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

Good afternoon, everyone, again. This is Andy Kaplowitz, Global Head of U.S. Industrials in -- for Citigroup, and we're really excited to have Greg Lewis with us from Honeywell. Honeywell has been and continues to be one of our top picks. We think there's a lot of growth potential here, great margin potential. Greg, I think we're going to just launch right into fireside chat questions.

[Operator Instructions] So Greg, maybe I'll just start with a bit of a softball. Obviously, you just reported earnings. And so maybe talk about some of the things that we see out there with -- one of the themes of the conference has been supply chain constraints. Obviously, people ask us about price versus cost. But the environment does appear to be getting better. So there's noise out there. I know you guys started conservatively with your guidance for Q1. But maybe characterize the overall growth environment for Honeywell as we go into '21?

Sure. Well, first of all, Andy, just want to say thank you for having us. It's always a pleasure to get to talk to you in this kind of a setting so I appreciate you having us participate today. We're optimistic. I mean, I think 2020 was obviously a really difficult year; turned out to be an exceptional one for other reasons for us. But we're very much looking forward to the pivot towards growth. And we did both last year, as we've talked about in our earnings calls, we did both the liquidity as well as cost as well as growth kind of actions to keep ourselves ready for this year. And I think across the portfolio, I'm optimistic. I think it's really more a matter of timing of as and when the growth will kick in for the various parts of the portfolio. SPS, with all of the focus around e-commerce, came out strong in the back half of last year, and I expect that to continue to be a strength for us as we open up here in 2021. I think HBT, as much as the non-res construction market is viewed maybe less positively, I think broadly speaking, there is a lot of opportunity for Vimal in that business, particularly with all of the health and safety kind of needs that people are going to want to address in order for people to go back to school, to go back to work, to get back into airports and other transportation types of areas. So -- and then people are going to return to flying. I can't wait to get on an airplane again. I mean, I personally know I have personal pent-up demand for wanting to go, get out of town and get on an airplane and go somewhere. and I'm sure that, that's true for a large portion of the population. So to me, it's really just more of a matter of when vaccinations -- when that rollout gets to be at a place where people feel confident enough to start traveling actively again. And we obviously think the leisure travel will probably come back first before the business travel does, and domestic before international, but it will happen. So that's just more of a -- and we talked about that being kind of a gradual recovery into the second half of the year. And then last but not least with PMT, they're going to have some really good things going on in the Advanced Materials portfolio. And then it's -- on the oil and gas side, I mean, that's going to be also, again, probably more of a second-half event, particularly with UOP. But so I guess, broad strokes, feel really good about what we're heading into in terms of an up cycle here, starting here in 2021.

So Greg, I want to get back to the individual segments in a minute, but maybe I'll ask you a bigger picture question in the sense that you talked at your last Investor Day about decreasing manufacturing square footage, 9% in 2018, you have supply chain transformation ongoing, digital ongoing. So these are big programs, right? And I feel like sometimes they get lost in the bigger sort of COVID takeout. So maybe update us on where you are with these programs because I think it's part of the transformational process here at Honeywell.

Yes, yes. We're a constant-transformation organization. We're always trying to change and get better, as you know. And I would say to you that both the supply chain transformation and the digital transformation are probably midway through their process. If I take digital, to begin with, we've probably been on this road for about 4 years now. And at the end of 2021, we'll be down to our 10 ERP target. We hit 23 at the end of '20. So we've gone from 147 all the way down to 23 on our way to 10. You can do a lot with that. We talked about the fact that some of that simplification is then being able to integrate with other platforms that we've stood up now around ERP, which we stood up 18 different platforms now across the various functions. So now -- we talk about stitching together a coherent IT architecture, we're doing it. And now we're building our own data platform, which again, it's leveraging our capabilities in Forge as well. So even Connected Enterprise kind of gets turned on our own business to create value. And so on the digital side, we're about done with the basics around the foundational platforms, and now we're really starting to accelerate the value capture from the use of all the data that we're getting and building our data lake around. So that's kind of digital, so I think now you're going to see a lot of acceleration. Investment is going to shift from building platforms to putting into the data elements. On the supply chain, Torsten is probably 2 years into his overall simplification road map. And again, I would say he's probably about halfway through what he's trying to accomplish. And now we're pivoting towards more investment in automation. And he's going to continue down the road. We're not going to highlight specifics around footprint and so on. But he's going to continue down that simplification path, and we're probably about halfway through that journey. We don't highlight, this is worth X and that is worth Y and this is worth Z, and so therefore, kind of build your model. And that's partly on purpose, but it helps us gain a lot of confidence in returning back to our long-term financial framework, which, as you know, is 3% to 5% organic growth, 50 -- roughly 30 to 50 basis points of margin expansion. And we think we're going to be back on that train now starting in 2021. And as we guided for '21, we think the margin expansion is going to be 30 to 70 basis points, which is beyond that, given the leverage that we hope to get out of growth as well as all the work that we did do in our cost management. So those 2 things are part and parcel of the cost programs that we did in 2020. But obviously, given the rash downturn in revenues, we went deeper than that as we've talked about before.

