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

All right. I think we're going to get started. Very happy for you all to be here. Again, most of you know me. I'm Andy Kaplowitz from Citigroup. Very excited to welcome you to the Citigroup Industrial Tech & Mobility Conference. We've got a great lineup for you guys over 3 days, 115 companies. We start with one of the best companies, one of the largest companies in Honeywell. Very excited to have Honeywell with us. I don't think Greg Lewis needs any introduction. It's been sort of a great time over the last few years. And so we appreciate Greg being here with us. Greg, I know you have a few slides that you want to talk to. So you'll talk to the slides and then we'll get into a sort of normal fireside chat format. So again, we very much appreciate you being here.

Great. Thanks. Well, thanks, Andy. It's hard to believe it's been a year since last time we were together. And can you advance the slides? Thank you very much. And I'm optimistic. I mean the -- if anything I've learned over the last 5 years as the CFO of Honeywell is there's always some surprise around the corner. I don't know what 2023's surprise will be, but I'm sure it will make itself known. It was only a couple of days after we were here last year when the conflict actually started up in Ukraine and Russia. But as I sit here today, I feel great about where we are as far as Honeywell is concerned. We've talked about it in our guidance. We're very well positioned this year with a really strong backlog, almost $30 billion. We are going to grow sales, margins, cash, et cetera. And the transformation of the company has been enormously helpful in so many ways in which we operate. So we've hit on the transformation that we started out in 2017. We're growing our software recurring revenue base, which again, about $9 billion of software and services in 2022. HCE is growing double digits. And then we're going to deploy capital. That was the promise we made last March at our Investor Day as we were going to accelerate our deployment of capital, $25 billion over the 3-year period. We've already done $8 billion in 2022, and we're excited to deploy the balance sheet. And then we're [indiscernible] examples here for us. It's never been just a story. It's something we at Honeywell have done for a very long time. You'll recall, roughly 60% of our sales and our R&D are on ESG-related solutions. So this is not a new thing for Honeywell. It's actually part of our DNA. And through all that, we continue to deliver a very compelling long-term growth profile. And this is what it is. I mean we've gotten some questions about why aren't we growing more and so on. And if -- but if you peel it back a little bit and look at the numbers, prior to 2017, we were growing at 1% organic growth, right? That was the knock on Honeywell, graded margins, but where is the organic growth? Well, we were at 5% 2017 to '19. We have 5% the last 2 years. We've put up 6% organic growth this past year. So we've been delivering on that. We've pushed -- that was one of Darius' biggest objectives was to drive the organic growth machine, and we're doing that through our BTIs, through our new products, et cetera. And then you know that we're a margin expansion machine. You can count on us for that. Once again, we did 70 basis points this year, delivered 15% free cash flow margins the last 2 years and, as I said, $8 billion plus the last few years in capital deployment. So we raised our algorithm in March of last year, 4% to 7%, 40 to 60, and we're delivering on it, and we expect to continue to do so. And that's really, I think, the power of Honeywell is we are going to outperform, we're going to out-execute, and now the next challenge is really to deploy capital. And just briefly, again, ESG is what we do. These are just 3 quick examples. We have a win with ExxonMobil. We're going to be working with them at their Baytown, Texas facility. And they're going to be using our CO2 fractionation and hydrogen purification system. That's a mouthful. And -- but we're also partnering with others. We're partnering with Johnson Matthey. Our technology is going to allow carbon capture to be that much more efficacious, which is going to open up access to some of these incentives that the government is offering. And so we're partnering with others to go do that. Same is true with Nexceris in EV. And again, this is for electric cars. We have sensing technologies that are going to help do gas sensing to make sure that the lithium-ion batteries can remain safe. So when you think about that energy transition in all the different ways that it's going to affect our lives, you're going to find Honeywell there to help drive that energy transition. And I'm excited about the next stage of transformation. We talked about this at Investor Day. The great integration of 2016 to '21. You've heard the statistics. We had over 140 ERPs, we're now down to about 10. We've pushed our ISC transformation. We've driven digital throughout the whole company. We've paired the portfolio with the spins that we had done. And then now we're really pivoting and looking to accelerate growth, a lot of that through innovation. Digital is not done yet. We have a lot more room to both impact our own businesses as well as our customers. And we're focusing on automation and, again, deploying capital. So that's really what underpins the long-term objectives that we shared and then really pushing our Accelerator operating system, which is it's really what helps us drive that execution performance that you know us for. So excited about the year in front of us. Don't know where the curveball is coming from. I'm sure there will be one. But again, you can count on Honeywell. One of the things, I think, we've demonstrated is our ability to adapt and overcome under any circumstance and still deliver for our investors.

