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

Great. Welcome, everyone. It's great to be back in person. My name is Steve Tusa. I'm the electrical equipment and multi-industry analyst here at JPMorgan. We'll -- we're very happy to kick off the conference this morning with CEO and Chairman of Honeywell, Darius Adamczyk. We'll do a little bit of a Q&A and then open it up with about 10 minutes left for anything that you guys have in the audience. But Darius, thanks so much for kicking us off, and I'll leave it to you for a couple of opening comments.

Well, thank you, Steve. Glad to be here. Just I'd maybe say a couple of words. I think as all of you know, we just recently had our Investor Day so we probably got a lot of the news out there about a week plus ago. But maybe just to reiterate a few of the things that we talked about, which is -- number one is we are taking our growth and financial algorithm up versus what it was before, from kind of a 3% to 5% and 30 to 50 basis point margin expansion up to 4% to 7% organic growth rate combined with 40 to 60 basis point margin expansion. Continued track record of cash generation. And if you look at the history of Honeywell, if you look at a decade ago, our cash margin was about 7% to 8%. It's now in the mid-teens, which is what we reiterated during our Investor Day. And then a couple of other important things also, which is we're doing $4 billion stock buyback this year. We've committed a floor for capital deployment of $25 billion over the next 3 years. I want to emphasize that's not a ceiling, that's a floor of what we're going to be investing in. And I wanted to be very clear and specific about that number. And then I think what was particularly important that we conveyed during the Investor Day is that we haven't been standing still in Honeywell. I mean potentially, we haven't done as many deals as we had in years past, but what's important is that our transformation initiatives, whether it's ISC transformation, whether it's Honeywell Digital, Honeywell Connected Enterprise, the focused work on innovation, breakthroughs, we've actually undergone a pretty heavy lift. And I think anybody who's been in Honeywell longer than 5 years would say it's probably been more active than it's ever been in their entire history and the company is fundamentally different than it was 5 years ago. And that's what gives us really the confidence to be able to reiterate new targets, new goals. And then maybe one last thing before Steve gets nervous that I'm going to talk too long this morning is just a commitment to sustainability and ESG. I think that -- frankly, I don't think Honeywell gets as much credit in this area as we deserve. About 60% of our revenues are ESG oriented. We are going to be setting a target for Scope 3. Whether you look at the E, the S or the G metric, I think you'll find that we stand out versus our peer set, and it's something that's going to continue to be a commitment going forward and a priority for the company. And then maybe one last point, which is it was another graduation day for one of our breakthrough initiatives, which is -- graduation meaning that an idea, an innovation, which is our sustainability technology solutions business, is really moving from just pure innovation to being a business with a fairly appealing growth rate of 50% compound annual growth rate between now and 3 years from now on a base of roughly $200 million. And what's exciting about that business, it basically has every relevant technology to transform the energy industry from being hydrocarbon intensive to being much more sustainable. And as you can imagine, a lot of those customers are customers today for kind of what we may call our old-school business, but I think we can help them transform into the future. So on that, Steve, I'll leave it up to you for questions.

Just getting the near-term stuff out of the way. I think we're going to be asking all our companies about situation in Russia and throwing a little bit of COVID concern over in China. What are you seeing on both of those fronts so far this quarter?

Yes. I mean just to reiterate, our guidance for Q1 and the year stays intact. In terms of Russia, I mean, that situation is very difficult obviously. We've really suspended our business there. Just to quantify that, we're -- just a shade over 1% of our revenue is Russia based. Margin is roughly consistent with the Honeywell margin as you think about kind of a 20%. I'm not optimistic that, that business is going to be there for the year. I mean, I think that that's reality based on what I see today. Could it change? Yes. But I think that, that segment of the business is probably under threat, but we're monitoring that situation very closely and seeing what happens. We're obviously protecting our Russian and Ukrainian employees. We actually have a very, very small presence in Ukraine. It's inconsequential on the broader scale of Honeywell. The China situation is brand new. I mean it's just literally evolving. So I'm literally getting updates as we speak in terms of what the impact is, if any, but that's one that just literally happened the last couple of days. And we are not going to be directly impacted in terms of our manufacturing facilities. What we're a bit concerned about but we don't know the answers to yet is what's going on with our supply chain. So we're actually doing a diagnostic right now in terms of the impact on our supply chain. And I would just tell you, right now, it's still a bit of an unknown.

