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

One of the JPMorgan 2023 Industrials Conference. My name is Steve Tusa. I'm the electrical equipment and multi-industry analyst here. Hopefully, you guys have a ton of good meetings, and we certainly have some good content. I think 14, 15 companies that we have across a broad spectrum of verticals. We're starting this morning with Honeywell, some news that will obviously follow-up on in our Q&A. With, I guess, now outgoing CEO, Darius Adamczyk. And CEO-elect or new CEO, Vimal Kapur, here on stage. That was announced about an hour ago this morning. We'll dive into that.

But I guess, thanks for being here, guys. And start with Darius. 7 years is not quite a normal tenure for most of the CEOs that I've covered. I mean I think there are some that have certainly stayed way too long. But 7 is a pretty short period of time. Talk about the mindset here and how you progress through this decision?

Yes. Well, thanks, Steve. I think in terms of period of time, I mean, I think 6 to 10 is the right period of time in my point of view, and I think it all depends on a lot of other factors, too, which is a successor ready is the company in the right state of transition. And there were a few factors that went into my decision. The first one is, first of all, we had a superb successor who was ready. We spent 34 years in the company and is -- has a vast level of experience. Number 2 is, and this was probably the single most important factor, I want to leave when the company was doing exceptionally well and positioned well for the future. And and it is, and I feel very good about that, and Vimal will talk about them. Because I think you can't -- like in 2020, you can't leave a company in a crisis, you got to leave at a time where things are going well. And feel very confident about how Honeywell is doing, it will do and for the foreseeable future. Three is, frankly, it's an all-consuming job. I mean -- and it's one of those that I think pretty seriously, and it's 24/7 and 365 days a week. And at some point, you got to find balance in your life, and I felt that after being CEO and CEO for 7 years and an officer of the company, for a couple more on top of that. It was the right time for a transition. I've been a CEO before for a private companies, have gone public company, private company and felt good about Vimal as a successor, and we felt good about the company. And frankly, there's not -- sometimes people look for a different story that what I'm telling you, there is no other different story. Companies financially extraordinarily well positioned. I'm leaving on my own. I'm not getting pushed out by the Board. There's no sort of -- I didn't do anything improper because sometimes there's that story. I'm not sick. I'm feeling good. So all those things are good. It was just the right time to sort of consider a transition.

What do you -- when you look back over the last 7 years. Anything, a, what do you think your legacy will be, I guess, 2 years from now, 3 years from now? And then what would you have maybe like to have done differently?

Yes. Well, I think that there's going to be 3 -- kind of 3 phases of Honeywell. And this was maybe the other reason why I think this was the right phase. Which is -- when Dave took over Honeywell in 2002, it was really a break and fix kind of an operation. I mean the company was pretty broken, needed to be fixed. And he did a great job doing that from 2002 to 2016, when I took over as COO. What I wanted to do, and I think we did a pretty good job of is I really wanted to streamline it digitize the company, both internally and externally, focus on innovation, optimize the portfolio, enhance the growth algorithm both on the top line, bottom line, generate better cash, and really optimize the operations of the company itself to provide an even better foundation for the next phase of growth, which Vimal will talk about, which is I call it prosper and grow is the next phase, both organically and inorganically. So that's really kind of what I did is to really transform Honeywell into a well optimized, digitized company both from an internal and external. And then the last point is we triple down on innovation, whether it's our breakthrough initiatives and made a lot of bets that are yielding results in the short term, but also are going to give us tremendous growth in the next 5 to 10 to 15 years. So we made a lot of those bets for the future as well, and really changed the mindset about innovation and how we do that. So that's sort of -- that's kind of what we accomplished. What do I do different? Probably not too many things, frankly. I mean, I think I wish there was more bolt-on acquisitions that were sensibly priced that we could do. I mean, I think that's still an opportunity. And in my transition to Exec Chair role, that is one of the areas I'm still going to be focused on and frankly, have a little bit more bandwidth and help Vimal with that area, and it's something that I think we can and should do. And it's -- and this is really important, which is when you can bolt-on acquisitions to a good foundation where you have streamlined our ERPs and applications and websites and processes and implemented accelerator and global design models. The probability of success of those acquisitions is dramatically higher than if you just add them on to a disintegrated company. And that's really foundation that's set in place.

