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

Good morning again, everyone. We are very delighted to have Honeywell with us today on the second day of our 8th Annual Crédit Suisse Industrial Conference. I'm joined by Torsten Pilz, who is the Honeywell's Chief of Supply Chain. So thank you for being here with us. Torsten has a couple of slides he's going to go through in the beginning, and then we'll open it up for Q&A. And so with that, let me hand it over to Torsten.

Yes. Thank you. Thank you, John. Yes. I think I'm going to spend like 5 to 10 minutes, just give you a little bit of the lay of the land and update you on recent milestones and what we've done, and then I think we can go into a chat session. So just briefly, one of the things we are actually really proud of is just a couple of weeks -- 2, 3 weeks ago we received the Supply Chain Resiliency Award for our ability to maintain operations through 2020, and to support also a huge amount of PPE manufacturing. And that's been a great pleasure and a good external recognition for me personally, but also for our teams. So we are proud of that resiliency award. And we also launched this year, I think that's one of the bigger things that we've done, the Honeywell Digital operations platform. So utilizing Honeywell Forge, and I think most of you have heard about this, but we're eating our own dog food and using our own technology to transform our operations. Let me remind you, and we can progress to the next slide real quick. We -- about 2 years ago, we embarked on what we call a supply chain transformation. And those are the 5 pillars of our transformation. So we are focusing day in and day out on really streamlining and simplifying our supply chain. That has footprint topics around it. This has process improvements around this. So that's one of our main pillars. And I think we made great progress so far. The next one is integrated planning. So we are reengineering this important process for the entire company, and we already deployed it to about 1/4 of our company and in the process of deploying it to the rest over the next couple of quarters. Procurement has been on the forefront and it was super important this year to survive and to actually thrive and create even productivity, but also keep our operations running to really focus on world-class procurement. When I mentioned Honeywell Forge and the Digital operations platform, this is basically the umbrella of our efforts to really go to the next level when it comes to data analytics and a real digital supply chain. And we can chat about this later as well. But the entire transformation would not have been possible without really focusing on our talent. So we created a lot of things around talent management from a supply chain academy. We simplified our organization, put a lot of training when it comes to leadership, especially on the middle layer, site management, logistics leaders, finance leaders, and we put a lot of effort into this. And so that's part of it. The reason why we are focusing so much on our talent capability excellence is that without this, transformation is actually not really possible. So it's not just creating new processes and changing the structure. We also need an organization that actually can live in this new world and embraces it and pushes it forward. When it comes to some results -- next one, please. So we focused pretty much this year on these 5 pillars, but we added a couple of new things to it, put a special emphasis on this. And one is to really focus more and more on a regional supply chain. We already had a very regional supply chain setup. So we never had a really very, very global supply chain. And that's helped us tremendously this year. But we really doubled down on creating regional supply chains, retail manufacturing hub, regional distribution. We also made a decision to really double down on automation, and this is automation inside and outside of our factories. So automation inside, not only factories, but also warehouse automation. We are in the business of manufacturing warehouse automation technology, so that really helped us a lot. And I already mentioned digital supply chain based on Forge. As Forge matured over the last couple of quarters, we took full advantage of this and really utilizing our own operations. So at the end of the day, we reduced our footprint quite significantly. I would say the investment in automation, that's pure automation, is around $23 million and we expect to increase this even further in the next couple of years. And so far, we are well on track of delivering to our promises. We looked at about $0.7 billion in material and productivity since we started the transformation, so -- and I think we are well on track to accomplish the $1 billion that we set out at the last Investor Day in 2019. And I already talked about the digital planning systems, 25% of the company right now. And I think we expect to get this quickly to almost the entire company in the next couple of quarters. Next one, please, and that's probably the last one. Just as an example, we are -- since we are not only trying to digitize our own factories but we're also a supplier and manufacturer of IoT sensors, that's a lot of technology, we really took the, what you could call, the smart factory to the next level and used to -- trying to really accomplish breakthrough things, not only with very brand-new processes but also with very mature processes, where over many decades, certain years, certain output numbers have been accomplished. And using new technology, and this is part of -- you -- we used this in one of our [indiscernible] a lot of IoT sensors, a lot of analytics capabilities. Our operations platform was actually a huge data hub. We can access basically the entire operations data of the company agnostic to analytics engine. And that gives us the opportunity to really push the limits of what's possible from a production output perspective. And in this particular case, it's been a huge success, about 1,000 bps improvement in yield. And that's in a sold-out situation. This is when you need every gram and every piece that you can manufacture. So that helps us. And I think, going forward, this is where we're really going to double down on. So I think I briefly gave you a snapshot on where we are, what we've been up to, and I think we are well on our way. We sailed relatively stable and with good operational execution through 2020 so far, and we are very excited about 2021. With that, I would just stop here and give it to John.

