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

Good morning, everyone. This is Sean Meakim, Vice President of Investor Relations for Honeywell. Welcome to the Fourth Quarter 2021 Installment of the Honeywell Leadership Webcast Series. As a reminder, this conference is being recorded, and your microphones have been placed on mute. The purpose of these webcasts is to provide our investors with the opportunity to hear from a wide range of Honeywell leaders on topics of special interest. Today, we would like to highlight our progress on certain elements of our proven value-creation framework that continues to drive outstanding shareholder value. Specifically, we will cover our ongoing portfolio transformation, our demonstrated track record of innovation and our outstanding ESG and sustainability story. Joining me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; Senior Vice President of Business Development and General Counsel, Anne Madden; and Julian Mitchell, Managing Director of Industrials Equity Research at Barclays. This presentation and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Honeywell also uses our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website, in addition to following our press releases, SEC filings, public conference calls, webcasts and social media. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. Darius, Greg, Anne and Julian, thank you for being here today. Before we dive into Julian's questions, we have some slides that we prepared. So with that, let me turn over to Chairman and CEO, Darius Adamczyk.

Thank you, Sean, and good morning, everyone. Let's begin on Slide 2. Honeywell has made great strides in evolving beyond a traditional industrial company and a differentiated technology company. We are solving some of the most challenging global sustainability issues while also unlocking significant shareholder value. This is underpinned by rigorous execution and our proven value-creation framework. As you've seen, we actively and continues to refresh our portfolio, deploying capital to strategic M&A that aligns with important growth and sustainability vectors. In fact, we've consistently deployed capital beyond our free cash flow generation. One of the things that differentiates Honeywell is our long track record of innovation, and our focus here has never been greater. Our ability to adapt to meet our customers' needs has enabled us to create profitable growth that is exceptional among our peers and has positioned us to capitalize on the ongoing macro trends, particularly with our breakthrough initiatives and sustainability and technologies to enable the energy transition. Finally, we consistently say and firmly believe that our robust environmental, social and governance framework enables our long-term success and differentiates us among our peers. With decades-long history of developing solutions that improve environmental and social outcomes, we have proven to be an industry leader in all 3 elements of E, S and G and will continue to lead the pack of our concerted efforts in each of these categories. We are also firm believers in our say matching our do, having spent over $4 billion cleaning up environmental issues, promoting diversity in our executive ranks and Board of Directors as well as being good citizens in all of our global communities. Overall, these efforts have laid the groundwork for us to continue to outperform in the years ahead. Let's turn to Slide 3. As I've mentioned, we have a long track record of outperformance versus our peers. Over the last 5 years, excluding 2020, which was anomaly due to the global pandemic, delivered a 5% annual sales growth on average. This top line growth is also paired with superior margin expansion compared to our peers. Excluding 2020, we have expanded margins annually by 90 basis points on average since 2017 and 70 basis points, excluding the margin benefit from our 2018 spins. This is a result of methodically optimizing our portfolio for high-growth and high-margin businesses and consistently executing our productivity and growth initiatives. Our track record also reflects a commitment in investing strategically in differentiated and sustainable technologies, setting us up to deliver continued sales and margin performance ahead of our peers over the long term. Our margin expansion, combined with top line growth, easily exceeds others where comparisons are frequently made. This performance, combined with a very strong balance sheet, offers a compelling investment thesis. Once again, our do exceeds our say. As you may recall, a 30 to 50 basis points per year margin expansion and 3% to 5% organic growth per year is our financial frame. Unlike others, where the future always seems to be brighter than the past, one does not have to operate on faith to be an investor in Honeywell stock. These outcomes are enabled by our Honeywell value-creation framework, we'll touch on next, giving us continued confidence in bright future ahead. Honeywell has generated superior shareholder value by executing our proven value-creation frame. This is underpinned by Honeywell Accelerator, a revitalized operating system that removes barriers and improves the speed at which we solve the world's toughest challenges. Proof points on the effectiveness of this value-creation framework are plentiful with [ BT ] XLI 10 out of the last 12 years and the S&P 500 9 out of the last 12 years, consistently outpacing the industry and the markets through all cycles. In today's presentation, we'll focus on 3 key aspects of this value-creation framework: effective capital management; active portfolio optimization to maximize shareholder returns; and innovation of scalable technologies, where we have developed high-margin solutions, particularly in high-impact areas like sustainability and software. We'll also take time to go deep on our commitment to being responsible corporate citizens, positively impacting the world through both the offerings we create and sell as well as the way we support the communities we serve. Let me turn it over to Greg to walk us through some preliminary thoughts on 2022 on Slide 5.

