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

I guess Mike is going to make a few introductory remarks, and then we're going to go to Stephane. And I just want to make Sean -- I want to thank him for making this happen. Thanks so much. It's, what, the biggest stock I cover. So it's a real treat to have you guys, thank you.

Well, thank you, Andrew. It's great to be here. It's great to see everybody in 3 dimensions again, and it was 2 years ago we were here. I was here, and it was -- we were saying, "Well, this thing is going to last a few months maybe. I don't -- all the way to the summer." So here we are 2 years later. But Real pleasure to be here. I'm going to let Stephane get right into it, but one of the things that -- one of the reasons why we formed a complete business unit around urban air mobility and unmanned aerial systems is I think it really needs the attention -- okay, good. I don' t want -- yes. I can talk louder. It's usually not a problem for me. I looked at it 2 years ago and felt that it needed the focus that an individual business unit reporting directly to me would bring it. At the time, we had been working on the products kind of in our electronic solutions, our avionics business group. And any time you do something like that, it sort of gets a certain focus and emphasis, but for us, this is much broader than avionics. This is propulsion. This is actuation. This is flight controls. This is avionics. This is services and support, and I really felt that to do that it needed to have its own place at the table as a business unit and also to enable it to move with the kind of speed that our customers move at. It's hard for a big company like Honeywell, even a division, a group like Aerospace within Honeywell to move with the kind of agility that a startup has. So I felt like having Stephane have his business, really a self-contained business that sits on my staff was the way to do that. And also, the other thing that struck me was that if you look at the products that we deliver today, our mainstream products, ring laser gyroscopes, pressurization and aircraft cabin, environmental control systems, business jet engines, auxiliary power units, these are products that, in the case of the gyroscopes, Elmer Sperry started almost 100 years ago. And so we've got a history of planting seeds that have 50-, 75-, 100-year sort of life spans. We still make business jet engines that we launched in the early 1970s with the TFE731 engine family and pressurization systems and environmental control systems that were developed starting in the 1940s. And so we're not just doing this for today. We're doing this for 20, 40, 60, 80 years from now. And we really do see this area, this broad area of unmanned aerial systems as the future of flight, and we want to be part of that. So without any further ado, I'm going to turn it over to Stephane, and as Andrew noted, Stephane leads this business, and we have plenty of time for Q&A.

