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

Thank you for standing by, and welcome to the Honeywell Fourth Quarter 2022 Leadership Webcast. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead.

Thank you, Shannon. Good morning, everyone, and welcome to the fourth quarter 2022 installment of the Honeywell Leadership Webcast Series. The purpose of these webcasts is to provide our investors with the opportunity to hear from a wide range of Honeywell speakers -- those high-level leaders on topics of special interest. For example, in September, we hosted a discussion on technology and innovation with our Chief Commercial and Technology Officers. And in June, we spent time with the CEO and CFO of Honeywell Building Technologies for a deep dive into our recent innovations in sustainable buildings. Both the presentation and webcast are available on our Investor Relations website. Today, we will host a roundtable discussion with our senior leadership and cover a wide range of topics that are on the top of mind for our investors. Joining me today from Honeywell are Chairman and Chief Executive Officer, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur; and Senior Vice President and General Counsel; Anne Madden. In addition, we have Scott Davis, Chairman and CEO of Melius Research, here with us to lead the discussion. Scott is a long-time follower of Honeywell with a few decades of experience covering our stock as a research analyst and certainly well known to many of you on this call. This webcast is 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 our discussion today may 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. Good morning, everyone. Darius, Greg, Vimal, Anne thank you for being here today. Scott, thanks for joining us. And let me turn it over to Scott to for the discussion.

Great. Thank you, everybody. Good morning, everybody, and thanks for your time. Let's get this out of the way. We're right in the middle of the quarter. We're, I think, almost spot on in the middle of the quarter, and we want to focus the conversation around long-term stuff, but I think there's plenty of people on the line, who would love to get an update on what you're seeing at Honeywell near term.

Yes, sure. So I'll think that, Scott. As you said, we're halfway through. And as a reminder, so much of our quarter happens in the third month -- but I can tell you we're off to a good start in October and into November. And as we see it today, our guidance ranges very much intact. So we're reaffirming guidance. It is a range on purpose, as we've said many times because there's a lot of volatility in the market. That continues to be the case, but we're confident we'll be able to manage our way through that as we always do.

Okay. Well, let's talk about more fun steps. So Darius, you walked in and mentioned you guys hosted a town hall today. Maybe we could start and just ask what you're focused on and what you're focusing the teams on?

Yes. Well, thank you, Scott. Thanks for being with us. Yes. So it was very fun town hall. I mean, for one, obviously, we always provide an update to the team on Q3 results and some rewards and recognition of business units and people doing great things for customers from a financial perspective, just innovation, it's always time for that. But today was kind of an extra special day because we focused nearly the entire town hall on sustainability. And what we're doing both internally to make Honeywell much more sustainable, but even morph on is what we're doing for our customers. We had one of our major customers actually dial into the town hall and talk about the kinds of things we're working together. And we get people, who've been to Honeywell talk about the kind of impact that they're having under all and some of their day-to-day work and how they translate to what they're doing in Honeywell to their personal daily lives and their care for the planet, future generations, and the kind of impact Honeywell technologies will have on the future of the planet. And for us, we are not bad surfing. I mean, we are not a company that's bad surfing because sort of sustainability seems to be the buzzword of the day. But if you look at our history and who we are, who have been in terms of -- we're primarily in automation and controls company. When you drive automation and control, you -- much of the value you create is to keep things within operating limits. And generally, to save energy and many, many of our solutions throughout all the SPGs save energy. On top of that, when you have businesses like PMT and UOP and the Sustainability Technology Solutions, which have every relevant technology, which is necessary to drive an energy transition. So I jokingly but I only have jokingly said, Barry Glickman, who leads our STS business. He probably has the coolest job in Honeywell, because every one of the technologies that are in his business really impact the future of the planet, and we're going to be more fun than that.

That's great. And sustainability is an interesting topic. But when I look across the products you've launched and the one that feels most tangible is aviation fuel, sustainable aviation fuel is just the market is massive, right? But it's been slow to take off, if you will. I mean, I think it's a -- there's a question about price and feedstock availability and what are the gating factors? And what can Honeywell do to really drive that growth rate and really the adoption of the fuel?

