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

All right. Good morning, everyone, and welcome to the 10th Annual Credit Suisse Global Industrials Conference. We are very excited to have everyone here live and those joining us on the webcast. We're going to be kicking off the conference with Greg Lewis, Honeywell's SVP and CFO. Before we head into kind of a fireside format, just has a couple of prepared remarks to make.

Yes. So great, John. Thank you very much. Really happy to be here, and I'll fly right through this pretty quickly so we can get to the conversation. So one thing, I guess, I would want everyone to take away is when you think about Honeywell, we're very well known for our execution culture. And that is what we pride ourselves on. And as we think about what's in front of us now we feel very strongly positive about a lot of the trends that are going to help our business as we go forward from here. We've done a lot from a supply chain transformation, a digital transformation perspective has served us super well through these last 3 years and last year in particular, I'd say last year, we're still a month away from finishing it, but last year. And our end market exposure, aerospace, energy, sustainable buildings, is going to be really, really helpful for us. And we talked all year long about our backlog. We're at all-time high backlog, $29 billion that's going to help us as we go into next year as well. But we really wanted to play capital in a much more aggressive manner. We talked about it at our Investor Day, committed to $25 billion over 3 years. I think the -- I think as we go into next year, it's going to be a Honeywell advantaged environment, and we can talk a little bit about that. But we're excited for that. And so I think we're a little bit differentiated as we go into '23 because we feel like even in the difficult operating environment that we have, we definitely have a path to growth, and that's something we feel very strongly about. And maybe the last comment is really just about ESG. ESG is something everyone talks about much, much more these last 2 years. We've got a very strong track record on ESG. And I would say it's not something that we've just come to the party from a marketing standpoint on. It's actually the way we've worked for many, many years. So just to clear the decks, a lot of volatility this year: supply chain, Russia, currency, interest rates we're still having a very strong year. And I'm here just to reaffirm the guidance that we gave back about 45 days ago. And as I mentioned, when you think about the transformation that we've done, we talked about this in our Investor Day, last 5, 6 years, a lot of foundation building. Next 5, really all about creating value from the digital threads we're building and really driving end-to-end process as well as automation. And so I think there's still a lot in front of us. We did a lot of heavy lifting, but we're not nearly at the end here, and I think there's a lot more for us to accomplish in our transformation. I'm excited about that. And then I'm going to test everyone on this slide, so please read it deeply, and we'll have the exam on the way out. I don't expect you to read all this, but the point is whether it's environment, social or governance. Again, this is the way Honeywell has operated. And so we've got a very strong track record, very proud of the company that I worked for. I tell our teams often when we talk, go read our ESG report. It's about 90 pages. And if you're not proud of the company that you work for, call me directly, and let's talk about it because I think we've done some terrific things for the communities we serve as well as our other stakeholders. And then just lastly, before we talk a little bit about 2023, we just finished a great event. Kevin Dehoff and the team, Honeywell Connect 2022, a couple of weeks ago. I'm really excited about what Kevin is doing in that business. He's been the CEO of the business now for the last 5 or 6 months or so and really put a strong emphasis around execution and delivering new products. And so part of what we did there was launched 15 products. We live demoed 22 of them. And it was a tremendous event, almost 150 customers. Again, we're not putting the cart before the horse here, but this is something that we're really excited about. And I think the themes around sustainability, digitization, cybersecurity were really what they honed in on, but really excited about what Kevin is doing there. And then lastly, this was the slide that we pitched in our earnings deck. Again, message simply being we feel very good about where we are, whether it's the backlog that we have to draw from, the demand that we've got in at least 3 out of the 4 businesses we've talked a little bit about; warehouse automation and the digestion period that we're going through, so not new news there. And we feel very good that we're going to have a nice growth path for next year. There are going to be some things that are going to be unique with interest rates rising, and we can talk a little bit about that. Our pension income is going to go down pretty substantially. But again, not a cash problem at all. We're 125% funded. So simply an EPS -- noncash EPS difference which will give everyone a lot more visibility to right around the end of the year when we snap the line on a lot of that. So we feel great about where we are and look forward to diving into some of the questions that we have for today.

