated the natural integration risk that comes along with any acquisition. This deal is a good example of making one of our strong core businesses even stronger by finding innovative technologies to add to our core strong capabilities and make them better. Xtralis continues to excel and is now a market-leading business globally. The acquisition has also led to our entry into data centers, which is an attractive new growth market for Honeywell fire. In terms of growth, when we did the Xtralis deal, we had modeled just under 5% compound average growth rate over the modeling horizon. But we've achieved actual average growth of over 10% annually, including greater than 20% growth in 2019. We also meaningfully overdrove synergy execution and leveraged the Honeywell Operating System, leading to over 1,000 basis points of margin improvement. This deal has generated a 20%-plus IRR since the completion of the acquisition, demonstrating the effectiveness of our disciplined M&A framework. Now let's turn to the next slide to discuss the Intelligrated acquisition. Back in 2015 and 2016, we identified the growing need for warehouse automation to meet e-commerce demands, and we recognized that we were uniquely qualified to participate in this market given the customer overlap and adjacencies that already existed. Using our disciplined approach, we concluded that M&A was the best way to scale quickly in this space. We identified Intelligrated as an attractive opportunity that satisfied our transaction criteria and completed the acquisition of Intelligrated in the summer of 2016. We applied Honeywell's resources and capabilities to expand Intelligrated software and services portfolio, grow our customer base and create operational efficiencies, which has led to doubling Intelligrated's revenue in just 3 years, with a sales compound average growth rate of over 20% since 2016. The deal has generated a 15%-plus IRR since acquisition. This acquisition continues to drive growth as e-commerce trends inflect, and we are investing to capture the growth by increasing our global footprint, innovating with cutting-edge technologies like AI and smart robotics and integrating with Honeywell Forge to bring real-time data and visual intelligence to our customers. We are exiting 2020 with our largest backlog ever and with a large runway for expanding into attractive adjacencies, reinforcing the effectiveness of our M&A strategy. I'd now like to turn to the next slide for a discussion of our important role as responsible corporate citizens. I also have oversight of responsibility for our health, safety, environmental and sustainability efforts, an area that I'm really proud to talk about. Honeywell has an unwavering commitment to the principle that good business, economic growth and social responsibility go hand in hand. We believe a robust environmental, social and governance or ESG framework enables our long-term success and is the right thing to do for the communities we serve. At Honeywell, we're making the world safer and more sustainable by inventing and commercializing technologies that address some of the world's most critical challenges. We're inspiring change in communities around the world by demonstrating corporate and social responsibility through unique community involvement programs, emphasizing STEM education, inclusion and diversity and humanitarian relief. And we're recognized as a global leader in ethics and compliance due to our strong corporate governance policies, practices and procedures. Let's turn to the next slide for more details on how we put our ESG framework into action. We believe that Honeywell is uniquely positioned to shape a safer and more sustainable future. We continue to invent and develop technologies that provide our customers with adaptable and efficient solutions to meet their safety, energy and environmental needs. In fact, approximately 50% of our new product research and development is focused on solutions that improve environmental, safety and social outcomes for our customers. As Darius discussed on our third quarter earnings call, we've already worked extensively to reduce greenhouse gas emissions, increase energy efficiency, conserve water and proactively restore former operations or predecessor company sites to productive community assets. We also established robust 10-10-10 ESG goals to achieve by 2024, and we closely monitor our progress against these goals. The Honeywell culture fosters an inclusive and diverse workforce. I&D is a foundational principle at Honeywell, not just because it represents our values, but because we recognize that having employees with diverse backgrounds, perspectives, experiences and cultures who provide a diverse set of ideas to support our high-performance environment is critical to our continued success. We know that diversity and an inclusive environment enables improved decision-making, more rigorous risk identification and oversight and a higher level of creativity and innovation. To that end, we're laser-focused on improving diversity and fostering inclusion at all levels of the organization. We're committed to hiring diverse and innovative talent, and we require diverse interview slates for 100% of job requisitions. We've also developed minority leadership programs across the company, including the women's advancement program that I've been proud to cosponsor and our newly launched Diversity Career Advancement Program that Greg cosponsors. We advance our inclusion and diversity efforts through robust governance mechanisms, and leaders across our organization are accountable for performance in their areas of responsibility. We have I&D councils across all our segments. Led by executive sponsors, they drive I&D initiatives within the businesses as well as govern and empower employee networks. And this year, our governance structure was redesigned and fortified with the establishment of a new global I&D steering committee to drive rigor, consistency and scalability across the enterprise. This steering committee is cosponsored by Darius, Karen Mattimore, our CHRO, and me. Honeywell Hometown Solutions, our corporate citizenship program, delivers innovative programs, educational resources and funding to a wide range of beneficiaries in communities across the globe. And finally, we're recognized for our best-in-class Board of Directors and executive management composition program. 12 of our 13 directors are independent, and the importance of diversity and inclusion starts with our Board. 31% of our directors are women, and 38% of our directors are ethnically diverse. Our senior leadership team is also more than 50% ethnically diverse. Many of these diverse executive officers were promoted from within, a testament to Honeywell's long-standing focus on retaining and advancing women and minorities. So with that, I'll now turn it back over to Darius to wrap up.