Yes. I mean certainly, SAP is a big opportunity for us. We recently announced a partnership with Alder Technologies and United Airlines, and we're on a path to really make that a reality. I would say it's less of a technology challenge. I think, between ourselves and many of our partners. The technology works. We've proven that it does. I mean we've conducted a cross-Atlantic fly it on green jet fuel more than 2 decades ago. So I mean this stuff actually does work. So I think let's put aside sort of those concerns. Yes, there are some challenges around feedstock, permitting things of that nature. But I'm very confident that's going to be figured out. And just anecdotally, I mean, I was in Latin America a couple of weeks ago. And if you look at sort of the bio environment in Latin America. It's very fitting to be one of the global hubs for greenfield. It's not just jet fuel, but really all fuels. And I think we have a similar opportunity here in North America and Europe and other places. So like anything, maybe the initial uptick is a little bit slower than all of us would like, but the curve could go exponential a lot faster than many people anticipate. I mean, that's sort of the way it is that people get very impatient to kind of see the results. But once that infrastructure is created and set up, the growth does usually exceeds our expectations. And that's what we expect in this case as well.

That makes sense. So I think one of the elephant in the room, whenever you're meeting with a large multi-industry company is, are you better off being a pure play or more focused? Or are you better off having the scale of a broad set of products that obviously can be helpful in different economic times and things are cycling in different directions. But what is your vision for Honeywell over kind of a 3- to 5-year time period? Is it going to be more focused, more diversified? Are acquisitions more likely to be outside of your core or within your core -- perhaps just a view there.

Sure. and I might ask Vimal to also comment on this one as well. But -- for us, it isn't a question of should we be sort of multi-industry or should we be -- I would also argue we're not really a conglomerate because there is a very much a common theme in terms of automation controls throughout our portfolio. But I think it fundamentally comes to the point is, are we -- is there -- are we adding value at the center? Is there something by having these businesses together is their value creation, not just do we think so, but the market thinks, right? Because I mean you have to keep yourself honest, does the market believe that? And do we believe that? We firmly believe that. So whether we talk about Honeywell connected enterprise and the scale we're trying to drive in our software businesses, whether it's Honeywell Technology Solutions, which is our COE of engineering talent capability, which really flows across many of our businesses, whether it's leveraging our automation and controls technology, whether it's our operating system called Accelerator, which we use in everything we do and reinforce the operating rigor that we have in our businesses. Those are -- and then sort of the BTI and innovation framework that we have to create value, which is really not business-specific, but really spans. Those are just some examples of the kind of value add that we have at the center. But we always keep ourselves honest. I mean we always do financial analysis, would be worth more as separate pieces and so on. And I think we're very confident in terms of what we do to value add as well as kind of doing the double check on the financial analysis that we're going to continue to add value. But just I also want to answer your question. No, I think it's more likely that we're going to be more focused and add adjacencies of our current businesses. We like our portfolio. For the most part, it's a very good portfolio that's generating good economic returns. We want to continue to strengthen that M&A is very much part of our future. But it's less likely that we'd become more diversified. It's probably more likely that we would add near and further adjacencies to continue to grow the business.

No anything I'd like to add to what Darius said is within the focus that how do we make our portfolio more aligned to sustainability and controls. But that's the 2 things which tie Honeywell together so both organically through new product development or breakthrough programs or inorganically, we just really further refine our focus under 2 dose big mega themes because that's what we are, and we can just get even more owned into those 2 themes. That's kind of how we think about it with every opportunity in terms of the [Indiscernible].

Makes sense. We used to call it permission to conglomerate most of the big companies that broke up were forced to break up because they were underperforming and their businesses where margins are falling. In your case, your margins are actually been quite healthy. You mentioned the accelerator. And I remember Dave Cote launching rolling out the Honeywell Operating System, call it, 2004 ballpark. And it was really about productivity at that time, and it's changed, and you rebranded at the Accelerator. You talked about it more in a growth context and a productivity context now. But sometimes investors can be a little skeptical whether you can do both, whether growth and productivity can really live in the same firm? So talk to us about the Accelerator. What is it exactly? And what's different about those who covered Honeywell for a long time? What -- how has the Honeywell operating system kind of morphed into this Accelerator and what does it really mean for shareholders?