Already got slides. There we go. Was that me? Or was that you? It's good that way. All right. Well, thank you, everybody. Welcome. So we're going to talk today about -- we're in this session about -- you may hear the terms urban air mobility, advanced air mobility, delivery drones, unmanned aerial systems, EV tools. You'll hear all these terms, and we'll use the umbrella term of UAM for that for now. All of that is a response to 2 big mega trends that we all know and live every single day, right? Traffic congestion is something that if you live in any kind of metropolis, it's 150 hours out of your life every year going back and forth. If you live outside of the United States, whether you're in Paris, Rome, Rio, Mexico City, London, something like that, it's up to 200 hours a year in a car. And so we all know this. It's getting more and more. And so that is prompting people to think about how can we do this differently. At the same time, all of us have gotten hooked on e-commerce, and rather than driving to the store, we all do things online. And it used to be that 5-day delivery was pretty good. Then all of a sudden, 3-day delivery was not bad, and then 2-day delivery was not fast enough, and now we want it same day, right? And what we see is that there are -- by the end of this decade, there will be something like 726 billion parcels being delivered around the world per year, 2/3 of which are e-commerce, and that doesn't include things like DoorDash, Uber Eats or Grubhub, right? So what that means in practical terms is more trucks, more delivery vans on the road. And so the combined effect of all these things is prompting the need for some kind of new innovation in transportation, whether it is self-driving cars, whether it is electric scooters or whether it is new kinds of aircraft, new kinds of aerial transportation. And so when we think about these, as you think about new kinds of aircraft that we can take off vertically like your helicopter that are as quiet as a Tesla, they're all electric, so that they're sustainable. Quiet enough that they can take off out of your neighborhood and enable a lot of new kinds of transportation to happen. So that's what we see. That's our vision. We think this is a generational opportunity in aerospace. New companies are being formed. Large aerospace companies have been around for a long time are getting revitalized and all sorts of new things that are happening here. And so our vision is, together with the people that are innovative in these new kinds of aircraft is that very soon, you'll be able to do 100-mile trip door-to-door in 45 minutes or less. Very soon, we'll be able to do same-day package delivery anywhere in the popular world, not just the major cities where Amazon delivers today. So that's really what our focus is, and as Mike mentioned, this is a long-term focus. It's not just about tomorrow. It's about tomorrow, 5 years, 10 years and so on. So if we drill down just a little bit into what it means for the movement of people, I assume that some of you live in New York City. So you imagine going from Manhattan to JFK and that can be an 1.5 hours ordeal or it could be 8 minutes, door to door. Maybe some of you don't like to live in Manhattan and you want to live in the suburbs like Connecticut, New Jersey, Long Island, whatever, and that can be 1.5 hours on a subway or it could be 20 minutes door to door. Or perhaps you live up in Boston and you'd like to go to Martha's Vineyard, but between driving there and a ferry, that can be a all-morning thing or it can be 20 minutes. Or perhaps you live in Phoenix, like we do, and you want to go to Sedona, and that could be a 1.5 hour, 2-hour drive up the I-17 or it can be 30 minutes. This is the kind of transformational change we're talking about, and movement of people via the air using these new kinds of vehicles. So let's switch go briefly to logistics. This is the other side of advanced aerial mobility. So if we think about moving goods, this is not people but goods, the traditional aerial logistics chain today is big air cargo freighter goes from big airport to big airport. Goods are moved into smaller aircraft that fly from bigger port to small airport. We do that again maybe, and then out to delivery trucks and then go to warehouses that then go to either your house, your business or whatever. It's very hub and spoke, okay? It's also potentially very single-threaded, right? So you have -- when you're having those trucks that go across bridges from one part of a city to another or from one border to another, it's single threaded. If something goes wrong, then all of a sudden, things stop as we all saw in Canada with [indiscernible] convoy not too long ago. And so looking at this advanced aerial mobility, unmanned aerial systems or cargo drones, as we like to call it, those have a place to play to completely change the way we do some of these things. So imagine instead of having a small airplane that goes from the big airport to another airport and then from a truck in the airport to the warehouse, you can [ have -- accept ] directly from the small airport or the big airport, and it goes right to the warehouse. It goes from warehouse to warehouse, as is shown in this picture here, okay. When now, all of a sudden, you could do cross-dock logistics more easily. You can do more just-in-time delivery. You don't have to preposition as much stock. These kind of things become possible. In traditional middle-mile delivery that we talk about, which is where you have the [ Cessna caravans ] that fly, the pilot takes off early in the morning, flies a couple of hours to the destination, all the cargoes unloaded, and he sits there for 6 hours. Then all the stuff from that city is put back the new shipments, new FedEx packages, whatever, go into that plane. Then he flies another 1.5 hours to get back and then he goes home. Most of his day is spent sitting waiting around. With an aircraft like this, the pilot productivity can be all 8 hours, right? He doesn't have to spend -- he doesn't have to go there necessarily. He can also do it remotely. So these are the kinds of things we're talking about. So the way we look at the market, we segment it into 3 major segments, what I call here, air taxi, which is the movement of people which we just