Thank you, Anne. The culmination of everything we've outlined today is simple. We're creating shareholder value and outperforming the industry and the broader markets in all environments. If you look at this chart, you'll see that Honeywell has shown remarkable consistency versus both the XLI and Dow Jones Index, indicative of the remarkable resiliency of the company. Honeywell is the "invest in and forget" type of a company because we'll generate superior returns compared to the benchmarks, which investors can depend on regardless of market time. With that, let's turn to the last slide. We've covered a lot of ground today, but to recap, the key message is that Honeywell is a rigorous and proven value creation framework that consistently delivers shareholder outperformance. Our framework is based on our expansive installed base and deep expertise in our domains, innovation of breakthrough initiatives and scalable technologies, leadership in high-growth regions, rigorous operations and continuous improvement culture, disciplined financial stewardship, effective capital management and responsible corporate citizenship. This crisis has simply reinforced the fact that our strategies to become more software-oriented, less asset-intensive and more digitally capable are exactly right. We will continue to drive them with the commitment to execution you would expect from us. Through this framework and through the Honeywell Operating System, we consistently deliver superior returns for our shareholders. With that, we'll now begin our transition to the fireside chat with Steve Tusa.

Thanks, Darius. And Steve, just bear with us for a minute here while we transition our location to the fireside chat.

Okay. Steve, we're ready for the fireside chat. I'll turn it over to you.

Great. Thanks, you all, for the slides, and I think very often, I get asked the question, other than just kind of the end markets, what's special at Honeywell. I think that the deck did a great job of walking through the business model, which I think is important for people to understand what we're looking out for the next 3 to 5 years, where there's a lot -- it seems like there's a lot of opportunity. So just starting on the growth side. Vitality index, you called out, has had a pretty nice step-up in the last couple of years, clearly reflected in growth rates that were at the high end or above that, just above that kind of a 5% rate, at least for the last 2 years. Maybe if you could talk about the sustainability of those types of increases. And how should we think about the hit rate on these breakthrough initiatives? Because it seems like these new products are really having a pretty substantial impact on the growth rate.

Yes. Maybe I'll start, Steve. I think a couple of ways to think about it. Let's start with the breakthroughs. The breakthroughs are essentially are kind of higher-risk, higher-reward initiatives. Our expectation is that the hit rate on these will be -- think about in the 40% to 60% range. Some of them will work out and turn out to be this $100 million-plus kind of opportunities. And frankly, some of them could be $1 billion-plus kind of opportunity, not $100 million. $100 million is sort of the base number. So these are high risk, but higher reward. When it comes to NPIs and where we spend a lot of time and energy, and frankly, it's one of our themes of our senior leadership meeting that's coming up in about a month, we have to continuously innovate, bring new ideas, new concepts, new thoughts to the market. These are lower risk, lower investment by higher probability of return. They're not going to generate the $1 billion kind of opportunities, but they're going to enable us to continue to grow our organic revenue at that kind of mid-single-digit growth rate that we're anticipating. And I think this year was a pretty good example of this, which is rather than being depressed by the COVID environment that we saw this year, we actually pivoted very, very quickly and developed some of these healthy solutions, whether it's healthy buildings, healthy aircraft, healthy industrial facilities, the Aclar Edge for health care packaging rather than sort of just being focused on cost, we pivoted to things that really matter in this COVID crisis.

How many -- I think one of the things that stood out this year, you guys bumped up your CapEx a little bit. And I think CapEx is a bad word to many in a cash-obsessed investor landscape, but you guys had such ridiculously high returns on that CapEx. When you look at the pipeline, how do we think about kind of the percentage that are CapEx related and then those that are more kind of asset light? It seems like there's -- growth is growth and then returns are returns. But just curious as to how to think about that going forward?