And anything on supply chain related more broadly? Maybe a bit of an update there in terms of Ukraine and Russia on just titanium and things like that.

So the good news for us in terms of titanium and any supply from Russia, we got a little bit ahead of this and we've been working on it for about 3 months in terms of having alternative sources of supply. We've also stocked up a bit on some titanium. We have alternative sources for titanium. So I actually feel very good about alternative sources as it relates -- and this is primarily for the aerospace business. So we're covered. And I don't anticipate much, if any, disruption due to supply chain issues from Russia.

And then what about kind of the legacy kind of the last couple of quarters with whether it's HBT, some of the -- any kind of bending of the curve on electronics and things like that?

I think I would put it twofold. We see some slight improvement especially for HBT in terms of the electronics. So I don't want to get overly enthusiastic, but we actually were getting a little bit more of the chip supply than we anticipated. SPS is probably a little bit worse so they probably balance out. But overall, I am cautiously optimistic there'll be some loosening of the supply chain in electronics. And it's been -- I would say it's slightly better, certainly not worse than what we see in Q4, maybe slightly better, so slightly improving situation. I would say it's still -- on the aerospace side, we've put a couple of hundred people into our own supply chain to try to really break through with some capacity on the part of our suppliers. I think that situation is still challenged, and I think it's one that we're working through. And really, we've projected our demand all the way through the end of the year. We provided frozen windows to our supplier to try to be clear about what the demand looks like. We also anticipate some improvement, I think, in the near term, meaning this quarter. I think it's about what we expected, and it's still a challenging situation.

So just stepping back a bit and talking about the long-term targets. You guys kind of put up this 25% margin target. And if you just do the math on 50 basis points a year, which is your kind of year-over-year annual guidance, that's a pretty long time to get to the 25% from where you are today. So how do we think about the confidence of kind of the bottom line versus obviously somewhat unpredictable top line? And then, ultimately, I think you can pretty easily, with the capital deployment, get to beyond 10%. You can get to something in the kind of 12%, low double-digit type of EPS growth range, which is actually the guidance that you guys had put out there a couple of years ago. Is that kind of the right math? Maybe just talk about the leverage here.

Yes. I think it's very much in the ballpark in terms of the math. I mean, I think -- could we get there faster? Potentially. I mean, I think we have to remember that we're already 21%, 22% kind of an operating margin business. So obviously, the more profitable you become, the gains come a little bit slower. But the fact is this is an up arrow versus what it was. I mean we're at 30, 50. Now we're at 40, 60. So actually, we're anticipating acceleration both in top line and bottom line. And I think that that's something that Honeywell has demonstrated for the last decade, is being able to do both. And I would argue that frankly, maybe in the past, the top line hasn't really been maybe what some of you expected, and that's been really the focus of what we're doing, focus on innovation and focus on breakthroughs and now committing both. So I think your math is roughly in the ballpark. I think that's right. We've got a lot of opportunity on the balance sheet, and we're going to deploy it. And frankly, on M&A, the environment might get better. I mean I expect it to get better in terms of things being a little bit more approachable from a valuation perspective. With interest rates going up, money being a higher cost, we have plenty of bandwidth to do M&A. So I think the algorithm just gets more interesting for Honeywell vis-à-vis what it was in the past. And the reason why is it's because of a lot of the self-help that we've been working on. I mean we spent -- as an example, we spent hundreds of millions of dollars on a lot of IT infrastructure to enable us to be more productive, to enable us to be more digital oriented, to enable us to make the business more simple to run. I can't quantify that, but when you operate the data -- the business with data and information which is of higher quality, you're simply going to make better decisions and you're going to make it foundationally easier to integrate acquisitions because they come into a common foundation. So for example, we started with 157 ERP systems. I mean imagine pulling data from 157 systems just to close your books every month. I mean it's quite a challenge. Now we're at 9, and then we've got a hard requirement that any new acquisition we do has to be integrated into those 9. And you may say, well, 9 is still a lot. Well, we have an enterprise data warehouse. Actually, 9 is quite manageable because we pulled that together into 1 place. And we could go to less, but there is a bit of a law of diminishing returns. So just fundamentally a very different company than it was.

