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

Thank you for joining us.

Thank you. It's a pleasure.

Okay. We'll start it off. Thanks, everyone, for being here for our last presentation of the day. My name is Sheila Kahyaoglu, in case you missed it. I run the Jefferies Aerospace Defense and Airlines franchise. And this is our first, hopefully, annual Jefferies eVTOL Summit. we're lucky enough to have Mike Madsen with us, who's President and CEO of Honeywell Aerospace. We'll be discussing Honeywell's -- how Honeywell is enabling the eVTOL market. And Mike is in Phoenix at his facility, I believe, judging by that view. The facility we were lucky enough to visit only in November. So really cool products you guys have out there to enable the market. For those of you who don't know, Mike, a little bit of background about him, he's responsible for the entire Aerospace business, which accounts for 40% of Honeywell sales. And Honeywell's products, as everybody knows, are found virtually on every commercial defense and space aircraft. In over more than 3 decades in the aerospace business, Mike has held a variety of executive roles, leading multibillion-dollar businesses as well as global support functions. Prior to his current role, he served as VP of Integrated Supply Chain, a very important role today, of course, with responsibility for the global supply chain and manufacturing facilities. Previously, he was President of Aerospace, Defense and Space, and Vice President of the airline customer business team within Air Transport and Regional for Honeywell. Mike joined Honeywell in 1986 as an engine performance engineer. With that, Mike, thanks so much for being with us and always helping us learn more about the Honeywell franchise within aerospace.

So maybe just to start for those who weren't there in November and most of the people in the room with the exception of [ Kyle ]. How does Honeywell -- what role does Honeywell play in the advanced air mobility market?

Well, first of all, thanks for giving me the chance to participate today. It's really great, Sheila, to see you and to talk to the team. We're excited about this market, and we participate in different ways. I think, first of all, obviously, as a component supplier, but also as a systems integrator. This is a nascent industry. A lot of the players in this space are new, they're entrepreneurial companies. And one of the things that Honeywell brings in addition to components and products is also the ability to provide systems integration and certification support. The technologies cover the entire range of what we make, everything from the cockpit systems with Anthem to actuation systems, cooling systems, electric motors, compact fly-by-wire computers, all of that. The other role that we play, I think, in this industry, and I think it's an important one, is really helping to shape the regulatory environment a bit, providing guidance as an aerospace OEM and systems provider, providing guidance to the rule-making authorities around what makes sense in terms of how to certify these vehicles, how to operate these vehicles. And that, of course, includes some engagements with Congress as well. So it's a pretty broad role that we play.

Great. We've heard a lot about the regulatory aspect all day from the OEMs. So that's helpful that as a supplier, you're enabling that. What other ways does Honeywell enable the adoption and uptake of UAM as a safe transport?

Well, in addition to working with the OEM customers, we're also trying to partner with them, again, with the airworthiness authorities to help shape the rule-making and making certain that the authorities understand what capability we're bringing to the vehicle as well as what we can and cannot feasibly do in terms of certification. We're very familiar, of course, with the FAR Part 23 world, the FAR Part 25 world. So we're able to bring a little bit of that experience with us and say -- and of course, rotorcraft and bring that experience with us and say, this, to us, makes sense. Our products will work in this environment. They can be certified to that level. And even with like the folks on the Senate, we've testified in front of the Senate on what it takes for the industry to succeed and also what we think makes sense. And I think, in some ways, we participate as a bit of an honest broker in that discussion because we're not an airframe or we're not one of the OEMs in that space. We also participate in all the industry groups, and we try to use those forums to help advocate for the adoption of consistent and appropriate standards. We're part of about 65 different industry working groups in advanced air mobility. And a lot of the hard work gets done there at the grassroots level to kind of build consensus around what makes sense for certification of different types of vehicles and the technologies that enable that. So it's -- it's AIA, it's GAMA, it's NBAA. It's the Commercial Drone Alliance. It's all these different industry associations that we use to try to rally support for those positions that we ultimately advocate for.

UAM, you've talked about $7 billion of content wins and then, of course, being one of the products and a market pipeline of $10 billion plus. Where are you seeing and winning the largest opportunities across fly-by wire, avionics and builders?

Yes. Anthem is probably the biggest. It's kind of tied with actuation, flight surface and motor tilt actuation. These vehicles are all going to use electric systems, so electromechanical actuators. That's also been a very big space for us, and we have headwinds there with a couple of OEMs. When you start to go down from there, fly by wire is a big one. The e-motor program with William is a big one. And then down from there, some of the systems around aerothermal management, cooling, et cetera. But the big ones are really actuation and the Anthem cockpit system. And not surprisingly, those 2 kind of go together a bit as well. So it's nice to be able to bring that integration to bear.