talked about; middle-mile cargo; and then small drone delivery, which we call here local light parcel. This is local delivery of small parcels. All 3 markets, we think, are very interesting. The air taxi market is the one that gets all the press, very, very interesting market. The middle-mile cargo, the logistics market is just as interesting, sometimes doesn't get quite as much press. The small drone delivery gets a lot of press as well, and it also is very interesting. Collectively, among the 3, we see that by 2030, the annual TAM for this market could be up to $120 billion, and the Honeywell share of that could be up to 25%, let's say, $30 billion of that. Now the way we look at it is based on a number of aircraft shipments, okay, because that's what we care about as a business because we sell technology. This may be in contrast or different to some of the other forecast or analyses that you'll see if you look around that are talking more about the airline level, how many passenger seat miles can I -- are going to be in the market when these vehicles are flying. So this is an aircraft quantity-type view. So we feel we're very well positioned, as I'll talk a bit more later, to really lead and create this market, both now and all the way through 2030 and beyond. So we don't make aircraft, but we make the systems that make these aircraft possible or, as I like to say to the lay people, we make the brains and the muscles that make these vehicles possible. The brains here is the software. It's the avionics. It's the fly-by-wire systems or flight control systems, and the muscles are the electric propulsion, the actuation, the thermal cooling systems that we do. These are the core systems without which a vehicle like this is not possible. And so let me talk just a little bit about the systems that we do. So starting from the bottom left, you'll see a display there, right? This is a display that a pilot will see in the cockpit. Really, what's behind that is a vehicle management system or what you might call a flight deck, this is the brains of the aircraft. This is the computer hardware, the computer software that makes the aircraft able to fly, enables the pilot to fly the vehicle, okay? Now by the way, in order to scale this market, we need to bring in a lot of pilots into -- to fly these aircraft, many more than we have right now. And so in order to make that happen, we're doing a lot of work investing a lot into simplifying what that interface looks like, what we call simplified vehicle operations so that it's easier to learn, easier to stay current and, therefore, easier to get a bunch pilots onboarded if you're going to start an airline based on these aircraft, big area for Honeywell. Another area for us here is autonomy, so that as these vehicles become -- the vehicles become more and more sophisticated, and eventually, pilots may no longer need to be in the vehicle, the autonomy, the technology that goes to make these vehicles self-flying is also an area that we're very interested in. Moving on from that, let me talk about our flight control system or, what we call, fly-by-wire. If you look at a picture of this aircraft, you'll see that it has wages and has 2 tails and it has 8 motors, 4 of which rotate once only vertically. There is no way that a single pilot with 2 hands is going to be able to control all of that himself. And what you need is a computer that can run all of that at the direction of the pilot or at the direction of the autopilot. That is what a flight control computer does or a fly-by-wire system does. Honeywell is a specialist in this. If you're ever in a Dreamliner and you look out the window and you see the surfaces moving on the wings, you're watching Honeywell at work. And that is the technology that we have now made extremely compact in order to fit into an aircraft like this. Next, moving on. All these aircraft need cooling, especially in hot summers when you're in the cabin, you want to quite comfortably. We make these kinds of systems. And then lastly, all of these aircraft need electric motors, electric propulsion units in order to fly, and that is an area where Honeywell is also investing a lot. It has technology, both on the electric motor side of things as well as hybrid electric systems for when you want to go longer ranges and maybe batteries aren't long enough -- aren't good enough for the long range. We also make plenty of other things, but for now, this is the core of what we do in this space. So with that, looking a little bit about -- okay, great. So what is the Honeywell share of this? So what you see here, again, urban air taxi, middle-mile cargo, small drone, the pictures you see here are just so that you can understand the kind of vehicle I'm talking about, they are not to indicate that any picture you see that those are the prices of those vehicles. But in urban air taxi, roughly, it can be anywhere, let's say, $2 million to $5 million per vehicle, roughly. And our share of that, depending on what systems we put into that vehicle, can be anywhere between $200,000 to $1.5 million. So what that says is we may be up to 1/3 of that vehicle. Same thing if you look at middle-mile cargo UAVs. They may be anywhere between $800,000 and $5 million, and our share of that anywhere between $100,000 and $1.5 million, depending on how much of our technology is on that vehicle. Again, a very significant, if not the most significant part of that vehicle. And then lastly, small drones, same story. There, we focus mostly on sensors, sensors that are required to going beyond the line of sight of the operator to fly these small drones beyond the line of sight of the guy on the ground, they need special sensors. They also need the [ FAA ] to do a few things for us. We specialize in that kind of technology. And we're winning. A lot of people debate on the sidelines in this business market going to be real? Is this market not going to be real? When is it going to happen? What does it mean? For us, this is for real. We're not in the sidelines. We're in the game, and we're winning. We've won already $3.5 billion worth of programs with many more coming across many of the companies that are leading in the segment today. And so with that, I think we can turn it over to Andrew if they have a few questions.

