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

[Audio Gap] And Mark Bendza, Investor Relations. So Mark, I think you want to kick off with some remarks and then hand over to John.

Sure, Nigel. Thank you, and good afternoon, everyone. First, many thanks to you, Nigel, for the opportunity to participate in this year's conference. We certainly welcome the engagement. And before I turn it over to John Waldron, I'd just like to quickly highlight Slide 6 of the deck that we posted on our Investor Relations website this morning. We are reaffirming our second quarter and full year 2021 financial guidance and wanted to make sure that everyone noticed that in the deck. So with that, I'll turn it over to John.

Well, thanks for having us, Nigel. It's great to see you. It's great to be with your audience today. And I know we've got a couple slides prepared, and I'll maybe briefly speak to those, and then we can get into the Q&A. And -- but before I do that, I want to just reiterate that it's really a great time for Honeywell and to be here at the company. I know the last 15, 16 months has been difficult for most people in the world. It's been a challenging period. We've come through this crisis stronger than ever. We've protected our investments while managing fixed costs. We've pivoted as our markets have changed and doubled down on innovation, which has been fun for a technologist like me. And one of the things I'm very proud of is how we've engaged in our local communities around the world to help both our employees and the people that are in our -- families and networks in our communities. And whether that's leading mass vaccination efforts like we've done here in the United States and elsewhere or supporting local businesses through our grant programs or expanding production of critical safety technology like N95 masks. We've done many things, and we're still doing many things. As you know, that there are employees around the world, people around the world still living through this crisis, in India, Brazil, Southeast Asia and elsewhere. So those folks are on my mind and in our hearts, and I encourage you to keep them in your prayers. So maybe moving forward and just talk a little bit about the business and teed up and then we can dig in, Nigel. We've started the year pretty strong here at SPS. We're a very complex business, as you can see from the first chart. If you move to the next chart, you'll see kind of the composition of the business in our 4 reported elements here on the right-hand side: Warehouse, Workflow Solutions; Safety Solutions; Productivity Solutions; and our Advanced Sensing Technology business. We delivered 47% growth in the first quarter, a pretty strong quarter to start the year. Orders are strong. Backlog has started strong. And all of our segments are participating. And I think what that really speaks to is the markets that we're a part of. And I'll talk a little bit about those macro trends here in a moment, but you can see we try to characterize that on the right-hand bottom graph there in terms of those trends driving the growth in our segments. And all of our businesses are performing well in the first quarter of the year. And all of our markets are really showing strength. And so if you go to the next page, I'll talk about the trends that we're excited about in those end markets because I think it really speaks to how we're positioning the portfolio at SPS as a part of the overall Honeywell corporate portfolio. There are really 3 things, 3 big wins in the sale of SPS. The first is e-commerce and consumer buying behavior. We're all consumers of online delivery for the most part. And whether it's online, deliver to home, online, pick up on store, retail is changing. And we make the automation technologies, we make the new workflow technologies and the new retail technologies that make that all possible here at SPS. And so we're expecting that growth to continue through this pandemic. The retailer road maps that we've talked to are accelerating. They're moving in their capital plans, their automation plans. That's big trend number one. Big trend number two is in the middle. This pandemic is really thrust into the 4 -- the importance of health care technology, whether that's the availability of protective equipment or the availability of monitoring equipment or treatment technologies. We make technologies that go into critical care all over the world. And our -- for example, our advanced sensing technology business puts its sensor technologies into ventilators, oxygenators, things like dialysis machines and CPAP machines. We really make the fundamental technologies and the building blocks that make next-generation health care possible. And as those modalities shift more toward home care and remote monitoring, we're well positioned to take advantage of those growth trends. Similarly, whether it's in the hospital or outpatient, workflow automation is going to become more and more important. Our Productivity Solutions business is really well placed in this part of the health care market and the focus that, that is being placed on in many of the markets that we serve around the world. So health care is the trend -- the second trend that's really driving growth in the business. The third is another fun and exciting one to talk about, which is this emerging and evolving energy ecosystem. We used to talk about this as oil and gas. And our investors would largely think about the PMT part of the portfolio as being driven by the trends in the oil and gas industry. While Honeywell as a company is now finding itself in the midst of this evolving energy ecosystem, the shift is more toward electrification, the shift toward monitoring, managing and really lowering greenhouse gas emissions. Our businesses like our gas detection business, our electrical safety business are turning into businesses that serve these new and evolving elements of the energy ecosystem. And of course, we've still got great technology and a terrific presence in the fundamental gas detection as well. But we're very excited about where the energy ecosystem is headed and how that's going to lead to growth in our portfolio. Similarly, we make current sensors in our Advanced Sensing and Technology business, and all electric vehicles, electric transport devices need current sensing technology. So we're well placed in many areas of that part of the world's growth. And so I hope, Nigel, this gives you a quick backdrop of kind of how we're thinking about growth opportunities in this post-COVID world. I mean, obviously, we're still between the pre and the post in terms of COVID's influence on the world. But we're well positioned to take advantage of the growth ahead of us.