Thank you, Darius, and good morning, everyone. As we highlighted in our recent earnings call, we are seeing strong demand right now, with third quarter orders up double digits, excluding the impact of the COVID-related mass business. We expect this strong demand to continue into 2022, and we're seeing that now in October, with orders up another 10% in the month. We expect organic growth in all 4 segments in 2022 as commercial aero continues to recover, capital reinvestment takes place in the energy sector, nonresidential construction returns to pre-pandemic levels and e-commerce continues to expand exponentially. These tailwinds, coupled with the innovative and differentiated technologies that we will touch on more in a few slides, give us a lot of confidence in the future for Honeywell. However, we do expect growth in the first half of '22 to be constrained due to continued challenges from labor force uncertainty, supply availability and logistics challenges, which are ever present. Inflationary trends that are accelerating from what we saw in the third quarter will also pressure margins, though we're actively driving rigorous pricing actions to offset this headwind. We're excited to be closer to closure of our deal with Cambridge Quantum Computing. That will unlock tremendous opportunity for our Quantum business, but it will be a slight margin headwind in the short term as we invest in the business. This represents just 1 of the many areas of investment where Honeywell is driving the future of technology. Now let's turn to Slide 6, and we can talk about how we've been actively managing the portfolio. Over the past 5 years, Honeywell has been focused on transforming its portfolio, both organically and inorganically, to drive market outperformance and increase shareholder value. Organically, our ongoing digital and supply chain transformation initiatives delivered $2 billion of benefits to the business. Recurring revenue from our Connected Enterprise is growing at a double-digit rate. And our portfolio of solutions that have proven environmental, social, safety and public security outcomes is now up to more than 30% of our total sales. Our strategies are delivering, and we're not done yet. From an inorganic perspective, we have focused on M&A that aligns our portfolio to key megatrends, increases our exposure to recurring and predictable revenue and streamlines our end-market exposures, all while maintaining a disciplined approach and ensuring high returns for our stakeholders. As an example, our Intelligrated acquisition, which enabled us to expand into an attractive new vertical, warehouse automation, has been a resounding success and is on track to being approximately $3 billion in sales this year, up over 60%. At the same time, we have methodically reduced our exposure to highly cyclical and lower-margin businesses. This portfolio transformation execution has had a direct impact on Honeywell's financial performance. Comparing our 2014 to 2016 average performance to our 2017 to '21 average performance, excluding 2020, of course, our annual organic growth increased from 1% to 5%. In the same time periods, we expanded our segment margin by 230 basis points from 17.9% to 20.2% and our free cash flow as a percentage of sales from 11% to 15%. Honeywell today is fundamentally a much different company than what it was 5 years ago with a much better growth profile, accelerated margin expansion and a much improved cash-generation engine, all contributing to our shareholder creation. Now let's turn to Slide 7, where I'll talk about a recent example of our portfolio transformation, our expansion into life sciences. In December 2020, we announced our acquisition of Sparta Systems, a leading provider of enterprise quality management software, or QMS. Sparta's unique AI-enabled QMS solution and its rapidly expanding Software-as-a-Service customer base makes Sparta an attractive company prior to the acquisition. And now under Honeywell's ownership, this business has surpassed our original expectations. Our expertise in artificial intelligence and machine learning, combined with our Honeywell Forge platform and our world-class Experion process knowledge system in controls and automation, further enhance the link between quality and production data, making it easier for our life sciences customers to gain critical insights that can improve their manufacturing and other operating processes. In September of this year, we once again added to this strong base by acquiring Performix Inc., a provider of manufacturing execution systems, or MES software, for the pharmaceutical industry. These combined offerings provide our life sciences customers with solutions across the entire product life cycle, from automation, project execution to optimal production to sustainable quality. Sparta in our life science businesses within HPS are expected to grow at approximately 25% over the coming years. Sparta is a great example of Honeywell deploying capital in a disciplined way toward M&A opportunities that deepen our penetration in highly regulated, attractive new verticals that require advanced process technologies and as a playbook we will continue to leverage. Now let me turn it back to Darius to discuss Honeywell's culture of innovation on Slide 8.

Thanks, Greg. One of the things I'm most proud of is how Honeywell effectively transforms the portfolio organically. We are laser-focused on investing in innovative next-generation products and services and breakthrough initiatives. Our framework ensures that we are driving investments in differentiated technologies and addressing new markets that's scalable go-to-market strategy. We're building our R&D investment strategy around disruptive trends that will shape the global economy for years to come in areas such as advanced computing, integrated mobility urbanization, contact-free economy and sustainability. In fact, we focus approximately 50% of our new product research and development on solutions that improve environmental and social outcomes for our customers. Through our Z21 innovation process, we move quickly and seamlessly from the discovery stage to engineering and development, while maintaining a high degree of iteration with end customers to generate successful commercial launches with a standardized set of steps designed to ensure a gated investment process as well as speed to market. We have 2 categories of new innovations: NPIs, from new product introductions and BTIs or breakthrough initiatives. A key metric we use to measure the success for new product introductions is NPI Vitality, which is the percent of total sales generated from organically developed new products introduced in the last 3 years. Our NPI Vitality has steadily grown, reaching 29% of total sales in 2020. We also have demonstrated success in building meaningful businesses from our breakthrough technology such as our Solstice, cyber and coatings businesses. Solstice, which is the family of ultra-low global warming molecules that we embedded to reduce carbon dioxide emissions and improve efficiency, is an excellent example. It replaces hydrofluorocarbons, or HFCs, which offer functionality but have a very high global warming impact. This business will be approximately $1 billion by the end of the year, and we expect continued healthy double-digit growth. Now let's turn to Slide 9 to discuss another very important breakthrough for Honeywell Quantum Computing. The combination of Honeywell Quantum solutions and Cambridge Quantum Computing, which is expected to close in the fourth quarter, forms the largest, most advanced stand-alone quantum computing company in the world. The new company will be a global quantum computing leader, backed by Honeywell's leading hardware platform and the world's highest demonstrated quantum volume and CQC's most advanced product software stack. The applications of these technologies are game-changing, providing advanced computational capabilities to transform society and solve the world's toughest sustainability problems. To provide just some examples, Quantum will enable the development of keys and encryption that harness the power of today's quantum computers for superior cybersecurity. It will aid in the advance of electric vehicle batteries, allowing with them to charge more efficiently and run longer. It will benefit the health care industry by enabling researchers to discover new medicines more quickly. And among other sustainable applications, we will also enable energy efficiency to advance fertilizer production processes. Now let's turn to Slide 10 to talk about our exciting innovations in Honeywell connected enterprises. Honeywell Forge is at the forefront of providing innovative solutions to enable a carbon-neutral future for our customers. For example, our Honeywell Forge energy optimization solution utilizes machine learning to optimize energy savings for connected buildings while analyzing factors such as time of day, weather, occupancy and much more. The Hamdan Bin Mohammed Smart University in Dubai was able to leverage this technology to reduce energy consumption by 10% across campus without manual intervention, a huge success for the school. In addition to energy optimization, Honeywell Forge uses machine learning to perform predictive maintenance, tracking asset performance across multiple systems and identifying faults before they occur. These smart solutions save time and money for our customers, while making buildings more efficient and reducing carbon dioxide emissions. Our overall portfolio of HCE solution is growing rapidly. Our triple-digit recurring SaaS revenue growth, enabling over 8,000 customers to run their complex operation more efficiently and effectively. Now I will hand it over to Anne to talk about some of our other leading innovations in sustainability.

