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

Good morning, and welcome, everyone, to the Honeywell ESG panel. My name is Deane Dray, senior analyst at RBC, covering the multi-industry electrical equipment group. And I also cover the global water sector. Now by way of background, Honeywell participated in our first RBC ESG conference last year, and they were eager to present again this year. We believe they have a great ESG story to tell. Really, the challenge for us will be to profile all the ways Honeywell is raising the bar internally for the company and also for its differentiated products and services to help their customers achieve their ESG goals and try to do all of this within 30 minutes. So let's get started and meet our returning panelists from Honeywell, beginning with Anne Madden. Anne is Senior Vice President, General Counsel. I've known Anne for many years. And each time I introduce her, I have to take a little bit more time, given all her expanding list of roles at Honeywell. She's responsible for managing legal affairs, government relations, health, safety, environmental, product stewardship and sustainability at Honeywell. And she also oversees global M&A, corporate development and the relatively new Honeywell ventures functions. So Anne, thank you for being here. And then we have Ben Owens. Ben is Vice President and General Manager of Sustainability -- Sustainable Technology Solutions. That's part of Honeywell's UOP business. It's within Performance Materials and Technologies segment. So thank you both for being with us this morning.

Thank you, Deane.

Thanks, Deane.

Anne, let's start with you. We've got some big picture questions. And maybe describe for us Honeywell's ESG strategy overall? How is it involved? I've seen it from the outside beginning, very visibly, with specific presentation slides on earnings. But there's so much more going on. Kind of take us through how the function set up the team and so forth? And again, welcome.

Thank you, Deane. Great to see you. Thank you for having us. We love this topic, so we love to have the opportunity to talk about it. In terms of our ESG strategy, it is not a new strategy. For nearly 2 decades, our strategy has been underpinned by the foundational premise that by improving our own ESG footprint for our own operations, our solutions can serve as a springboard and a proving ground, if you will, for new product innovation to help our customers meet their own ESG goals. So it's this virtuous relationship between innovating for ourselves and innovating for our customers to solve their problems. And for ourselves, this innovation has helped us to achieve a 90% improvement in our [ GSG ] intensity since 2004. So this is not a new focus for us. Though our focus today has shifted to achieving carbon neutrality in our facilities and our operations by 2035. That's an announcement that Darius, our CEO, made back in April, our commitment by 2035. And we like to say -- I'd like to say that our internal efforts really serve as a laboratory for our scientists and our innovators as we develop new products, such as flow batteries and carbon capture and storage, energy efficiency and building management systems, emissions monitoring and a whole suite of other ESG-oriented solutions that we offer. So our strategy really has come full circle, and our internal commitments toward a sustainable future lead to products and solutions that help our customers and society. And one really good example of that is our Solstice line of low global warming refrigerants, which we innovated a number of years ago, but we were able to develop an alternative to traditional refrigerants, which were high global warming, and to a much lower global warming potential. And we now estimate that this product innovation has helped our customers avoid discharge of carbon to the atmosphere, which is the equivalent of 250 million metric tons. That's a big number. And that's a big, big positive impact on the environment. And so today, our ESG strategy, front and center, is to be a leader in the energy transition, to lead in helping address the world's sustainability challenges. So that's core to our strategy today. And I don't think we've talked about it in those terms really previously. But we are all about -- our entire portfolio is about committing to developing solutions to help our customers meet their ESG commitments. So Ben is going to talk about it a little later, but we're super excited about the solutions that we have today because they're solving problems today. It's not just innovation for the future, which we're working really hard at, too, but what we have in our toolkit today actually solves customers' today problems, which I think is a nice differentiator for Honeywell.

Terrific. Maybe you could touch on the structure of the ESG team at Honeywell. And then how do you all measure and disclose ESG performance overall?

Yes. Great. Thanks. So we've had a senior executive in charge of our sustainability program since 2004. So having a dedicated structure, our Chief Sustainability Officer reports directly to me. And he regularly reports out to our core gov committee of our Board. This Chief Sustainability Officer role is also supported by a Senior Director of Sustainability, which is a full-time job, and also a dedicated cross business, corporate energy and sustainability team. So we have an important structure that's a totally devoted structure to ESG and sustainability. But we also support that structure with a senior executive ESG Steering Committee, which I chair. And we've established a Sustainability Review Board, which is comprised of myself and our CFO, the head of our PMT business, our SVP of Integrated Supply Chain, the SVP of Enterprise Business Transformation. So these are the senior most leaders of the company being brought to bear to make the decisions around where we invest capital for projects that will support our carbon neutrality commitment and also to provide the oversight overall to our ESG operations. And we think that it requires that level of senior oversight because it's that important. It's that important to our core strategy, and it's that important to our customers to get it right. And I'm sorry, the second question that you asked, Deane, before...

