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

Heather's saying we're live, Deane.

Oh, okay. Good. All right. I'm sorry. All right. Anne, I apologize for the technical issues, but it looks like we're all back live here.

Anne, could you kick us off here with describing Honeywell's ESG strategy, how it's evolved over the past couple of years, the team that's [Audio Gap] both focused on this.

Thanks, Deane. Well -- and thank you for including us today. First, let me begin by saying that Honeywell has an unwavering commitment to the principle that good business, economic growth and social responsibility go hand-in-hand. It sounds like motherhood and apple pie, but we really put a lot of rigor behind it. We believe a robust ESG framework enables our long-term success and is just the right thing to do for all our stakeholders and the communities we serve. And there's no debate about it. We just know that to be true. It's a foundational principle for us. We're committed to making the world safer and more sustainable by inventing and commercializing technologies that address some of the world's most critical challenges. And we focus on inspiring change in communities around the world by demonstrating corporate and social responsibility through our unique community involvement programs, which emphasize STEM education and inclusion and diversity and humanitarian relief. And it makes us super proud to be able to say that we're recognized as a global leader in ethics and compliance due to our strong corporate governance policies, our practices and our procedures. Our commitment to being environmentally responsible is reflected in the extensive work we do to reduce greenhouse gas emissions, increase energy efficiency, conserve water, minimize waste and drive efficiency throughout our operations worldwide. We are a 100-plus-year-old company. And so we have learned how to do this very well by necessity. We champion responsible environmental remediation projects, which deliver highly valuable assets and properties back to the communities that we work in and support. And we drive our R&D efforts to make our products safer and more sustainable. In fact, about 50% of our R&D spend currently is on our ESG-oriented products. So we put a lot of rigor, and we put financial commitment behind it. Our ESG strategy and stakeholders span our entire organization across various functions. So we do have a dedicated sustainability team led by our VP of Health, Safety, Environmental, Product Stewardship and Sustainability. And we also have teams dedicated to corporate governance, to inclusion and diversity and to community engagement. We're making great progress on our ESG initiatives. In fact, we integrated our ESG program into our Honeywell Operating System from the outset so that the rigor of our metrics and our score-keeping has the same rigor and fidelity as the other elements of our HOS program. Since we began our ESG program in 2004, we've been able to reduce our greenhouse gas intensity by 90% and improved our energy efficiency by about 70%. In 2019, we established robust, what we call 10-10-10 sustainability goals to achieve by 2024, which we closely monitor progress against and report those results out annually to our Board of Directors. More specifically, by 2024, we're driving to reduce global scope 1 and scope 2 greenhouse gas emissions intensity by an additional 10% from our already impressive 2018 levels. We'll also deploy at least 10 additional renewable energy opportunities, and we'll achieve certification to ISO 50001 energy management standards at 10 of our facilities. We recognize that these goals, while aggressive, are absolutely not the end of the story for us. We are committed to continuing to make progress on our journey year-over-year and put a lot of rigor behind that. I would say we're hardly in the early innings of our journey, given the progress that we've made, but we're also not yet in the final innings either. And so we'll continue to be devoted to making a significant difference with our programs and our technologies. I think, Deane, you've heard us talk about in some detail on our earnings calls and other forums previously about the actions Honeywell has taken in the past year to really quickly innovate to provide healthy solutions that address our own challenges as well as the new challenges being faced by our customers. The overall Honeywell sustainability portfolio, which includes technologies in all 4 of our reporting segments, is driving growth above and beyond our core markets. So let me share maybe just a couple of examples of our technologies that provide our customers with solutions to their most important safety, energy and environmental needs. So in Aerospace, we have aviation safety and sustainable aviation solutions that create more fuel-efficient and better maintained aircraft as well as safer skies and safer airports that will make all of the flying public want to get back on aircraft again. For instance, Honeywell's next-generation flight management system optimizes air traffic management by delivering improved fuel efficiency, lower direct operating costs, reduce pilot workload and improved safety. In our Building Technologies business, we have a sustainable buildings offering, including control systems for every type of building that balance energy, comfort, health and safety for the operator and the occupant. For example, our building management systems can help reduce energy consumption up to 30% by managing HVAC and lighting systems in an integrated manner. Honeywell Forge energy optimization can deliver double-digit energy savings and decrease a building's carbon footprint when added to any existing standard building management system. Honeywell has also completed approximately 6,000 guarantee in efficiency projects around the world, including upgrades at more than 150 U.S. government facilities and campuses. And combined, this work will decrease customers' energy and operating costs by an estimated $6 billion. In our SPS business, we've been hyper-focused on providing personal protective equipment for worker safety, given, of course, the COVID pandemic and sensors for critical medical applications. Each year, more than 0.5 billion workers worldwide rely on our PPE, our advanced gas detectors, our scanning and mobility devices, our sensors and our automated material handling equipment to keep them and their workplaces operating safely, effectively and more productively. A good example of that is our advanced fixed portable and personal gas detectors, which help warn workers about potentially dangerous situations by sensing or ultrasonically hearing the gas leaks and giving that appropriate warning from a safety perspective. Another example is our connected distribution center and smart logistics solutions, which help shorten supply times. They enable more efficient e-commerce, and they optimize final delivery routes. And lastly, in PMT, a key focus has been on our sustainable refrigerants and aerosols, on eco-fining, and plant and personal safety. And I know Ben and George are ready to talk more about those specific offerings. And so I'll leave it there by way of backdrop. So thanks.