Yes, Greg, that's really helpful. And as Torsten's gotten into sort of the supply chain, I mean, again, it's -- I'd be remiss if I didn't mention that. Again, a lot of our other companies are talking about supply chain issues. It feels like Honeywell is able to navigate that better. Would you say that, and that gives you more confidence in that sort of longer-term 30 to 50 basis points and 30 to 70 basis points this year?

Yes. I think we've -- Torsten and his team have done a great job navigating the environment for sure. We've kept predominantly all of our supply chain operations up and running throughout the COVID crisis. He put in some very specific, I'll call it, tactical operation center-type approaches during the course of the pandemic to make sure that we were monitoring all of our global footprint and what their operations levels were and so forth. I mean, we have had to face challenges. We've had absenteeism, particularly in hotspots with COVID. But we've managed them well. And so yes, I think Torsten and that team have done a really good job of managing that overall. Simplifying the portfolio helps. Again, putting some of these digital tools in place has helped so that we have the visibility to how we're operating and performing throughout the regions. And yes, it gives me a ton of confidence for our ability to deliver prospectively both from a productivity, a scale and a customer service perspective. I mean, that's one of the other areas that we don't talk about a lot but continued focus on delivering to our customers because ultimately, that's one of the key things that we need to do to differentiate ourselves.

Right. And Greg, like I know we'll talk about PMT a little bit more later, but -- because inflation helps that segment to a certain extent. But overall, given sort of what Torsten and Honeywell are overall doing, you guys feel good about price versus cost even as we're seeing commodity at recent highs. Is that fair?

Yes. And we are seeing it, too. I mean, ethylene prices have gone up. You've seen that. That's a key component into some of the PMT businesses. We're certainly seeing semiconductor costs going up and some supply shortages in that area, which we're managing through. But again, if you think about the Honeywell operating system, these things are not surprises to us. I mean, we're monitoring them all along. We have a very mature direct material productivity portfolio approach to managing a pipeline around that. We have -- we do a lot of engineering of componentry to try to continuously redesign our products as well. And then we have a very strong commercial excellence program, which focuses on pricing. So none of these things happen by accident. And the fact that we have those operating systems and tactics constantly moving keeps us in front of those situations. But we are definitely seeing some inflation. But we're going to be able to manage it in the context of the guidance that we share.

Great. And then I wanted to ask you about another big topic that has come up at this conference and really even last year too, energy transition. So when we think about sort of Honeywell's positioning in energy transition, I think last earnings call, you guys talked about the launch of your Sustainable Technology Solutions business under UOP. Maybe you can give us more perspective on when you think those kind of businesses will be impactful for Honeywell in terms of revenue and earnings?

Yes. Well, again, those are some of our BTIs, which we talk about as trying to deliver things that are $100 million in revenue or more. And you're right, the Sustainability Solutions and UOP is one of those things. Those all have different time lines associated with them. But we feel very confident that with the energy -- basically, the macro in terms of energy and sustainability, we're going to have plenty of ways to participate in that. Whether it is with the Sustainability Solutions, thinking about the recycling channel, whether it's with what we're doing in flooring products with our HFOs, whether it's what we're doing with buildings and being able to make buildings less energy -- less of an energy hog. I think we've got plenty of ways for Honeywell to participate in that cycle. And I think it's a nice tailwind for us more broadly.

And then maybe somewhat related but there are several Honeywell businesses that are enjoying a tailwind from the pandemic, right? You talk about industrial safety, Warehouse Automation. And the question I often get is, well, how much is this, I hesitate to say one time, but that it could fade over time. And so how do you think about the potential of these businesses beyond '21? Because it does seem to me like maybe people are underselling how impactful these businesses could be over the long term.

Well, I think they are. And I really hate to paint Intelligrated as an example as a pandemic tailwind. It's accelerated, something that was already there in the e-commerce sector. That was already something that was accelerating at a fast pace, and this just put an exclamation point on it. From a PPE perspective, again, we feel very strongly that, that's going to be a long-term demand driver or else we wouldn't have invested as heavily as we did in the CapEx for that business because believe it or not, I mean, we all sat here last February and probably didn't think that this pandemic was going to come from China to the U.S. But I think with what's happened globally, people's perspectives on safety and protection are very different than they were 12 months ago. I don't think this goes away in 3 months' time. I think this is going to be something where the demand for PP&E is going to be very much sustainable. Now it won't be growing at the rates that we're growing at right this minute when you go from close to 0 to a pretty sizable business in a matter of months, that's exponential growth. But we would not have invested in the capital if we didn't think that this had a long-term future for us, and we feel really good about that.

Greg, let me ask you a follow-up there in the sense that you were asked on the last call about Intelligrated and its scalability, which I find a very interesting question in the sense that you took it from, I think, a $900 million revenue business, $2.5 billion in backlog now. At the time you bought it in '16, you said Warehouse Automation was a $20 billion market, growing 8% to 10% a year. What do you think those numbers would look like now? And what share of the market do you think Intelligrated could capture?