How do you think about the areas of investment that are required to compete in the UAM market? Or does much of your product suite transfer from the commercial aerospace arena? You have this co-development effort with DENSO, a new e-motor to support Lilium, which we got to see. I couldn't take pictures of it, though, for my report but -- and you're also offering the Micro Vapor Cycle System.

Yes. The investments, first of all, the way we look at this is, it's every -- in every product area, it's a bifurcated approach. We're making a core investment in a core product for every system, okay? So there's a core Anthem system. There's a core EM actuation system for both tilt and flight surface actuation. There's a core vapor cooling system, et cetera, et cetera. We do that to build a product family approach that we can then build on. There's also an application, and in some cases, more than 1 application. So when I look at Anthem, there's a core Anthem program, and then there's an Anthem program for Lilium and an Anthem program for vertical, et cetera. And by doing that, we're going to be able to reuse these technologies, not just on other advanced air mobility platforms, but also in other market verticals, like business aviation, general aviation, air transport, defense. So we want to keep that core product as common as we can and then use the application-specific investments from our customers to tailor those to each of those applications. So it's a bit bifurcated. And the other thing that I would mention is, we're partnered, of course, like with DENSO and looking at other partnerships. We try to focus those on areas where we can benefit both from a technology standpoint as well as manufacturing capability. I think that's a really important point in this market space is these vehicles are going to be produced in much higher numbers, particularly when you think about the cargo space, much higher numbers than even the helicopter industry has today. And so manufacturing capability at scale is really important. And it's not something that most aerospace companies sort of think of as a natural talent, right? We tend to think of 500 of something is a lot or 1,000 of something, it's a lot. This is the great thing about the DENSO partnership. They're used to high-volume manufacturing, and thinking from a manufacturing standpoint and the design of the product. So one of the benefits of that partnership there.

No, that's great. And when we think about your UAM ramp, I think you've talked about $2 billion of revenue without a time line associated with it. How do we think about that ramp? And when does Honeywell specifically start generating revenue? Do we have to wait for FAA certification? How much visibility is there?

Yes, it's still obviously not as clear as conventional aircraft, where we've had these standards and these processes in place for decades and decades, and then make just small changes. But we still believe strongly that this will be a very big market by the end of the decade. That $2 billion revenue number still seems quite reasonable to us. It will follow sort of an S curve. We're going to start to see entry into service the middle of the decade, kind of the '25 time frame. It will ramp slowly as we get into the next couple of years beyond that and then really start to accelerate, we think, in the '28, '29 and '30 time frame. It's unclear really what sector is going to lead or even which OEM is going to get there first. There's quite a few that are sort of neck and neck right now. But I do think that we will see cargo take hold pretty quickly simply because the use case is there, the economics are there. The operational part of the -- from a certification standpoint, may be a little easier than it is to operate in a congested space like the urban air mobility vehicle as well. But this is going to go from entry into service in '25 to a pretty big space, we think, over the 5 to 6 years beyond that.

And I apologize, when you think about your partnerships, you mentioned Lilium and Vertical. Are you -- do you have an offering across all the OEMs, whether it's passenger, cargo, autonomous pilot?

Yes, we do. The Lilium motor is one offering. The motor that they have on their vehicle that we've developed with DENSO is one. And then we've also got a core motor product that we've developed with DENSO, that's a bit different size. It's a dual motor. It's a bit bigger than the one that's used on the Lilium application that we think would be well suited to some of the larger e-motor requirements that we see out there. And is too is a family approach that can be used at -- one at a time or in pairs to be able to create different scalable power levels. And we continue to look also at -- in the other product areas for partners that make sense, particularly for manufacturing. We have designs that are Honeywell designs for these other systems like Anthem and the cooling system and the actuation system, but still looking closely for manufacturing partners in all of those areas.

And when you think about the growth rate associated with Lilium beyond 2030 and that $2 billion revenue number, how should we be thinking about it? I always associate air traffic with 4% to 6% growth. What's the growth rate you're thinking about?

Yes, I think it's going to be a lot different than what we're all used to. I think it's going to be really slow at the beginning. There'll be some initial vehicles introduced. They'll be used for some limited use cases, maybe under some pretty strict requirements. And then I think it will take off. I think it's going to be strong double-digit growth as we get into the back half of the decade. And that will continue for some time until the market finds a bit of an equilibrium with the level of technology in those vehicles. There's going to be early adopters, mid-adopters, and then it will level off a bit. And then I think it will start to behave as we go into the 2030s more like a regular conventional aircraft market where you see these step changes come along every few years and capability and those aircraft get adopted. So slow in the '25, '26 range, then probably really fast for a 5- to 10-year period, and then kind of leveling off again. And at some point, more like a conventional aircraft industry.