Thank you, Darius. As you can see from this page, Honeywell has a robust portfolio of sustainable solutions across our businesses that align with key sustainability megatrends, including renewable energy, energy efficiency and emissions reduction and public health and safety. I'll highlight a few examples from each of our businesses, where we're leading the charge to create a more sustainable future. In Aerospace, we're building the future of sustainability and aviation through our unmanned aircraft systems and urban aerial mobility, or UAS/UAM offerings. Honeywell's fly-by-wire technology and electric propulsion systems make up the brains and the muscles of air taxis and cargo unmanned systems that have the potential to significantly reduce carbon emissions. We already have over $3.5 billion in wins with a pipeline of over $7 billion. We're also continuing to see success in our healthy buildings portfolio, which is providing important innovations in public health and safety. In fact, we're estimating $400 million in orders in 2021. Our indoor air quality offerings and electric air cleaners help make buildings safer as the world returns to work, school and play. And the macro tailwinds such as the recently passed infrastructure bill ensure this will be a big theme for Honeywell in the coming years. In our Safety and Productivity Solutions business, we recently won a significant contract to provide our Rebellion gas cloud imaging technology to a major U.S. oil and natural gas provider. This technology monitors emissions and keeps workers safe by providing continuous monitoring for methane leaks and pinpointing sources of leaks for faster repair and minimal leakage. In PMT, we're positioned to lead the energy transition with solutions such as our Ecofining process technology, which can make green jet fuel that meets or exceeds jet fuel standards from a variety of sustainable feedstocks. This fuel, when blended up to 50% with petroleum-based fuel, can be a drop-in replacement with no changes required to the aircraft. In addition, this process can reduce life-cycle greenhouse gas emissions by over 60%. Our recent co-investment with United Airlines in older fuels was the largest SAF agreement in aviation history, demonstrating the power of Honeywell technologies and our capability to innovate. These technologies are just a small selection of the many ways that Honeywell is optimizing its portfolio and investing aggressively to address growing societal and environmental needs. Now let's turn to the next slide and talk about our demonstrated commitment more broadly to ESG. As Darius mentioned earlier, we're an industry leader in environmental, social and governance matters. On the environmental front, in addition to innovating to help customers meet their environmental and social goals, we adhere to a comprehensive HSE management operating system to minimize waste, conserve water, improve efficiency and manage emissions for our own operations. In the past 2 decades, we've spent over $4 billion to clean up environmental sites, and we've reduced our greenhouse gas emissions by over 90%. In April of this year, we committed to finishing the job, pledging to become carbon neutral in our facilities and operations by 2035. We're also actively engaging in our communities. We sponsor numerous STEM education programs across the world, including educating 500 girls annually in India at the Honeywell Center for Advancing Girls and Science. We've taken action to improve racial equality and inclusion and diversity in our communities, including entering a 5-year corporate sponsorship with the National Museum of African American History and Culture in Washington, D.C. Lastly, integrity and compliance, respect and inclusion and diversity, our foundational principles, are core to our strategy at Honeywell. Our focus on these governance principles flows throughout the entire organization. In 2021, Honeywell once again earned the recognition as one of the world's Most Ethical Companies by Ethisphere, a global leader in corporate ethics and compliance. And I'm proud to say, this is the sixth time we have received this designation. Now let's turn to Slide 13, so we can go into more depth on our robust COVID-19 response. Early in the pandemic, we recognized that our capabilities and resources put us in a unique position to fight the virus and positively impact the lives of those most affected, and we acted quickly to support our communities. We leveraged our supply chain expertise and strong balance sheet as we invested significant capital to quickly pivot multiple facilities to produce N95 and surgical masks that were critically needed by first responders, medical personnel and governments around the world. We also innovated quickly, introducing several healthy solutions offerings to help the world safely navigate through the pandemic. Most recently, we used the capability of our newly acquired Honeywell Sine software business to enable employers to manage occupancy levels and track vaccination status, leading to a safer return to the workplace. Beyond just our product offerings, there are many other ways that we've helped our communities through these difficult times. Our operational excellence and supply chain automation capabilities allowed us to organize and conduct mass vaccination events at Bank of America Stadium and Charlotte Motor Speedway, 2 of the largest sporting venues in North Carolina, enabling over 150,000 people to get vaccinated against COVID-19. And in May of this year, India was reporting approximately 400,000 COVID-19 cases and 4,000 deaths per day. We responded by airlifting vital PPE and medical supplies to support health care workers and the people relying on them. We also created several care centers and intensive care units across the country, each equipped with the necessary supplies and medical infrastructure to treat COVID-infected patients. Lastly, we paid a thank you bonus to support our employees during the pandemic. Our frontline production and production support employees went above and beyond to keep our manufacturing sites running, enabling all the other COVID response efforts we've mentioned. And we would, again, like to publicly thank them for their diligent effort during these trying times. With that, I'll hand the call back to Darius to summarize with a few key points on Slide 14.

