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

Good afternoon, everyone. My name is Sheila Kahyaoglu with the Jefferies aerospace and defense equity research team. Today, we're very lucky to have Honeywell with us. We have Doug Wright, who's President and CEO of Honeywell Building Technologies. A quick bit about Doug. He's President and -- he was named President and CEO last month. He -- prior to this, he was President of HBT's Fire and Security business and quickly made a significant impact. Doug previously was President and CEO of Source Photonics. And prior to that, Doug spent 6 years at UTX, where he served as President of Asia for the company's Fire & Security business. We also have Doug's CFO with us, Mike Stepniak. But first, I'll hand it over to Doug to go over a few prepared remarks, and then we'll kick it off to Q&A.

Thank you, Sheila, and thanks for having us today. Next slide, please. So first, a little bit of a background on Honeywell and where we are today. And I think we've had a pretty strong start to 2021. You can see here first half revenues, $2.8 billion at 22.4% margins. We are well on our way to achieve our committed margin expansion target of long-run target of 23%. We are a global business, and we think that's a source of strength in our revenue performance. We're in a lot of -- we're in over 10 million buildings. We are -- our service business has continued to grow. Our -- 2021 estimate of $1.4 billion for service profile in our business. We've got a lot of exciting macros that we support, urbanization, sustainability, digitization, recently healthy buildings. We, as part of Honeywell, are a substantial portion of our Forge platform, particularly as it relates to connected building offerings. We'll talk a little bit more about that later. And we've seen, over the last several years, an improving margin mix in both our product line and as we increase our services and software footprint. You can see here, I think you're -- many of you are familiar with the business mix. We are -- I think where Honeywell is unique and that we are quite balanced among our service and product portfolio. We're balanced regionally. You can see there, 41% Americas, 37% EMEA and the balance, APAC. So we quite have a global footprint, which gives us resiliency. And you can see on the right-hand side, projects, 18%; services, 25; and products, 57%. So if we move to the next slide, please. I think the first half results were pretty strong for HBT as were the results of Honeywell. Revenue, $2.8 billion. Organic sales of 7%, and that was strengthening through the first half of Q2, was stronger than Q1. High single to double-digit growth rates in all regions. We're fortunate that we serve a code-driven environment for a substantial portion of our portfolio, so that gives us a lot of resiliency there. We have seen synchronized recovery across all lines of business in every region. We've continued to see growth in our digitized maintenance services, digitized building services. And we have a lot of new innovations that we're going to talk a little bit more about and, hopefully, there's some questions about that. We're pretty excited about some of the new innovations, particularly around healthy buildings where, as we return to work, return to school, are quite relevant. Margin performance was quite good, 22.4% in the quarter, 160 basis points expansion. Continue to benefit from a good OpEx and cost control, good margin mix, 80-20 rigor. This is where we're focusing our energy on the high runners and pulling out of certain low margin and low utilization product lines. Anyway, a lot of new growth vectors that I'm sure we'll explore in Q&A. So recovery is on track. And we expect broad-based order performance to continue in the second half, particularly in building services projects as education verticals and energy services verticals gain traction. Our order growth rates in Q2 were quite solid in our product businesses, up over 40%, and in our services businesses, up 25%. So strong orders growth portends well for the back half of the year. Turning to next slide, please. Turning to our growth framework. We believe our portfolio will continue to benefit from tailwinds. I'm sure we're going to talk about sustainability, public safety and digitization. Particular as building owners are now facing an interesting calculus around needing to reduce energy consumption, but also needing to maintain air quality and healthy building status. So we feel that we're in a unique position to help them deal with that. That's really our #1 mission right now is helping people restore back to normal, balancing of those needs. And then further, we've got a lot of stimulus coming from various governments around the world, targeting airports, schools, health care, all the markets that we serve, and we believe that will accelerate our growth into these markets. So here on this slide, you can see our revenue framework. There's a few new features here from the last time we presented to you. We have a stable of really advanced new products in edge to cloud technology using AI, machine learning and a lot of new service offerings that we're deploying right now to continue our sort of our baseline journey around core product expansion. We have a lot of breakthrough initiatives that we've launched. Even in the middle of a downturn, we continue to invest heavily in our breakthrough initiatives, things like Connected Life Safety, which is a next-generation fire panel; small, medium business administrator, which is in BMS product line; and cybersecurity. These are all things that help our customers digitize and gain productivity in their buildings, and we feel pretty comfortable that they're going to be a big part of our growth in the future. And finally, our verticalization focus. This is really our -- the way that we deal with the need to be able to take great product platforms that need to be competitive. We've grown it across horizontals, fire panel, building control system. But being able to have a differentiation -- differentiated advantage by adapting it specifically for specific end customers or verticals, we think, is a way forward for us to continue to differentiate and bring our technology to specific use cases and outcomes for our customers. Balancing the growth side, we'll continue our strong journey on margin expansion. Supply chain management and productivity is a big part of our focus this year, particularly with some of the inflation that our industry has seen, pricing strategy, which is sort of the mirror of that particular issue, and our ability to execute there has been a very important part of our contribution margin expansion story. Continuing investment in digitization, I think Honeywell has a distinct advantage in how we drive productivity through digital. And new margin mix, new software content, new product lines will continue down the path of margin expansion. And then finally, just one kind of deep dive -- deeper dive I'd like to do on the one particular area, which is I know of interest, is around healthy buildings. We started out on this growth vector as a result of COVID. But as we've learned a lot with working with our customers, we think this is a much longer-term growth factor for the company where building owners, occupants, parents, administrators of all sorts are kind of permanently rethinking the way they think about the quality of their air and the health of their facility, contactless air quality solutions, et cetera. So we have -- we put in a robust -- as we've learned about this, we've put in a robust framework to help our customers make choices. We call it Assess, Act, Assure. This is how we go in and diagnose issues, help our customers make decisions and then make sure that those decisions deliver the results that they want. Commercially, this has been a really successful vector for us, and I think this is going to be a big theme for us for several years to come. We have a pipeline of over $2 billion in healthy buildings broken down in the verticals here: education, commercial, hospitality, health care, government, all great markets that we have a long legacy in. We expect those to be big drivers to our healthy buildings portfolio. We won over 2,000 projects to date, and we've driven 35 new product introductions in this space and applied and been issued 15 new patents. And then finally, on the right, you can see some of the new things that we've brought into the portfolio for healthy buildings, advanced air cleaning technologies, new dashboards, analytics to allow users to ensure social distancing policies are adhered to. We have a next-generation air quality sensor portfolio that we're developing and a whole host of other information fix systems and digital diagnostic tools for our users and the occupants themselves to actually know and monitor the health of their building. And finally, some important partnerships with -- in lighting, and IDEMIA is a biometric company that has a stable of noncontact biometrics that our customers are really excited about. And then we are very active in industry associations to help customers determine how to make their building healthy. Example here is our WELL Ecosystem that we're very much in the forefront of. So we think that this healthy building, by 2024, will represent over $0.5 billion revenue contribution to HBT. So that's our deep dive into healthy buildings. So with that, I'll turn it back over to you, Sheila.