We all -- analysts always have to keep score. And so there's -- talk about the reporting standards, frameworks, how the ESG performance is measured at Honeywell?

Okay. Perfect. Perfect. So we have a comprehensive centralized system to collect and analyze our sustainability and our safety data. We have had this in place for many, many, many years. This is absolutely essential for all players, and it's going to become increasingly challenging and increasingly important. I think it's no mystery to anybody who's listening in that the regulatory framework is getting more complex. The stakeholder scrutiny has become more complex and is becoming more so. The rigor of the reporting is becoming more dramatic. We know that's coming, whether it's here in the U.S., whether it's in the EU or elsewhere. Our own businesses are developing sophisticated software offerings that can track the sustainability data and develop the connections and the analytics that make that data actionable. So making buildings run more efficiently and tracking and reporting, because I think the world is going to need to very quickly land on and have in place a comprehensive system of record for reporting and ensuring compliance. For us, in our own reporting, to make it very transparent and visible to our stakeholders and our cohort, we publish a corporate citizenship report, which is posted on our external website. I'm really, really proud of it. It goes beyond all the other formats that we report to. It's a great one-stop shop for our investors to read about and see all the great things we're doing and that we're working on. But we also report to CDP. And we issue reports that comply with SASB and TCFD. But if anyone is listening who cares to do a little more research on what we do, I would point you in the direction of our corporate citizenship report because it really goes beyond those more standard reporting elements.

Yes. That's a terrific overview there. Look, this is still an evolving process with all of the ESG rating agencies. And there are multiple cases in our coverage where the company managements are saying, "Hey, the rating agencies still don't get this right or they don't quite understand what this business is or who the end customer is." Is there anything from your perspective about the rating agencies for Honeywell that they're either wrong or it's underappreciated?

Yes. I would say -- I'm not going to be the master of the obvious here when I say -- or maybe I am the master of the obvious when I say more consistency is better amongst the rating agencies. There really is a proliferation of these agencies, some for a fee that investors pay, but they all have different metrics. They review things differently. They scrape the data differently. They define the problem set differently and they interpret data differently. So a lot of time and effort is consumed by those of us who have to respond to these different indices with different methods of ingesting and interpreting, and it becomes complex. And it's an elaborate burden to kind of try to be all things to all people. So we certainly much preferable to have a broader consensus about critical data. So for those who are listening, coalescing around what the right way to measure is and the right data so that we can all focus on more fully explaining and improving those data because that's a higher and better use of all of our time is driving better data instead of worrying about satisfying myriad different regimes. So more alignment, more visibility, more accountability across the rating agencies would be good. There are errors. We know there are errors in some of these agencies that pull our own data from what we disclose. And so we work to correct that. And I'd say we found that with good and more detailed engagement, we get better responsiveness with the agencies. And a good example is our scores with ISS and Sustainalytics, for example, continue to improve as we engage more deeply with them and take the time to help them better understand us, we get better uptick and better understanding and better accuracy with what they report. So that's rewarding and that's worth doing. And I also -- as I said before, I think there's significant business and commercial opportunity in the monitoring and reporting area for systems that we and reporting companies, customers of ours, so that they can more efficiently collect the data, maintain and report it in a secured and auditable fashion. That is going to be a need that's very important going forward. So efficient collection of data, defined clearly in an auditable system of record throughout the ESG organization, that is what good looks like. That's where everyone needs to get to.

All right. That's really helpful. Now let's shift over to where and how Honeywell is investing R&D dollars today. There's a great statistic that about half of Honeywell's R&D investments today are being targeted at products that improve customers' environmental or sustainability outcomes. So take us through that. What are the other kind of growth opportunities that you're pursuing through R&D?

Yes. Thank you. Awesome question. And I wake up every day super excited about this topic. Ben, of course, is the rock star in terms of our commercial sustainability-oriented product offerings. And so he's going to talk about it from a PMT perspective in a minute. But we have a lot of other R&D investments that's produced new offerings in this space elsewhere in Honeywell beyond PMT. So Sustainable Building Technologies is a great example where we've spent a significant amount of investment and time and research. That's in our Honeywell Building Technologies unit. So better thermal management and power management for buildings. We have an offering that will allow customers to track their GHG footprint real time, which is important, and operate their buildings or their campuses more efficiently to achieve a carbon footprint target that's reliable and credible and auditable. On the aerospace side, we're doing some super, super exciting things. We've talked before with you, Deane, about our urban air mobility offering, which uses electric power. And that's opening up a lot of opportunities for electric and hybrid, electric engine technologies. And we're working with our aviation customers also on a hydrogen-powered aircraft and on flight management technologies that further reduce the GHG impact of flying. And then lastly, I guess I would cite our safety and resilience focus, which is another large part of our portfolio. Healthy buildings, gas and fire detection, emergency management and remote and autonomous operation of facilities, all of those solutions reduce injury and property damage, in addition to energy efficiency as well as sustainable impact as well.