So those who are familiar, we launched Honeywell Operating System 10-plus years back, and it was heavily focused on supply chain. We call it HOS and we evolved it over a period of time. But what it is different today is that we have -- we are able to now focus by business models because we primarily practice 4 business models, services, projects, products and software, and how do we build standard processes supported by digital platform in each of those business models because that's how we create value. The knowledge is highly transferable. And those business models are underpinned by common processes in supply chain, new products, commercial processes, customer experience. So Honeywell Operating System now, which we call Honeywell Accelerator is a combination of our standard processes, by business model and support processes coupled with our digital platform, which programs that you run it in a more repeatable manner. The foundation of that is a learning platform because in today's environment of high turnover, it's given that we have fairly new set of people coming, both at the entry level and the leadership level, they can go in and really experience our standard operating system versus relying on making or third-hand information. So I think the combination of that is giving us a lot of repeatability, a lot of productivity. And we are absolutely doubling down on that. And we just feel that it's another differentiator we as Honeywell bring to all our businesses and really feel good about it. Greg, do you want to add something?

Yes. I mean -- and as you mentioned, our Honeywell Digital effort is the inculcation of that, right? The technology isn't the thing in that case. That's how we inculcate all those processes so that goes from more than just best practice sharing orally or otherwise and inculcating those processes and systems of the business. And again, we've talked about it a lot that we've gotten great value from that throughout this last 2, 3 years of extreme volatility, whether it's from all the improvements we've made in the supply chain and the visibility around that or what we've done on the pricing side.

Is lean still very much a component of Accelerator?

Absolutely because as I said, there are by business models and then the foundational processes. The foundational processes of supply chain is going to be up in front and center of that. And they practice lean in the supply chain environment. The foundational process is also about new products. So we have evolved a new process more in an agile manner. We call it Z21. So that's a standard operating process for that. The commercial processes are driving on managing the sales force. So it's a combination of business model processes and the support processes, all rest sit together as Honeywell Accelerator. Maybe if I can give one example on that. If I think about knowledge transfers 5 years back, Honeywell has project businesses in practically all its segments. Our approach in 2015, 2016 was, oh, we acquired this segment or we have new business in projects, let's transfer somebody from Process Solution or building solution. So the premise, suppose, knowledge will be transferred from experts, but now while experts are still available, that's underpinned by operating system where all their knowledge has been captured and codified. So I'm not really reliant on individual's ability to transfer the know-how because we have translated into an operating system and further enabled by a digital platform. So the success metric is now far higher success probability versus you depend on me going there, and I may do it, I may not do it. So I just wanted to...

Yes. And Vimal provided a great example about a little bit of how this works, right? Because there are various global design models for businesses. We have projects business, a service business, a products business, consulting business, software business. We have a standard way in terms of how we run these businesses in terms of process and it's underpinned by technology and common infrastructure. Why is that important? It's important for 2 fundamental reasons. The first one is consistency in terms of how we buy, which we think is important because there are better ways than others to run things. And number 2 is it's not so people dependent, because if you have a phenomenal General Manager and CFO, they could probably figure it out anyway. But there's just all 8-plus GMs. And we want to make sure that whoever is running that business has a great set of tools, processes to rely upon that are really amalgamation of the best practices and the best way to run those kinds of businesses. That can be very, very powerful. It's had tremendous impact in our project businesses because projects businesses can be good or they can be an absolute train wreck, if you don't run it well. And we've seen incredible value just being delivered there. But we're going to do that for every type of business model that we have.

So it sounds like digitization has become an enabler, right? And that makes sense. So really, for shareholders, this is both -- there's an external view of digitization and there's an internal. How would you -- how do you think about balancing those? And how much do you benefit from what you're doing for your customers internally?