Thank you, Anne. As you can see, we are not the same company that we were 5 years ago. We continue to optimize our portfolio and introduce breakthrough innovations to unlock shareholder value. Our advances in software and sustainable technologies align our businesses with important sustainability megatrends, and our commitment to ESG excellence differentiates us among our peers. And while these past few years have been extremely successful, we continue to strive for more. Ongoing rigorous execution of our value-creation framework will continue to accelerate and transition into a premier software industrial company. We'll now turn it over to Julian for Q&A.

Thanks very much, Darius, Greg and Anne, for giving us a very good update on some of those topics that are most relevant for investors today. Maybe starting off with that first point in your summary, Darius, around the portfolio. Give us some high-level thoughts on how satisfied you are with the progress in the portfolio, how it's performed in that downturn last year and how you think it's performing in the recovery so far.

Yes. Well, I think, first of all, I'll start off saying that the portfolio has never really optimized for the pandemic. So it wasn't a pandemic portfolio. And obviously, we faced some difficult market conditions last year, particularly in our PMT business, our aero businesses. So having said that, I think we reacted very, very well. We dealt with the reality, we worked out in terms of volumes. We reduced our cost structure by $1.5 billion. $1 billion of that is permanent. And we found a way to do it in a smart way through the use of innovation and already many of the initiatives that we get ongoing and running such as Honeywell Digital, ISC transformation, automation, both for -- in the office and in manufacturing. So we accelerated some of the actions that were already taking place and drove them faster and harder in 2020, which enabled us to protect our margins and drive a good outcome for our shareholders in 2020. Now as we see 2021 and as we now emerge into '22 and '23, we see strong recoveries in just about every one of our markets. We're not kind of a boom-and-bust company. So we probably are not going to have the spikey recovery that some of the other companies have seen. But nevertheless, the tailwinds for our end markets are very strong. It's reflected in our booking rates. We're going to have very strong backlog positions as we head into '22 and '23. And kind of the overall, if you want to look at the higher level macro, the world does need to fly again, whether it's consumer travel, business travel, freight. There's a lot of pressure on freight right now to liberate more capacity. So that's coming back. Energy investments are coming back. And what's exciting for us about energy investments coming back, they're coming back in both areas. The first area being what I call sort of the world of new energy, which is green fuels, which is carbon capture, which is battery storage, all these technologies in which we have a great deal of expertise. And just to give you a specific data. In the last 2 months alone, we've had 4, and I mean 4, green fuel on a global basis. And that's unprecedented. It's a technology that we own. The world is also going to need to make some investments, what we call kind of trend traditional carbon energy segment. We see that we're energy short in many places in the world, and we can help some of our customers really make those investments. And what's really interesting, particularly in our P&T portfolio, we are the company that can help bridge the transition from the energy past to the energy future because we have all the technologies that are needed. They are much more sustainable and renewable energy. And this last thing I'll say and as always, the portfolio is always under review. It never ends. It continues, and I anticipate there's going to be further additions and subtractions based on our analysis and assessment.

Maybe switching to the short term. You mentioned some of the challenges in freight and logistics and the tightness there, that's hurting, I think, your revenues a little bit in the fourth quarter right now. How long do you think these headwinds will persist through next year?

Yes. Julian, let me take that one. Let me just start by saying when we gave our guidance, we provided a wider range than normal. And that was really on purpose given the severity of the constraints that the economy is feeling, whether it's the parts shortages, logistics challenges, labor. And all of that's real. I mean that's -- we highlighted that at the end of the quarter, and we're feeling it. We're about halfway through the quarter. And I would tell you, we're more back-end loaded than a normal quarter is. Roughly 50% of our sales generally comes in the last month of the quarter, but I would tell you that we're probably trending to the low to middle end of our guidance range given all these challenges. We're doing all the things we talked about last quarter in terms of price actions for inflation, compensation, doing a lot on the engineering side for creating some opportunities for swap-outs of chips and so forth. But this is going to be a real -- it's going to be with us for a while. It's really hard to say whether -- if we're seeing the peak right now. But I would say to you -- just kind of reiterate, I think we're going to see some of these challenges going into the first half of next year. We'll probably start out on the sort of the low or maybe mid-single-digit growth in the early part of 2022. I don't think we're going to come out of the shoot firing in all cylinders because these things are going to be with us for a while. But that being said, as Darius mentioned, our bookings are terrific. We've got $27 billion, $28 billion of backlog. The demand is not the issue. And we expect as these things ease, and they will, that we'll exit '22 at a very brisk pace of revenue growth.

And maybe just to add a couple of things. I think one thing that we're confident about is demand is not going to be a problem for '22. That is, we don't see that being an issue. We're going to have tailwinds. And I would say the same for '23 as well [indiscernible]. Two is we are adopting an inflation playbook. I think inflation is coming pretty hard and fast. And if you look at our Q3 results, probably one of the leaders in terms of being agile and adapt to that big price increases, we're finding we're going to have to be doing that maybe [ quarter ]. It is even higher than we anticipated. And I think that that's probably -- that's something that we're going to have in our playbook throughout the year '22. So we're not assuming that inflation abates in '22. And we're changing our playbook and operational moat to make sure that we can operate, pass them through. That's probably what's going to be a little bit different. I think as we look forward to '22, as Greg pointed out, it's going to be a year of growth. It's going to be a year of margin expansion. It's going to be a similar framework that we've laid out for Honeywell for years to come. As you saw earlier in the deck, when it comes to operational excellence, I think you should have the trust and the faith at us that we're going to do it.

Perfect. And yes, it sounds like the demand outlook's very good for next year. Maybe flesh out a little bit the expectations around margins. I think Honeywell has that sort of 30, 50 bps placeholder, if you like, for the long term. There's some headwinds against that, maybe price cost or Quantum tailwinds perhaps from mix. Any color of that?