Yes. I guess to that point, I guess I would have -- if that is the case, I would have expected maybe more activity because you can obviously pay a bit of a higher price. And with your internal capabilities perhaps drive more synergies than a company that doesn't have that capability.

Well, I mean, look, you can't get the money back, right? So we still have a very strong balance sheet. We have about $25 billion to spend that we committed at our Investor Day last year. We spent about $8 billion primarily on buying back our stock last year, which I think is going to be -- was and is a very good decision. And -- but we still have 15 -- at least $15 billion to deploy over the next couple of years. So we have plenty of firepower to still deploy. Some of the work was recently completed. It's not like we were done 3 years ago. A lot of the foundation building optimization work was really done in the last 12 months or so. So I think that the time is right to get in the market and look at some things that are bolt-ons that are going to fit our strategy.

And how long will you be Executive Chairman for?

That's for the Board to really decide. I anticipate it will be at least through April of next year. And then we'll see what's going on with the company and what's happening, and we'll have that conversation with the Board and have kind of left that open end and depending on what's happening.

Will you be hanging around investor events being on the call over that time period? Or...

Probably not. I think it's Vimal's company to run now. And I think it's -- I mean I will be in the short term, but longer term, it's probably going to be -- Vimal's going to be predominantly represent Honeywell.

Got it. Well, congratulations on a fantastic 7 years.

Thank you. For sure.

Vimal, I wouldn't necessarily characterize it as a fresh look but how much of a fresh look will you take over the next I don't know, 1.5 months before we're going to have to hear something new? How much of a fresh look are you taking here?

I think you're right. I mean, the -- we have been working together at least for the last 1 year on many things. So I would say that Honeywell deserves evolution to the next phase. I think every C has an opportunity. So it's a statement of the obvious. I think things we are focusing upon, it's my view, and I think Darius has supported that view that now we have an opportunity to further sharpen our portfolio into 2 big macro trends, which Honeywell is good at: one is sustainability; and second is digitization. We are an automation company by background, a very large amount of our portfolio is automation. That paves very well for digitization, our Honeywell Connected Enterprise being a big pivot of that. And sustainability I think we're in a terrific position with our current portfolio. So how we progress our organic growth and add some good inorganic additions to that, and really make -- will always remain 4 segment company, but how do we really focus it on the 2 big macros which are in front of us, I think that's where we really are focusing on. So that's one slow change. You will observe -- we are already talking about it. In our kickoff meeting January this year. This is what we all talk to Honeywell leaders at how we are taking it that direction. So it's not that it's -- it was a direction which is evolving. I'm accelerating that. Other thing we are really working on is to enhance our margin expansion, which we have committed 40 to 60 basis points. What is the sustained way to do that moving forward? And One thing I'm paying out of attention is Honeywell Operating System, we call it Honeywell Accelerator. Now you will say that, okay, every big company have an operating system. What's a big deal about it. I mean we're so unique. I think the unique thing here is that we have been onto our operating system like for 15 years. This is not a -- they worked on Honeywell Operating System, heavily focused on lean, manufacturing in our supply chain. And many of you have visited and seen the impact of that. Darius took it to the next level really took a lot of our other operational processes and put a lot of stability in that. That's commercial processes, for example, how we drive our pricing, how we drive sales excellence, how we drive innovation. Where we are going is something extremely challenging. We are standardizing how we conduct business, externally facing business model. So Honeywell revenue can be divided into 4 business models, products, projects or solutions, aftermarket and software. How do you build a global design model by which you can conduct business in a standard way by business model? So how do you conduct business in projects? Because we have multiple project businesses, the way they conduct business is variable and standardizing that gives us those who appreciate Six Sigma terminology, we're reducing variability and more variability, we reduce, more upside we're going to get, and we're going to instrument that in a manner that it's a standard procedure followed by digitization. So it's a much higher level of degree of difficulty. Most companies have done more horizontal standardization, supply chain standardization commercial. We are doing vertical standardization. While the horizontal standardization already exists, and that, to me, is sustained we are doing margin expansion in all our 4 business models. We already have completed 1 out of the 4, and we are both convinced that's like -- it was -- the results were -- earlier you do anything new you've said is that going to work. It sounds good, but you don't know the outcome. We have CVC in outcome, which are you can pencil in margin expansion, you can pencil in some growth algorithm. So that's another change we are making. So some end substances, there's a lot of goodness in Honeywell. What data is leaving behind is extremely well company with good operating system and we're adding on more goodness to that and make it even better business.