I think we're doing both, right? I mean -- and it's really -- we started this journey kind of with 2 different initiatives. And we talked to them both, and it's not really initiative one of them is Honeywell Connected Enterprise, which is really the digital solutions for our customers. Then Honeywell Digital, which is really our internal digitization. And I can tell you this is unequivalent through all the crisis that we faced in the last 2 years, whether it be inflation or COVID or labor shortages or supply chain challenges. We love the kinds of digital ability that we have in-house to really diagnose, understand, identify, track and take action that's based on facts, not anecdotes, there is no chance that we would been able to run this business. I mean, just to give you a very detailed perspective, we can have -- we have 38 smaller business units within Honeywell. We can tell at a business unit level and a product unit level, exactly how we're doing on our price/cost ratios and whether or not we have coverage for the inflation, not that we've seen but it was going to happen in 12 months. And that's all underpinned by what we've done in Honeywell Digital internally. And for Honeywell Connected Enterprise, which is our external play, I think that this is a great story that maybe doesn't get as much publicity. I mean, we've grown that business double-digit every single year. It's not a small business. It's about $1.5 billion roughly. And it's growing double digits. So I mean we're doing a lot of things right. It's not our only software business. We've been [Indiscernible] to one that's really what we connect to our installed bases. I think both of those digitization efforts, both internally and externally have a great success.

So let's change gears a little bit and talk about the segments. And we used to think of HBT as being a mid-teens margin business structurally and now it's a 24% margin business. But SPS kind of feels a little bit like HBT 10 years ago. SPS is a mid-teens margin business. Any structural reasons why SPS can't be in that 20-plus percent margin rate? And I doubt, in warehouse automation, I know is a little bit of a drag on that. But is it all about getting warehouse automation up to company average? Or are there other businesses within SPS that can really drive that runway, too?

Yes. I mean I think it's a good question. I mean, I think I talked a little bit about warehouse automation. There's a couple of things going on in warehouse automation, which frankly, are not additive from a margin perspective. The first one is warehouse automation is very much in a growth mode, right? So it's primarily a projects business. If we just strip out and make -- look only the projects business in HPS because we also have project business there. That is not the most profitable part of our portfolio, but it's growing very, very quickly. And it's creating the installed base for our future. If we look at the life cycle services business who've been Intelligrated, that's also growing double digits, and it will grow our digits next year, by the way, despite some of the challenges we're going to face on the project side. And it's in that kind of range. It's substantially margin accretive to the current SPS rate. So this is a function of where we are in the evolution of warehouse automation, fast growth, but primarily in greenfield creation. And you know when you're in a projects mode, it's going to be less profitable. The other businesses are generally profitable. We have some work to do. Our PSS business is terrific, which is our barcoding and scanning business that profitability is going to grow rate. Our SSP business is -- we've got some more work to do on PP&E in terms of streamlining that business and that work is very much in progress. So there's absolutely no reason that we can't get SPS to similar kind of margins. We're on that path. And as a matter of fact, I would point out that, that's the business probably has the most opportunity in terms of margin accretion within the [indiscernible].

Makes sense. So if you think about I mean, Honeywell was the only company that we cover that raised capital spending during the pandemic. You guys played offense when most played defense. You weren't as aggressive with M&A as perhaps some other companies out there. We can get to that in a minute. But -- where do you think shareholders will benefit the most from those investments that were made in that time period? Because clearly, you were investing quite heavily again when others generally were not.

Greg?

Yes, I would say, I mean, and Vimal speak clearly to a lot of the investments we were going into growth in places like advanced materials, and we see we started up some of those facilities even this year to add to our capacity. And that's a playbook we know well from sort of when we did the investment in Solstice back some years ago. So that's clearly been an area that we and investors are starting to see that value actually be generated as we sit here today. We're also making investments in some of our new BTIs as well. And again, that's going back to Sustainability Technology Solutions. That was part of our growth capital plan this year and then I think we'll see some advances next year. And again, BTI related, we're also expending capital, as you know, in Quantum in our Quantinuum business. So I think these things are -- they're peppered throughout all of the businesses. And some of them take a little longer to show their face. But certainly, where -- they just came from that PMT right now, we're seeing many of them come to fruition as we sit here in 2022.