How do we think about the opportunities across the different geographies? Are you more focused on the U.S. or Europe to start?

We're seeing adoption and interest in every geography, in some cases, for different reasons, right? The green aspect of this mode of transportation is very appealing, especially in Europe. The ability to be able to move people and freight without an infrastructure investment is attractive in certain geographies. It's everywhere. But I do think -- so I think we're going to see all the geographies adopt it more or less at the same time. When I say all the geographies, I mean the developed areas of Asia Pacific, the U.S. and the Europe areas all at the same time. Where I think it's going to be some bets to be placed is what sector. I personally think that military and cargo will find a little bit of an easier path to growth in the early days. But the air mobility piece of this, the ability to move people to and from airports or within cities is very compelling. The economics are going to be the key there as well as the regulatory hurdles. But I think we'll probably see cargo and military go first, but only by a short amount of time, and then we'll see the advanced air mobility piece catch up to that.

That's great. And then if we could talk about Anthem, maybe taking a step back because people might have not spent as much time with the Anthem engineers as I did in November. What is Anthem? How does it -- how is it differentiated from your Epic platform? And then we'll talk about specific.

Yes. So Anthem is our first real major new cockpit system in about 20 years. Epic has served us well. It was modular, and it was -- it had a lot of capabilities in it that were just groundbreaking at the time it was introduced and still very powerful, and we continue to do software upgrades there every couple of years to those systems. But Anthem is a real step change. Anthem has all the sort of capability that people will become used to in advanced cockpit systems today and flight management and flight planning, but it has some features that make it really unique. First of all, it's modular. It can be scaled up to the size of an air transport aircraft or all the way down to a general aviation aircraft. The boxes themselves that host the processing capability are about half the size and less than half the weight of competitor systems, including Honeywell systems today. Because they're so small and because they're such lightweight, they can be located outside of an avionics cabinet. You're not going to see an avionics cabinet with these racks of processing modules. You're going to see these distributed. And they can also host processing capability today that sits in other boxes. So that means that because they have so much more processing power, it takes other weight off the airplane as well. They're passively cooled, so you don't have fans, that improves the reliability. The system will always be connected. It's connected to the Internet just like your -- like if you have a Tesla, you get in and it's connected, just like your smartphone is always connected. The systems in the Anthem cockpit will also be connected. That means you can upload, download flight plans, flight information from the aircraft to your company or your personal website. You can do fuel management. You can check the status of the systems on your aircraft remotely. It's also tailorable. We can configure the primary displays the way the OEM wants to have them very easily. And there's a section of the software and for the displays that's user tailorable. It's got a secure web browser built into it. So things that a pilot a day might need to use a ePad or an iPad for, they can do right there on the center stack. And again, it can be programmed or set up for a specific operator, an airline or a charter operator or a fractional can set it up the way they want to have that. Lastly, it's really got built-in capability for autonomy. We've built processing capability into it to allow simplified pilot operations as well as ultimately single pilot and even remote operation. And so it's got that capability. It's got that processing built into it. And as the rule making allows that to occur, the systems will be ready for that.

Then maybe can you talk about the R&D investment. When does Anthem go into service? What product platform does it go into service first, whether it's commercial or business jet or UAM? And the investment has likely been dilutive to segment margins. Can you maybe help frame the margin profile of Anthem? And is there any associated recurring revenue given the cloud connectivity element as you mentioned?

Yes. It's a great question. So first of all, Anthem fits within our investment profile that we have for the business, which we always sort of talk about it in that range of 5% to 8% of our revenue base from a total investment perspective. We've managed to fit that in. And so it's not going to be a big impact in terms of the profitability of the business. It just consumes investment that we would have made anyway. But I would say that it's not too far away. The program is well underway. It's been underway for a couple of years now. Entry into service will be in that 2025 time frame. Probably with Lilium, Vertical is also right there in terms of timing for entry into service. So 1 of those 2 will go first. And what's really exciting about it is because the software has this tailorability and this configurability to it, we think there will be an even bigger appetite by the operators for software enhancements, not just for things that we do today to improve flyability of the aircraft or aircraft behavior, but even just functionality and think of apps that they could put on there, we think that will be an ongoing revenue stream as well. And because it's connected, that really opens the door to be able to bring information into and out of those noncertified parts of the cockpit that operators will benefit from. So we do expect a pretty strong recurring revenue stream there. And that will start shortly after entry into service, I'm sure.