So this is not a scenario we would come in and say, "Hey, our margins are great. We're going to now invest for growth." So there's -- this becomes less of a margin improvement story. Margins are central to what you see as the opportunity going forward?

Absolutely. Yes, I think we are committed to our growth algorithm, what we mentioned in the last Investor Day, 4% to 7% top line growth and 40 to 60 basis point margin expansion. We will do both. We'll do it this year. So this is not -- we did it last year. So I think that's something which is our commitment is we keep performing in good times and bedtimes. And we'll do that unless something dramatic happens this year. We are very confident we're going to deliver this year, as you've seen in our guidance.

When it comes to portfolio, you mentioned, is it more on the buy side? Or is it -- are you evaluating.

We will.

You're not -- you haven't worked in Aerospace as far as I saw on the resume. Are you an aerospace guy?

I'm -- look, I'm a Honeywell guy. We do the portfolio valuation every year as part of our strategic plan. Darius said that last year. I will do it with him this year. There's always going to be options. The -- on a broader portfolio, I mean, if you look at the Aero question aside, there are no massive underperformers. We want to get rid of like yesterday afternoon. It's -- there's -- there are some, obviously, they'll be in such a big company, there will be always some stranglers. But there's no one big obvious one. But the bigger transformation, I think it's all opportunity. I mean we look everything objectively. But at this point, we're pretty excited about the aerocycle. We are an UpCycle. This year is going to be potentially double-digit growth. That's what we have signaled. And the cycle is up for the next couple of years. So we're focused on aero supply chain and how do we believe that and keep delivering on growth. So on the portfolio question, we will do a formal assessment as part of our strat presented Board, and then we'll prosecute it depending on what we all align on.

Valuation is a very personal discussion with people, I think, I found over the years. How do you look at valuation and returns on deals?

On deals. I think the basic financial discipline will always remain core I think we have a strong history of not overpaying and not being over excited. I don't think fundamentally having been trained in Honeywell for several decades, I don't think all of a sudden I can spin my head and change. That's going to remain pretty much. Would we be more focused on these 2 broad macros? Yes. That's what we really want to do. But would we overpay? I don't think so. I mean I don't -- I think it does look exciting at the headline, you can get glory for like 2 weeks or 2 months, but then you have to pay the price for it for a much longer time. So we will absolutely do deals. I think we are -- I mean it -- sometimes looks that we underwhelm ourselves with our performance. It doesn't mean we are not putting efforts. Our efforts are not reflected of what you guys see. Our -- we simply don't want to overpay and some expectations are off the table. We being in industry have been there, done that. So we know what it is worth off, and we have our point of view.

I guess when Danaher made the transition years ago, they loosened their return hurdles, and that was kind of a big deal at the time. But obviously, they've had a lot of success along the way with a bit lower of a return hurdle. How what's your mindset on the return hurdles? Will we get a different take from you or pretty status quo?

It'll be -- would be -- I mean, I haven't. thought about it to kind of big change what's on the table. So till the time that happens, our current rules that apply. But as I said, that some interesting growth vectors, I think I personally believe a lot that sustainability or climate change is a problem of a scale, which most people don't even appreciate it from a business standpoint. An opportunity set here is extremely large and making some right acquisitions in that space is going to position us. We already are very well positioned. This is like not that we are starting from behind. If there's a case here to look at ROI differently? I mean, we may. But at this point, we haven't really visited that. I mean this is like one of our old news. So we were not really working on that since the [indiscernible].

Well, I mean you didn't just show up this morning. I mean, you've been the COO and been around for a while. I'm sure you have some ideas.