Great. Thank you for that overview. Maybe before I go into kind of some of the questions I had prepared, that 25% number that you referenced in your slides today, I think you said you have aspirations to cover the majority of sales, but is there a time line associated with that?

Yes. Yes, I think we will see, by the end of 2021, a number north of 50%. And then probably the year after, we'll be in the 80% to 95% range. So I think that's -- right now, we roll through the company. We've proven out the concept and the results have been excellent so far, and now it's just execution. We have developed the so-called global design model for this already. And so it's now -- we're just going through the regions and going through the ERP systems. I think that's the plan for the next, I would say, 18 months, something like that.

Great. Obviously, realizing you've been with Honeywell now a couple of years, but I'd love to get your perspective, when you first joined, what was something that you saw very unique to Honeywell? And then maybe since you've been in your role, what's something that you've seen change?

Well, one of the things that I've inherited is I was leading a supply chain, I'm still leading the supply chain of a company that also develops and sells supply chain products and services. So for us, that gives me the opportunity that I can play with the toys first thing. And so that's very exciting for me, and this also helps us really from a total company perspective, because it's a very close feedback. We're working very well together with our colleagues in HCE and the other divisions and SPGs. And so trying things out first is a really good thing for us, and it really helps us being innovative. What -- so we've created a lot of IoT sensors and we've always done this. But what we've added to this, and that's maybe to your second question, to really put these all together, including the appropriate data infrastructure, the appropriate analytics engine behind that to really utilize this. I mean it used to be third parties who would do this for you, but then I think we developed the capability to really do this in-house. And not only be a technology company when it comes to selling products and services, but also operating like a technology company.

Great. And then supply chain has been incredibly topical this year. Just curious, as you look around the world, are you seeing any kind of incremental restrictions being put in place by governments as we're continuing to live through the pandemic? And then maybe any kind of comment on your own operations?

Yes. I mean our own operations, we are up and running completely, and we always have been through the entire year of 2020. On average, we lost probably 1 production day per factory this year due to government restriction or something. So I think we managed this pretty well. So we've really established and we utilized our own -- I mean we were already on the way to establish a really strong governance and then operation system in the company and it had helped us tremendously this year. I think we are pretty proud to do this. So I think, very early on, we organized a really strong cross-functional team. And then encompassed basically not only operations, not only the supply chain team, but also government relations, our medical capacities and HR and our safety and environmental teams. And all together I think we did this over 200-plus days on a daily basis around the globe, following the sun and managed this pretty well. And I think all of the troubles and problems, we were very successful in resolving them. Basically, all of them almost within 24 hours. That's why we almost lost no capacity this year.

Yes. That's a pretty impressive metric to hear given everything in 2020. I guess sticking with the themes of some of the things we've had to navigate, right, this year, both tariffs and COVID, how have those either accelerated or kind of changed the time line you've been operating under?

Yes. I think I touched on this already a little bit. We always had an automation program and a digital program. But I think the experience this year really showed us that we had to accelerate this, that this was something we really made a decision to double down on this. And hence we really focused and reemphasized this and create -- we created an automation COE. We standardized a lot of things around products and services to automate our own factories. And I think that really opened our eyes that it is not something you can wait and sit on. This is something that has to happen now. And we acted pretty quickly on that. We have so much data. We have already so much data around the supply chain, and we already have built or started building an infrastructure around this. This year, COVID, this has really shown how valuable this information is in a crisis.

Yes. And I guess -- so maybe that's the next question, and this might be a little bit of a 2-parter, but you're already on this supply chain journey, right, ahead of COVID. We're seeing a lot of companies scramble quickly to react, right, to COVID who weren't on that journey beforehand. You alluded to it a little bit in your prepared remarks about how to help other manufacturers accelerate their journey. You have solutions that you can sell into them. I don't know, you might have certain relationships where you have such a tight partnership. You might be pushing some of these tools down into your kind of Tier 1, Tier 2 suppliers that are selling product into you. Can you help us understand how you can get them up and running as fast to keep up with where your organization is today?