Right. And I think of that 30 to 50, you ended up doing 70.

That's right.

So you kind of beat the target.

Yes. I mean, I think that's the other important thing. And you're referring to the charts that we had in our Investor Day. But credibility is really important to Honeywell, meaning that our say kind of has to match our do. We don't put out targets that we can't deliver and we don't see a path to delivering. We established that in the past. We've actually performed beyond the high end of the margin guidance range, the high end of the revenue growth range. And that combination of revenue growth and margin expansion is what really creates value. And if you take a look at that performance versus some of our peers, it stands at the top of the heap. So -- and we expect that to continue except that the algorithm just got a bit higher, not lower.

So I think you touched on this but it's important and something that Sean and I have been talking a little bit about. And as a fresh face, I think he's been really good at kind of calling out what has surprised him positively. And the narrative is that Dave ran the organization hard and kind of took out all the cost. As you just discussed, the ERP consolidation which has been incremental obviously for you guys. And then you talked about this new operating system, kind of evolving Honeywell operating system. Maybe talk about the differences there between what Dave had going, what the new system looks like as part of this, I think, underappreciated operating transformation that gives you a lot of runway going forward that people don't appreciate.

Yes. I think what Dave put in place was something called HOS, which is the Honeywell Operating System, but that was fundamentally focused on lean in manufacturing facilities. And by the way, it was a great program. It generated a lot of value and enabled us to operate more efficiently with better quality and better output. So that was a good program. But what I did in 2016, '17 and then even enhanced in the last couple of years, which is I really wanted to create a broad framework in terms of how we run Honeywell in terms of an operating system and expand the set of tools beyond just integrated supply chain but really to all aspects of how we run the business. So whether you happen to be in HR or finance or marketing or sales or you're a general manager, there is a curriculum or course around here's what's important, here's how we run the business, our templates, our lessons. There are educational experiences that one can have. It really says this is how we run businesses in Honeywell and it standardizes that. It isn't a recipe so it's not so rigid that we force everything into sort of a very discrete recipe book. But it is an operating system that we integrate in terms of how we run the business. So if you look at my operating reviews and so on monthly, you're going to see all the tools from Honeywell Accelerator reflected in that system. The same is true for my functional leaders, my business leaders. All of that is underpinned by what's found in Honeywell Accelerator. And just to give you -- there's -- I think at the present time, there's over 350 modules in there that we're continuously building. Think about this -- just to simplify a little bit, think about this as sort of like a college curriculum. There's 100-level courses, 200-level courses, 300-level courses based on sort of the maturity, seniority of the professional in place. And people are open to learn about other functions, how GMs work. There's information about other businesses. It's really our playbook as well as our university in terms of how one operates within Honeywell.

Right. And that's kind of the -- I guess when you look at the tangible benefits of that, supply chain, digital, I mean maybe that's part of it, maybe it's not. Maybe talk about those 2 initiatives over the next couple of years and how important they are to the longer-term margin trajectory.

Yes. I mean, I think something we forget is we took out roughly 40% of our fixed cost footprint just in our manufacturing facilities. I mean we're just too complex and that wasn't necessary. We've got a little bit more to go, but we're getting to the place like ERP systems that I just mentioned. I mean we want to make the company easier to run, more streamlined and not make it such a behemoth that's unwieldy. We actually want to make it simple, simplify supply chains and just make it easier to run. Similar story for Honeywell Digital. I mean think about the ERPs I mentioned. Think about over 2,000 websites, 1,500-plus applications. I mean we don't need that. That's just complexity that's unnecessary. And we've reduced all these things by factors of, well, 10 or 100 in some cases. So that all goes not just to -- there's obviously efficiency and productivity that's there, but it's also simplicity because the more simple we can make the business run, the better off we're going to be. So those are -- that's really bearing the fruit of what we're doing. And even technologies, installing a common PLM system across manufacturing and engineering to enable us to design faster and for engineering. So it's just -- I'm very proud of how much we've done to really digitize the company because we've also done a heavy lift on having common data architectures, common set of processes, common global design models and then common IT infrastructure. So now you make it error-proof to run the business. So let me give you a specific example. We have 7 businesses that are project businesses. Project businesses in general are a little bit harder to run than product businesses. They just are because their potential for error is high. Overruns are -- can be common. If you miss something, you can cost the company a lot of money. We've actually standardized and used a common IT backbone. We have metrics which we have all the way at my level that really almost gives me daily visibility to exactly how each of the projects is performing so that we have multiple sets of eyes on exactly how we're running these businesses. It's just one example of the kind of effort that we've gone through in Honeywell to standardize how we operate and also derisk some of the bad things that could happen.