Thank you, Greg. So I will try to provide no curveballs for you.

But let me just ask you briefly about one of the slides. You had that ESG slide. You talked a lot about sustainability. And I believe you're targeting $700 million in sales in your PMT sustainability business, Slide 24, $1 billion on sales in your HBT sustainability business in the next 3 to 4 years. Tell me about these businesses, are they still going to hit their targets? And I do get a lot of questions on IRA. How is IRA, if at all, helping you?

Yes. Yes, maybe I'll kind of start there first and then work backwards. So I mean the IRA is going to help. Again, think about the Johnson Matthey partnership, right? That's about them partnering with us to use our carbon-capture technology to increase the efficacy of carbon capture to hit some of those thresholds to unlock IRA, right? So there's absolutely going to be a cause and effect between those incentives and our offerings. Will that turn into hundreds of millions of dollars of sales overnight? No, that's going to take some time to work its way through the chain. But that's absolutely going to support the future growth trajectory and this theme around sustainability. And that really is, as you highlighted, both in buildings and in PMT. That's why we created those BTIs and then we birthed them as their own GBEs to give them the attention and the love that they need. And yes, they're doing great. I mean we grew the STS business by over 20% of revenues, roughly 50% orders. The sustainability building -- business in buildings is already around $400 million, growing nicely. So yes, I think those things are going to persist over time, and they're going to be one of the things that's going to underpin our confidence in our 4% to 7% growth algorithm. That's the thing, like one of the beauties of Honeywell is we have a number of different arrows in the quiver. There's not any one thing that we need to count on to make sure that, that happens. But this portfolio is very strong and its ability to deliver that.

Got it. So look, I know earnings were not that long ago, Greg, but of course, we all kind of want to know an update. So let me ask it to you like this. I think during the earnings call, you mentioned you're seeing some short-cycle weakness when you reported Q4. You did mention sequential orders growth, though, in Aero, PMT, SPS. Have orders actually held up maybe better than you expected so far in your short-cycle businesses? And obviously, you seemed a little more cautious regarding HBT. So maybe talk about that. And maybe just one other follow-up there, how is China shaking out in Q1? As the Chinese New Year has ended, have you seen sort of an improvement in that?

Yes. So maybe, again, I'll start at the end and work my way back. So China has actually so far been okay. I mean the concern that we are watching for is as Chinese New Year ends and everyone goes to their homes and then comes back together, was there going to be more lockdowns or some issues, disruptions? So far, we haven't seen that. So that's great. And we talked about it before, we can manage disruptions of the challenges. If it happens at the end of the quarter, we're still 50% leveraged to the last month of any quarter. But so far, so good with that. We really haven't seen many issues as people have returned, which is tremendous. In terms of the longer term for China, I mean that's just going to be runway, right? I mean China is reopening. There will be more activity. People will travel. So there's no doubt that that's going to provide a tailwind for their economy in general and for us in particular. So I feel very good about what that could provide for us going forward. As it relates to the quarter, I mean we're kind of where we thought we would be. No big surprises up or down at this stage. We talked about the strength of the backlog, and we continue to have strength in the orders cadence in PMT and Aero in particular, and we're making our modest improvements in our supply chain. And as we said, the backlog is going to protect us in both HBT and SPS to some degree, although we know that HPS is not going to grow this year. And again, that's not new news. But when you take the whole thing together, we have a nice growth path. So no surprises at this stage. We're about halfway through the quarter. And there is a slide in there just so that there's zero concern. We are reaffirming our guidance for both the quarter and the year. And I think we're 6, 7 weeks in, we're in pretty good shape so far.

Got it. And I should mention that we will open it up for Q&A a little bit later. Let me ask you one sort of follow-up to what you said. Like one of the questions I've been getting a lot, Greg, is like you kind of talked about maybe orders picking up in the second half. There's sort of like a bit of an unusual pull forward in the first half of '22. And I think somebody asked you on the call around you had the 2% to 5% guidance for the year, organic, like the high end is more predicated on orders picking up. So maybe talk about what gives you the confidence to see a potential pickup, like as we sit...