Sure. So a couple of things. So maybe you had a slide or maybe you could just talk a little bit about [indiscernible] for the business in the second half of the decade, like thinking about the urban [indiscernible] middle-mile [indiscernible]. How do you see the ramp? How should we -- how do you see the ramp? How should we look at the backlog building? Are you going to get backlog before that? Just looking from the outside. And how do investors will be able -- is it going to be linear? Is it going to be more [indiscernible]?

Like an S curve.

Yes. So we think it will be more like an S curve, like any new technology, right? It doesn't just flash automatically to being everywhere. It starts out and then has an accelerating ramp as more and more people decide they want to fly in these aircraft, as more and more municipalities decide that they want this kind of a service in their city, so then there'll be a rapid ramp, and then eventually, it will little mature just like any new technology. So that's kind of the way we see it. .

And $3.5 billion in orders, but as we look at orders backlog, would that be more linear? Would that follow a similar pattern as well?

That could go -- that will probably follow a similar pattern, but there'll be some shifting because clearly, people have to build the aircraft. So there'll be -- but I think overall, I think about the market as it's going to start with a lot of buzz with some very key visible operations, and then we'll come to the hard work of actually growing this across the world.

Yes. The vast majority is -- will be in the back half of this decade and into the next decade, and it's extremely nonlinear. I mean it will be a very rapid ramp once it starts. And I don't know if we're talking 2024, 2025, which revenues [indiscernible].

Yes. How does -- have you evolved in the past 12 months, timing, technology emerging players?

The -- in terms of timing, we kind of just talked a little bit about it. I think if you had asked us a year ago, we might have said 23 to 25 [ LCVs ] in operation. Now I would probably say 24, 25, so the first really start seeing them. The -- in terms of the emerging players, what we kind of see is we kind of see sort of 3 kind of groups companies. We see the sort of the first movers, right, the ones that have come in, that raised a lot of capital, that are well known now, that are really driving innovation. We see traditional aerospace companies that are also active, especially more recently being very active in this now. And then we also see a second wave, a second wave of companies that they were not the first mover but also see this as an opportunity that are beginning to materialize. So that's kind of what we see.

Got you. And you sort of talked about air taxi, middle-mile cargo and local light parcel. Which one has been developing the fastest? And other big differences in underlying technology requirements if you compare and contrast?

So I don't think we see one segment developing faster than the other, but what we do see is the urban air taxi segment, that's the one that tends to get a lot of the press. And so it's perceived that, that one is really moving ahead fast, and it is moving fast. What perhaps doesn't get as much visibility is the cargo side of things, which is just as interesting, okay? And they're moving just as quickly, right? It just doesn't get quite as much press, mostly because it's, I think, a business-to-business play rather than a business-to-consumer play, so it's not visible. Then the small delivery drones is also moving quickly as well. The technology for the first 2, the first 2 segments are almost like common in between. There are differences. There's no pilot on UAV. So there are differences, but they're kind of very similar. Small drones are different. It's got a super lightweight, super inexpensive. It's a sort of a thing.

Yes. There is a -- I think, a -- maybe it's a public perception or just inertia element between an urban air taxi and a freight vehicle. The underlying technologies are identical, but I think people's willingness to accept a completely autonomous vehicle carrying people in the city is going to be a little further out. These things are going to start off with pilots, and they're going to move to operators, then they're going to move to autonomy, mostly because of rulemaking and because of public perception issues. From a freight standpoint, I think we're going to see much more autonomy sooner. So...

So look, you highlighted the use of the Honeywell core air expertise to develop next-generation technology, flight management, fly-by-wire, connectivity, simplified vehicle operation. I guess you guys showed it at the Analyst Day. It was really, really cool, but emerging technologies like electric propulsion. So as you -- right, you -- given your historic focus, right, so a couple of things. What is similar? What is different in terms of your R&D and product approach as you try to tackle this market? And then how do you set up organizationally for next-gen, high-growth businesses like UAM in aero, right? And you highlighted that you did need to set it up separately, but what is different. So A, first, how do you sort of tackle the technology challenge? And B, how you do tackle organizational challenge?