Great. Thanks, John. That's a great setup. I think when most folks think about your business, they think about warehouses and N95 masks, don't think about health care necessarily. And I thought it was interesting that 14% of your sales go into health care market. So I'm just wondering what scope is to increase that mix over time and where do you see the growth opportunities?

Yes. Well, that's a great question. So we see the investments in technology and health care really being the growth driver there. And toward the end of remote patient monitoring, remote care delivery as well as advanced care, and then similarly, we think efficiency throughout the entire health care network is going to be a bigger and bigger area of focus and importance. We hear a lot about the shortage of expertise throughout the health care world. And so that's going to put a greater emphasis on the ability to deliver care efficiently and the ability to deliver it remotely. So those are really the drivers. So what does that look like in our portfolio? Well, we're investing heavily in the next generation of sensor technologies that get embedded into diagnostic devices, patient monitoring devices and advanced care. We're investing in our productivity solutions and services business. Barcode scanning, RFID, location tracking, those are the technologies that are really going to underpin the health care environment for years to come as they focus on better care, remote care and really more efficient care. So that's just a couple examples. There's others out there, but we're very excited. It's a huge space that's really well set up for the kind of things that we do.

Great. Let me take a step back and think about the first quarter -- the quarter that just passed and the current quarter we're in now. Your growth was off-the-scale strong in 1Q. You're in the [ 40% ] range on oil and gas sales. It sounds like 2Q is kind of set up to be very similar, maybe slightly slower, but certainly in that full handle. Any changes in the way that you're thinking about 2Q? And I was thinking to hear more about supply chain pressures that you talked about. And how has that developed since we last heard from you?

Yes. Well, we don't have any significant changes relative to what was talked about on the earnings call. And the challenges that we're experiencing are largely those that we've been forecasting and talking about. And we're managing through them with daily rigor, whether it's the needed components that have to go into our products or the chemicals and resins that go into making some of the devices and products that we manufacture. Our outlook, I'd say, is consistent with the challenges and those dynamics as they're playing out. So really no changes or surprises there. And we are expecting a strong quarter.

Great. And then pretty much every company is talking about supply chain as a pressure point. Is it causing lead times to extend in your business? Or is it leading to some share shifts to the extent that some companies are able to deal with this better than others?

I think both are outcomes of that dynamic. Lead times on the inbound side are certainly extending. Lead bounds on the outbound -- lead times on the outbound side are extending as well. We're trying to be transparent with our customers about the challenges that are playing out in those constrained spaces. We're a fairly large buyer of many of those commodities and components. So we work very closely with our suppliers, and we're trying to engage at very high levels to make sure that our interests are met so that we can deliver on our commitments to our customers. So that's kind of what that daily management looks like, and it's got, I think, as Darius has communicated, generally, the full attention and weight of the company. We're operating at a very high level in this regard.

Great. And John, before we get into -- deeper into some of the sub-businesses, maybe just talk about what you describe as your top sort of 3 priorities for the next 12 -- 3, 4 months? What's top of your mind? I'm sure supply chain is up there, but what's top of your mind right now?

Yes. So clearly, execution is top of the list. And execution for us comes by way of the supply chain execution we're talking about. It also comes by way of making sure we're engaging with directly and closely with our customers and making sure that that's a daily exercise. One of the big emphases we've put throughout the company and in my business is on direct engagement with our customers. I know it sounds like a simple initiative, but it's really, really important that our customers know that they are a top priority for me as a leader, for Darius as our leader and the others around the Executive Board table and on down in the organization. So customer focus is a top priority. We're not going to take our eye off the ball of innovation. If there's one thing that we've learned and reemphasized through the course of this last 15-month period is that innovation can happen anywhere at any time and it can happen rapidly. And so we've continued to come up with great ideas. We've continued to get our teams together cross-functionally to exercise on those ideas and launch new products. That's not going to stop, and it's going to continue to be a big focus for me. Last and certainly not least is productivity and continuing to really run the tried and true Honeywell toolkit around productivity and cost management, whether it's fixed -- controlling fixed cost and fixed cost management, whether it's mix management and managing costs in our variable ledgers. That continues to be a focus for me. It's part of our weekly management exercise and our daily work. And it's really a continued focus. It's what's made us a great company.