And then to add to that, I mean, PMT started 2 new plants in 2022. So that obviously is going to add to our volume in 2023. And we continue to see more opportunity in our advanced materials and UOP business or more product capacity, supported by long-term contracts, not a forecast or actually a long-term contract and we are seeing this and now looking at additional capital assessment supported by our volume expansion. These are high-return projects always, probably the most attractive opportunities we have and we'll carefully review them and put more capital behind them. So PMT will continue to have volume expansion driven by the market of sustainability, more sustainability products will require more volume and we'll have to expand our plants.

And that's why oftentimes, we talk about this whole free cash flow conversion metric, and we've said many times why we don't like that one. I mean you can guarantee that we are going to invest in organic growth in terms of capital expansion. And that has always been something where we flexed up and back down again when we needed to, and we're going to continue to do that because those are great return margin.

Makes sense. And so I mentioned M&A, but -- and there's been some extraordinarily interesting deals in the past in Honeywell and high return, high hit rates as far as the deals you've done. You could argue that there could have been more done. You certainly have the balance sheet room. What do you think the next 2, 3, 5 years looks like from an M&A perspective? Why will it be different than the last 2, 3 or 5?

Yes. I mean I'll take that one. I would say we've always been a disciplined acquirer. The valuation environment over the past few years has been inhospitable. And so it's made it tougher for us to develop as we work our pipeline into a high degree of confidence to make sure we can deliver the returns to our shareholders. And so we're never going to be defensive about that. There's never going to be a must-have deal for Honeywell. So we're going to be very careful. Having said that, we find the valuation environment today way more benign, way more attractive. And so there is an increased opportunity for us to work our pipeline and our screening process to deals that we can develop that high degree of confidence that we can push forward. And so we're optimistic that entering 2023, we're going to be able to convert in a way we feel really, really good about. If we can't find those opportunities, we will not do those deals. We're never going to just do an M&A deal because we can do one because we have a big balance sheet. We're going to find the best deals that help us get accretive growth, help us be accretive to our margins. We look really hard in the growth pockets that make sense in our core markets, but also those interesting and attractive growth pockets in near adjacencies. And so we're optimistic we're going to be able to make some [indiscernible]

Yes. As we talked about at Investor Day, too, I think while our transformation isn't complete, we've certainly done an enormous amount of integration of our own company over the last 5 years, and that is coming to some degree to a close, which frees up the people capacity for our leaders to go spend even more time on building those pipelines and creating those opportunities. And we're excited about that as well.

Yes. And to that point, it actually enables -- increases the probability of successful integrations and bolt-ons because we're bolting on to a foundation that's repeatable. There's a process. I talked about the global design models for our types of businesses. So it's not sort of a random structure that you add the acquisition to. You add it to a set of processes, you add it to a set of common IT infrastructures. And we're just increasing the probability of success. And most importantly, we're making these businesses easier to run. We hate complexity and love simplicity. And the whole Honeywell Digital and all these other actions we've taken is to make Honeywell easier to run and underpin it with easy analytics data information in a standardized format that just increases the probability of having successful [ information ].

And we look through that lens when we evaluate opportunities. I mean we're very happy with our U.S. digital designs acquisition that we did this year into our fire business, really nice adjacency where the technology allows first responders to respond more quickly. And that speed is super exciting for them because those extra minutes, even seconds, allow them to save people's lives at a higher rate than they hear Q4 could. And so we're thrilled with the safety and ESG element of that, and it plays into our wheelhouse and our ability to help them scale, expand, grow in a way that they couldn't stand alone.

What's the sweet spot from a size perspective? Is it $1 billion? Is it $3 billion I mean what?

Yes. I don't know if there's such a thing as a sweet spot. I mean, I think we've done quite a few small deals, call it, less than $200 million, $300 million. And we did those primarily for technology reasons, and those have worked okay. Probably not likely to do mega deals either. There's no mega deals out there that we have to have, although I never say never because situations could arise, which are unique and different, but that's probably not where we're going to be focused. So for us, call it, a multibillion single-digit kind of $1 billion deal, call it, $1 billion to $5 billion, $7 billion something in that range would be ideal because those are bolt-on. We're -- we're a company that's well over $100 billion valuations, we sort deploy single-digit percent of the valuation. Those IPs those are very much as bolt-on and sort of ideally the kinds of things that we're adding. And theyre needle moving, too, which makes it -- which is more exciting.