Yes. So I expect for a margin expansion in every segment. Now they're all going to be a bit different. You can imagine, some will have more headwind or some a little bit more tailwind. But you said in terms of mix, we're going to see the aero recovery continue in the aftermarket, which, as you know, is a fairly strong margin enhancement for us. We expect to see UOP continue to accelerate. We talked about having over $1 billion of backlog in UOP at the end of the quarter. And we see that continuing to be a tailwind for us. And the margins in that business, obviously, are very strong. Intelligrated is dampening our margins in the short term. We talked about some of the constraints that this supply chain situation have created from there. And so that's going to give us also some tailwinds as that improves next year as well. So there's a lot of good things going for us. Each of the 4 businesses will have a great opportunity. And again, when you think about everything we've done with supply chain transformation, with our Honeywell digital efforts, we're just getting started on automation broadly, both in our back office as well as in the factories. And Honeywell Connected Enterprise is going to continue with double-digit growth, which at those kinds of margin rates will be nicely accretive. You did mention the Quantum bit, and that will be a bit of a drag for us on the margin rate. That's not a concern. I mean we're excited to invest in that business. And again, it's just part of the way that we consistently perform in the short term but are also always investing in the long term. So a lot of runway still in front of us. People ask often if we're done here, not even close. We've got a lot of opportunities as we look forward into '22 and beyond.

Great. And maybe circling back to sustainability. The aspects at Honeywell, particularly, I suppose, in PMT, but more broadly around the energy transition. Investors worry or ponder, what does decarbonization mean for Honeywell more broadly. Any thoughts there?

Yes. Thanks, Julian. I'll take that one. As Darius said, Honeywell really is an industry leader in all 3 aspects of environmental, social and governance. We got all 3 of the letters covered, not just 1 or 2. And I think on the E element of it, we've been doing this for a very long time. Our strength is our experience, and our strength is the rigor of our program. Since 2004, we've had a management operating system that's been integrated in the overall Honeywell operating system. And so this is not arm-waving and fun with numbers. This is real rigor that we've proven to ourselves over 2 decades. I mentioned our carbon emissions reduction, 90% reduction in our greenhouse gas emissions. And we've set our carbon neutrality goal for 2035, but we are not going to wait until then. We're going to continue to prosecute a really rigorous program. And we have 2024 interim goals that are very aggressive as well. And so I think unique about Honeywell on the E element of it is we've been doing this for ourselves for so many years, but we also do this for our customers. We sit in between this creation of sustainable solutions, both for ourselves and helping our customers fulfill their sustainability goals. On the social element of it, we mentioned our community engagement, our commitment there. One example, further example of what we do there is we've provided safe drinking water to over 650,000 people in India through our safe water network partnership. And that just continues to give back to those local communities in India. And on the G element of it, inclusion and diversity, our job will never be done, but we've seen incredible improvement, not the least of which is Darius's and our Board's message from the top down. Over half of our top executives are diverse by ethnic background or a non-U.S. birthplace or gender. And very proud of our world-class Board of Directors and their diversity. And they, of course, are over 90% independent. On the topic of the energy transition and decarbonization and what that means, when I think about ESG, where Honeywell is really special and unique is our ability to innovate. And when you think about the energy transition, let me just highlight some things we're doing in the PMT business that have been just incredible innovative technologies that are so exciting. Our sustainable aviation fuel and green diesel technologies enable emissions reduction -- will enable emissions reduction throughout the aerospace industry. Our United Airlines joint venture, our co-investment with Alder Fuels will be a -- will have a big impact. United is going to purchase 1.5 billion gallons of SAFs in connection with that deal. Our carbon-capture technologies are capable of capturing up to 33 million tons of CO2 every year. One nice recent example is we've been chosen by Wabash Valley Resources to capture up to 1.65 million tons of CO2 annually. Our new flow battery technology. We have a recent agreement with Duke Energy to provide our new flow battery technology to Duke Energy. It enables renewable generation sources and lasts 3x longer than lithium-ion batteries. And the last one I'd want to point out by way of our ESG innovation is our advanced plastics recycling, what we call our up-cycle process, which generates 77% less CO2 emissions than landfilling and incineration and increases by 3x the types of plastics that can even be recycled. So we're excited there. We have a joint venture with Sacyr in Spain that we're working on, and we'll have the capacity to transform 30,000 tons of waste plastics into recycled polymer feedstock each year. That is game-changing for us and for the world.

If I could just add one other thing because I think there's a little bit of a misnomer and a misunderstanding of what the PMT business is and what it does and sometimes being characterized the Quantum gas business. That couldn't be more possibly wrong. Let me just -- Anne just went through some of the technologies that are available in our UOP business. As you can see, they can help transition energy industry to the future. But that's not the only place in HPS where we see it. Greg, earlier in the presentation, talked to you about the shift in focus and investment in our HPS business towards life sciences, which has been a tremendous success, now generating several hundred million dollars in life sciences, which is where that business is heading, where a disproportionate part of investment will take place. And then lastly, our Advanced Materials business, which is also housed in PMT, could there be a more ESG-oriented business, which has the Solstice molecule, which I talked about earlier? It's the most environmentally friendly refrigerant molecule there. Our research chemical business is also housed in there, which supports research for pharmaceuticals and biopharma needs as well as our Aclar business, which provides health care packaging. So if you look at objectively at this entire PMT portfolio, it's probably our most ESG-oriented business we actually have.

Understood. And then if you think more broadly across Honeywell about the -- there's a lot of innovation underway, clearly, a lot of R&D and capital spending. How do you ensure that the return on those organic investments is high and is sort of adequate relative to your long-term goals?