Well, that's why there's a range. I mean to be -- I'm not here to tell you that I'm confident in 5% or otherwise, I would have guided 5%, right? We guided 2% to 5% for a reason because we have some short-cycle businesses that we don't get a lot of lead time to see what's going to go out. So I can't tell you what HBT and SPS commercial trajectory is going to look like, as I sit here today, in Q3 and Q4. That's part of what I mentioned on the call, we're going to have to see how April, May shapes up, and then we'll kind of take it step by step. The things we are confident in are Aero and PMT in particular. So that's really what underpins the guidance.

Got it. And one of the other things that I talk to investors about is sort of like I think of Honeywell as a good bounce-back candidate for '24 in terms of growth sort of reaccelerating. Obviously, you showed us the long-term target of 4% to 7% and the 40 to 60 basis points. So we know you've been focusing on software services, talked about sustainability; fixed costs, you talked about sort of going to 10 ERPs, for example. So maybe if you can talk about sort of the self-help that you have that could help us sort of get back to where the growth should be going forward.

Yes. Well, again, I'll remind you that we just printed 6% organic growth this year, 5% organic growth the year before that. So it's not exactly like we're bouncing off of some bottoming at this stage.

I understand.

And so the self-help that we're doing is we continue to invest in our BTIs and our new product introduction programs. We're -- the other thing about Honeywell, as you know, is we're investing for the long term as well as short term. We're not looking just to win now. We're looking to make sure that we've got a strong pipeline for the future, and that's why you see us investing in things like UAS/UAM, like the sustainability business, both in buildings and in PMT, because those are more in the future, if you will. I mean they've got -- they're good businesses now, but they're going to be bigger later. And so that's a continuation of how we see the commercial engine of the business. And then as you said, HCE, it's a $1.3 billion business, roundabout, growing at mid-teens. And I don't know if -- Honeywell Connect last November, we launched 15-plus new offerings out of HCE. So really excited about what Kevin Dehoff and his team are doing there. Again, when you think about what they're doing, digitization, sustainability, I mean people are going to need the offerings that he and we are going to deliver. And in many cases, there's not going to be anyone else besides Honeywell that's going to be able to combine the domain expertise and the technical and software expertise that we bring to bear. So there's lots of ways for us to -- that's why -- that's the beauty of Accelerator, right? Accelerator is a total business operating system, and it addresses what we do commercially as well as from a productivity standpoint. We don't do one or the other, we always do both.

Yes. And just maybe an update on Forge also.

Well, again, I think Kevin launched 15 new products on Forge. Really excited about what he's got going on there. He will figure prominently in our Investor Day in May. So really, really happy with what he's got going on over there.

Okay. And then you gave us a slide there and talking about the great integration at Honeywell and supply chain transformation. Can we go over like -- because you mentioned pretty good performance over the last few years in a tough supply chain environment. So can we talk about what you've done, how these efforts helped you operate all the supply chain challenges and sort of where is the supply chain now? Is it continuing to normalize? And what does the effort look like in 2023?