I'll take a 10-minute deep dive. So in terms of -- just to kick it off, explain new ways HBT is responding to the post-COVID environment as we return to work, but we're also hybrid as demonstrated by this conference. How do you create new opportunities for your offerings, like the healthy buildings portfolio? How does Honeywell play a larger role in indoor air quality solutions.

I think we've always had a good intimate knowledge of the types of challenges building owners face about what they're going to invest in and how they're going to manage their facilities. And I think this new environment, now we take that platform, we've always been into the safety and the efficiency of buildings. We're a big player there. But a lot has changed. Building owners are now faced with challenges of do I -- how do I -- what is the regulations for air quality, how do I balance the need for air quality and energy consumption, because if we want to filter air more at a higher level, we have to spend energy to do that. So how do I make those decisions? So these are the types of questions that school administrators, airport administrators, building owners are at. Even inside Honeywell ourselves, we're asking those questions. So I think we're trying -- we're taking our deep domain knowledge of the individual systems and trying to bring together, through digitization and software, bringing them together to help customers make decisions, that sort of assurance process to help them do that. So we've taken the learnings that we've had over the last 18 months of kind of the COVID cycle, and now we're building that into our offering and are both the product and service level to help our customers make better choices.

That's great. And then I believe the slides mentioned the education vertical is about 30% of sales. So correct me if I'm wrong there, but how has Honeywell been involved with the recent U.S. government's stimulus funds actually to specifically help achieve safe and school education for students, faculty and staff? How was this sort of sized now? And how do you think about that growth profile?