Yes. Well, that is something we closely monitor, and we're not -- don't just monitor when we invest in it, we monitor after we actually -- the innovation is launched, commercialized and so on. And I will tell you that our R&D IRR -- I mean if you think about IRR on R&D vis-a-vis M&A and so on, our investment in R&D and the CapEx generates the highest rate of return out of any other investments we have. And we never starved good IPOs within. Having said that, sometimes we shut off good ideas because they can't be commercialized or they don't work as we anticipate or the innovation doesn't go through. But that's sort of the lifeblood of Honeywell's innovation and funding that innovation. We never shortchanged those kinds of investments. Sometimes we stop them because sometimes the innovation or the commercialization isn't what we had hoped. But we also -- that also takes rigor and discipline to stop an investment that's in progress because the brighter day isn't always tomorrow, and we are comfortable making those tough decisions. But overall, this is the highest rate of return of any investment.

Yes. If I could maybe just add on to that a little bit. We've made a lot of investment in this business, whether it's been in digital, whether it's in R&D, et cetera. And as we've talked about in the past, you noticed we're still doing that while reducing our costs because, to Darius' point, reallocation. We have discipline around making sure that every year, we're trying to reduce our fixed cost base and then people come for investment. And the first thing we're doing is going back and inspecting the investments we have. And that's really -- that's a premise for the way we operate this company, reallocation of resources, constantly challenging what's working and what's not, funding the most strategic things with the highest impact that are working and being courageous enough to turn off things that we know are not. That's all part of the learning process, and that's part of how we continue to fund this company and create margin expansion at the same time.

One example, I suppose, of sort of new and headline-grabbing innovation at Honeywell is around content computing. And you mentioned some revenue goals for the medium term in the slide deck. Maybe help us understand, sort of to that point on innovation and returns, when should investors expect to see a return on these Quantum investments and innovations?

Well, Quantum is certainly very much in kind of the early inning of the evolution. But nevertheless, I mean, we expect Quantum Computing to be a multibillion dollar business before the end of the decade. So the path of growth here is exponential, not linear. And it's already generating a double-digit million revenue base. So it is real. We're also trying to balance between continued funding of innovation technology and not necessarily steering to maximize commercial results now. Because we obviously know that we're going to have to continue to invest and devote some amount of time, effort in some of our deepest science to continue to evolve the strategy and technology and not just maximize commercial. We think it's foolish just to shift towards full commercialization. It's something that needs to be fully developed that we add it. So -- but nevertheless, the time frame is quite short, frankly. And we're looking at a multibillion dollar business certainly before the end of the decade, if not sooner.

Yes, maybe I could add. We have invested a lot. In fact, when we closed our merger with Cambridge Quantum this quarter, we're going to provide an additional investment of $270 million into it because we need to continue to fund at a level that will maintain our world leadership with the world's most powerful quantum computer and then the innovation on the software side. And given the recent valuations of companies in the quantum computing sector, our investment is already generating tremendous value creation. And that's really why we're so excited about our partnership and our new business together with Cambridge Quantum. The future is really bright. And as Darius said, it's not something far out in the future. We expect to have something on the order of $2 billion in sales by 2027.

And I think it's -- it can be difficult from the outside because it's a relatively sort of nascent industry or technology to understand sort of what differentiates Honeywell's offering in quantum from its peers. So I don't know if there's any color around that.

Yes. No, I'd be happy to. So today, there are multiple hardware routes to quantum compute in the race towards achieving quantum supremacy. Our technology -- we're fortunate that our technology is the most powerful today. We'd like to keep it that way. But we work a lot with -- we collaborate with a lot of players in the industry. Why? Because it's everyone's common goal to drive the advancement of quantum computing. And whether you use trapped-ion technology or supercompute or a different photonics or a different route, it's all going to end up being game-changing for the world. And the world really needs these technologies. The most exciting thing from my perspective around the differentiation of what I think we can achieve in our new company is the really near-term exciting applications around cyber and driving to better cybersecurity about pharma and material sciences and driving to the faster design and development of new ethical drugs and new molecules. All of this goes into -- frankly, quantum computing is like the ultimate ESG technology. Because what it will ultimately do that classic compute will never be able to do is solve the world's most challenging climate problems, carbon capture, quantum computing is beautifully situated around that. But again, there's near-term things in electric vehicles that it's solving problems for, in banking and finance, it's solving problems and even in fertilizer production where it's reducing energy requirements through advanced processes. So it's a great, great story around what we've been able to do, and we're very excited to onboard our partner in Cambridge Quantum. Of course, Cambridge Quantum software will remain agnostic across all forms of hardware compute in the quantum industry, which will really enable it to accelerate.

Fantastic. I suppose the broad subject of software comes up increasingly when investors are talking about industrial companies. I know that's something that Honeywell has been focused on for many decades. So maybe give us an update on where we stand in terms of the impact of Forge. And also on sort of connected enterprise, if there's a way of delineating embedded software, pure software, some of these other terms that...

Sure, sure. Let me get that one started. So we've talked about the HCE business and the size of that and how that fits into our overall software algorithm. As we see it today, we've got about $3.2 billion of software -- of pure software -- excuse me, of software in total, of which embedded is about $2 billion of that. So HCE is about $1.2 billion, about $2 billion in embedded. That HCE number's a little bit smaller than what we talked about back in 2019. There's a reason for that. That's not a mistake by any stretch. You can imagine when we started the business, we cast a fairly wide perimeter for what we were trying to address from a market perspective. And as we've learned more, we've actually taken some things out of that perimeter. But that's where we are today, $1.1 billion, $1.2 billion in HCE, growing at double digits and about $2 billion in embedded. And now remember, embedded software doesn't have the same growth trajectory on purpose, right? By definition, it's attached to our hardware, to some of the products. And so that's taken a little bit of a step back in 2020 with some of the recessionary impacts on our overall products.