That's a great overview Anne. A lot of specifics there. Maybe we hand it over to George here, take us through the Advanced Materials portfolio and what you're doing from a sustainability standpoint. George?

Deane, thank you so much, and thanks again for the opportunity to speak about what we're doing in Honeywell Advanced Materials to make the world safer and more sustainable. And that's really what our business is in its totality. And so before talking specifically about sustainability, just a little context. We're developing innovations today that are addressing some of the largest macro trends that are opportunities in the world today. For example, an aging population that needs better patient compliance, safer drug, the supply chain and more advanced therapies. We're providing solutions with advanced health care packaging solutions and high-purity chemistry solutions that are addressing these tough challenges. Secondly, with rapid growth in the consumption of data and cloud computing, we're providing leading solutions to help address the large need for heat management in these high computing power applications with our advanced metals and high-purity chemistry solutions that are making the semiconductor industry more productive and more effective. And then of course, lastly, in context of all of this, is what we're doing on sustainability, which is with our Solstice low global warming offerings from refrigerants, [ foam ] blowing agents and propellants that go into a range of applications from auto, home, commercial air conditioning applications to supermarket refrigeration in the cold chain to personal care applications, and the list goes on. And these are many applications which we've developed that are in the market today. Combined with all these solutions, our sustainable solutions and the other solutions I talked about for semiconductor industry and for the life sciences industry, this represents a $20 billion addressable market opportunity for us overall. And just in the last 2 years alone, we've developed new products and new offerings that have added to our addressable market opportunity of over $6 billion. So we're really focused on meeting the societal trends that are there. And we're leading this with a major focus on climate.

George, that's terrific. I appreciate the additional color on Solstice. Let's turn over to Ben. Talk about the Sustainable Technologies portfolio.

Thanks, Deane. Absolutely. So for more in a century, sustainability has been part of our oil and gas business. Our technologies, they focused on making the most of every molecule, reducing waste and improving energy efficiency. We've applied this to transportation fuels, petrochemical productions, but you may not know also biodegradable detergents and numerous medical applications. And as part of the effort to double down there and really accelerate it, we've created a Sustainable Technology Solutions business. It really harnesses and leverages the years of R&D experience in UOP, really just laser-focused on developing, commercializing and ultimately accelerating sustainable technologies. And let me give you a few examples. We're developing energy storage solutions that leverage our expertise in membrane technology, which is critical to new battery development. And also on the management side, we're using our knowledge of HPS controls and automation to manage those renewable energy sources. So that's [ really ] key. Very exciting space is we're focused on the conversion of waste plastics into economically viable feedstocks, building on our core competencies in petrochemicals. And with the widespread commercialization of hydrogen as energy stores, we really have the expertise in purification to grow that business. And that's not all. We're not stopping there. We have a wide expertise in chemical engineering, material science and digitization, and we'll continue to grow here. We'll continue to look for new areas.

Ben, just take us through -- because Anne had mentioned the eco-fining opportunity, advances you've made in green diesel and green jet fuel. Would love to hear some more specifics about those.