How do you -- how often do you find yourself getting involved in something like that? There's some, I don't know, refinery being built in Thailand or something that you have to kind of like go a little bit of a level deeper because it pops on to your screen. I mean how often does something like that happen to reach your level when it comes to the project businesses?

It does sometimes. I think it's important for the organization to know that I watch that. So sometimes they do it just to make a point because if I ignore it, then it means I don't care. So not that I dig in every project in Thailand, but it's also pretty well known that I do look at this stuff. And if I have -- and it wouldn't be unusual for me to send an e-mail 5 levels down to say what's going on, on this project. Why? Because I think it's important that I'm not any different than anybody else that works in Honeywell and I have to understand what's going on. And I'm probably not going to sit there and solve the issue, but I'm certainly going to ask the question. And I think that's sort of a mutual accountability that's pervasive in Honeywell, is we all have a responsibility to perform to run the business well, and I'm not any different.

From an ESG perspective, I'm definitely not an expert here. But you guys -- a couple of years ago, I think you were doing some due diligence on -- it's hard to put your finger on what it took to kind of get more interest from ESG-related investors. You seem to have much higher conviction on that front at the Investor Day. You put forth a pretty good presentation on that front. What was the biggest -- I guess I don't want to use the term cracked the code, but like do you feel like you now have at least a view on what you need to do to kind of ingratiate the company more with ESG investors? And what was that pivot point? Was there a certain business? Was it something you were doing internally? Like what was the key item that you think gave you the aha moment around ESG for you guys?

Yes. To be very transparent, I'm not sure that we fully cracked the code. I mean just to be very honest, because I -- we've done a ton of research on this very recently, even in the last 2 to 3 months, around sort of -- particularly around some of the rating agencies, the list and so on. And some of the answers, frankly, aren't particularly clear. They're a little opaque, and we've been struggling with that and would love it to be clear so we'd really understand it. But we've sort of checked -- changed our tactic, which is people want to have us on the list. We'd prefer not to be on a list, but -- so what we're going to do is we're going to continue to do what we've been always doing, which is a very ESG-oriented company. I mean 60% of our revenues are ESG oriented. When it comes to the representation both on our Board and within our ranks, we're way above our peer group. When we removed -- we've reduced our greenhouse gas emissions by 90%, and we're committed to a Scope 3 target. And it's something that's very -- it's a very natural thing for us in Honeywell because we've already been doing it for decades, way before everybody started talking about ESG. If anything, we just accelerated. And the new business that we launched, sustainability technology solutions, is frankly 100% ESG oriented. And frankly, my source of frustration is when people kind of refer to our UOP business as oil and gas. It isn't oil and gas. What it does is it actually plays on both sides of the barbell in the energy transformation. Yes, it does provide some solutions for hydrocarbons that frankly, we're still going to need. And the world right now is energy short. We see it in Europe. We see it in a lot of other places. We're going to need some hydrocarbons at least for the near to medium term, but we also have to make a transition to much more sustainable sources of energy. By the way, the UOP business and the STS business have the full portfolio of those solutions, ranging from Ecofining to plastics recycling to carbon capture to hydrogen. I mean we have -- all those solutions are there. They're not undeveloped. They're actually very well developed. And we play on both ends of that barbell, meaning that we can still help our current customer set but we can really help them to transform to the future. And I think that's -- to be honest, Steve, I think this is one of my biggest sources of frustration, which is I would challenge anybody to find a company in our segment that's as ESG oriented as Honeywell in just about everything we do. We're basically a controls and automation company. So things like building controls, what do they do? They sell you energy. Our automation controls in the industrial facilities, they also sell you energy. They also protect human beings. So we have a lot of great stories. So what we've decided to do is we're going to be a little bit more forward in terms of communicating what we do, how we do it, the kind of impact that it has in the world. And I'm convinced that over time, people are going to understand it and embrace the fact that ESG is one of our core themes within Honeywell.