Fabulous. Well, that was also a good lead into Ben, who's been very patient here because he has a fabulous story to tell about Sustainable Technology Solutions portfolio. So Ben, give us the overview about the portfolio, key initiatives and what we need to know from an ESG standpoint.

Absolutely. I appreciate it, Deane. The Sustainable Technology Solutions portfolio was launched as a business in March of 2020, really to accelerate the commercialization from our sustainable technology portfolio. But what's key is it's built on a rich history and the technology foundation of UOP that goes back over a century. So the portfolio includes renewable fuels, plastic circularity, long duration energy storage, hydrogen and carbon capture. I know it's a lot to say. Since launching is a business in 2020, it's grown to over a multibillion-dollar opportunity portfolio that we see in the next couple of years. And kind of go a little deeper on that rich history, the reason we can accelerate here so quickly is we have such a strong technology background. For example, UOP launched the hydrogen purification business 50 years ago. We have 1,000 pressure swing absorbers in the market today. We're now using it to purify the hydrogen that comes off electrolyzer. It's a critical part of the electrolysis process. Second area is membranes. We developed this area over 30 years ago, and we have over 33 million metric tons of CO2 per year of installed capacity around the world, separating CO2 from gas use. So those kind of -- those are just 2 of the critical areas that give us that acceleration benefit that we're seeing in the sustainability portfolio.

Now just take us through the ecofining process. I think that's a big success story, Honeywell Green Diesel, Honeywell Green Jet fuel. Take us through the opportunity. And where does it stand in terms of commerciality? And how can you scale it?

Absolutely. Just to explain a little bit. Our ecofining process works by reacting biologically derived feedstocks. So think cooking oils, fats, greases, plant oils with hydrogen, in the presence of a hydroprocessing catalyst, to produce a drop in quality diesel and jet made from renewable fuels. And we've proven that our catalyst life is one of the best in the market because we have the most operating experience in the market, with over 25 years of combined operating experience. We've demonstrated that we can deal with high contaminated feeds. You think about these type of feeds and the inconsistency of them. The significant benefit here is a carbon reduction or carbon intensity. One of your main choices is feedstock in this process, and we're able to reduce that carbon intensity through the hydrogen supply. We can either integrate hydrogen into our ecofining process or have a carbon capture on the back end that significantly reduces the carbon intensity. This kind of, all put together, it delivers higher yields, longer care profit that's for renewable fuels. We have over 25 units licensed in the market. We have the largest installed total capacity of dedicated [indiscernible] in the ecofining process. And we're rapidly growing because there's many customers that can't announce yet, but this you'll see -- you've seen in the market recently, this is a market that continues to stay. Today, we can produce a virtually all sustainable aviation fuel from renewable feedstocks. It's important to mention here is only a fraction of this market is sustainable today. About 1% of aviation fuel is produced as a sustainable aviation fuel. And we aim through proven technology to drive this. As it's a needle mover, I think we're in the early days. This business model is very similar to UOP, license, engineering and equipment catalyst service. So we're at the early part of the cycle with many license or selections being announced as part of UOP's growth in the coming years.

Great. How about you listed plastics recycling, what's the opportunity there? Any specifics we should know?

Yes. So one of the kind of key areas we're innovating is our up-cycle process. We've recently announced that. We believe the combination of what the world is doing today is mechanical recycling. To get up to a higher rate, we -- our vision is over 90% of the world's plastics can be collected. And instead of going into a landfill or incinerator, the combination of mechanical and chemical recycling is needed. So our process converts waste plastics back into recycled polymer feedstock that enables higher blend limits, lower contamination, and is a significant way to increase the overall rate. We see that as a robust technology that fills a critical gap.

That's great to hear. Every time I hear about the R&D investments and a payoff that is a little bit further down the line, I'm reminded that most investors have a more near-term focus in terms of hitting near-term financial targets. So how does Honeywell balance this opportunity of these types of technologies, renewable fuels, plastics recycling within payoffs that are going to be further down the road?

Yes. I think, Anne, you were going to comment on that one, under the near-term, short-term payoff?

Yes. We think about it in terms of near-term, midterm and long-term payoff. And we balance our investment portfolio accordingly. We have an incredibly strong payback projects in the world of ESG. And so it's not that we're compromising returns in order to achieve the rationale to invest where we need to invest. And so I think that we -- Solstice is a great example of an investment that has paid off enormously for us, our Solstice HFO offerings. And we have many, many examples of really, really strong paybacks that happened both on a near-term horizon, a midterm horizon and a long-term horizon.