Yes. Yes, of course. I mean you're right. The playbook hasn't really changed this year. I mean we've discussed our supply chain transformation in May 2019, and we haven't changed that playbook. We have a strategy, and we stick to the strategy and we execute. This year has shown us that there are aspects of it where we really had to accelerate, and I talked about digitization, automation is one thing. But here is also the -- how do we help our, for instance, suppliers to cope with this. If you talk about digitization or automation, it doesn't only mean automation of production processes. It also means automation of processes outside of factories, procurement processes, planning process. We already alluded to it. And now if you connect this with your outside world, meaning your suppliers and your customers, this is where the real value is being created. And this is where transparency, the real-time access to data is invaluable. And this is what actually helped us also during the COVID crisis because we were -- very soon, we were able to see that suppliers were struggling because they weren't able to cope with government mandates so very fast. So we stepped in and helped them, provided guidance and solutions that we've already developed for ourselves and helped them keep operating.

And then I guess, maybe that leads to the next question. So when we look forward, right, you have strong visibility into this PPE ramp and you talked about that earlier. I think there's also record backlog at Intelligrated, right, that you need to execute on from a supply chain perspective. How do you go about setting up the supply chain and the processes to make sure that, that goes seamless and it continues to be seamless?

Yes. Yes. Perfect. So look, these things -- and you're right, the growth rates are extraordinary in both of these businesses. And it has actually 3 different aspects. One is production capacity itself. And that's production capacity in your own 4 walls but also production capacity in your supply base. And we've done a lot of work doing this. We increased our production capacity. We even set up new factories, complete factories to just build both PPE equipment but also increase the capacity of our Intelligrated teams. That is one thing. The other thing is what I just talked about, the reengineering of planning processes because if you have visibility, now you need to connect this demand with your supply, and it's your internal supply and your supply-based supply. And one of our businesses that was part of our rollout of our new digital planning is our SIoT business. This is the business that produces all these sensors and electronics. So those were -- these guys are on the forefront of this. And last one is you have to scale the teams and the capability of the teams. It's all about leadership at scale. It's all about having teams that used to be at a certain size and now all of a sudden they are 3x as big. So that requires a lot of different leadership capabilities and training and support. And here our talent excellence or our supply chain academy in all of our efforts to increase our capabilities in the supply chain teams, they really came to the table. And I have to say, we also simplified our organization in the last 2 years. We -- and simplifying just means that we really doubled down on avoiding a very hierarchical and very deep organization. We really flattened our organization. And in these situations where all of a sudden demand explodes, it's really helpful to have a relatively flat organization because then you are faster in how you react to things. You're way more agile than in a very traditional and very, let's say, I would say, old-school organization.

And then maybe a follow-up on to that is one end market we get asked a lot around supply chain is aerospace. Obviously, it's a very complex supply chain, stretches globally for a lot of your customers. How are you preparing the supply chain to be able to react to where the current demand is today? And depending on how this vaccine deployment works, it could be a quick snapback to demand potentially, right? We don't know what it's going to actually look like. There's a lot of different scenarios to plan for. So how are you, as an organization, with the supply chain planning for those different scenarios?

Well, you're right. We don't know. Right now, it's speculation. But we do know that at some point it will come back. So what we've done, we've actually done 2 things. I think your remarks were spot on. The aerospace supply chains are traditionally relatively complex. They're usually very long and the supply base of this is traditional. It's not like the most advanced and technologically kind of at the forefront supply base. So we've done 2 things: a, we've broadened our supply base. That means we've really doubled down on creating supply alternatives. This is from a -- and it was born from a risk mitigation standpoint since we didn't know if at some point some suppliers would start to struggle or whatever was going to happen. So we really doubled down on this one. And the other one was to emphasize our cycle times. So we went through our manufacturing cycle times and we found that we have opportunity to really shorten our cycle times. Now if you do both, you have a more resilient supply base and you have a shortened cycle time, that gives you the opportunity to react pretty quickly if you have to. So right now, and since there's a lot of ambiguity when it will come back, but I think we prepared the team pretty well to be able to react very fast if we see signs of improvement. We also have some leading indicators, flight hours. We watch this all the time, and we -- I think we will have a pretty good idea of when we think it's coming back significantly.

Great. And then, I guess a couple of days ago, right, when Darius was presenting, you got a shout-out, your organization, ISC. Can you remind us and maybe help us better understand the impact -- the financial impact, right, from a margin perspective and from a free cash flow perspective, the commitment that the supply chain organization has made to Honeywell?

Yes. I mean, actually, 2020 was not so much different than any other year. I mean we helped by making progress from a cost perspective. I think we delivered outstanding productivity this year, but also from a free cash flow perspective. And free cash flow for us is to manage our inventory, for instance. It's been actually, I think, for this year, I think we made pretty good progress when it comes to inventory management, also helped by our digital planning processes because that's a fundamental enabler to be -- for you to manage this effectively.