Great. Appreciate, that was a really good kind of state of the union overview. I guess maybe if we could kind of start higher level maybe kind of around the macro and maybe a little bit of what you're seeing around the different geographies of the world.

Yes. So it's interesting because everyone talks about a recession as if that's one thing. And the world is going to behave very differently. We all know that and see it really clearly. When I look across our own portfolio and from a regional perspective, the U.S. and the Americas are really strong. Again, we'll have some softness just because of the size of Intelligrated inside of the U.S. business and its so U.S. concentrated. But the rest of the portfolio, across, is super strong and feel really good about. Europe, as everyone knows, is probably going to be one of the more challenged environment. Our sales have held up nicely so far. But we're going to be cautious as we go into the new year around that. China, with a lot of the lockdowns and just they're still not flying. So internationally, at least -- so our aerospace business is challenged with the lack of any flight hour growth. But the SPS and HBT business is growing nicely. And PMT just coming through some tough comps on some bigger projects, but I feel good about the overall demand environment. Obviously, a lot is happening every single day there with some of the things that are going on with the lockdowns. And so we're, again, being very cautious around that. And then Middle East, super strong. I mean there's so much investment going on. I was also just in Latin America as I mentioned a couple of weeks ago. Lots of opportunities there for sustainability. They're going to be a big player in things like SAF, and we're going to partner with some folks down that way to help bring our technologies to their solutions. So broadly speaking, things are reasonably good, but I know that we're going to have volatility as we go into next year.

Great. And then maybe as we think about that and definitely want to come at supply chain from kind of 2 different ways, maybe one is a little bit kind of longer-term thinking about the transformation there. But maybe just kind of more real time. What are you kind of seeing with your lead times and stuff from your suppliers and any kind of update around that?

Yes, so we've -- over the last year in particular, we've really broken it into 2 pieces, aerospace and everyone else. And if I think about that right now, I mean the semiconductor supply chain is getting a little bit better every quarter. We're starting to see some of our past due backlog come down in PMT, HBT, SPS. So we see those supply chains healing or catching up a bit, which is positive. I still think the bigger unlock for semis is probably going to be in 2023. So it's not like it's fixed necessarily at this point. A lot of the capacity that's coming online isn't actually coming online until the first part of next year. So that's getting better. If I think about aerospace, and the overall challenges in labor, which really is what that is. I mean, you can go up and down the value chain, starting with pilots and all the way back into the supply chain, and there's just a pretty substantial shortage of skilled labor there. And so that is getting better, more slowly. And we are -- our past-due backlog continues to grow. We've talked a lot about the de-commit rates of our suppliers being in the 20% range. That's still true. Volumes are getting a little bit bigger each quarter, but the de-commit rates are still hanging around in that 20% type of an area. And so we're going to continue to build past-due backlog probably even going into next year. So I think that one is just going to have a bit of a longer ramp. And my guess is that's probably what you're hearing from a lot of the other aerospace players because this is not really -- this is not a Honeywell common. It's really more around the industry.

Great. And then if we just think about the backlog broadly, can you just remind us as you kind of think about the different businesses like the resiliency of that backlog?

Yes. If I just go through the businesses, each one of them, that $29 billion, each one of them has a really nice share of that. And I feel like we've been looking out for things like order cancellations. Are we seeing that happening. And while that may have happened in like some small sponsors, there's not any of that that's given me any cause for concern that we shouldn't be confident in the quality of the backlog that we have. So broadly speaking, I think that $29 billion is going to help us as we go into the first half of next year, in particular, because in some of the non-aerospace businesses, I think we will see some orders weakening as we go into next year. But that backlog will kind of help us through. And I think I expect the back half of next year we'll probably have a little bit better demand profile. But I feel pretty confident about the resiliency of the backlog overall.

Great. And then very topical -- inflation, right? So just wondering if you could talk a little bit about what you're seeing kind of from your own ability to price. And then maybe the prices you're getting -- your input costs?