Maybe I'll take the technology piece, and then -- so on the technology piece, one of the things that we're doing is we are looking at this not just as, okay, this is a new segment over here, and we think it's important to we're going to go and invest in it. We're looking at this as this is an opportunity to innovate, not just for the UAM business, but across all of our businesses, right? These things need technology that are lighter, that are more inexpensive, that are more capable, and every segment wants that. So everything that we develop tends to end up being a platform kind of across multiple segments, and we treat it that way. So we go out and saying, this is something that is foundational. We'll do a clean sheet design on actuation, for example, just to make sure we have the weight targets, and once we've done that, that has benefits for everybody. So that's a lot of how we approach it.

Yes. I would echo that. So to put some specifics on it, air transport aircraft of the future are going to operate with [ bleedless ] engines. They're going to need air pumps and vapor cycle cooling systems to cool them. They're not going to use their cycle machines like they do today that run off engine [ bleeder ]. So we're developing vapor cycle cooling for general aviation and urban air mobility, but it's going to be applicable to those other spaces. Electromechanical actuation for urban air mobility is going to find its way into air transport and business aviation as well with more electric aircraft. You're talking about 400- and 800-volt systems being available. You don't need hydraulics anymore. The waste savings with electronics is very significant as well as the reliability and, of course, the environmental friendliness of it. So the electromechanical actuation work we're doing is applicable in those spaces. Anthem as a cockpit has applications in business aviation, air transport and defense as well. So very little of what we're doing is completely bespoke to this segment, and that's important to us.

And in terms of talent, right, I guess, [indiscernible] highlighted [ his thought ] probably would sort of study all this stuff, right? But is there an opportunity to take engineers from your legacy programs and transition them to this new technology? Or do you literally need to bring in new people with new mindset because it's a different end market, different culture, it moves at a different speed, different regulatory environment? How do you tackle the culture?

Yes. I can jump on it, and you can add. I would say from a technology standpoint and an engineering standpoint, there's a lot of commonality. One of the things we bring to this space is our certification product development certification experience. So we actually want people that have that more legacy experience in that area. I would say from a business development and ideation and breakthrough initiatives and developing new technologies that are unique to this space, we've tried to go get fresh eyes on it. So I don't know if...

Yes. Exactly. So within our business, what's worked really well is mixing long-term Honeywell experienced engineers that know everything about certification and all that with people from the outside that maybe come from Silicon Valley, right? And that mix creates really something that's bigger than just one or the other, right? And it's worked really, really well for us.

And I guess the last question for me, we're sort of running out of time, but it seems like simplified vehicle operations, one of the key enablers of scalability, right? And as I said, you definitely showed it at the Analyst Day. It was pretty cool. What are the steps and timing to get the necessary regulatory approval? And what are the key agencies in the U.S. and abroad? And what have you heard from them?

Yes. So the -- well, the key agencies, it's the FAA, [indiscernible], civil -- the CAA in England. Those are the agencies. The -- and what we have to do, obviously, we have to come up with a concept, which we've done; develop prototype software to really flesh out our concepts; then do the human factor studies, doing a fair number of studies, in fact, to really flesh out what it is we want to do; and then immediately need to engage with the authorities to familiarize them with what this is because most of them -- there's some talk about this in the past, but it's still socializing this, familiarizing them with this. So we're kind of in that phase right now, and then eventually, we have to have some certification basis for this kind of technology. So far, it's been very receptive. People are intrigued. They want to see new things. They want things to move forward. They want it to be absolutely safe, and we would all agree with that. But so far, it's been a good reception.

But would you discuss in sort of your early discussions? Are you starting to sort of discuss concrete time lines?

No. It's pretty mature with several of our OEMs. And I would say also that what we're seeing is -- and I think this is a good thing, is that most of the OEMs that we're working with are targeting the high end of the [ cert ] Approach. They're not trying to squeak this thing by -- like a general aviation airplane. They're approaching it as a Part 23 or a fuller transport-type [ cert ], which is going to be much harder take longer, but it's going to ensure that these systems will actually work, will be certifiable and will be able to operate, and I think that's actually a good approach. So it's -- I've actually been pleasantly surprised by the response of the regulatory authorities and their engagement in this. The bigger challenge is around the operations in the city like they are with helicopters. A lot of this, though, is pretty familiar. So...

All right. Mike, Stephane, it's -- as I said, it's an absolute pleasure to have you here. Thank you for kicking off the event. And Sean...

Thanks for having us.

Thank you.

Thanks so much.