Look, one thing you can be sure, we are working together now for 11 years. So that's too long in time to mutually influence each other. So the influence on this side, on that side. So it's going to take a while to separate it. I think a lot of things that you saw was a collective view of the current leadership and what I can ensure is large amount of continuity, but the change, which is necessary to take Honeywell to the next level.

So I'm going to ask you both this question. But as far as the near term and this year, everything on track for guidance for first quarter as well as 2023 annual guidance?

Yes. By the way, thanks for asking that question because that's sometimes -- some place where our those people go is everything is very much on track for Q1, the year. We feel very good about the year. Everything is through a couple of months of this year's operating right where we expected to. So yes, we don't reinforce our outlook for both for the quarter and the year.

Anything bouncing around in January or February that obviously on net in line, but -- and anything within the businesses that you've noticed how's China? China coming back at all?

I would say -- I mean I feel pretty good about the assumptions we made in our planning process for all our 4 SPGs. We were well within a rounding error in our estimation range for all the 4 segments. China, in particular, I would say, everybody's thesis is Q1 is going to be soft and it's going to roll after Q1. We'll see what happens. I mean I think the -- the foundations are strong, but geopolitics are the only worry card, which if anybody has a guest card there. But fundamentally, I think the China does look strong. It's like what happened in the U.S. in '21 after we came back from COVID, we had a huge recovery. They are the second largest economy, so they should experience the same. They need to return to work and everything should kind of follow the same pattern. That's what we are really counting on. But at the end of the day, China is $2 billion out of $35 billion, so it's 2% less or higher. It matters, but it is not that material from overall scheme of things. I think rest of the geographies are performing on expected lines. Europe stress is slightly lesser than what we expected. I won't say it's less, but it is, I think, in energy they manage the energy situation far better than most of us have anticipated. U.S. continues to be doing well. Middle East with oil and gas prices. Everybody saw the eye-popping income of Aramco yesterday. I mean it's a case here, they're going to continue to invest more there in the region. ASEAN, India all are doing really well. So I think the word economy is on balance. As best you can expect at this point, sitting when you were planning last year, there was a lot of worry cards. But I think for most part, things are gliding along on expected lines at this point. So we should have '23 per guide. And Q1 per guide, we don't expect any major changes from that.

And just to give you kind of a comfort data point is if you take a look at our guidance range, you look at the midpoint. Historically, the backlog coverage was about 72%, '19, '20, '21. This year, it's over 80%. So I mean we have an exceptionally strong backlog through a couple of months, orders are up in total Honeywell. So I mean -- I think that...

And supply chain is easing on expected lines. I'm not claiming victory here their supply chain problems are solved, but we clearly see in our aerospace business, we are seeing double-digit growth in the first 2 months as we expected. So will that ramp up? We have put a lot of hard work that it should further ramp up. But we are not declaring that victory given so much of uncertainty in the Aero supply chain for the last couple of years. The supply chain is an improvement trend, less challenges on electronics compared to the past 2 years. Markets are more generally trending on expected lines. So that gives us confidence that we should deliver our commitment for 2023.

So this growth algorithm of 4% to 7%, you're not doing that this year?

We said 2% to 5% this year.

Right.

Yes. That's primarily driven by the SPS segment, where we have revenue contraction due to warehouse automation. If you leave that aside, that one segment, we're in that algorithm.

Okay. So that would be the flip to next year and the look forward that you should see accelerated revenue growth, removing that negative over the next couple of years?

Because it'll rebaselined itself. I think the segment warehouse automation saw some insane growth and it rebaselined itself to whatever it is this year, so that becomes a new normal. So I guess after that, this abnormal baseline goes away, and that should put us into yes, that algorithm range for the year.

Yes. Well, plus if you take the midpoint 3.5%, could round 4%, could round to 5%. So I mean I don't think we're shying away from our growth algorithm even for this year. I mean, we feel very confident about the margin expansion growth, it's early. So we'll see how that goes. I mean, we're very energized to what we're seeing in terms of just the unlock in the supply chain, both in aero and the electronics. So if those trends continue, things could be very much within our growth algorithm.