Yes I mean, the team is one of the things that I would say I'm proudest about of our teams in 2022 is the effectiveness we've had with our pricing programs. And again, I'll point back to our digital capabilities that we've built. We are doing it in a far more surgical way than we would have ever been able to do prior to having that level of visibility and the ability to have a closed-loop understanding of what's happening. We've had, I think, a very good price uptake, and I think that speaks to the technology differentiation that we have in the marketplace -- so you know that we've reported 11% price gain in the third quarter. That will probably be around 10% for the year, give or take. And that's been a big part of why we've been able to have good margins this year, even with a little bit of volume declines overall. As we go into next year, I don't think inflation is going away anytime soon. I don't think we're going to see maybe the spikiness that we had this year. But I think inflation is going to moderate a little bit, but it's going to be with us. And as we handle that next year, we'll probably going to have to just be a little bit more cautious about demand destruction. And so that's a little bit of what we're looking at with our business teams. We're watching cancellation rates, win rates et cetera, as well as just the order rates themselves by region and inside of the product lines in order to make sure that we're able to be smart about the actions that we're taking that we don't get too far field from the competitiveness that we have.

Yes. And then I guess, as we think about kind of the global stimulus that's happening right now, whether it's in the U.S., Infrastructure Jobs Act, right, IRA. I mean how is that going to translate into your business? And what do you kind of think the timing of that looks like?

Well, like most things that are kind of attached to the government, they go slow. So I'm not expecting to see a big tidal wave. I think it's going to be more of a gradual spending of some of those funds. And the big places that I do expect to see that are going to be in the building space as well as in PMT -- because all things sustainability, I think, are really going to be the -- some of the major places we'll get some of that. With some of the Chips Act that's going to drive investment in the semi industry here in the U.S. We actually have a good part of our business that supports the semi industry. So I think that's going to be a positive for us as well. So those 2 would be the -- PMT and HPT would be the 2 places that we'll be looking most closely for the impact of that. But I think, again, it's probably going to filter in over time.

And then the concept of near-shoring or re-shoring. Just curious, are you seeing it from your customers? Are you doing it as an organization? Maybe give us a view.

Well, maybe let's just start with whether deglobalization is a good thing or not. And I actually don't think that it is I think the world is actually better off if we're partnering with one another outside of our own borders. And while it might make for a good news reel, I think cooler heads realize that, that's probably true. And so while I think there will be near-shoring and to be clear, I mean, we are also looking at our own supply chain from a resiliency perspective with those kinds of things in mind. I don't expect that to be massive. Now again, strategic things like semis, the government is making some very specific incentives to encourage that, and I understand why that's happening. But I don't think you're going to see -- it's really difficult to completely uproot your supply chain. And frankly, it's very inflationary, right? So I think people are going to take those decisions really carefully as opposed to just like wide open the doors and run through it dramatically. And so for Honeywell, we are taking some actions. But again, I'll use the term surgical. We're sort of doing a few things around the edges to create some redundancy in places where we think risk levels may have gone up. But I don't -- again, that's not going to be a massive change. One of the things that we've been a beneficiary of over the years has been our HGR strategy of local for local in the first place. So in many of the countries where we're doing business, we have local supply: Europe, Eastern and Western Europe kind of serve one another. The Americas, we have a lot of presence, Mexico and the U.S. for the Americas and China for China in a big way. China does some manufacturing and export but the lion's share of our manufacturing activity in China is for China. So we don't have a huge problem to solve in that regard. And I think that's again, that's served us well over the last 10 years.

Great. And if we go back to kind of those opening slides, right, it started with supply chain and you got a slide on transformation. So maybe we could just take a step back and maybe just talk about what's different around supply chain now versus, I don't know, 5, 10 years [indiscernible].