So when you're looking at a deal, how important you think about kind of the trade-off between buying technology and buying scale, and just having more on the shelf for your customer, what's more important? Is it more important the technology deals that you've done? It's certainly been interesting. But -- are you at the point now where perhaps going on and building a little bit more scale makes sense, too?

I mean we're probably always going to lean towards technology and scale. I mean, -- that's sort of where we fly, and that how we differentiate. That's how we can capture value. But if there's the right scale deal, sure, we'd look at that. You never sort of say never to anything. But I mean, between technology and scale, we're always going to err on the side of technology. And I think sometimes people associate with technology that must mean software. It can mean software, but doesn't necessarily mean software. There are other technology companies other than software companies and we would look at all.

Okay. So we talked about diversification and the role of the multi-industry [Indiscernible] lots of different markets, pretty much arguably every major country in the world. They probably have scale in literally every country in the world. But -- that also makes it harder to outgrow global GDP. You're going up and down in the ebbs and flows of what's going around in your different end markets and geographies. How do you think about your ability to outgrow global GDP and kind of not get hurt by that diversification?

Yes. Well, I think it starts with innovation. I mean you have to continue to innovate and bring new and interesting solutions offerings to the marketplace. I mean at the end of the day, if we can't drive organic growth, and something that we're always going to fund, probably not going to be a very successful company. And fundamentally, that's the mindset is drive organic growth, fund organic growth through CapEx and R&D investments. And then build bolt-ons. I mean bolt-on acquisitions as we see fit. And we've been fairly successful. I mean we're in markets that matter or in segments that matter, we continue to assess our portfolio to add sometimes to subtract, too, and we're going to continue to do that. That's very much part of our playbook. There are times to be a buyer, there are times to be a seller. And we've probably been a bit more of a I won't say a seller, but we'd probably like to be more buyers, but we're going to continue to maintain the rigor and the discipline to not just do acquisitions for the sake of doing an acquisition. It has to make financial sense. And we're not going to lose that sense of responsibility and accountability that, frankly, we have to our shareholders.

So how do you drive a higher level of new product introductions without breaking the bank, if you will, and raising spend, too? I mean, you're already spending 6% plus R&D to sales, which is a pretty high level.

I think it will be more -- how we improve and mature our process compared to where we are. And so we are paying much higher focus on, for example, on launch process because the new product introduction has 2 parts. The front end is you capture the requirement and you do the development. And generally, we have observed that the later part, which is taking the product to the market, training the sales force, building value proposition, it's paid less [Indiscernible] because it's like it's all the harder problem. This is easier. So we're paying lot of focus on quality of value proposition, scoring that, training the sales force. So there's certainly an opportunity on that front. Also the overall framework we have, ease-for-each program, mass mid-market segment for specifically high-growth regions. We have performed well on that, and we don't want to let that go. We actually have doubled down on mass mid-market segment, both in China and India since last 2 years and have seen tremendous progress of creating new categories, which we did not have globally. And the challenge there is bigger because we are going without any know-how locally in the markets. We are entirely dependent on local team's capability to define and develop and launch, but the good news is our capabilities have improved to a point that we have become self-sustaining in these countries now. And that's kind of also adding to our firepower within the new product introduction. And finally, on breakthrough programs, our maturity is improving to kill and add. One big issue in larger companies is that you keep adding -- a large portion doesn't perform and you keep feeding the animal and it doesn't grow, but we keep killing but we also keep adding so that the pipeline is always very relevant. So I think it's a range of things which basically give these as well.

Yes. So I was going to just build on that. I mean one of the things I think that is -- I think it's fairly unique, at least with the rigor in which we do it is the reallocation concept. We're always driving productivity, and we're reallocating funds all the time. So when we talk about water lining and cutting off the tail, it's not just sort of like an interesting anecdote, that is what -- we talk about capital allocation for GM, like that's their capital allocation, they're figuring out where their CapEx is going, where their NPI is going, and they have to make trades across their portfolio. And the only way to do that is by inspecting deeply where the money is going and when something is not working, killing it. And so we talk about it a lot when they come to talk to us, there's no free bag of money. I don't have it, Darius doesn't have it, Vimal doesn't happen. You got to create productivity and you've got to constantly be reallocating. So that same 6% R&D is being put to work differently and reconfirmed.