A quick pivot to the businesses. What are you guys seeing in terms of the commercial aerospace recovery? I think Delta had some positive comments this morning, but what -- how is that playing out so far this year?

Yes. I mean we see continued recovery. I mean we see -- and both -- not just in air miles flown but also OE build rates. I think that sort of the limitation is probably going to be the supply chain. But I mean frankly, I am not -- I don't have a single concern about commercial aviation, both on the business side as well as air transport side. I mean the vector is up. It's going to continue to be up this year, next year, probably the following year. It's -- the only thing that we spend time worrying about, as do some of our customers, is making sure that the supply chain is functioning. But it will debottleneck. It will happen. I don't know if it will happen this quarter, next quarter, second half or next year, but there's no question that there will be an adjustment in capacity and the market is poised for growth.

And then on the UAV side, you guys have this $2 billion target out there by 2030, I think it is. How does that -- does that revenue kind of ramp with the market? Is there a consistent share of that market that you put out there? Or is it way later in the decade that we can see some tangible benefits?

We should see exponential growth starting in 2024. So we'll start to see revenue -- we might see a little bit in '23, but it's going to be completely inconsequential. Then '24 starts ramping up at kind of an exponential type curve. And you should expect to see UAVs, UAMs in flight in cities late '23 and in '24. And we made a bet here. I think it's a logical bet. I think the world does need an alternative form of transportation which is sustainable. I think we're the only large aerospace player that's actually made that bet. And when that market takes off, and I'm confident that it will, we're going to be a major player. And the way we kind of think about that is not only is it a breakthrough but it future-proofs the business. And this is the thing that I think also doesn't -- is not well appreciated. I mean we can always print a bit more EPS like this year if we didn't invest in UAM, UAV. But I think it's our responsibility, my responsibility to not just think about tomorrow but think about a decade from now. And we always try to have that balance between delivering in the next quarter but also delivering in the next decade, and UAV and UAM is just one example of that.

On HBT, this is a business that has -- should seemingly grow pretty fast, it's a decent amount of technology here, but never quite kind of gets there. You're targeting mid to high single-digit growth going forward. Why now? Like what's different today versus the past? Acknowledging supply constraints, but when will we -- when will people come away saying, "Okay, now this thing is now growing. This is kind of realizing its potential?"

Well, as you look at some of our offerings, whether it be connected, healthy buildings, all those projects are taking off, I think, now as we kind of see people coming back to offices, to schools. And by the way, the last cycle was missed. I mean there wasn't a lot of retrofit healthy building kind of work that was done last summer so we think summer of '22 and '23 are even bigger because schools now do have more funding. So we should expect to see that this year, acceleration next year as I look at our backlog, as much -- as I look at our win rates in a lot of our healthy, connected buildings. I'm very optimistic what that business can do, and our backlog just keeps growing. I mean it's -- so I'm very confident about its growth rates, whether it's some of our solutions or product offerings in fire and security. They're all doing very, very well. And fire is one of our best global businesses that we have in the portfolio, which is continuing to win in the marketplace. So there's a lot of reason to be optimistic. And we see it in the numbers and the bookings and the backlog, which is -- and the good news is it's continuing to grow. The bad news is it's continuing to grow, which is we just got to be able to get through a lot -- some of the supply chain challenges. But it's very well positioned for growth.

Second half of this year should be pretty good?

Yes, we should see good growth second half of this year.

On SPS, a bit of a tale of 2 cities. The handheld stuff is now kind of -- seems like it's full on recovering, maybe even taking a little bit of market share.

No, no, no. Not a little bit, a lot.

So how fast can that business grow this year?

We're still targeting for high single-digit to double-digit growth this year. I mean it's -- that business has been on an incredible run. It's winning in the marketplace, in every region. It has a very exciting array of brand-new products. And what used to be a bit of a problem business is now winning and winning substantially in the marketplace. So we're pretty excited what that business is doing, and I'm confident it's going to continue to grow faster than the market.

And then there is Intelligrated, which you're kind of taking a little bit more of a project selectivity tack around.