Yes. Yes, so when I think about the supply chain transformation, it started out as, call it, a network simplification effort, right? Let's shrink our footprint, let's simplify the network. Then we pulled into that some of the digital capabilities that we brought to bear. Torsten was at the forefront of developing, I'll call it, a digital dashboard for the way he runs operations. That was one of our first investment areas to make sure that he and we had the visibility needed to run that supply chain. We've been -- we talked about it a little bit, we've also been investing in our planning platform. We've got about 65% of the business on our planning platform to also increase our efficacy around planning up and down the supply chain. Specifically, we were able to see directly into some of our supply base to mitigate risk. I mean one of the things that we were able to do both from an engineering perspective and a supply base standpoint, Torsten was able to leverage his suppliers in a better way, knowing who we're doing business with across that broad network. And Suresh and the engineering team did a lot of work during last year on doing engineering changes to try to change out some of the products that we were producing and offering to get to more available parts, right? And if you can't see into your bills of materials and into the things that you're making, where you're getting supply, you're guessing and stuff. And I mean, to be honest, that's the beauty of our digital transformation. We're not guessing. We're not guessing at pricing. When you think about the -- price/cost was probably the story of 2022 for Honeywell. And we developed an 18-month rolling inflation model that was able to go backwards into the product sets to a specific-enough degree that we could take pricing actions that were going to be targeted, right? And so all of these digital capabilities are -- they're germane to our ability to operate in these volatile times. I mean when things are smooth, you don't have to have great process capability. It's only when you start seeing things move around a lot that you really test what you're made of in terms of that. And that's really why I will say until I retire, so happy that we launched that journey back in 2017 because everything that's come, whether it was the pandemic, the supply crunch, inflation, whatever it is, our digital capabilities have really served us well managing through that. And so for the supply chain from here, again, we're getting sequential progressive improvement. And it's going to take time, particularly in Aerospace. I mean you can go up and down the value chain and that we talked about it ad nauseam, the labor shortage goes from tip to tail of the value chain. So that's going to take time to work its way through, but we're making sustainable progress. Mike Madsen and his team have invested in a rate readiness team that's working with our suppliers to try to help them as well. You are seeing shortages abate in semiconductors. It's not gone, but it's getting better. And so therefore, you're seeing our past-due backlog come down in HBT, it's coming down in SPS. It continues to grow in Aero and it will because the demand is still strong, right? So although we're getting progressive improvements, everyone would rather have like 3x improvements, right? So -- but that just bodes well for the future. That just means we're going to have a really nice multiyear growth trajectory to enjoy through this period.

And is it the right characterization to say price remains relatively sticky across the portfolio?

Yes. I mean our assumption is that that's going to be mostly true. But again, when you have 38 businesses in different environments, some that are regulated, some that are not, some have more technology differentiation, some do not, I'm sure it's -- the answer to any question can be yes or no in Honeywell somewhere, right? So there's probably going to be some parts of the portfolio where price may turn out to be difficult to hold on to. But I think for the most part, it will be sticky. And we're going to -- we update our inflation models regularly. And we are taking price actions dynamically, and that means not doing something as an action, right, because we don't want to destroy demand either, right? So this isn't just a price, price, price. We have to make sure that we're monitoring the markets locally and by business to ensure we do the smart thing.

So I want to shift to cash flow, Greg, something near and dear to your heart, I'm sure. Like -- so you guide long-term guide 14% to 17%. You were in 10% middle of last decade. Now you did 14% last year, 14% expected this year. Maybe talk to the moving pieces that could help you get closer to the high end of that range. And obviously, you won't have the legacy liabilities that you've had, so that will help, but anything...

Yes. But that's already like baked into the number. And in fact, as you saw from our walk, I mean, we're going to be having a headwind because we got the last of the Garrett payments in 2022. So we'll have to leap over that, which is something like $400 million to start with. But the short answer to your question is working capital, right? And inventory for everyone has been a challenge. Lead times have lengthened. Not knowing which part won't come in means people have things 98% complete, so they're holding more raw and work in process than they otherwise would. And that is going to take time to normalize. But I can tell you, that's a big target of what we're working on. And we're also starting -- we talked about in our transformation, the early parts were, I'll say, like uni-functional, if you will. Finance is transforming. Now we're moving towards more end-to-end transformation. And one of the big ones we're working on this year is quote-to-cash. So you could think about that going all the way back from who's doing the estimations and the contracts to actually invoices to delivery and to collections. That's going to run the gamut of the whole value chain. It's going to be like a big Six Sigma program, right? And that's something that we're really gaining momentum on right now. We're going to -- it's going to be a little bit different in every business model that we run. Projects business model will look different than the products one, will look different than service and software. But this is sort of some of the next leg of the digital transformation we're on. It's not about the shiny toy. It's not the technology that you buy. It's about how you do the work. And so all of those things, though, between that and the planning execution,, processes and systems and our 80/20 effort, which is going to again simplify our portfolio, those things are really going to be what underpins our working capital improvement program here over the next 1, 2, 3 years, and that's going to be what's going to support us. We'll continue to grow earnings as well, and that will be the differentiator to overcome the Garrett hurdle and stay in that range that we talked about.

So Greg, let's talk about what to do with the cash. So as Vimal settled into the COO role, there has been some read-up to do a little bit more. What's changed at Honeywell? And then I want to make sure I get this right. Darius mentioned that he wants to do smart M&A and that it should be focused on controls, automation, digitization or sustainability. He also said that Honeywell would acquire an asset where shareholders could be confident that Honeywell will create a lot of value. Could you elaborate on what that means?