I'll [Indiscernible] Greg's point, our bang for the buck is pretty strong because of our footprint, how smartly wetted over the last several years because we obviously have strong footprint in U.S. but we have equally strong print footprint of R&D now in Mexico City. We have a long-standing presence in India, in Czech Republic, in U.K. So I think it gets a double benefit. One, you have your distributing innovation through different culture, different capabilities, but we also get very high productivity. So 6% number, I always look at R&D as a headcount game. It's about how many engineers are working on creating new products, and I think we definitely score higher there because how we played on our footprint in a very effective manner.

So changing gears a little bit, you mentioned supply chains and supply chains have been topical for quite some time now in the last 5 to 6 quarters specifically. But at the Investor Day, you talked about the great integration of Honeywell and supply chain rationalization. Where are we in that effort and where do you really see real tangible results?

Yes. No, I mean I think when you look at our -- I mean at the end of the day, Scott, it has to show up in margin expansion, right? I mean it doesn't show up in margin expansion more than we're really doing. And I think we've had a pretty good track record of that, including this year, and we're confident we're going to continue to expand our margins next year and then much beyond. The playbook is changing a little bit. We've really focused in the early phases of our playbook was much more focused on where should we be manufacturing? What's our footprint look like? Is it really -- are we really leveraging it appropriately? Do we have a lot of subscale facilities. And we've done a great job rationalizing that. And adding really a digital footprint to ISC because we have a very mature structure in terms of digitization of our integrated supply chain. But now we're kind of getting to the next phase. Now we're looking much more into automation and driving automation, which is going to be the next phase of our integrated supply chain program, which is not only going to drive out productivity which helps to drive quality, standardization, capability that, frankly, we didn't have. And we're already starting to fund some of those efforts right now. So we never -- the thing about Honeywell that's maybe not well understood, and I get this question all the time, well, Honeywell had a great track record of expanding margins, but that's going to stop, right? It's -- you're probably at the end of the rainbow. And it never -- will never stop because we're always going to come up with ideas, thoughts, elements about how we're going to continue to drive margins. And when we think about that, we're not thinking a year in advance for '23, I mean, we're thinking about what we're going to do in '26, '27, both through productivity efforts, but also playing in segments and technology, which are going to enable us to drive value capture and so on. And we're going to do what Greg talked about, which is we're always going to ration because there's always waste somewhere indices. But if you're not proactive and if you don't go and really assess what you do deep in the belly of the company and force yourself to rationalize you're always going to be adding and spending money on things that aren't creating much of a value. That's very much part of our DNA. We do, I think, a very good job at reallocation of spend and investment, that can be a differentiator.

So you talk about rationalization, but a lot of companies are talking about resilience in the context of adding suppliers expecting out new suppliers. But there's a certain level of cost -- increased cost and some inflation that comes along with that, right? Because oftentimes, you're speccing out a subscale supplier. How do you earn that margin and rationalize while also thinking in terms of having some duplication and more duplication of suppliers?

Yes. I mean, obviously, as we assess our supply chain, we -- there is some level of -- to some extent, rationalization or expansion can be both good and bad, right? Because if you're a more meaningful part of a supplier spend, or our spend, well, then you can have a deeper and more pronounced relationship with that supplier or if you're their 200 biggest customer, you're going to get a different level of attention. So there's no one formula and say, okay, we're just going to expand supplier base or we're going to -- in some cases, we're rationalizing to simplify and have a bigger impact with that supplier base. In other segments, which are truly capacity constrained, sure, we're bringing in new suppliers that we can partner with. And in some of those cases, we use kind of an 80-20 approach, which is we maybe give one supplier 80% another 20% to others to really maintain our cost discipline and rigor and -- so there's a lot of different techniques. And in some cases, we're expanding our supply base. In others, we'll rationalize in scope and have deeper, broader relationships with the suppliers.