First and foremost, visibility. And that's -- when we started our digital transformation I was leading something called Enterprise Information Management. It was early 2017, and we had this vision of what we were going to try and accomplish. And I am so glad that we stepped forward into that journey because the people talk a lot about the power of data, but it's real. Just our ability to see is impressive. I mean if Torsten Pilz, who is our Chief Supply Chain Officer, were here, he would tell you I could at any point in time, ask them how are things going for the month of November at the end, and he can pull up a digital tool and see exactly where the ships are with our stuff on it. And so he has changed the supply chain's capabilities dramatically in the last 5 years in terms of our ability to see and therefore make good and strategic decisions for that supply chain overall. We're also doing some things as you can probably appreciate with resiliency and our own supply base, making sure that not only are we resilient but also reaching back into our supply base from a resiliency standpoint and making sure that they also are taking some of those actions as well. And then like I said, when you think about the inflation problem and supply shortages. A lot of the work that we've been doing as well has been redesigning where we can to try to find alternate sources of supply. And again, back to the capabilities that we've built there. It's been a big enabler for us to be successful. So we're a very different company in that regard than we were 5 years ago. And the ability to have that cockpit and knowing what's going on near real time has been incredibly valuable to us, on top of the physical simplification that he has done because we talked about that a lot as well. The 300 rooftops, cutting that in half, and we're a long way towards that, and that itself is given us leverage from a physical perspective and also reduced risk as well. So that's -- the supply chain is incredibly different from where we were and there's still more to go. So we're not done. There is -- the thing that he's working on right now is, I would say, 2 main areas. One is really instrumenting our planning system throughout the network, and we're about 65% of the way done with that and then driving automation in our own facilities. Like those are probably the 2 big next steps that we're working on.

Great. Maybe just jumping down into the segments here. Obviously, in your slides, you had some preliminary thoughts looking forward. Maybe just starting with aerospace, right? Because it's aerospace, but there are several businesses under there. So maybe you can just talk a little bit about what you're seeing more on the commercial side? And then I'd say on the defense and [indiscernible] side.

Well, I mean, everybody is building airplanes. And they all want to go as fast as they possibly can. And so whether it's BGA or ATR, there's no lack of demand and that, as I mentioned in the early part of this discussion is going to be entirely gated by the supply chain. So I have zero concerns about demand as far as that's concerned on the OE side. From an aftermarket perspective, business jet flight hours are above where they were pre-pandemic. I mean that's been a really big shift to people flying private during the pandemic, and that doesn't seem to be going backwards. But we're probably at a place where the aftermarket growth there is going to moderate single digits type of thing. The aftermarket in ATR, still a long way to run because, again, back to international travel, the widebodies are not even close to where they were pre-pandemic. And I think when you start seeing that pick back up -- we talk often about the fact that we have 3x the dollar content per flight hour for our own aftermarket business in wide-body. So that's still yet to come. So I think the aftermarket for ATR should still be really, really healthy for the foreseeable future. And then when you think about defense, we've declined for the last 2 years. A big part of that is our supply chain because roughly half of our past due backlog is sitting in the defense area. But again, I would say I feel good about the demand position even with all of the social unrest, the world's security concerns, we haven't really seen the orders tick up associated with replenishment in the defense area, which I think is going to come. So again, when I think about medium-term tailwinds, I think that is something that we will benefit from over the longer term.

One of the things you mentioned earlier in the opening around sustainable buildings, right? So I guess can you remind us how much of your building portfolio would be driven by things like new construction versus kind of the retrofit opportunity and how you think about that?

Yes. The way I would think about it, I mean, certainly, non-res construction is important to us. And it was growing, I'd say, high single digits, and that's probably going to moderate down to low single digits next year and beyond. But to your point about retrofit and sustainability, I think you're going to see a lot of investment there. Our sustainability business is around about $400 million at this point in terms of healthy buildings, just our healthy buildings offerings. So that's grown quite nicely. And you mentioned some of the government funding. People are going to want to have sustainable buildings, whether that's air quality, whether that's energy efficiency. I think we know at this point, 37% of greenhouse gas emissions come from buildings. So people are going to go and deal with their issues around Net Zero. They've got to do something with building. So to me, that's not an if, it's how fast. And so that's one of the things that really underpins our confidence in the growth of that business as well.