Got you. And then another big topic through the industrial community is kind of ESG. There's a lot of different ways to tackle thinking around ESG. But as I think about supply chain, you talked a little bit about it earlier, right, the avoidance of waste, the ability to recycle. Can you maybe talk a little bit about how the supply chain efforts align with some of the ESG initiatives that Honeywell has been talking about?

Yes, absolutely. Look, we have HOS now for many years in the company. And the fundamental principle of our Honeywell Operating System, HOS, is to drive sustainable improvements. And the elimination of waste in manufacturing and logistics is just one aspect of it. So since HOS is really a lean-based manufacturing system, it really -- it is inherent in how we operate to really reduce waste, energy consumptions, things like that. But we have -- so that's one aspect. On the other side, we're also in the business of selling products that help other companies doing this. If you look at our Building Technology business, it's all about energy efficiency, energy management. So we use these types of technologies to really use them in our own 4 walls, putting solar panels on the roof, managing peak electricity. And there's a lot of potential still for us. But I think we are really -- it is part of our DNA, and we're in a good way to doing this, thanks to HOS that we have, thanks to our products that we produce in-house. And right now this is for us at the forefront. But it's not really new. It's not a new concept that we had to develop. We already have the foundations. But 2020 was a great year because we had a lot of new products that we could use. And I think with all the digital integration of operations, it really gives you an additional lever to pull, an additional way to even address more and more topics here. And in operations supply chain, ESG, less energy, less waste is also very cost effective. So for us it is not something we have to do, it's something we want to do, not only because it's the right thing to do but it's also the right thing for the company because it just helps us save cost.

Great. And then a couple of times you alluded to automation investments. I think you've also talked about some robotic investments you've been making. Can you just unpackage that a little bit for us that might not be as familiar with what those investments are and how you see them? Do you continue to make incremental investments around those technologies?

Yes. So look, we have always -- we always had capital investment projects to automate certain processes. But this year we took an even more -- an even bolder approach. And what we've done is we said, let's focus on really deep automation in certain areas rather than going super broad across the entire company. So we identified is was a subset of factories where we know if we automate them, the return will be really, really good for us. But we really wanted to not just incrementally automate them, but really wanted to do 50% to 80% of all the value creation in these factories needs to be automated. And so we defined a subset of factories and we are in the process of deploying all of this. And -- but in order to do this, you just can't say, I want to automate this. We also had to create an infrastructure inside of our own organization, meaning people who know how to do this. A whole program, we set up a whole program that first started to standardize what kind of automation technology are we talking about? What kind of controls? What kind of warehouse automation are we talking about? And the other topic is we have -- we are a company that's been in the automation technology business for a long time. We sell automation technology for factories, for warehouses. So we also have quite a good understanding of what it takes to do this effectively and how to do this. So in this area, it's very similar to the digital approach and operations. We can -- we already have capability in the company that we can leverage and pull together. And that gives us the opportunity to react very, very quickly on these topics.

Then you also talked about, and we've heard this consistently from Honeywell, the importance of talent development. Maybe you could talk a little bit about how you're doing that within your organization to make sure as you do this shift, right, that you have the right people to be able to drive the change.

Right. I think a transformation, in particular a supply chain transformation, will not be successful if you do not take care of your organization and the capability and the talent. So what we've done is that we kind of -- we created a framework around what do we want to see from a skill perspective, what is the technical capability, for instance, but also from a leadership perspective. So both areas are important for us. And then we identified certain groups where we wanted to really drive the change in a very particular way. And I'll give you an example, if you look at site leaders, people who run a manufacturing facility, those people are really pivotal roles for us because they represent the company towards a large workforce, but at the same time they're responsible for driving the change that we want to see in our manufacturing assets. So this is one group that has, I would say, special treatment in terms of capability training, leadership training, but also standardization of how do we want to measure success. How do we want to do this? What do we want to see? How do you set up a budget in your factory? How do you do talent management within your factory? How do you do all of these things? And how do you plan and operate this? So I think we really created a lot of tools, processes and support for this group, but also other groups, in order to drive this change within into the organization. It's not enough if I'm the company change agent here, that's really irrelevant. What's important is that it really hits the floor. It really hits the shop floor. That's important for us.

Great. Well, with that, I would like to say thank you. This has been a very engaging dialogue. I appreciate your time, Torsten, and we look forward to keeping the dialogue going, and we hope that everyone stays safe.

Cool.

Excellent.

Thank you, John.

Thank you.