Yes, absolutely. So this is one of the areas, kind of despite the recessionary pressures, the pressures we saw from COVID on transportation fuels, this is an area where demand's increased and activities picked up. Eco-fining can be built from the ground up, a kind of greenfield application or we can re-purpose an existing hydro-processing unit. And we offer 2 types of the technology: a 2-stage solution that can produce green jet and green diesel or a single-stage solution that's really aimed at diesel fuel. And it's ideal for those refiners that have existing access that quickly want to get into biofuels, and we offer that single-stage technology. Both can accept recovered vegetable oils or nonfood crops to produce these fuel. But our 2-stage solution can even use waste animal [ talous ] or waste animal fats. So we see that very exciting. The only limitation here is the feedstock availability, but we see the potential to [ circling ] over 5% of the oil currently use or produce these transportation fuels. And this is a very exciting market. This market is growing 17% to 20% up to 2030. So really like the eco-fining market.

Terrific. Let's get to George. Talk about some more about the Solstice offerings and just broadly what you're doing in R&D investments that you're particularly excited about?

Yes, Deane, thank you. We're really excited about our portfolio overall. I think to talk about what we're doing and expand on it and laser focused and kind of provide a finer resolution on what we've already done today in Solstice. So the range of applications that I've mentioned in my opening remarks cover a $10 billion addressable market that we're addressing today. And I'll give you a couple of examples of some success that we've already had in the marketplace. We're the only thermal fluid provider in the world that has 3 HFOs, hydrofluorolefin offerings have replaced the old technology, hydrofluorocarbons, HFCs. These HFOs have a, on average, a climate impact of 1,000x less than the existing HFC offerings in the market today, truly impactful. And when we design solutions with our 3 fluids, which we're the only one in the world that has 3 HFO offerings, it gives us a palette to create, blend and develop applications that solve for 3 problems: energy efficiency, safety and low [ GMVP ]. Take a look at our Solstice liquid blowing agent as an example. That's been designed to be a propellant for foam insulation that goes into appliances, and it does 2 things: one, it reduces the climate impact of appliances by replacing the HFC that exists by over 99.9%; and two, it actually increases the energy efficiency of refrigerators by 4%. Second example, Solstice N40. This is a product we've designed to go into supermarket refrigeration systems. This reduces the climate impact compared to the HFC product it replaces by over 70%. And it's increasing the energy efficiency of supermarkets by 10%. So these are really impactful solutions that are having a wide range of impact on both sustainability, but also the bottom line impact of the companies and the users. And so when you look at the wide-scale adoption of our offerings today, it has had the climate impact equivalent of reducing CO2 emissions by over 270 million metric tons. To put that in a real-world perspective, that's like the equivalent of removing 45 million cars on the road today, impactful. So what are we doing to go beyond that? Let me give you 2 examples. One is meter dose inhalers, the puffers. Either you or you have a loved one or a family member who has asthma that use these puffers. Pharmaceutical companies are using HFC propellant in that application. They've looked at our Solstice offering as a bonafide replacement to that. And because of that opportunity, it -- and that replacement reduces the climate impact by over 1,000x, pharmaceutical companies see this as an opportunity for them to reduce their environmental footprint by over 20% to 40%. Because of this opportunity, we're in active dialogue and working with many pharma companies today. And while I can't mention the names, I'm highly confident that we'll be announcing contracts that will be delivering over $1 billion of revenue potential over the next decade. Let me give you one more example of how we're expanding the portfolio. It's in the EU green deal. You've heard about that, where the EU is committed to spend almost $400 billion in new technologies to phase out older carbon-based technologies. In fact, many member states today are phasing out the use of oil or gas as a heating source. And what that means is they have to go to an alternative heating systems like heat pumps. That's a whole new application that requires thermal fluids to make heat pumps more effective. In fact, we're using heat pumps today outside your homes. You have an air conditioner in North America, and it has both the heating and cooling mode. That's a heat pump. So they're used. But now what EU wants to do in the European Union is they want to actually use that not only for residential but for district heating. And so we see this as a huge opportunity to design our fluids, and we're actually going to market very shortly with new applications in this. And these 2 alone represent a marketable expansion for us of over $2 billion.

That's terrific. Ben, I'd like to stay with the R&D theme here. Can you take us through your R&D initiatives that you're particularly excited about? And comment on the idea that Honeywell's R&D spending, half of it is targeted on products that have an environmental or social outcome benefit for your customers. Ben?