Yes. I mean I don't think any of our shareholders want us buying things we don't know anything about, right? I mean one of the big questions that we always have when we're looking at a property is, is it better under our ownership? Is there something that we can add to make that business better? Do we know enough about how it works that us applying our Accelerator operating system is going to be helpful to that thing? If we can't answer yes to those questions, then we're just paying a premium for something that I'm not sure how it's going to be better, right? So that's -- when he talks about that, I think that's a little bit of what he's alluding to. So you're not going to see us buy something that's totally foreign to Honeywell either in end market or business model, right? I think you'd be surprised if you saw that. Of course, we're going to do smart M&A. I mean people are willing to pay sizable checks for things just to get stuff done. That's not us. We're a disciplined organization every way we work and here, in particular. I mean this is our shareholders' money, and we take that very seriously. So we have not gone away from our major metrics. We want to have GAAP accretive earnings in year 2. We want our 10% book ROI by year 5, a 10% IRR overall. I mean those are still the metrics that we operate by, and I don't see that really changing. So -- and yes, I mean, when you think about us as a controls, a digitization and a sustainability company, I mean that's what we do, right? But there's some interesting end markets that those things may apply into that may be adjacencies to us. But I think, again, it's got to be something that looks a bit like what we are good at or else, we're just bolting something on that we have no way to help make it better under our ownership.

Just one follow-up on that. Like is the sweet spot still in, call it, the $1 billion to $5 billion range, something like that for you guys?

Yes. I mean we would love to do a couple of deals a year, $1 billion to $5 billion. We don't feel like we need to go do some big transformational deal. We've never felt that; we still don't. And so yes, getting into a rhythm would be great. Now again, that's -- you have to find the intersection between actionability, valuation, attraction and so on. So that's always going to be a hard trick to turn. It's easy to say and hard to do if you're going to stay disciplined and you're going to try to find that sweet spot, which is why getting more bats matters, right? So anyone who's ever done M&A knows that it's a -- you've got to get a lot of the bats because you're going to do deals, I don't know, 5% of the time, 7% of the time, 4% of the time. It's not a 50-50 type of thing. You've got to be willing to walk away. So that's what we're working on. We continue to build our pipeline. So back to your point about what's different at Honeywell and how is Vimal as the COO helping Darius, I mean Vimal is taking over the operating cadence along with me, and Darius is now freeing up his time to go explore more the things that he said he was going to go focus on, which is really people, strategy and M&A, and that's really what he's doing.

I know you're targeting the $25 billion, you did $8 billion last year. Like do you feel confident that more of the $8 billion in quotes this year is going to be M&A?

That's our goal. I mean we spent $4 billion in buybacks in 2022. Again, part of that, everybody was like, wow, if you think you're so undervalued, why don't you go buy your own stock, so we did. And so -- and I feel very good about having done that last year. But yes, I mean we would rather that deployment go shade it more towards M&A. But again, we're not going to force that issue if it doesn't happen, but that is certainly our objective or our bias would be to do that.

Let me ask you a few questions just about your businesses. Just Aero, for example, you talked about a little bit, but you've got -- mostly it's strong, right? But business jet, for instance, had a good couple of years here. Defense has been weak, but it seems to be turning a corner. So if you roll it up all into your guidance of high single digit to low double digit growth, maybe just talk about how you expect the individual businesses to fare in there?

Yes. Well, if you just start with the OEM businesses, I mean that's going to be a long-term, multiyear growth trajectory there as people need to -- the OEs need to ramp up. Production lead times for new airplanes are long. So that's going to be a really strong growth driver for a very long time. On the flight hour side, just in terms of flight activity, you're right, I mean business jets have already surpassed 2019 flight levels. So the remainder of growth vis-a-vis the ATR business is going to be different, right? So we would expect that ATR will grow faster than BGA at this point. And we'll see. Do people trade back down? I don't know how that's going to -- what's behavior going to do, and we'll see how that goes as time goes by. And then to your point on Defense, I mean, again, lots of -- we have lots of orders. This is where -- more than half of our past-due backlog in Aerospace is in Defense. So there seems to be this strange dynamic in the supply chain where anything commercial, it makes sense. People are making more money in that area. It gets a bit of a higher priority. The Defense business customers seem to be a little bit more patient. People on -- the profit pool is different. So there's probably a bit of a different incentive to drive that harder. And so Defense and Space is where a lot of our past-due backlog is really growing at a greater level, but we've got so much demand. Again, as that progresses forward and the supply chain improves, I expect that to be a nice grower for some time to come. And again, the world is not a safer place today than it was a year ago or 2 years ago. So trends for Defense, I expect to remain strong for some time.