So how do you manage around the structural problems? If you think about like Aerospace, you had the forging and casting issue. You've got the chip shortage that still continues to go on, certain ship sizes and mix. But you can't fix those problems directly in that but you need to manage around them, right? So how do you manage around them?

Yes, maybe I'll start, and I'll have Vimal talk a little bit about this as well. I mean we are actually trying to fix some of those problems directly because we've deployed more than 400 [ or above ] supply chain professionals into our supply base to actually help some of our suppliers expand capacity, source labor, their job planning. I mean there's a lot of opportunities. So we are working directly with our suppliers to help them sort of shift their capacity. That's certainly very pronounced on the Aerospace side, but it's true in a lot of other segments as well. So we've been very active in the supply chain. I think it's -- it is slowly getting better. But there's -- it's still not where we want it to be, and I think it's going to be a continued focused effort on liberating more capacity.

I think the supplier, I think there are 3 things we are doing that Darius talked about focusing on supplier and managing suppliers. We started with aero, we're doing in other businesses, too. Second is a product redesign. I think we really upped our game to respecify the products with 2 options versus 1 specifically for chips. Incidentally, our first problem of supply chain constraint came in building technologies when I was still around. We redesigned a product, which is regulated within 6 months. And today, that product is no more in constraint because we have 2 optionality of 2 chips versus 1. And that playbook really opened up our eyes that we can -- and we thought this takes 2x the time, but we have learned how to compress the time and redesign the products. Finally, we are doing the supplier integration through our digital platform. We are deploying new platform by which we are linking suppliers so that our commit rates are known to them, our -- we can visually see their production rates. And that's under deployment across Honeywell, that's how we are bringing bigger suppliers as part of our overall ERP network. So the combination of a range of things. I don't think we have some unique trick, but I think what's unique about us is the depth on which how we deploy, it's deployed consistently, depth is deployed across Honeywell. And I think that scale gives us a little edge because then we have seen generally the benefits across the organization.

So I think we have time for one last question, and let's finish with software and perhaps a fairly open-ending question really about how you can help increase the growth rate and drive customer adoption rates higher, but there was a new product launch recently out of HCE, which is -- was advertised at least driving greater commercialization. Can you talk a little bit about that and talk more generally about software?

The way we're looking at the next growth rate of HCE is really looking at solving 4 big issues, which our customer face across the end markets we serve, sustainability, cybersecurity, asset management and worker productivity. Because these are highly repeatable from industrial to buildings, to supply chain and so forth. And knowledge transfer happens one way or the other. So sustainability product, which we have launched is our ability to measure and contain emissions for building customer and industrial customers. And why that's important? Let's take a typical industrial customer for PMT, a chemical company, an oil and gas company. They are building assets also. So if they have to truly report Scope 1 and 2 emissions for the enterprise, they need a product which does both, and we do both. So we need to do an enterprise-level measurement and also give them containment actions, and that's how we lead in the market. So our software offerings are integral linked with the rest of our business. And that gives me confidence that we are essentially creating new segments through software in these 4 areas. Same thing will apply in worker productivity. The reason I believe in worker productivity a lot is the skill shortage issue is permanent. I don't think this issue will get -- supply chain issue will get resolved, but skill shortage issue will not get resolved. It's here to stay. So what can you do about it is to bring people more productive so you have to do more with less, so you need more tools. You need automation of workflows. And that's what we are good at because we support workers in supply chain, in retail, in industrial environment, in process plants and how do we build offering so that is a common software infrastructure, which makes worker productive. So essentially, our approach to software is really opening these big problems -- solving this big problem -- and really building our incremental software revenue on top of what we already have today. And really pretty excited about that.

Fantastic. Thank you, all of you for your time this morning.

Yes. Thank you.

Thanks, Scott.

That's a great way to wrap it up. Yes. So thank you all for the thoughtful discussion. Scott, thanks for joining us here in Charlotte today. And thanks to everyone on the line for joining our fourth quarter 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'll announce at a later date. Thank you. Enjoy your weekend.

This concludes today's conference call. Thank you for participating. You may now disconnect.