So when you think about the CapEx side of it, I mean, as you said, we're going to spend close to $900 million in CapEx this year even though we've -- we're in the midst of this crisis because we boosted up the growth capital, as you mentioned. As we go into next year, I would say roughly half of our CapEx is going to be either in growth or productivity-related capital. And it's going to be at a fairly similar rate to what we're seeing this year. So many of the kinds of initiatives that we're talking about are going to support a continuation of high-return capital in the near future.

Okay. Got it. Just kind of delving into a couple of the growth innovations here. Quantum computing, I know it gets a little bit of an eye roll when I bring it up to investors because a lot of times with our companies, there are things that are pitched as kind of big ideas. And I don't think you guys have kind of gone that far. But the little bit of digging that I've done on it, it seems like you guys kind of have something here. Can you maybe just talk about how your approach is different than maybe somebody like an IBM and maybe a little bit more about your plans around that key metric of quantum volume and what that may mean, just at a high level in the future. This really seems like you guys have perhaps kind of a differentiated mousetrap here.

So Steve, this is Anne. I think I'll take this one since a little known fact, the Quantum business currently reports up to my organization. So guilty of having a little bit of an understanding of what happens here. So maybe I could start with what quantum volume means for the -- for those who aren't quantum physicists, a qubit is a quantum bit and it can be compared to a classical bit that reads 1s and 0s. But a quantum bit reads the 1s and 0s all at the same time. And that's important because whereas a classical computer trying to figure out how to get out of a maze can only figure it out one route at a time, whereas a quantum computer solves for every way out of the maze all at the same time. It's called superposition. It reads the 1s and the 0s all at the same time. So this is important because it means that it can drive problem-solving in areas like chemistry and materials science and drug discovery and super cool things at an incredibly powerful rate. But not all qubits are created equal and they can be really unstable. So if I have 10 qubits and you have 40, that doesn't mean you're better than I am if your qubits are unstable and unreliable and not efficient. And so quantum volume is a way in which we measure in a standard way how we stack up against our competitors from a quantum compute to quantum compute basis. So our most recently released quantum computer has a measured quantum volume of 128, and that's the most powerful measured quantum volume to date. So that's pretty exciting, and we do believe we have something. We've taken a very different approach from our competitors in quantum computing. First, we have our own trusted foundry, which we use to fabricate our specialized trapped ion architecture. So we're building it ourselves. Our competitors are not building it all themselves. Second, Honeywell is a global leader in mission-critical control systems and complex system integration. This is our technology heritage. This is something we're really good at. So leveraging both, we've designed our quantum computers to be in-field upgradable. Since March, we've increased our quantum volume eightfold, and we're confident that we'll be able to increase the quantum volume by at least an order of magnitude every year for the next 5 years. The real power of our strategy is that we can release a generation of quantum computers that our customers already value and then rapidly increase their computing power. We've been working with partners and customers for a year. And what we've learned from that commercial experience is that organizations are really committed to quantum computing and really just don't want a few minutes as a little science experiment on the quantum computer. They need tens of hours working hand in hand with our quantum experts. And this is because the entire quantum computing ecosystem is focused on finding how to generate the most effective algorithms for the quantum computer and focusing on those that show the most promise for creating value in the near term. So our business model is a subscription-based business model around both our hardware strategy and the customer need for substantial compute time. Our customers access our systems through a cloud-based API. Many customers access our systems directly, while some customers prefer to use other access methods, including via Microsoft Azure Quantum or via algorithm software partners of ours like Cambridge Quantum Computing and Zapata Computing. It's also worth noting, Steve, that today's systems are primarily being used as research tools focused on end-use applications that show the most promise, including optimization, machine learning and chemistry. These are all use cases very relevant to Honeywell. We expect the first substantial inflection for revenue generation to come once those focused value applications have been developed and integrated into customer business processes, and that's still realistically a number of years out. Customers have to be able to use the solutions, the problems that are being solved on the quantum computer, they have to render them usable, and that's still going to be a number of years out.