And then can you just remind us kind of the mix within that business, kind of software, equipment and kind of what Honeywell brings to that market?

I guess the way I would think about it is our projects business is, call it, $1 billion-ish of the total portfolio, so just around about 20%. There's a fairly sizable software component inside. The connected buildings is a few hundreds of millions of the total HCE portfolio inside of HPT. And it's actually one of the best connected offerings that we have. We've got great connectors that really power a lot of the opportunity to connect outside of just Honeywell systems. And so I think we've got an advantage there. It's not just a matter of can we connect our own equipment, but we have the ability to connect others as well and then layer on top of that some of the analytics on the Forge platform. And we're doing that in our own building. We built our new building in Charlotte. We moved into it a little over a year, 1.5 years ago, maybe at this point. If you haven't come, please come and visit us, and we'll show you. But the technology that, that business has created for being able to monitor and address set points and again, whether it's energy, air quality, et cetera, is second to none.

Great. And so you just mentioned Honeywell Forge there. It was in your slides. As CFO, kind of how do you measure the success of that within an organization?

Well, if you think about -- for us, when we created the HCE portfolio, and again, think back, this was 2018. And we essentially formed it into its own business. One of the reasons we did that was to create one platform, right? Because if you can imagine if we left it in each of the segments independently, they would have each built their own tech stack, we would have wound up with a ton of technical debt. Lord knows whether we would have had the same type of user interface across customers and think about how we were going to go to market from a CPQ perspective. And so part of the thing that I'm happy about as a CFO is that we built one stack. And I know that it's going to be -- because when you think about scalability in a software business versus scalability in a manufacturing business, what we want is as little separate patching of things as possible, right? And so I'm happy because we are creating and have created a scalable platform across the entirety of Honeywell. And to me, that's productivity, right? We're going to be able to create leverage and scale as that business scales up. And so that's one aspect. The other one is just simply double-digit growth. We're growing that business roughly 15% per year. It's obviously, as a software business has accretive margins to the company. So when you think about us raising our growth algorithm, both on top line as well as our margin expansion, that's a player in there, too, because if I'm growing that business at, call it, 15-plus percent -- that's going to add to the top line acceleration as well as my margin expansion.

Great. Maybe I'll see if there's any questions out in the room. All right. Let's kind of just keep going down the P&L, right? So I guess you talked a little bit about Intelligrated earlier, right? So when we think about that kind of SPS portfolio, it feels like there's several platforms under there. Maybe just kind of unpackage that and kind of what drives those different businesses.

Yes. So you're right. I mean, we've got kind of 4 major business units, our sensing business. We've got our mobility business. We got Intelligrated and we've got our PPE business. And if you just step back for a minute, the whole sensor trend, whether it's in health care applications, whether it's in transportation, logistics, et cetera, that's roughly a $2 billion business for us, and that's got a lot of runway to it. And anything that's going to be requiring sensing, which is anything that's going to be connected these days, is going to have a lot of good runway to it. So that's a great trend for us to take advantage of. The other one, I would say, e-commerce, while we're, again, going through a little bit of a digestion period, I don't view that as a long-term change in trajectory. I view that as a pause. And so I think you'll see that reaccelerate as well. And then when you think about labor in general, and whether it's the cost of labor, the difficulty getting labor, there's going to be a continued effort and need to be automating, again, whether anything where there's workers -- warehouse, people and factories, automating the workflow for people in trucks driving around delivering packages, all of that's going to be accretive for our business because that's going to touch Intelligrated. It's going to touch PSS. So I think that there are still some really healthy macro trends, and while we've alluded to the fact that this business is probably going to be -- it's probably going to have the toughest demand environment for 2023. Again, I view that as a little bit of a dip as opposed to -- and then we'll get the continuation of growth beyond '23. So I feel good about what's happening there. And I think George Koutsaftes, who is now running the business, took over in first quarter of this year is doing a really nice job with his focus around operations and driving productivity, and you're seeing some of that in the margin expansion.