Right. And then that should accelerate in '24 and '25? Just to flip on SPS?

Yes. Yes. I mean just flip on SPS. I mean if you see by segment, Aero continues to perform well. So there's no reason that high growth in Aero will not sustain in 2024. PMT business, is absolutely benefiting from sustainability. I think IRA did it strict. We see more form demand from new technologies we have been talking about coming in and also our advanced materials business continues to perform very well. And Process Solutions business is generally performing well in the market conditions. And in the buildings, I think our business is much more institutional. We are much more stronger in one thing. I always struggle see, if you recall, even during our HPT Investor Day, Honeywell Building Technologies, a building when I joined the business thinks offices are building. That's 20% of our business. Our business is airports, schools, hospitals, data centers, I call it institutional, you don't stop making hospital because economy is weak. I don't stop upgrading schools. That remains very stable. Commercial has a lot of noise for sure. But for most part, that business is also having a good growth algorithm. So on whole, the 4% to 7% stand on a strong fee because our macros of the end market we serve are pretty strong.

I guess the HPT is one that is lower than I would have expected. I mean, your peers, obviously, a little bit of different mix some HVAC companies, JCI more diversified. But that's one where the low singles, including price just seems to just doesn't seem to connect with the marketplace. What's going on...

We are little bit less of our business and HPT is much more short cycle compared to our peers. We have a very strong product portfolio where from booking to delivery cycle is 30 days, 45 days. So we felt it prudent not to go any bullish in the second half of the year and made more moderate assumptions. If you have a business like our peers and have a large project portfolio, then you have more stuff in your backlog and you're going to be more bullish, but the margin rates are also different. So our margin rates are more attractive because our portfolio is more short cycle but that's subject to more variability in the economy. So we're just being cautious there. More business comes, we'll take it. We are all ready to deliver it. And that's how we have factored and planned that.

On the short cycle side as well in SPS, Zebra has been talking about customers delaying decisions a bit with their purchases. What are you guys seeing on that side of the portfolio?

We do see softness in PSS segment at this point. I think that business is probably the shortest cycle in the whole Honeywell portfolio. And within the short cycle, things can change as a matter of weeks. So at this point, I think we see Q1 better than Q4 from an order booking rates perspective. So I think the trough occurred and we are on the recovery. That's how we have modeled it. And our expectation is that we should every quarter better than previous quarter, moving forward, Q1 better than Q4, Q2 better than Q1. And we are building our pipeline. We are building prosecuting some of the large deals. So we do expect we're going to execute well. We compete well with our peers, and we'll continue to do that.

Yes. PSS is tracking about what we expected. So there's not really any surprises. Yes, there's some -- there's a bit of softness in some of those end markets. But frankly, it's performing at or better than expectations in terms of what we had in our growth algorithm. And frankly, we expect a pretty strong second half that the comps get a lot easier. We're still operating off the backlogs. So nothing different than expectations, if anything, probably slightly better than expectations.

When it comes to price, I know people ask very direct questions like, are there parts of your business where price will go down. And in a $35 billion portfolio, I'm sure there's a couple of businesses. On net, how do you guys look at pricing this year? And is there any risk there that would play into your margin guidance in the end?

No. I think risk on margin guidance answer is no. Last year, we heavily focused on price. And I think this year, price is not going to be 1% or 2%. It's normal to be 10% either. It's going to be somewhere in the middle. We are executing very well on that. But one thing we are doing different this year compared to last year is to get direct material productivity. Our goal is can we really drive direct material productivity equals to inflation? Why not? We used to do that. This is not a new thing for an industrial company and really build an equation that we offset inflation with productivity and all price falls to bottom line. That's the overall playbook we are working on. Surprising, I feel pretty confident on Honeywell capability of heavily digitized pricing model. We can change pricing across the company on a weekly basis. We -- do we make 52 price changes in our businesses? Answer is no, but we have capability to do that and we constantly look at inflation, elasticity and see where we have optionality to do things differently. So I think our maturity level on pricing is best-in-class at this point of time. And that gives me a confidence to your question. Surprising is not going to be a headwind, direct material productivity and getting and pulling that because sometimes organizations forget. This is like the muscle memory that we used to save material costs. So pushing that harder the organization and reviving that capability. I think we're doing a good job so far on that. So that's kind of overall model we are really working to drive offset inflation with productivity and really that's priced to the bottom line. And that's the very thesis of our margin expansion this year.