Maybe we'll figure out a way to come up with a price-to-qubit ratio to match the exuberance in the market around other things that may not be as scientifically promising. Thanks for that backdrop. I believe JPMorgan is actually a partner of yours there. So we'll see what we can do here. One other one, obviously, is Forge, and you talk about $100 billion TAM here. How do you come to that? And then maybe tell us how -- what KPIs you're looking at here to track progress. I mean, we see all these customer logos on slides. It's really kind of hard as an industrial cap goods analyst to track the progress on something like this other than the revenue growth rates you're giving. But maybe you could just talk about KPIs around Forge and help us understand what that $100 billion means.

Yes. So I'll take this one, Steve. In terms of the $100 billion space, I mean, we didn't -- it sounds like a nice round number and it feels like we invented it, but there's actually some math behind it. And let me just -- without taking you through the gruesome level of math. So -- and if you think about buildings and you think about energy savings, we took some level of savings we generate, typically in that 30% to 50% range, and we'd say that we take half of that. For cyber, let's say, we have so many sites. And on average, we get about $0.5 million -- yes, $0.5 million per site in terms of our cyber solution we multiply that through. For industrial facilities, we computed the yield gains that we get in terms of some of our offerings there, and we took some percentage of that. So when you kind of add that across all the various industry segments that we play in, you kind of end up with a number that's roughly in that $100 billion range. And I don't think it's very inconsistent of some of the sort of external numbers that have been quoted. But I can tell you, this number is something that we computed ourselves, not just sort of pulled from the sky. So with that kind of a market opportunity, we're extraordinarily excited about what we can do. In terms of the KPIs, I mean, sort of the natural ones, I guess, are fair, which is revenue growth, margin rate, which is accretive. It's been growing double digit. It's going to grow this year even though the industrial market is obviously very, very challenged. The software part of it is going to grow, bookings. The number that I think is really important for us, and we've sacrificed some top line headline growth because of this, but we think it's really important, which is Forge is intended to be a SaaS recurring business. And obviously, when you grow something in the offering as a SaaS offering, you don't recognize a lot of that revenue, but it comes over the course of the contracts, which are long term, 5-plus kind of year contracts. And frankly, that's enabled -- or actually, that's reduced our growth rate. But if you look at our SaaS growth, that's a 40%-plus rate even this year. So those are the things that I think matter. The cycle times to -- from sort of the origination of the discussions with a customer already closing a significant size are fairly extensive. That's 6 to 9 to 12 months for some of the bigger ones. And the reason for that is extraordinarily simple. And that's what's industrial IoT differ than some of the other consumer applications because these are high-risk, critical function kind of operations. So whether it's industrial facilities or aircraft or protecting the assets of those just -- it has to be proven. It has to work. And it sort of goes in 3 different phases. The first phase is interaction, description of what we do, understanding. Phase 2 is typically a proof of concept. Phase 3 is an award of a larger deal. So I also sort of look at how many customers we're engaging, what our pipeline looks like, how many proof of concepts we have. Those are sort of predictive metrics in terms of what will happen in the future.

Who are you bumping into on this front? Who are the competitors that you're seeing out there?

I think they vary. I mean, obviously, with some of the other industrial players, whether it's Siemens or Emerson and some others, that's one group. Obviously, we see some consulting firms out there as well that are offering some of their solutions. You also see some of the tech-oriented companies out there. So it is a relatively crowded space. But I strongly believe that we're differentiated based on what we discussed today, which is: one, we have domain expertise; two, we have vast installed bases; three, we have deep relationships with the customers; four, we engage and not give them just a canned solution, but really what they need, and that's making it different. That's what's allowing us to be successful. And rather than spending billions and billions of dollars in this business and hope good things will happen, the margin rate and the growth rates are both accretive to the overall Honeywell, which I think is what makes it worthwhile. And I'm firmly a believer that you got to pay for what you're doing or we would never want to underinvest in this business. We also don't want to get ahead of ourselves and spend billions and potentially have big write-offs later.

Can you talk about in more of the kind of traditional areas that we've heard about over the years from a digitization perspective, where you guys are on digital twin in general and then manufacturing execution systems or that kind of next layer above the plant, whether that -- I guess some of that is probably integrated into Forge, but my guess is some of that is also borne out of your -- what you guys have done at HPS over the years and maybe the buildings business. Just curious as to kind of where you guys are on those fronts.