That's real helpful. And lots of focus on issues of diversity and inclusion. Can you give us an update at Honeywell, how are you able to meet these challenges within the company? Any specific examples?

Yes. Great. Thanks. Inclusion and diversity is a topic I care very deeply about, but so too does our Board of Directors and our senior leadership team, from Darius on down. We've had a long-standing commitment to inclusion and diversity. Again, this is not something new for Honeywell. Fostering diversity has been a key behavior, which our employees are measured on and have been measured on for over a decade. It has become 1 of our 3 foundational values, inclusion and diversity, workplace respect and integrity and ethics in everything that we do. So it's no accident that half of our independent directors are diverse. Nearly half of our senior leadership team is diverse, many of whom were promoted from within, which we're very proud of. We see that as a testament to our sustained focus on succession planning and retaining and developing women and people of color. So we're a long way from declaring victory. No one should be declaring victory, but we are proud of the progress we're making. And we're very intentional and purposeful about driving that progress and increasing our workforce diversity. Our progress stems from embedding inclusion and diversity in our day-to-day operations. We're a company that operationalizes everything, and inclusion and diversity is no different. So it's highly operationalized and in the fabric of our governance structure. In fact, we mandate and track diverse slates in our hiring process. We require that every time a rec is opened that a diverse slate of candidates being paneled. We deploy mandatory unconscious bias training for our global workforce. And we hold executive sponsor, women's career advancement program and diversity career advancement program. The ideas and the foundation for that, both of which were birthed by Darius. And this year, Mike Madsen, our CEO of Aerospace, and I co-sponsored both the women's career advancement program and the diversity career advancement program. And this is a very, very intentional and calculated way to drive the development of our diverse talent. Last year, we welcomed Cheya Dunlap as our Chief Diversity Officer. And she is just a total rock star. She's continued to elevate our game and our governance structure and the impact of our inclusion and diversity programs. And one of her priorities and great accomplishments since she's come to Honeywell has been to amplify the voice and the impact of our 7 employee affinity networks. These are employee resource groups. Women, Black, Hispanic, LGBTQ+, all abilities, Asian and veteran employees each have employee resource network. And Darius, our Chairman; Karen Mattimore, our Chief Human Resources Officer, and I are the cosponsor across that system of employee networks. And so we are making a lot of progress. And frankly, when you look at our peer group of companies, our metrics, which we disclosed, are superior to that of our peers in terms of women and people of color. And we're going to continue to drive that and be a leader in our peer group.

That's fabulous. If there was something that you just said that I would put an exclamation point next to is that Honeywell likes to operationalize everything. And that's -- having covered Honeywell for as long as I have, there's only one way priorities are set, it's with high degrees of structure, accountability, clear communications priorities. And it is -- I'm just so not surprised to hear the level of specifics that you're providing on this. So that's the Honeywell that I know, and it's great to see. Look, we only have a couple more minutes. There was also an impressive line of community giveback initiatives going on at Honeywell. And for the 2 minutes that we have, I'd love to hear a bit more about that.

Well, thanks for asking that question. Nothing like capitalizing on a crisis to find a way to create some good and a silver lining. And one of the silver linings for us in the COVID crisis was it gave us an opportunity to really make a difference in our communities. One good example of that is the mass vaccination efforts that we architected in our big headquarters cities, Charlotte, Phoenix, et cetera. We ended up getting vaccinated over 150,000 people. We operationalized that. Thank you, Deane. And really put it through our very systematic logistics program, and it made it super productive and efficient to get shots in arms as quickly and productively as possible. And it really made a difference in our local markets. We also stood up a small business fund here in Charlotte, which is our global headquarter city, that Honeywell sponsored. And it really breathes life into small businesses, the majority of which were minority-owned businesses, and allowed them to navigate and survive the challenges of the pandemic and come out on the other side as a viable, vibrant business. And we also devoted a lot of time and effort to supporting people with product. And so for instance, in India, which had a terrible, terrible humanitarian crisis during COVID. We supported India by shipping ventilators to India to really ease the scarcity of ventilators on the ground there, and felt really good to be able to make a difference. And those are just 3 examples of things Honeywell continues to do in normal times and in exigent times, but felt really good to make a difference. So thank you for that question.

Terrific. Well, I said at the very beginning, it would be a challenge to try to get all the ways that Honeywell has made ESG a priority into this 30 minutes. I think we made a good honest effort. And I know that there's more going on, and there'll be further updates. But let's call this panel to its conclusion. Anne Madden, Ben Owens from Honeywell, thank you very much for your participation. Wish you the best of luck. Thank you.

Thank you, Deane. Thank you for hosting.

Thank you, Deane.