And by the way, just to add a couple of things. Number one is we're not getting price because we're shifting some price. We're getting price because we have technology differentiation, and we're going to continue to do that. That is part of the innovation mindset that I've talked about. We will always get more price than our peers because we have better innovations, we have better offerings which create more value for customers. That's how you get price. And that's whether there's inflation or isn't inflation. That is part of our value add to customers. It's you always -- we have a very high vitality index, as you know, we're always introducing products in new offerings, which offer an opportunity to capture more value. That is very much part of the accelerator and will be part of our algorithm going forward. And of course, we watch inflation. But even if inflation was 0, we expect to capture more value in the offerings that we bring to the market.

Right. So I guess the message is the price gains are structural, and they're actually going to fall to the bottom line more than they had in the past as opposed to the narrative that your pricing is higher than normal and it's going to revert to a place where you'll be guiding down margins?

No. That -- Honeywell guiding down margins. Yes, that's funny. But that's not what we do. And no, they're not going to revert back or something like that. I mean I think that this is -- our margin performance speaks for itself. We've done it for 15 years. We're going to continue to do it. And it's because we do 2 things, and we do those 2 things extraordinarily well. Number one is we drive productivity every year, whether it's a good year, bad year and different year, we have a productivity program, whether it's our ISC productivity, whether it's material productivity, labor productivity, automation, we have about 7 different levers that we drive every single year to drive productivity. The second lever is the one we just talked about, which is drive innovation. And when you drive innovation that's differentiated and captures value, you can capture more of that value. So we always have 2 ways to drive margin expansion. We don't -- and we do that every single year. I think we've established a credibility that we can believe that we can continue to drive margins. We feel very confident. As a matter of fact, as you know, last year at our Investor Day, we actually increased our margin commitments for -- from 30 to 50 to 40 to 60 because we are that confident is that as part of our algorithm.

You agree with that statement? Just making sure.

Absolutely, absolutely.

Okay. All right. That was pretty definitive. On Aerospace, you mentioned that some of the supply challenges are getting a little bit better. There has been some debate around the margin there as well. Do you -- are you sticking to the margin targets there longer term?

Absolutely. I think longer term, we have a runway to expand margins just by our volume leverage alone. I think this year, the volume growth is we have to manage our mix in terms of our deliveries to OEM versus aftermarket. I think that's a -- in a constrained supply chain managing our shipments in a careful manner is our biggest challenge at this point of time. So -- but on a longer-term basis, we absolutely find a pathway to our long-term commitments for the Aero margins.

That's 29%?

Absolutely, absolutely. And we have a path -- this is not a slide. We actually have algorithm, how this works, supply chain leverage being the biggest part as we get more volume, we're going to get more leverage there. 2023, that will aluminum rate gets partially offset by some of the mix challenges because you're shipping more to OEMs. That drives the other dynamics in that airline credits and -- but that to me is a 1-year event. It will just settle itself as we progress.

One last business one for me. Just on the core of PMT. The non sustainability type of stuff. What are you seeing there, whether it's UOP or HPS? What's this trend line there?

Yes, UOP trend line seems very robust. We see much more licensing activity in the both core technology, primarily in petrochemicals. People are investing in petrochemicals we see more licensing activity, more wins there. And people are investing in sustainability. We announced our major win with Exxon about a month or so back. It's a massive undertaking of establishing blue hydrogen plant. That's what IRA was supposed to do, and it's enabling that kind of investment. And we see activity on SAF continues to grow. It's just like a race to arms race who can build more SAF plants. We are in an extremely good position to license that. We see a lot of activity in carbon capture, blue hydrogen. So UOP is in a more of a phase where it saw a challenging situation from 2020 when the COVID happened and energy spend become less and everybody went much more focused on energy transition. Now that thing is settled. Now we are more into -- everybody is more on strategy execution more, energy companies versus what should we do, what are the optionalities there. So we see pretty robust pathway there as we had signaled in UOP.