And we should think about it as a new platform first to start off and potentially retrofits thereafter. And you mentioned the connectivity. So how should we think about the connectivity to your other solutions?

Yes. We are anticipating that operators will want to have connectivity to a wide variety of systems. So we're not going to make operators, you have to be connected to a Honeywell hub or anything like that. It will be set up so they can connect to a hub that we establish for them or that they have for themselves. We anticipate airlines, for example, are going to want to be able to connect to their operating systems and their fleet operations and planning systems. So it will be set up so that it's enabled to do that very easily. It can also connect to Honeywell systems or even an OEM system for monitoring the airplanes in ways that are of value to the OEM. The other thing I would say is that it's important that, that tailorability exists because what connected means and what connected does for the operator and for the airline, let's just say, or for the user of the aircraft is very different as you move between a military space or business aviation space or in your transport space. So we didn't want to create anything that was too constraining. We wanted it to be pretty flexible, and that's what we've achieved.

That makes sense. And then you've mentioned a few of the UAM partners. How selective are you in terms of picking your UAM partners? What's the risk to Honeywell there?

Well, we do look carefully at the partners that we choose to do business with. This has always been on top of mind for us. The partners have to choose us, of course, the OEMs have to choose us but we also choose them. And what we look for is, first and foremost, sound aircraft design, something that we think is going to work, be differentiated, compelling, be certifiable. Second thing we look for is the strength of the leadership team. Is this a group of business people and technologists that can get this vehicle certified? The third is we look for funding. Are they well-funded? And then last, but not least, of course, is how do we fit with them? If our skills overlap with their skills, it's not nearly as good a fit as if we're complementary. And it's interesting because I do reflect on this quite a bit that if you went back in time, 75, 80 years ago, 90 years ago, the early days of commercial aviation, it was very much like that. A lot of players, a lot of partnerships, a lot of people working together to try to conquer this domain of air travel. And now air travel has become ubiquitous and it's a little bit incremental. And this is a space where it's back into the kind of wide open spaces like it was in the regular way maybe a long time ago. And it's very exciting to be part of that.

And then beyond aircraft certification, you mentioned you are helping with regulation. But one of the focus items has been operational regulation, which we haven't really touched upon with the OEMs that presented because they're so focused on certifying their own aircraft. How do you think it will all work out at the end of the day with all the FAA has to handle?

Well, a couple of things. There's a long way to go, I would say. EASA really kind of led the way on this. I think they early on recognized that they had to adopt standards. The standards had to be pretty rigorous, more or less along the lines of air transport aircraft, which seemed like a real challenge at the time, but I think was smart because it sets the bar high. Now what we're seeing is the FAA is pretty tightly aligned with that, and we're starting to see a convergence between what EASA and the FAA are doing in this space. That's super important. We take that for granted, right, in regular way aircraft that aircraft that are certified by EASA will get reciprocal certification by the FAA and CAC and others as well. We sort of take that for granted. But without that, it creates a real problem for aircraft that an OEM wants to sell into different markets. So we're starting to see that come together. That's great. I would also say that the certification standards are ahead of the operational standards for sure. And one of the areas that we think is really important for operating standards is going to be those that are associated with autonomous operation and beyond visual line of sight operations, sense and avoid navigation technologies, the ability to operate at flight altitudes that are below where a helicopter would typically operate, in a congested space, in a GPS-denied space, for example, in adverse weather. So there's a lot of problems that have to be solved operationally to allow vehicles to be operated in a more flexible way than a helicopter is operated today and also more safely. And that's going to be absolutely essential when it comes to the urban air mobility piece of this. You start to think about flying at 200 feet or so above a city street between buildings. It's a very different environment than a helicopter going from a rooftop out to the airport. Of course, the EV tolls will be able to do that, they'll take advantage of those. Rotary lifts sort of helicopter rules from day 1, but they want to be able to do a lot more than that.

And how do you think about the pilot element of it, given autonomous likely won't be the first to lead the way? Given the pilot shortages we're seeing in commercial, what do you think the industry is doing around that?