Great. Intelligrated, I'm not sure if it's the best acquisition Honeywell has ever done, but it's got to be top 3, maybe top 2. How is the business evolving? And I'm thinking about this was pretty much a U.S.-centric business when you acquired it. To what degree is that internationalized since Honeywell ownership? And to what degree are we seeing some of the backlog strength developing outside of e-commerce and going more into traditional warehousing?

So -- well, I don't know if it goes down as the best acquisition or not, but it is probably the most fun. I mean, it is an awesome business to run. It's a fun business to be part of. And the customers we serve are really demanding. They make us a better company. They have very high expectations, and they're growing like crazy. So what I would say in terms of how the business is changing, we've owned it for 4.5 years, give or take. And the business has grown tremendously. And so operating at now the scale we are has required different management techniques, which require different tools and different visibility and different capabilities. So kind of on the internals of the business, there's a lot of transformation that has happened and is continuing to happen as the business grows. In terms of what we deliver to customers, that's also changing pretty substantially. It used to be largely just a sorting and conveying business. We have world-class technologies now in storage, in warehouse execution software, in labor management software, predictive analytics for our customers managing their employee base, remote technologies for managing a warehouse from 1,000 miles away and knowing how its assets are performing. Those are all real technologies now. Those are powered by Forge. Those are part of our portfolio that when we bought the company, they were not. So that's a very different go-to-market, a very different set of value propositions that we can deliver to customers. And then to your point on international expansion, very exciting progress that we're making. And really, we're focused on 2 markets primarily outside of the United States and in North America. We're focused on Europe, where we have -- we bought Transnorm almost 3 years ago, and we have now added another manufacturing location. We are growing rapidly in Europe and increasingly delivering more comprehensive solutions there. So very exciting progress and more to come. And expecting that to grow to be a very large part of the business. The other is China. Chinese e-commerce is, I think, well chronicled in terms of the volume that they delivered, whether it's on 11/11 or 7/7 or any holiday. I mean, their volumes are really mind-boggling. But it's the automation that's going to make it all possible and efficient long term. And we have a terrific Chinese business there. We have a fantastic team, local R&D, local project engineering. And we're taking the best of what Intelligrated is and knows how to do and localizing it for China and really starting to see the shoots of growth there that I think will pave the way for years to come.

And then I mean, obviously, today, Intelligrated is mainly an installation business and equipment business. Where are we on services right now? And where do you think services can get to? And then talk about software, warehouse execution software. I mean, these are what I describe -- what I view as potential areas of acquisitions maybe 3 or 4 years ago. Sounds like you've got capability there today. What is the software kind of vision going forward?

Okay. Well, that's a big set of questions. Let's try to take them one at a time. So in terms of our lifecycle service business, it's actually an excellent part of the business, and it performs extremely well. It gets kind of drowned out a little bit by how fast the rest of the portfolio is growing, but it's multiple hundreds of millions of dollars. Think about it that way. And it's growing very rapidly. It's growing double-digit pace. And -- but it kind of trails behind the projects business. And if you kind of wind back the clock and think about the Process Solutions business, it has a pretty similar growth model. It's a pretty similar business model. And we're taking the tools and techniques from that business and deploying them at Intelligrated. And so we have a very sophisticated model around contract management, life cycle management and selling outcomes to our customers. Increasingly, like I was describing, we are able to remotely manage those sites after they're deployed. And so now we bring all that data back into Forge, and we analyze it, and then we can tell customers about failures that haven't yet happened. And we can prevent them from happening and do preventative maintenance on those assets before they create downtime. We are delivering those outcomes today. So that's not science fiction. That's not in our road map. That's happening today. So that's really where the LSS business is at Intelligrated. It's come a very long way in 4 years. I'm very proud of what the team's accomplished. And there's a lot more excitement to come. Because as your second part of your question I think teases out, we have developed some very sophisticated warehouse execution software. We've done it all organically. It's done very -- in a very contemporary architecture. We've got the world's best both cloud and platform architects working on this, and we've deployed it in nearly a dozen customer sites. So we're really far down the path of integrated both planning and execution software with visualization that gives an operator a total view over $100 million asset, right? We're talking about a very sophisticated integrated machine, storage, picking, movement, sortation, outgoing, right? Very, very complex buildings that our software is planning and orchestrating. And then all of that, again, can be remotely managed back to a remote location. So we are investing in that technology. We're continuing to evolve it with our customers' partnership. And I'm very excited about what's to come there.

Great. We're running really long here. So not getting through these questions very quickly, but [indiscernible] topics. One more on Intelligrated. You're having a tremendous year. You got $2 billion plus backlog in place. But is the current strength creating really tough comps as we go into 2022? How confident are you we can continue to grow here recognizing the opportunity but also recognizing the fact that we are coming off some pretty strong growth here?