Well, just a point of clarification, education is about 30% of our healthy buildings pipeline, so it's not the total business, but the healthy building segment. And it is an important segment. Obviously, as parents, many of us, we all have a lot of sensitivity to what our school children are going to be going through as they return to school. So I think this is one where, first of all, there's substantial amount of new funding coming at this problem. The governments around the world, particularly the U.S. government, has put a lot of resources specifically dedicated to the education segment, and I think we'll benefit from those choices. But I think, maybe more importantly, I think we've had a lot of -- we're in constant conversation with school administrators. And you can imagine that, that pace has picked up a lot recently. That -- there's a lot of investment choices that they're having to make in air quality, COVID mitigations and there, again, how they balance that with their energy savings demand. So I think we're going to have a lot more work to do to help them make those choices. And it's going to be a multiyear effort to really raise the -- both first the awareness and then helping them decide what investments to make to help them make schools safer. We think of this funding -- we've identified in excess of $5 billion of that, that will be dedicated specifically to air quality investments as part of the COVID mitigation plan. Now there's a lot of bills going around here and there that, that number might change, but we're pretty comfortable of what's actually already been authorized represents a pretty secular growth vector for HBT.

Great. Thanks for that clarification as well. So new growth vectors have been opportunities for Honeywell. What are the top 3 recent innovations that are category game changers in buildings automation?

Well, if you force me to pick 3, I'm not sure. That's a tough one. But I think the 3 that maybe is the most interesting to the group here, the first is our small and medium business administrators. So this is a new tool powered by Forge that allows us to take air quality and other energy sensing signals in a smaller building that's more suitable for that type of a market where maybe the application doesn't demand sort of a full-scale grand BMS system. And also we've identified that there are a lot of customers that have multiple sites that they want to administer. So think about a quick-serve restaurant or a small retailer where they have multiple sites, and they need a way to both locally manage their capabilities for maybe the store manager, but they also want to have visibility at the corporate parent level to maybe look at compliance or whether the regulations are being followed, how much energy is being consumed. So this is our small and medium building administrator. Sorry, it's a mouthful. The second is around what we call Connected Life Safety systems. So Honeywell's always had a really strong position in the fire safety systems in buildings. We have a strong position there. Well, historically, those systems have been on -- we've got on-premise. They just are inside the building, and they really do their job inside the building. They sound an alarm when a fire goes off. Well, what we've actually invested in is the capability to take those signals, and now through a gateway, enable a customer to see them in real time remotely through a mobile app. They can do programming remotely. They can check maintenance status or compliance status remotely. So this is another example of a sort of a traditional building system that we've now digitized to allow a different value proposition that -- of course, the system is always going to do its job to know if there's a problem in the building. But by being able to have connectivity, it gives users more functionality. Let's say, you're a city and has 200 buildings, and you want to be able to know the status of all those systems, when they were maintained last, you can do that in one easy way. An then finally, we're -- we've invested heavily in smart city and smart community technologies. We made an acquisition of Trinity a number of month -- quarters ago. And I think you're going to see more in the future us looking at the public safety space as cities and municipalities look for ways to digitize their environment the way we've been doing in private -- the private sector for quite a long time. So I think those are 3 areas that I'm most excited about at HBT.

That's super helpful. And then turning to high-growth regions. It's a key element of Honeywell's growth story, both pre and post pandemic. Provide an update on the geographic business and the impact of urbanization, what you're seeing, how are key regional markets responding to the current changes in the post-pandemic recovery.

Well, I think Honeywell really has a differentiated position in how we have invested in HGRs, and we're seeing the benefit of that now. The high-growth -- our HGRs will continuously grow over the next 3 years at mid-double-digit rates. There's still a lot of opportunity. We generally serve at the higher end of the market in a number of those regions, so we have specific programs and investments in going at the mid-segment to be able to bring our technologies to the right functional level and price point level to allow us to serve the middle market, if you will, and that's across almost all of the regions. We have identified opportunities to do that, China, India and as well as some of the other smaller regions as well. I think the HGR recipe within Honeywell has been pretty consistent. We look at the growth vectors in that region. We build strong local teams. We localize our product technology and our manufacturing footprint. And then we liberate that for growth by leveraging the Honeywell operating system. It has been a pretty unique capability. Each region has some unique flavors, but the thing that we are seeing in common across all regions is that we're seeing a lot of investment in data center, which is an important vertical for us now more and more. We're seeing a lot of health care demand. We're seeing a lot of smart communities and smart city investments, airport and critical infrastructure. And also everywhere, even -- it's not just a U.S. phenomenon. This balancing act between sustainability net zero and comfort and air quality inside buildings is a real important threat across all of the regions, and we're really excited about being part of helping to provide those solutions. So I think HGRs are going to continue to grow at a faster rate than our overall business, as you would expect. And I think Honeywell is in a very unique position in that we have pretty strong footprints in all of the major growth regions in the world.