Yes. I think that's right, Steve. I mean, I think it is led by the innovation at HPS and Forge offerings. It's really both. And I think as you well know, I mean, one of the things exciting about HPS, it's been an innovation leader in the industry for many, many years, and it's something that's well recognized. And with some of our great HIVE offering, which is really virtualization of the whole process design and so on, you now have greater flexibility. You can create a digital twin. You can do a full acceptance test virtually, and you have full flexibility to change the number of IO points that you have. I mean back when I ran HPS, which wasn't that long ago, '12 to '14, you have to be very precise in terms of your definitions about your input points, output points, hardware driven. Any given change would require months to change the design. It was expensive. It took a long time. You can do all of that virtually now. We create that digital twin. And this has been perfect in the COVID era because if you think a lot of our final acceptance testings or functionality testing, we've been able to do that remotely through the use of digital twins. So this business is just continuing to innovate and bring great solutions to the market. And if you think about sort of our global mega projects over the course of the last 12 to 18 months, I mean, we've been winning something like 80% of those projects. And the answer why is very simple, is that we're the technology leader and we're recognized for it.

Can that allow you to kind of outperform a sluggish oil and gas CapEx environment at HPS? And then I guess, secondarily, the things going on at UOP.

Yes. I mean, clearly, the oil and gas this year has been challenged, and we're taking share in a market that's frankly down. I mean that's a given. But I think the more important point here, both around HPS as well as UOP, is we're kind of moving just beyond the oil and gas focus. So for example, in UOP, our new sustainability technology solutions business, which is really focused on 3 different elements, the first one being energy storage in an economically feasible way. Two is eco finding. And three is full recyclability of plastics. Those are the types of solutions that the oil and gas industry is going to need for the future. And the good news for us is that most of those are available today. And that's where we're kind of starting to pivot our UOP business to, which is, yes, it's still going to have some level of oil and gas focus. But its future is going to be looking very, very different than its past because its full focus is going to be on the future of sustainability in renewables. And that's kind of how we're pivoting. But just in oil and gas, just let me comment on that. As you know, Steve, and the last time we saw this was in the '15 and '16 time frame when I was running PMT, which is -- whenever you get through a cycle, which has been so pronounced in terms of cuts in CapEx and OpEx, you simply need a bounce back when you need to recover that because you get a discontinuity between demand and supply. So I'd expect we're going to see that in 2021 or 2022.

Got it. But just kind of wrapping up the growth side. There's been a lot of announcements from all of our companies around partnerships with SAP, Microsoft. You guys seem to have one on the building side with SAP. Maybe just explain to us how things like that or how partnerships are structured like this one. It's always hard for us to kind of understand the economics of kind of the dollar of revenue that comes through the partnership, how you guys approach that. I know others are almost a distribution channel to those technology companies. You guys would seem to have some of the IP in some of these arrangements. Just curious as to how you approach partnerships, which can mean many different things to -- in different situations.

Sure. Well -- and by the way, they're not all structured the same. They're all different. But let me give you a couple of very specific examples. So with SAP, we're literally coinnovating. We have our technology teams working together and linking the ERP systems to some of our SaaS solutions for buildings to come up with a joint offering, and we're jointly creating IP. We anticipate -- we already have pilot customers that we're working with, and we're going to be doing the formal launch in the first half of 2021 with the actual solution. So in that model, we're going to be sharing the revenue. Now let me just compare that to a Microsoft model. A lot of what we do sits on a cloud infrastructure served by Microsoft. So obviously, the more we win in some of these spaces, the better off they're going to be. So that -- we're in partnership with them to -- they're somewhat of a channel. They're also a partner, and we leverage some of the micro services they provide. So it's sort of a symbiotic relationship that benefits both parties. But they all really vary. And as you can see, just between Microsoft and SAP, they're fairly dramatically different.

Right. So it seems like SAP would want your expertise, your domain expertise, your data feed, if you will, as opposed to, "Hey, they have a great product and they're just using you guys as a channel."

Yes. Yes. I would say we're kind of the end point. As I explained Forge, we're the ones that really create the final value to customers, it's that performance management. So it's -- although we are linked to their ERP platform, and that's sort of invisible or completely transparent to the end customer and seamless, but we're developing that end solution.

So all the above kind of suggested growth should be pretty good, but there have been times when your growth has disappointed. And I think one of those has been in the handheld business where -- kind of a laggard in -- coming into 2020. What's kind of the -- with the benefit of kind of a look back there beyond, it seemed like there was something a bit beyond just the move -- the missed move to Android. Just give us an update on maybe what you -- I mean I think fixing a business like that and setting it up for growth again is just as important as maybe coming up with something new. So maybe you can just give us an update on -- postmortem on what happened there and how you're positioned there for the future.