Yes, yes. I think if there's -- this is one of those good news/bad news stories. The good news is we grew the business 50% last year. The bad news is we grew the business 50% last year because, I think, frankly, that rate of growth last year was not something I would try to do again given supply chain, people shortages, ability to execute. So we did a lot of growth, but frankly, the profitability suffered. And we're going to be looking at this a little bit differently, both in terms of our capacity, ability to really process that level of growth as well as, and this is really important, the life cycle margin opportunity on a customer-by-customer basis. So I wouldn't expect 50% growth rates in the future. We could do that. There's enough business to do it, but I think it's better to grow profitably and thoughtfully to make sure that we have an installed base that really we can mine for many years to come.

Is there enough business to -- I mean shouldn't there be some digestion here? Maybe we're just -- as a cyclicals analyst, we're kind of used to, if there's a 50, that means there's got to be a negative -- pretty significant negative somewhere.

Yes. At some point -- yes, I think at some point, there is going to be a little bit of a falloff and probably reduce. But that -- I don't think that's anywhere in the next 3 years because as we think -- I would say that -- if we think about the market, I would say that the North American market is kind of middle innings, let's call it, fifth or sixth inning. When we think about Europe, which is just starting to pick up, it's probably in the second or third. So as maybe North America decelerates a little bit, which I don't think is really going to happen for another at least 2 to 3 years and beyond that, I really don't know, Europe is going to be picking up. And we're building out some capacity. We've opened a new manufacturing center in Poland to actually serve the Intelligrated business. We have a metrics-based system for a lot of our designs, and we think that's the next leg of the stool. And I think this business, what we're trying to do is win market share and create the installed base but not at any price. It really has to have a segmentation of customers that really want to buy our services, that want to buy our connected warehouse software, that really creates that profitable revenue stream for the long term. And that's why we're being selective. That's probably going to cost us a few points on growth, but it's going to enable us to be much more profitable longer term.

But can we like level set that? Because there's a difference between some company's -- the business is so bad that they reach project selectivity. That means the revenues are down 10% or whatever, right? There's a big gap between that and 50% growth. So is -- can the sweet spot still be that high single digit or even double digit? Or is the sweet spot 5?

Yes. If you take a look at the next decade, I expect that business to grow exactly in that range. Let's call it a high single-digit to low double-digit growth rate. That's probably the sweet spot over the cycle. Some years, it's going to be flattish. Other years, it's going to grow 20%. What I don't want to do is a little bit like 0 to 50 and those kinds of reverberation. I think we've got to get it to a bit more of a steady state. That's real -- and we've got to build more infrastructure, a little bit like I talked about, Honeywell Digital and ISC transformation and so on that we've done to the broader Honeywell. We've got to remember we only bought that business 5 years ago. And at that point, it was $800 million. Now it's nearly $3 billion. And any time you go from that rate of growth, you actually have to invest in the infrastructure, the process, the IT systems and so on. And that's what we're doing now to really be much more coherent in terms of how we process and really drive the business.

Just one last one for me. On the M&A side, a bit of market volatility, some of these growth multiples coming in. Do you feel -- how do you feel today about your ability to get something done here in the near term, better than a couple of months ago or people's expectations are too high?

No, I think as -- obviously, the market is going sideways to down -- it's, well, down, not sideways. But we take a look at interest rates are probably going to get at least a 0.25 point bump this week, maybe 50 bps. So we're going to go into an environment which is higher interest rates, markets trending sideways to down. So I do -- I'm a bit more optimistic about assets being at a much more approachable value point. And obviously, we're ready. I mean we still have plenty of capacity on our balance sheet to be active. We're going to be active. And I think we could be going into a period in the short to medium term. Some of this does have to soak in because, I mean, sort of people don't instantly say, "Okay, well, the market is going sideways so now my company is worth 20% less." That takes a few months to soak in. But overall, I'm actually pretty optimistic, about as optimistic as I've been in a long time, that we might have more opportunities ahead of us. And maybe just to provide an update on an acquisition we made about a year ago, which is Sparta Systems. That's a software acquisition, software business. It's going to be EPS accretive in year 2 after we bought it, and that's GAAP EPS accretive. And that's -- I think that, that just gives you an idea in terms of how we think about how we value companies and what we pay for them.