Well, we haven't sat down and fully forecasted 2022 yet. We think that the e-commerce market, the underlying market that it's a part of, contemporary retail, the transportation infrastructure is still highly unautomated. So we believe that there is a lot more growth out there. Whether we can continue to post 47% growth, probably not a sustainable growth number. But we think that e-commerce and fulfillment market is a double-digit grower for a while. Now we've got to deliver on our current set of commitments, and we've got to continue to expand our capabilities to deliver. But it's a very robust market, and we're excited to be part of it.

Great. Moving on to product solutions. This is a business that's had some challenges in the last 4 years. There's been a little bit of volatility caused by channel movements, et cetera. What's changed in the last couple of years, both technology-wise and the way you manage this business? I'm thinking about the last quarter where it seems like it grew in line, if not a little better than your big competitor.

That's a business that I'm really proud of, Nigel. You're right, we've had some challenges in that business, and we missed an investment cycle in the technology a few years back. And that caused us to really struggle for a bit and lost some share in the market. We put our minds together. We put our pencils to paper. We developed an awesome technical road map around our next-generation architecture, and we drove it through the market. We put an entirely different channel -- set of channel programs in place, set of management techniques in place. And like I was describing before, we went out and spent a lot of time with our end users. And we've spent an inordinate amount of time at our competitors' end users. And we've done a nice job of winning market share. The business is performing really well. We've recently added the voice business to that portfolio to give them a huge shot in the arm relative to solutions and services. It used to be called Productivity Products, if you'll remember. Now it's Productivity Solutions and Services. And that's not an aspiration. They have a very sophisticated set of capabilities around application software, around workflow software and the service portfolio to complement it. So I'm very excited about what they're doing, and I think there's even greater things to come.

Quickly on safety PPE. Maybe just give us an update on how that ramp-up progressed versus plan. And what sort of outlook is for that business for the remainder of the year?

Yes, sure. Well, the dynamics in PPE are mixed. What we're seeing in the industrial end of the business is pretty robust demand as some of the end markets grow and industrial production improves. Categories like fall protection, hearing protection, we're actually seeing quite positive dynamics in. In terms of the more COVID-related categories, we're seeing softening. And we feel like we're in this period between the prepandemic period and the postpandemic period. And we believe the long-term demand profile in those categories is elevated vis-à-vis the pre-COVID demand levels. We think that's because there's going to be a lot more focus on health and safety. People who have preexisting conditions are going to buy us up in terms of levels of protection. And there's always the threat of another pandemic out there. I mean, we haven't exited the current one. So we're kind of in the in-between period, so to speak, where the dynamics around stockpiling are unclear, the dynamics around imports and market regulations are still a bit unclear. But we're managing through it.

But [indiscernible] will be a bigger business postpandemic than it was prepandemic?

Yes.

Yes. Okay. Margins, you've got a good problem and that the mix kind of down, if you will, from Intelligrated. It's restraining your margins a little bit here, but I'm just wondering what the path is to the high-teens margin target longer term. And what sort of incremental margins do you think you can generate over the next several years?

Well, we remain committed to our long-term margin targets. And I think as you've rightly pointed out, the growth in that business has created some challenge in the timing of achievement there. And we don't want to restrain growth. I mean, this is a structural change in the retail and manufacturing industry. And we want to be as big a part of it as possible. We're not going to put our foot on the brake. It's going to go on the accelerator, and we are going to continue to capture that growth. So we're going to focus on the things -- the other things that offset and can control, like simplification, mix management, pricing activity in our portfolio, continuing to focus on our 80-20 toolkit to make sure that we're really focusing on the things that matter as well as our fixed cost portfolio and making sure that we're making good investments in the portfolio and simplifying the footprint along the way. So we think those things have positive offsetting characteristics, but the timing is a bit uncertain just relative to the growth that we're experiencing in that part of the portfolio.

And then finally, as your focus on execution and coping with this incredible growth, how much scope is there for building an acquisition pipeline? And what do we see as the M&A opportunity set for you going forward?

Yes. Well, we characterize this as the need for [ and ], right? We have to develop great organic products, technologies, innovations, and we have to energize an M&A road map and an M&A agenda. And we are doing both internally. I mean, you know that right now, I mean, prices are relatively high in the market for M&A. We're continuing to energize activity to look at properties and to be involved. And so we're going to pick our spots. We're going to be disciplined buyers though. That's not going to change. And so we're going to continue to do both. We think there's still a large opportunity and a long runway. Our overall market space is well over $100 billion that we're a part of. And so we've got a pretty small position. So that's a great opportunity for us to pick spots over time to acquire great properties.

Great. Well, John, I think that's a great discussion, and I think we'll leave it there. But again, thanks for your time. Sorry for being a little late starting here. And good luck into that backlog.

Thanks so much, Nigel. Have a great day. Be safe.

Thanks. Bye.