Yes. Well, a couple of comments. First of all, as I've always said, we're a $35 billion business. There's going to be something -- some business somewhere, which is not going as well as we hoped. That's always going to be true, and last year happened to be performance products. The interesting thing, Steve, is I don't get that question on my earnings call anymore. I wish I did because I actually would love to answer it because that business actually grew in Q2, grew in Q3, taken share again. It's been a terrific turnaround of the business and regaining its presence in the marketplace, pulled through. I would say, more commercial rigor, commercial execution than necessarily innovation. I actually think it was pretty well positioned from an innovation perspective, but adding that commercial rigor really is making a big difference, and we're winning in the marketplace. You know that the lessons learned are simple, which is the good news and the bad news here is our HOS, we can -- we see issues fairly quickly, and we see execution issues. And we're pretty honest and transparent about that. We even shared that on the earnings call. I think most companies of our size probably would bury that data. We didn't. We said we had an issue here. We fixed it. The business is performing extraordinarily well this year, both on the top and bottom line. And we think it's going to be one of our great growth businesses heading into 2021. So the lessons learned is you got to identify these issues. You got to address them. They don't go away on our own, and we have to change our execution model, change our processes and frankly change some people too.

Got it. Can you talk about your cyber capabilities? I mean I only ask because there are a couple of companies in our sector that are basically buying kind of small cyber consulting firms. I'm not quite sure what to make of that approach. I know you guys have been talking about cyber for a while. I think you did a deal there a few years back. Maybe just talk about what kind of cyber infrastructure you have and how that has been a building block and enabler for this Forge growth and the digital progression?

Yes. I mean, cyber is a great example of what's possible and a breakthrough. I mean if we go back to 2013, and this is back in the days where both Greg and myself was still in HPS. I mean that business was 0. I mean, basically, it was 0. We felt we needed a solution for industrial cybersecurity. And we created a mini business then grew it, recruited some people from outside of Honeywell to grow it. We augmented it with very, very small acquisitions. But to give you an update on this thing, I mean, it went from 0 to being greater than $100 million. I mean that is, I think, a pretty nice run, and we think it has double-digit growth potential. And most of that work we're doing is organic. I mean, yes, we've invested in some venture firms that are going to augment. We invested and bought a small -- very small Israeli company, which helped augment our capabilities. And it's really enabled us to grow and accelerate our rate. And when I talk about breakthroughs or new concept, new ideas, I think that's one of the areas where I'm particularly proud of what the team has been able to accomplish and taking something from virtually nothing and making it a $100 billion-plus kind of level.

Is it to the point from kind of a critical mass perspective where you can execute on this $100 billion TAM and all this digital growth with your current offering? Or is that something you need to kind of still add to in certain areas and fortify?

Well, I mean, we always are -- will add to it. I think we've recently signed a partnership with Nozomi Networks, which is going to augment our capabilities. We're a great partner. Together, we offer more compelling value position to marketplace. And one thing about cybersecurity, you're never done because just when you overcome one threat, there's 7 or 8 or 10 more new ones. So you always have to continue to innovate and both internally partner or acquire externally. So we've had a strategy that's been pivoted on both, which is continue to innovate internally, but also be aware of what's going on in the marketplace to either partner or acquire. And that's what we're going to continue to do. And I think the next stop for that business should be $1 billion.

Thinking about portfolio management and capital deployment, you talked about the $30 billion to $36 billion of deployment. What kind of leverage does that assume, just to give us an idea of how you think about the guardrails that the ratings agencies are looking at?

Sure. So I'll take that one, Steve. And with the ratings agencies, Moody's got their own formula, as you know, which adds back some other things beyond just the external debt level. And we've always tried to play that to be around at 2.5x leverage point, knowing that we can go above it as long as we're strategic about it and we're very transparent about our plans with them. So that assumes that there's some level of ability to go up in terms of debt levels, with growth in our EBITDA as well as, again, an ability if we needed to, if we saw an opportunity, to go beyond the 2.5x as we are right now. We could always do that with a plan to come back again. So it's -- I think we called it ratings neutral in the commentary because we would want to always maintain a very close relationship to that 2.5x leverage point with the agency.

Right. Okay, got it. Has your -- Darius, has your view on aerospace and the long-term value creation opportunity there changed at all with the recent reset in this market?