And just to add to that, maybe an explanation of why is it that we change the perimeter. Because initially, in the perimeter, we have a lot of the hardware products that went along with the software. But frankly, the way we've designed Honeywell Forge in that business unit, it's meant to create software, and we're kind of maxing and matching software expertise, hardware expertise. So we transitioned a lot of the hardware that goes on the software back into SBGs because that's really where the R&D know-how reside. So it was logical to put it in there. But frankly, a lot of the know-how and research and development investment and domain expertise was really in the SBG. That's why we shifted that back in there. So we're not mixing and matching hardware and software. We kept things pure. The other maybe thing that I just want to add on, on the Forge solutions, all the Forge solutions are SaaS-based. And we are very proud of the triple-digit growth we're seeing in that recurring base. And that's kind of how we know we're winning. We know that if we were building sort of one-off stand-alone solutions, the rate of growth would actually be higher. But what's -- the beautiful thing about SaaS is that it gives us that base of growth, and it compounds. And that kind of rate of growth is going to enable us to grow much, much faster in the future.

Understood. And then maybe switching to profit margins. Honeywell has been relentless for 15 years or so on pushing margins up. I think sometimes, investors take that for granted or worried that the runway, maybe the end of that is insight on margin expansion. Maybe help us understand sort of how you think about the remaining sort of margin scope and also how digital and the application of digital can help extend that all the way.

Well, first of all, I'd agree with you, Julian, and I think that it is taken a little bit for granted. Because when you look at value creation, you always have to look at your revenue growth and your margin expansion. Those things go hand and hand. And as we showed it earlier, when you look at the kind of track record that Honeywell has, we think it's best-in-class. And probably what's a little bit different than 5 years ago was it may be our revenue growth rate wasn't as high. The margin expansion was good. What we've changed now is now you get the top line growth, which is mid-single digit, combined with margin expansion, which is above our framework of 30, 50 which, frankly, is how you create value. And then you combine all of that with our cash margin, which is the best-in-class margin. So that is the framework, and you don't have to have faith in that to actually be an investor. That's something we do. The second part is, how do we do this? And why is it sustainable, which I think is a fair question. We do this through some of our core initiatives, whether it be Honeywell Digital; ISC transformations; the investments we made in our IT infrastructure; the data architecture; consistency and processes; and now most recently, automation, both in our office as well as manufacturing. So there's nothing that's going to change about that framework. We see continued opportunity to expand margins. We should expect to see that in our '22 framework, and we see continued opportunity ahead of us.

Yes. I'd like to just say a few other things. When I think about Honeywell Digital, which again, the beginnings of this was all the way back in 2017, we just spent the last 4 years doing almost like a great integration, right, of all of Honeywell. And on top of that, we've invested probably $1 billion plus over that time frame in our IT infrastructure, building platforms basically for every critical function across the company. Now once again, you didn't see any big bump in costs because we continued to take productivity, make sure we reallocate. So this is part of the self-funding mindset that we have here at Honeywell. But I guess what's exciting to me is we've just scratched the surface on the usage and really the value capture from that investment. I can tell you for sure that the reason why we're having success in pricing is because our visibility, the transparency around it, the ability to connect from material to SKU is something just astronomically different than what it was 5 years ago, which allows us to do things like that in a systemic basis. And again, Honeywell Digital was meant to create scale across the entire enterprise. That's what it's doing. And there are other opportunities that we're not even done with what Torsten is doing in terms of rolling out our supply chain, our [ SIAP ] connectivity. By the end of '22, we're going to have 80% plus of all of our supply chain network, utilizing our [ SIAP ] platform which, again, is going to allow an enormous amount of visibility, transparency and connectivity. So -- and this is happening all over. The next frontier, frankly, is going end-to-end. Right now, we're doing it -- we started in silos. And by the way, I don't know how else we could have done it because if we try to start out with the larger picture, we probably would have knocked ourselves over with the intellectual challenge of that. But now we're actually starting to think about these things from an end-to-end perspective. And the opportunities are -- honestly, they're endless. So I'm as excited about the future as I am about what we've done. And frankly, I don't even think we appreciate the potential of what we've created in this case. And that's just digital. As Darius mentioned, we've got connected enterprise, supply chain, and now we're also doing customer intimacy. There's a lot of road here.

Yes. And probably one last thing I forgot to mention whether -- there was a question last, which is something our investors should be very excited about because we're extraordinarily excited about it, which is within Honeywell Connected Enterprise, we talked about the perimeter change. But one of the things that we're also creating now is something we call Forge Labs. Forge Labs is going to be housed within the Honeywell Connected Enterprise. It will really be an enablement for a lot of the connected software solutions that lives within SBG. Honeywell Connected Enterprise is not, and I want to emphasize this, it's not the only place within Honeywell where software will be created. However, we wanted to be created in a consistent way, leverage the Honeywell Forge IT stack. And thus, it will be incubated and created by our Honeywell Connected Enterprise team. That's new. And we think that, that's going to further turbocharge a lot of our software development. It's not necessarily we're going to be housed within a Honeywell Connected Enterprise, but in all of our other SBGs. That's a new development that we're funding, we're investing in, and we're going to see the [indiscernible] in '22 and beyond.

Understood. And maybe on the portfolio, it's a record year for sort of global M&A overall. There's the investor perception that Honeywell has been fairly sort of quiet on that front year-to-date. Maybe give your perspectives on that sort of acquisition aspect. Why has Honeywell maybe been a bit more reluctant than some peers to deploy cash on to acquisitions? And how active should investors expect Honeywell to be next year on that front?