Just related to that, I think Darius mentioned that the Aero margin algorithm was ahead for last year, but the margins were still down year-over-year from obviously supply chain stuff. So to get to 29% margin over the long term, which is your target, what business conditions are required? Where does R&D fit into the occasion? And what self-help is Honeywell doing to ensure, let's say, normal 30%-plus incremental?

Yes. Yes, so we're -- just to be super clear, we're very confident in our 29% long-term target. We have a path to get there. Just the volume growth alone is going to provide some margin leverage. We are going to spend on R&D. We're not going to milk the business. As opportunities make themselves known, we are going to put money back into development for the future. Again, we're doing that in things like UAV, UAM and with our Anthem platform, we'll continue to do that. So I think the team there has done a really nice job to have a world-class cost structure. And when you think about the volume leverage that we have, and that's going to create some room for investment. I talked a lot about some of the near-term headwinds around selection credits and so on. But those are exactly that, they're near term, right? There's a dislocation between shipments of finished airplanes from OEs and the production of them and our materials going into the OEs. That's just a dislocation that's going to go and it's going to come back again. And probably by the end of 2024, we'll be back to normal. So we talked about that just to be transparent and clear, but it's sort of a short-term thing that's going to come and go. And the 29% margin target is very much intact. And I am not ashamed at all at printing 27% margins today. I'm sure there's probably a lot of people out there in this industry that would love to have this portfolio and that kind of earnings power.

Great. So shifting to PMT, like your guide is mid-single-digit growth, but there's a lot of late-cycle flavor to PMT. HPS should be ramping up. And like when I look at mid-single digits, right, a fair amount of that is probably price. So you probably don't have that much volume dialed in. So what is holding you back there, especially when businesses like advanced materials are still doing very well?

Yes. Well, again, I would say, when you look up and down the portfolio, we've talked about price is different in various places. Advanced materials had one of the highest price captures in the portfolio because of the nature of its contracts and the commodities that are inside of it. And so you can imagine like that's a place where we're not going to get the same amount of price in 2023 in advanced materials that we did in 2022. And then the other thing you got to keep in mind is it's a little bit of a lead lag thing between the UOP business and the HPS business. We've always said UOP probably leads the way and HPS kind of follows behind. The good news is we had double-digit orders growth in every single business in PMT in 2022. So they're part of the confidence story around the backlog and the orders growth. But it's going to -- it's probably going to evolve at a little bit of a different pace in each 1 of the 3 businesses.

Got it. And maybe a similar question on PMT margins I asked you on Aero. You got a 25% goal. The margins have been kind of a little stagnant over the last couple of years. So what does it take that more of a breakout year? Why can't '23? I know you're only talking about modest margin.

Yes. Yes, well, I think the thing you have to keep in mind there, too, is the mix of that business, and it can shift from quarter to quarter in particular. And so that's why in some of the businesses you're like, oh, I'm at a run rate and now I can kind of hold that and continue to grow it from that run rate. But PMT bounces around a bit more as you wind up with either mix of projects going up and down or mix of catalysts, sales coming in and out and also where that catalyst goes because of the profitability levels depending on whether it's in petrochem and refining are different. So I think you're -- like it or not, we're going to have to live with the fact that there's always going to be some bouncing around in their margin rate. But what I would tell you is I'll go back to Accelerator as an example. All these things that we're talking about in terms of operational excellence, they're going to happen there, too. Like we started something in 2022, we call it GPMO. It's the Global Project Management Office. But think about that as that was our first foray into really designing in a sustainable and formal way how we run projects businesses and then permeate that across the whole company, including with a technology stack. And that's happening now. Like we really got momentum in 2022. IGS, for probably obvious reasons, was the first in the boat on that given some of the challenges that we had in 2021. And then now that's going to be in full swing here in 2023, and both UOP and HPS are going to participate in that as well. So I think we're going to have some nice operating leverage gains from just productivity and execution there also. And then again, when you think about the software content of HPS and Sparta, again, HCE is throughout all of the 4 SBGs, there's a fairly heavy part of that that's sitting in PMT. So I think the software content is going to continue to grow in that business as well, which is going to help give us a bit of a margin lift. So I feel very good about where we are going on margin rates there as well.