Yes. Yes. I mean, so we clearly think that that market size has grown maybe by a factor of 50% from the $20 billion that we highlighted previously, and it's going to continue to grow at a pretty high clip. As far as our capture of that, I would say to you, in the Warehouse Automation segment specifically, we have a very strong share and we're continuing to win. I think we talked about it being something like 8% to 10% of the growth market. We think that growth market is probably now more like 15%. And as far as scalability goes, that was part of the upside of joining Honeywell, right? We talk about that oftentimes where we take a business that we know how to deliver. Intelligrated, very much like Process Solutions and Building Solutions, we know how to make those kinds of businesses hum, and that's exactly what we're doing. We've taken some of the best practices from what Honeywell can do, and we're bringing them to Intelligrated. And as you highlighted, the growth has been tremendous. I think that that's going to be a nice grower for us for some time. Remember, the point for us is not just to capture the share that we are today. The point is also to create an aftermarket business that comes later. So we've always said we're going to get outsized growth here in the short to medium term. And then that growth rate will settle back down when we're back into more of the software and the aftermarket streams, but those are going to be at much higher profitability rates and that's what we're after. And again, that's not dissimilar to the model that we've built in places like Process Solutions.

And Greg, you were also -- again, when you announced and after, like, you've talked about building it out internationally also. So maybe update us on sort of where you are internationally in the build-out because I mean, as you know, that's a whole big market there, too, in addition to what's going on in the U.S.

Yes, sure. Again, feeling good about that, the prospects there as well. We've won some large jobs in Europe now with some of the major players. And we are beginning to have some sizable deployments in 2021 in Europe, building out our business. That was part of why we bought Transnorm a few years ago as well was to create a bit of a footprint that we can build off of, and you're going to see that in a much bigger way here in 2021. And we've started to win in Asia to some degree. Now that's a bit harder, the competition level in Asia is a bit more price sensitive. But we are smartly bidding on some jobs that we like there. So I feel like we're -- 2021 is going to be an important year for us as it relates to the execution in Europe in particular.

Great. So let me shift gears and ask you about aero in the sense that obviously, we can all see the flight hours and bookings numbers that are out there -- relatively stagnant. Like -- and we know that you started out with relatively conservative guides for the beginning of the year. What's interesting to me, obviously, is you have a sizable business jet business, which has looked like it's improved a bit. The 737 MAX is flying again. So maybe update us on, if you take all of Honeywell Aerospace, I mean, it did sequentially improve pretty nicely between Q3 and Q4. I mean, should we still expect sort of modest sequential improvement as we go forward even as flight hours right now are a little stagnant?

Yes. Well, I think that's -- as we spoke about a couple of weeks ago, Q1 maybe flattish to Q4, maybe even a little bit of a modest step back, we'll see as this develops. I mean, you guys see the same data I do. Domestic flights in China, in particular, have stepped down from their earlier levels in the later part of Q4. We talked about the fact that Q4 had both Thanksgiving and Christmas in there, which obviously creates a bit of a bump on the leisure side. And with the virus acceleration that we saw in December and January, there were some concerns about people putting more strict travel protocols in place. Thankfully, we haven't seen that in the U.S. It looks like the U.S. is not going to require testing on domestic flights, which I think will keep things to be fairly robust. But that's really why we laid out the guidance the way we did. I think Q1 is going to be flattish, maybe down a little bit, maybe up a little bit sequentially but not a big move. And it's probably going to be more towards the June, July time frame when vaccinations get to be much, much more prevalent across the U.S. in particular, that we'll start seeing maybe more of a ramp in the second half. So -- but again, we all have models. It's hard to say. The one thing we know is it's going to go up but exactly what the slope of that curve is going to look like, there's so many human dependencies around it, around how people's safety -- how they feel about their safety and their willingness to go out and travel again. So that one is a little bit hard to call. So that's really why we're positioned where we are at this moment.

That's fair. And does the MAX flying again help you at all? Or is it kind of...

It's -- right now, I mean, it's -- I would call that muted. I mean, there's a little bit of revenue uptick we'll get as they do start putting more planes, delivering more planes. But as far as the flying is concerned, I mean, it takes a little time, as you know, before things come off of warranty, which is when the aftermarket streams really kick in, in a material way. So I would say that, that's not going to be a material shift for us here in 2021.

Right. And you've talked about Defense. Defense maybe not quite as great a growth as it's been but still relatively solid. And with the new administration, have you seen sort of stability on that side? Is that the right way to think about it, decent growth?

Yes. I mean, yes, our position is -- listen, we had double-digit growth in Defense, I think, maybe 2 years in a row, so it's been pretty tepid for the last 2 years in particular. And so for it to slow down to a more modest growth rate but still be positive is what we think is going to happen. And no big signals yet out of the new administration that would change our view on that. So that's why we are where we are. I mean, it's as steady as you go, I think, type of situation at this moment. And again, we feel pretty good for what we can see here into the first half of the year so far.