Yes. First of all, I'd say it's probably a fair assessment, although we did spend about $1.5 billion on Sparta, closed it earlier this year. We had a couple of smaller acquisitions success. But one of the things that we take very, very seriously and take great pride in, frankly, is being very careful stewards of our shareholders' cash because we don't view it as our cash, we view it as their cash. And frankly, some of the deal map that we see and in terms of the growth and margin expansions that one would have to assume for that to make any sense for Honeywell are sort of a stretch at best. Now having said all that, we do want to be acquisitive. We expect us to be more acquisitive. I mean, let's be honest, Sparta wasn't the cheapest acquisition we ever made. But frankly, it's working out tremendously well. It's exceeding our financial hurdles, but we're convicted both about the growth, the profile, the kind of company we want to own. And that's going to be our framework. We will acquire. We're going to be more active. You should absolutely count on that. But we're also going to be smart and prudent and thoughtful about dispensing our shareholders' money.

Yes. Thanks. And maybe I'll add to that. It may be the proverbial duck on the surface with the paddling furiously below, but we are not on the sidelines. We are very, very active. And the single best thing we can do for ourselves in our M&A program is generate the richest, broadest, deepest pipeline of ideas that are always aligned to our strategic plans and our best growth ideas, best growth areas, and that's what we're working on. So we are in motion, a constant motion around our ideation. But in a frothy valuation environment, you need to have rigor. And so we stand down from a lot of activity if we can't develop -- looking soberly at ourselves, can't develop the right amount of confidence and conviction that we can deploy our value framework with that transaction. And so when we do, do deals, what I can assure you is we have developed that confidence and that conviction, and that's why we're doing it.

Great. And maybe on the divestment front and sort of portfolio management more broadly, how much do ESG considerations feed into that versus growth or financial return considerations? And I suppose, perhaps in that context, how do you think about any minuses of maybe having the defense business and aerospace in that ESG lens?

Well, first of all, ESG is absolutely a consideration. I mean Honeywell has a great ESG track record. And as we look at making acquisition, that is going to be a lens that we're going to be looking through to make sure that it fits with our ESG profile in terms of what we do. More broadly speaking, I mean, we're always assessing our portfolio in terms of what fits and what doesn't fit. I think that we want to be thoughtful about that, just like we are in acquisitions. We have been also thoughtful about divestitures. But that process is ongoing, and we're always going to be assessing it. But I will say something else because there's been a lot of news around sort of whether you want to keep a conglomerate. But we really don't view ourselves as a conglomerate for 2 primary reasons. First one is we create value at the center, whether it be through our Honeywell Connected Enterprise to our Honeywell Digital, through ISC transformation, through Honeywell technology solutions, all these things that we do at the center, which make a difference. And the second thing, which is maybe just as important, which is we do have a theme throughout our businesses. It's not a spare set of businesses that have no connections. We are a controls and automation company. We do that in every business unit. Controls, automation can point to every single, whether it is, HVC, PMT, SPS or aero, we control and automate. That's what we do. That's the common theme that creates economies of scale. So -- and we're not necessarily [indiscernible]. I mean we do what's right for our business. And if there was a set of actions required on the divestitures, you can rest assure we will do that. And as you can see, we've done it, whether it's the Advansix spin, Resideo spin, Garrett spin or the sale of our retail business about a year ago, we're not afraid to do those kinds of things.

Yes. No, we are certainly not afraid, but we're smart about it. We're very analytical and unemotional about it, and we're constantly examining our own portfolio and the characteristics of that portfolio and in the context of our strategic planning process. And so no, we're not afraid. But we are careful acquirers, but we're also careful divestitures. And we want to be very mindful of making sure that when we do divest, we can maximize value for our shareholders. And so we prepare very well. We take the time to prepare well. And we also watch the market timing to make sure we're not being silly about what kind of valuations we'll secure.

And on that point on sort of divestments, it's been, yes, 3 years or so since Garrett and Resideo came out. I think, Darius, you were saying, we should expect maybe more acquisitions in 2022, multiples committing and so forth. Should we think the same about divestments? Or the focus is probably more on sort of adding than subtracting?

I think there's a possibility of both. I mean we obviously want to build an add. But as Anne pointed out, I mean we're not afraid to subtract where something doesn't fit our profile in terms of buying with mega trends, if it's a technology business, if it's that controls and automation profile. Our levers to make the business better aligns with megatrend, ESG, as we pointed out. I mean, all these things are part of our framework. And frankly, a business doesn't check a lot of those boxes, that will end up on the other side of the ledger. So not being specific, I think there's a possibility of certainly both sides of that occurring in the near to medium term.

Maybe last one, as I know we're out of time. Maybe you mentioned, for example, Life Sciences and the push there. That's something, obviously, I don't think investors associated with Honeywell 5, 10 years ago as a market. Maybe explain sort of the reasons behind going after that. And should we expect there to be perhaps other similar adjacent markets that Honeywell will fit into?

Yes. Let me just comment on life sciences. I mean if you just look at our life sciences revenue across all our various businesses because, I mean, we don't have 1 life sciences business because it actually spans across a number. That total revenue is north of $1.5 billion. It's not small. It's actually very meaningful and growing, growing very quickly, obviously, as part of that, but so our various other businesses. So I would say life sciences is an interesting segment. Obviously, we recently invested it in inorganically. We're investing in it organically as well through our experienced software for batch controls and so on. But I would say it's not the only vertical. It's not the only adjacency we're looking at. And I think software is not the only kinds of businesses we're looking at either. They have to be technology. They have to be differentiated. They have to meet some of those acquisition criteria. But frankly, it's -- we have options and we like the businesses that we participate in, and we want to continue to enhance them to adding adjacencies and incremental technologies just to make the whole better.

Great. Yes, great way to end the conversation. Thank you, Darius, Greg, Anne, Julian, a really helpful discussion. Thanks to everyone on the line for joining our fourth quarter leadership webcast. We remain focused on continuing to perform for our shareowners, and we are excited about the future of Honeywell. We hope you will tune in for the next leadership webcast, which we will announce at a later date. We will now conclude the webcast. Thank you.