No, it hasn't. I mean it's -- I think people are going to want to travel again. I think there's a lot of pent-up demand for both consumer travel and business travel. I think as soon as we get a medical solution that's rolled out, which we believe is going to be relatively soon, I think you're going to see the aerospace segment come back and roaring. But also, the other thing I will tell you is that the aerospace segment also is going to evolve, and that's why we created a whole new business unit around UABs, UAMs and so on because that's the future of aerospace. And I think it would be shortsighted for us not to invest in that future, participate in that future of a viable business in it. And it'll -- probably 5 to 10 years from now, aerospace may look very, very different than this today. We're trying to think ahead and participate in that growth when it comes.

And then I guess the same question around oil and gas related businesses. I know you mentioned in UOP, there's a push for a little more of a renewables revenue stream. But how do you look at kind of oil and gas longer term as an addressable end market?

I mean it's still a market we're going to continue to serve. I mean we can argue when peak oil is going to be, whether it's 2025 or 2030 or so on. We do think the future is renewables. I talked a little bit about UOP before. We're also pivoting the HPS business. And one of the growth segments for HPS is the renewables, particularly wind and solar farms, as well as pharmaceuticals. Those are kind of 2 key areas of focus for HPS. And although we're going to continue to serve the oil and gas industry -- and by the way, the oil and gas industry is going to have to change and evolve. I mean we know that and we want to the ones that provide these solutions to help enable that evolution. We also want to play in these new market verticals and that are emerging such as renewables. So it's kind of, let's say, 2-state strategies: can help the oil and gas industry evolve and then two is play in these new attractive vertical segments.

The question I get kind of constantly from investors is, "Well, what are they going to buy?" I'm not going to ask that question here today because I don't think you're going to really answer that, obviously. But what's your take on some of the higher multiples, kind of lower return deals that we're seeing out there? How do you measure that against the strategic benefits? What's kind of the outlook? And also what types of assets at a high level will you be looking for? Because everybody talks about software, software, software. So just maybe just an update on that front.

Yes. Let me start, and I'll turn it over to Anne to augment. First of all, we are going to make acquisitions. We made 3 this -- or 2 in a strategic investment. Pipeline is very, very active, more than I've seen it, and I anticipate there'll more acquisitions. I don't think they're going to -- you shouldn't expect mega deals. We're not -- we don't feel like we need to do mega deals. Look, I've talked about this before. The software acquisitions are very expensive. And if you look at IRRs, and Greg had the chart in our presentation today, you have to be thoughtful about making those investments because if you compare the IRRs and some of these types of acquisitions vis-à-vis investments in R&D or growth CapEx, frankly, those returns are better. They just are. That's a fact. So that doesn't mean we're not going to do some of the more potentially expensive acquisitions. But they really have to fit our strategy. They have to fit where we're going. We have to see the growth to be able to pay up those kinds of multiples. And we're just cautious spenders is the way I put it. We certainly have the firepower. But with firepower is once you kind of spend it, it's not coming back. So you got to be really thoughtful about what you acquire and when. And Anne, if you want to, please add.

Thanks. I think you said it really well. Returns matter, and we'll always focus on our ability to execute towards sales return.

Right. It's kind of funny to me that you guys do $200 million of CapEx at 100%-plus IRR, and it's right next door to the acquisition spending on the cash flow statement. And most investors completely ignore and give companies all the leeway in the world to spend cash on acquisitions that have low single-digit returns. And the only difference is one-line item on the cash flow statement. So it's refreshing to see the discipline there, of course. Can we just get an update on Honeywell Ventures? You guys -- I think there's FogHorn, Element, Soft Robotics are some of the names that we're throwing out over the years that you guys have invested in. Maybe where does the Honeywell Ventures portfolio stand? And just a bit of an update there.

Thanks for the question, Steve. This is Anne. So we have made over 20 direct portfolio investments through Honeywell Venture Capital, deploying about $100 million to date net of exits. And happily, with all our SBGs represented across our portfolio of venture investments, we also have 5 global fund partners in China, India, Israel and Canada. And just as a refresher on our strategic thesis, while we expect to generate compelling financial returns with our venture investments, the overriding strategy of these investments is to drive innovation aligned with our strategic priorities and generate successful outcomes, both for ourselves and for our venture partners. So we're highly focused on that. And our most recent venture investments have been in the quantum space with Cambridge Quantum Computing and Zapata. You mentioned FarEye in supply chain logistics, urban air mobility with Daedalean. And we're very happy with what this is generating. It's a way in which we can tap into a strategic ecosystem that's innovative and important to our existing strategies and enables us to really leverage that into a more expansive strategic lens for ourselves. So we're very happy with how that's going.