It's really exciting, and there's kind of this parallel thing going on. I was talking to some of the freight folks the other day about this. Is that, look, these vehicles, in order for them to make economic sense, they need to be single-pilot operated. And ultimately, they need to be operated by what I would call an operator, not a pilot. They need to be managed by someone who has far less training and experience than an air transport pilot. So early days. It's going to be an air transport pilot. And it's going to evolve towards someone who's maybe a commercial pilot and then ultimately an operator. Think about a train or a bus, right? That means the avionics need to have the power and the capability to manage the vehicle 95% of the time. The person in the cockpit needs to be able to handle those 5% of the cases that are outliers, push a button, land the vehicle safely type of thing. They're more of a monitor than they are a pilot. And this is sort of a scary idea, but this is what's going to be necessary for us to be able to see these vehicles really be commercially viable, particularly for passenger use. But what's interesting is, is if you talk to people that fly freight in 767s and 777s and 747s today, they have the same challenge. They want to be able to operate with 3 pilots instead of 4 or 2 pilots instead of 3. So the very same technologies that are going to enable this to occur in an AAM space, in advanced air mobility space, I think you're going to see a real strong pull in conventional aircraft as well. So we're sort of keeping both of those things in mind as we work with the regulators, and we also develop the technology, and we share that technology with the regulators. I really do think that the regulation is going to be the challenge, not the technology. If we can make a car that can drive down a city street autonomously, boy, aircraft is a far easier problem statement than that, so.

No, that makes sense on why you're focusing on the avionics of it, too. Maybe last 2 questions for you before we wrap it up. Can you talk about Honeywell's offering in the EV toll infrastructure at all, whether it's charging stations or vertiports? That's been a question that the infrastructure is not available yet.

Yes, we're still trying to determine exactly what we want to do there, where we add value. There's a lot of things we can do, but there's a smaller set of things we probably should do, where we can be of greatest value to the infrastructure. One area we're trying to do is make sure that the cockpit is set up and the systems on the aircraft are set up to be able to support a pretty extensive logistics management system. If you think about these vehicles, you're either going to need rapid recharging or rapid battery exchange, one or the other. And being able to monitor the state of charge, to be able to monitor the health of the systems on board has to all be built in. Whether we participate in that logistics space, that operating space or someone else does, we know the vehicle has to be set up to support it. So we're focused on that for sure. We've started to talk a little bit with the OEMs and each one has their own approach to this, by the way. They're all doing things a little differently about how that works, and what role we might be able to play. I certainly think we can bring Forge, our Forge software suite to bear on some of the routing problems and the asset availability problems. This is stuff we do today, but it will be at a much bigger scale. So think about a fleet of 100 of these, where do you need to have batteries located, where do you have charging capacity, where are you out of charging capacity, how are your crew members -- crew scheduling? We've already seen how difficult that can be even with regular aircraft. It's going to be much, much bigger problem with these because of the fact that they can operate outside of an airport environment and there'll be many, many more of them. So I think software and our Forge analytics and routing software will be part of that. Beyond that, time will tell.

Last question for you. What are you most excited about for the industry as it looks to take off?

Well, I'll tell you what. What I'm excited about is what we've expected to see happen is starting to become true. It's real. It's no longer an if, it's just about when. This market is going to come forward and really take off. There's some interesting technology challenges, but nothing that's really fatal to our use cases or to the early adopters. So what really excites me about it is it's real and it's tightly connected to a couple of mega trend. One is the growth of e-commerce. I've talked about the fact that e-commerce, which means people want stuff that they've bought online, delivered to their home today, is going to drive the adoption of advanced air mobility for cargo. Not just the little drones that can drop off your pizza, but stuff that will take things 300, 400 miles from a cross-dock facility to another cross-dock facility without a train, without a highway, without another airport. So that's going to fuel it. And that's here today. We also see the need for efficient people transport within and between cities without having to build more roads and more fixed infrastructure. There's still going to be a place for high-speed rail, still going to be a place for long-distance air travel for sure. But I think this fits in between those 2 and provides that point-to-point solution that's a bit infrastructure-dependent. And I think it's going to transform the way people think about travel, and the way they think about where they live and where they work. We also have more people that want to work remote. Who wouldn't want to work in the mountains 50 or 60 miles from their office, right, but be able to get to the office in 45 minutes for a meeting and not have to drive a car and not have to combat the travel in the city, and not have to pay taxes for another road? This opens that door as well. And so there's some mega trends that are starting to converge, not only that, but electrification is a technology, which is going to be ubiquitous even in regular types of aircraft in another 10 or 15 years. This market is giving us a chance to develop those technologies now in anticipation of those markets as well later. So pretty exciting.

That's awesome. Thank you so much, Mike, for being with us. And answering all of our questions we've stated. And thank you, everyone, for attending.

Thanks very much. Great to see you again, too.

Good seeing you. Thank you.

Bye-bye.

Thanks, all.