Great. And then -- another big topic from a macro perspective, right, energy transition, right? So it means a lot of different things to different people, kind of remind us what it means for Honeywell.

Yes. Well, I guess what I would say is this, when you think about our sustainability business inside of PMT, whether it's carbon capture, plastics circularity, sustainable fuels, SAF for airlines, hydrogen in the future. There are so many ways in which we're going to play in that energy transition, UOP, in particular, has some of the greatest technologies for each of those areas, and we've been the leader in sustainable fuels for over 20 years. And so getting back to why we feel so confident about the medium- to longer-term trends, is that's not going away. There's some of that that's active today. Some of it's really more in the future, but our technologies are going to be required for making this happen. And we talk a lot about energy transition being an all of the above, right. People are going to continue to drive, fly, the activity level is going to go up. So I do believe that it's not like the demand for traditional oil and gas is going away tomorrow. This is going to be a long time horizon. And so you're going to get investment both in traditional hydrocarbons as well as in renewable fuels and other aspects of that energy transition, and we will play in both, which is, again, why we feel so good about the position that we have today.

Great. And then, I guess, if we go back to one of those slides, there was some discussion around allocation of R&D for new product development. So maybe what are some of the ways you measure success that you're spending the dollars?

Yes. I mean we look at whether we're creating sales from new products over a 3-year cycle. And so we measure that. We're getting roughly 32%, 33% of our sales over a 3-year horizon from our NPI. And that's Suresh and now, John Waldron, his CCO for the company, partner very closely on that. And again, when you think about Honeywell, and I mentioned sort of the execution orientation. Part of the reason why I know that, that's going to continue to create value is because we have a pretty deep operating system from the top all the way down. It doesn't mean that at the center, Honeywell is deciding what to invest in, the businesses own their technology road maps, but you can be sure that we've got a very rigorous operating system around how we make those decisions. Are we allocating that capital properly? Are people calling the long tail, are we getting the innovation bang for the buck that we're looking for. And so I think that's on -- I'll call that the traditional NPI, that's what we're working on. And then we've talked at length about our BTIs and those are curve vendors, right? Those are generally things that are going to make a big difference all on their own that, in some cases, create brand-new businesses like we've done with sustainability. So that gets a lot of rigorous focus with the operating cadence that we have with the company. And yes, that's really how we think about it.

Great. And then maybe I'll just -- I'll throw it out there if there's a question in the last couple of minutes from the audience. Otherwise, I have another one. So, can we think about that same thing, but just instead of R&D around sustainability, right? So how does that now factor into your decisions as you're running the business?

For ourselves, I mean, we're -- we've allocated roughly $50 million per year for CapEx for our own -- dealing with some of our own sustainability investments, and we have a Sustainability Council, myself, Anne Madden, Vimal, a few others in the sustainability space. And so we're always creating a pipeline of ideas for how we're going to address our own sustainability challenges in our operations. And so that's the vehicle that we use to create a funnel and screen opportunities for us. And again, we're committed to and I protect that $50 million budget so that businesses don't go, hey, times are tough, I can't afford that thing. Because to be honest, I mean, those tend to have longer payback periods for them. But they're important for us to achieve our objectives. So my involvement directly is actually one of the governance aspects that makes us confident that we know we're going to deliver on that objective.

No, that's great. All right. Well, I'll kick it back to you. If you have any final closing remarks here in the last...

Yes. No, I guess I would just say the -- I've just said this to our own employee base, I'll say the same to you guys. I mean, we feel very good about where the company is at. Obviously, the world is still a very volatile place. And I think it's -- we're not done with that volatility. The last 3 years have been pretty challenging. I think the next 2 to 3 will be as well, but we feel great about our ability to execute through that. And we're looking forward to deploying capital in a more aggressive manner. And I think 2023 and hopefully, beyond that should be a Honeywell advantaged environment for us to go do that.

Great. Well, Greg, I'd like to thank you for being with us. I appreciate it.

Yes. Great. Great.

Thanks.