I got a couple more questions here and then we'll wrap it up. Can we just get an update? You mentioned the software was growing this year in this kind of tough economy. Can you maybe just give us an idea of what are some of the higher growth parts of that portfolio? And then maybe on the flip side, which ones were a bit more challenged this year?

Yes. Yes. Yes, happy to give that, Steve. In terms of growth, I mean, we're -- the 2 that really stand out this year, interesting enough, is our connected buildings, healthy buildings offering in Forge. It's really been blood scaling and growing [indiscernible] month-over-month. So we delivered a whole new product set there, and I've been very, very encouraged about the growth potential and really transforming all types of business -- buildings. And when people think about buildings, they kind of maybe naturally migrate to office buildings, but buildings take different types and different varieties. The hospitals are buildings, stadiums are buildings, clinics are buildings, data centers are buildings. Those are some of the more, I would say, interesting, even growth opportunities we really penetrated. The other place which is industrial cybersecurity has been another business that's continued to grow and do quite well in this environment and we're very excited by the possibilities, and we're moving outside. That business is not at all tied to the energy segment at all. I mean we're moving it to food and beverage and many other verticals. So we're sort of going beyond what many would view as our industrial roots to further diversify that business. On the challenged side, as you can imagine, the aerospace or connected aircraft has been more of the challenge throughout these reasons. I mean, obviously, on the hardware side, there's not many aircraft flying. The airlines are trying to conserve cash. So that one's been a bit more challenging.

Just to kind of wrap it all in here, I think watching the Honeywell Tech Forum presentations, I tried to watch every single one, but it was a little bit time-consuming. Listening to what you guys are saying here, I mean, when I look at the long-term target of kind of low to mid single-digit growth, and in '17 through '19, you were nicely in the mid-single digits there. How do we think about low to mid-single in the context of kind of a mid-cycle type of growth rate? Because obviously, you'll have cycles and that may drag the number down, but it just seems like there's a lot in the pipe here to make you look a lot more like you did in '17 through '19 than you did '14 through '16. I mean am I looking at that the right way as kind of the kind of aspirational target here?

Oh, absolutely. I mean there's no question. I think that's what we've shown, as we've shown through '17 through '19 what the new Honeywell looks like. But I think we still should have shown something in 2020. And I think we've shown one thing that's Honeywell of old, the other thing that's Honeywell of new. The Honeywell of old is that we did a good job executing and dealing with the cards that market has dealt us. We protected our margins, protected our return for shareholders and delivered even in a very, very challenged environment. And the Honeywell of new is that rather than sort of crying in our soup and worrying about market conditions, we innovated and brought a series of these healthy offerings, the health care packagings, a whole new play in PP&E, which is going to be very, very dynamic for us. We're creating a new health care business around that. So we've not just done what we've always done very, very well, which is drive productivity. We've also driven innovation. And as we come out of this pandemic, we think we're extraordinarily well positioned for the future.

Yes. And I'm sure a little bit aerospace recovery would -- cyclically would help as well, something that certainly anchored the growth rate this year. Well, I think that's all the time I have. So I'll turn it over back to Bendza. Thanks.

Thanks, Steve. And before we close, I would give Darius an opportunity to make any closing comments.

Well, thanks, everybody. Thanks to all the shareholders and potential shareholders for joining today. What we're trying to do today is really demonstrate what our growth and value creation framework is because a lot of times, we get the questions, how do you do this? What's your value creation framework? And today, you saw that fully on display and it isn't coincidental. We are not -- I would say we're not a company that's sort of loosely managed at the top. We're a very rigor operating company that's becoming much more technology and software oriented. We're focusing on innovation, but we haven't lost our productivity and operational boots. And you're going to -- you can count on us to deliver in all economic cycles. I think sometimes people worry a little bit too much. Is this business market up? Is it down? When is it going to come back? And I think the point of today is don't worry so much about timing the market, timing the -- your entry point because whenever you entered and as you saw this over the course of the last 10 years, whenever you're entered, you're going to beat the indices in terms of performance. And I think that kind of consistency, hopefully, convinces you that we've got a model here that works, and it's going to continue to work in the future. And thank you all for joining.

Great. Thank you, everyone. We hope you will tune in for our next leadership webcast, which we will announce at a later date. We'll now conclude the webcast. Thank you.