What's the revenue base of that thing now?

It's north of 100.

Okay. Any questions out there? Okay. I've got about 5 minutes left here. On the acquisition side, you are sticking to return hurdles, I think. I mean I couldn't quite discern what those return hurdles are. Are you -- are these returns going to be more back-end loaded now because of the valuations? Or when you announce these things, are -- will it be a realistic kind of ramp to whatever return you're going to get in year 3 or year 5?

Yes. I mean -- look, I mean, we have some rough hurdles. We'd love it to be EPS accretive year 2, which is one of them, I mean, IRR greater than 10%. But we're also really looking at sort of the strategic positioning and our conviction in the market. The competitive environment for that business is also superbly important, which is how it's positioned versus alternatives. And we look at all these things. So I'm not -- I mean we have hurdles because I think it keeps you disciplined, but I'm not ultra rigid around those hurdles. And US Digital Designs, I mean, we bought that business in December, and it's probably going to be a 25% ROIC in year 5. So I mean those are the kinds of acquisitions I like because I can stand in front of all of you and say this is going to have a valid return.

And is there something out there that's north of $10 billion that's bubbling up or we're still talking more like sizable bolt-ons?

It's going to be more likely to be sizable bolt-ons. I mean what we're -- kind of our sweet spot, and this is from an acquisition price point, let's call it, from 1 to 5 would be ideal. I mean that's sort of what we're targeting. And I would view that, given our value, as probably a bolt-on.

And any major divestitures that are -- are you still portfolio...

Yes. Divestitures are always going to be part of the program. I mean the portfolio rotation is important, and it's going to be part of the playbook because we constantly have to stay relevant and have a portfolio of contemporary businesses, which are going to grow in the future. We've done 4 divestitures or spin in the last 4 or 5 years, whether it's AdvanSix, Resideo, Garrett, and then we sold our retail business last year. So there's going to be some divestitures. So I do expect something probably not -- we're not going to hive off a major part of Honeywell because a lot of the heavier lift was done, but I would expect some further optimization of the portfolio to be part of the normal course of action.

And then just lastly on quantum. Why are you guys so differentiated here? And what makes kind of Honeywell special on this front?

A couple of things. In terms of the hardware, we do have more sort of functioning logical cubits than anybody else. And that's not something that we're told -- we're told that by our customers who frankly use other quantum systems. Secondly, our software from the company that we merged with, CQC, is used across many quantum platforms, not just our own. So if you think about that, we really kind of have 2 different bets on quantum. We have a bet on our own hardware but we also have a bet on quantum in general. And what makes us unique is our controls expertise, our know-how in the trapped ion technology. The blue chip customers said that -- we have blue-chip investors that are investing in the company, IBM being the latest to make an investment. And we think that that's a business that's well positioned for the future, and we've incubated it within Honeywell. But probably, at some point, it's going to be liberated from Honeywell. And the way that investors should probably think about that is that's an incremental source of cash as over time we monetize that investment. That was not reflected in any of our sort of cash projection view. That is incremental to anything else that we projected.

And you guys have incubated this for how long? I mean when did this initiate?

It's close to a decade, I mean. So this started even in Dave's time.

Right. I think we use it here at JPMorgan. And very -- I think people also underappreciate that you can have a technology like that kind of sprout out of nowhere from this portfolio. There aren't many industrial companies that can...

Yes. We've now had several examples where we've grown things from 0 to $100 million or $1 billion. Our cybersecurity business for OT has grown from literally 0 to now it's well north of $100 million. So our Honeywell Connected Enterprise, it was in hundreds of million. Now it's $1.2 billion roughly. So we -- there's more and more examples like that. STS, which was less than 100, is going to do -- the 200 is going to do 700. And I feel very confident that the $700 million number could be even bigger. So we're just thinking about it at scale. I think what -- when you think about Honeywell, I think the one thing that I want to emphasize is do think of us as a company that creates technology. We are a technology company. We just don't happen to serve the consumer. We serve the other industrial companies. But it is a technology company. It just doesn't happen to get all the headlines that consumer companies do.

Great. I think that's all the time we have, and we'll move on. So thanks, Darius. Appreciate it.

Thank you, Steve.