So Greg, I have about 12 questions on SPS, but I'm going to synthesize them into like basically one. And so maybe just a 2-part question. Like margins obviously much, much better. You set out last year things like 80/20, supply chain transformation. How much have you accomplished that led to that sort of 20%? And then the other side of that is you did seem somewhat maybe cautiously optimistic about Intelligrated pipeline looking better and orders coming back as you go throughout the year. So maybe you can talk about that and also the PSS business, the -- it seemed like you also thought short-cycle productivity solutions might be able to come back [ inside ]...

Yes. Yes, so a lot in there. Yes, yes, a lot in there. So that's the fun way of getting 1 question that means 7.

Yes, it's our job.

I know. I know. So let's maybe start with PSS. So absolutely PSS had really strong back end of '21, strong front end of '22. They were part of the supply chain constraints on semiconductors. So I ensure that order patterns shifted as people were trying to accelerate their place in line for orders. And so that's part of -- we talk about orders had declined during the back end of '22. And now we're -- this is why it's hard to say like with confidence what's exactly going to happen. What I feel great about, though, is our technology is best-in-class. And so as the market does recover or renormalize, if you will, I do expect we are going to win more than our fair share. We took share in 2022 from our favorite competitor. And I'm sure that we will continue to be successful in 2023 in that regard, but we'll see how the channels shake out and the end-user demand evolves. But we're in a really good position as a company there. IGS, we talked a lot about our largest customer who has substantially reduced their build-out and the focus and effort that we've been putting on is really 2 things. Number one, we've got the service business, which was the whole point in the first place, right? We built a $400 million-plus service and software aftermarket business behind that installed base, which is growing strong double digits at very accretive margins. So that's doing terrific. And then we are working back to diversify our pipeline outside of our largest customer. So that's a work in progress, and we'll see how that develops during the course of the year, but the software and service business is doing quite well. And then just broadly speaking, are we -- where are we in terms of the transformation or the execution improvements? It's still early days. I mean we did a lot of that business. I give them a lot of credit for planning ahead. One of the beauties of Honeywell is we don't run away from problems. You'll hear people say this in the hallways, problems don't get better with age, right? You have to go address them immediately. And probably in the May-June time frame, that team took a really sober look at what's the revenue base going to be really. They were a big part of our repositioning at the end of 2022 in terms of subscribing to the repositioning funds that we put to work. And they've put their cost structure where it needs to be to handle what will be, again, a down year on the top line here in 2023. So I feel good about where they've positioned themselves from a cost perspective. And then they're doing 80/20. They probably still have more of the footprint. Like if I think about the businesses that have footprint remaining to be -- just to be simplified, a lot of the work is there, right? So a couple of the other businesses are done or close to. So they still have some room to go there. They probably have the lion's share of what remains in terms of footprint simplification. So again, that's part of why we feel very good about their path to their 20% target.

So I'm quickly running out of time. Let me ask you, I've got one question I'm going to ask all the companies, so I just appreciate your sort of view. What are the top 2 or 3 innovations, megatrends or structural changes that have affected or will affect your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the [ current fiscal ]?

Yes. Yes, I don't know if it's overlooked. I just -- I'm not sure people appreciate it, but it's the things that we've been talking about, digitization, automation, sustainability. Those things are not going away. They honestly are not going away. When we did the Honeywell Connect event, I participated with Kevin and then afterwards, I talked to him and I said, hey, Kevin, next time you do this, invite more CFOs because I learned some stuff about what's coming from an ESG reporting standpoint, the need to be able to publish and stand behind data around those things, not to mention the solving of problem, right? So sustainability and so on, that's not going anywhere. Again, automation, the labor challenges in the world are not abating. So solution, automation, right, that's going to continue to be a big deal. And then like I said, digitization is the way, right? If -- even in our own teams, if people aren't evolving and using our digitization capabilities, they're going to get left behind inside Honeywell, and the same is going to be true in the marketplace.

Awesome, Greg. Well, we really appreciate your time. Thank you.

Yes. Thank you. Appreciate it.