And just to add to that, I mean, we've never seen a better pipeline for greenfields projects than we do right now. I mean, it is -- the pipeline is really filling up, and we've had a recent win, and we anticipate there will be many more this year. So UOP bookings actually look good.

We're working some exciting technologies in SAF. I mean, SAF has been strained as many of you know, by supply side. This is -- people will buy as much as you want. We launched ethanol new technology about 6 months back. You're going to produce SAF from ethanol. Now why does it matter? Because ethanol is available in abundance in the United States, in Brazil, in India, there's a lot of ethanol so you can repurpose ethanol as the fuel consumption goes down, which it will likely and you mix ethanol in the fuel, the ethanol becomes free now because less fuel is being consumed, and you can produce it more. So that technology enables a new pathway. And we are also working on possible pathways to convert CO2 to SAF. That's an absolutely path-breaking technology. We are aggressively working on that with some customers. That's not yet commercially launched, but I have a high confidence our team will crack the code. So SAF is just keep adding new routes. So it just keep opening more and more licensing doors for us, and grow with the market for hydrogen and for carbon capturing. So I remain pretty optimistic. HPS side, I think we see more opportunities in the new economy, we are focused on things like PV cell manufacturing, gigafactory automation. I know some of our peers claim they already won that market, but we'll see who wants to win the market. It's a new space. We have a pretty strong portfolio in gigafactory manufacturing that's underestimated on Honeywell participation. So we are actively part -- a lot of decisions will be made in the next couple of years. So HPS will see its fair share in new economy type of manufacturing, solar cell manufacturing, battery manufacturing, and they're quickly moving their business towards that.

Any questions out there for these guys? Wow, got to do better than that over the course of the day, guys. I don't have enough content to keep it going. Let's see, 3 minutes, M&A pipeline. What are you seeing out there? Is there anything -- I guess, can you comment directly on national instruments? Are you guys still poking around that asset?

Yes. I mean that's -- M&A is probably an area that I'm going to kind of for a while focus on and help offload because he'll have plenty to work on. I think he's going to be plenty busy. So that's probably an area that I'm going to help out as Exec Chair, but pipeline is good. We don't comment on specific acquisition targets, but think about bolt-ons and think about things that fit the portfolio should probably give you a hand as to where we're looking at that one. But we are looking at a lot of different things. I actually like the timing. I think things are becoming much more attractive. Myself and our BD team, I can tell you, we are -- we have more bandwidth now, and I think we're pretty active. We're about as active as we've been in the last couple of years, really doing portfolio shaping. So I mean -- and I think that that's going to also be part of our growth algorithm. We're always going to be shaping the portfolio, adding quality businesses that kind of fit the megatrends or growth businesses, management levers or technology differentiate their matter. And we're going to taking stuff off the bottom, which frankly doesn't fit the Honeywell profile. Some are sort of counter to what I talked about. And there's a lot of work to be done there, and I'm excited to be able to help them will get some of that stuff done.

When you say off the bottom, that sounds like 5% of sales or less?

Yes. I wouldn't anticipate something dramatic. I mean I'd say maybe 10% would be a better number, but less than 10%.

Right. And as far as some of the dislocations in the tech valuations that we've seen, I guess they were dislocated to the upside, now there may be fair. But I mean, are you seeing enough movement on software assets to make them a bit more attractive here?

Yes. I mean, certainly, they're a bit more attractive than they were 12 months ago. And I think some of those are approachable, but so are other assets, too. I mean, I think that there we have -- we're looking at all types of technology companies and software are not the only technology companies out there. So yes. Some of the things that we're looking at are software-oriented, some that we're looking at are not. But they generally have some software hybrid element and/or they have some process element meaning like PMT fit.

A PMT fit.

Yes.

But something that would be more ended sustainability as opposed to the traditional fossil?

Yes, it will be a bit more focused on sustainability [indiscernible].

Okay. I think that's all I got.

Thank you.

Thank you Congratulations to you both. Thank you.

Absolutely. Thank you.