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

Okay. So I think the webcast's live. So Greg Lewis, SVP and CFO of Honeywell, thanks for being here.

Thank you.

And Greg, I know you've got some opening slides. So...

Yes, just really quickly and -- thank you very much. Appreciate that. That's helpful. Okay? Well, while that's coming up, it's feels like a year ago already, but it was maybe 10 days ago, we just did our Investor Day. So really happy to be here. So thanks for having us. It's an exciting time for Honeywell. We've talked about this before, the markets are continuing to be a pretty volatile place. The latest, of course, is the debt ceiling fund that's happening right now. But Honeywell continues to deliver through all environments. I talked a little bit about that a couple of Thursdays ago. But when you sit here today, I mean, I feel great about where we are as a company. I'm proud to be with Honeywell. When you look at our markets, we've got some really strong areas of growth for us. Vimal talked about that in terms of really focusing on 4 key themes: Automation, digitalization, the energy transition and aerospace. Multi-years of strength behind all of those key macro trends, which our portfolio fits in very nicely. Again, our track record, executing through all environments, you guys can go back and look, and has been pretty outstanding in terms of our ability to execute. It's one of the things that I'm proud of. We're a big company, but we are actually very nimble. And we're always making sure that we use our advantages to protect ourselves. We did something just of that ilk right after Investor Day. Went out into the debt markets and raised another $3 billion just to, a, give us a little bit of flexibility for our capital deployment, but also as a little bit of a safety measure given some of the challenges that we're seeing in the debt markets today, and really leveraging that strong balance sheet that we've cared for, for many, many years. And then we'll talk about Accelerator, our next lever to outperform. We've done a lot of work on digitalizing the company, and we're not done yet. And there's a lot more to do in terms of the global design models around our 4 basic business models. Some of them will be more focused on growth, like in software and in services, some a bit more on profit and cash generation and things like the projects businesses, but a lot of room left to run. And then as I mentioned, our balance sheet's going to be a big strength for us to take advantage of, particularly around capital deployment. So the numbers we talked about, where you see them on the right-hand side of the page, I think some fairly attractive financial outcomes that we expect to generate here over the coming years, and we spoke about our gross margins specifically for the first time. And in this area, we printed 37% last year, that's up 700 basis points over the last 10, and we see that going over 40% through both our own optimization efforts as well as our capital deployment plan. So I think we've got a really compelling set of financial outcomes in front of us. And we upgraded our long-term commitments in a few key areas. One of them was around the Aerospace growth algorithm. Now with defense becoming a stronger portion again of the thematic that I think is going to be something that will give us some longer-term leverage as well. We raised our margin targets in HBT and SPS given the fact that we've had such terrific performance over the last 2 to 3 years in particular. And then our overall margin rate, 25% plus now, we see some runway beyond '25. So I think a lot of good things are happening. And then again, last but not least, Anne talked a lot, as did Vimal, about his view of the portfolio and how we want to go deploy capital. And that's both internally with a lot of really high-ROI internal growth projects that we have, as well as deploying capital back into M&A. And I think you're going to see us continue to be more active in that. We've talked about it quite a bit over the last 2 years in terms of not only our capability, our bandwidth, given kind of coming down the other side of the hill on the transformation efforts; but also just the way we see the markets today, we see it as being Honeywell-advantaged given some of the challenges in the credit markets. So we've got a fortress balance sheet to deploy that many others don't have the advantages to do so. So I'm really excited about what's front of us. As always, we'll manage through the short term. But the medium and long term also look really terrific. And so we're excited about where we're going from here. So with that, I'll turn it over to you.

Thanks, Greg. So look, you mentioned Investor Day felt like about a year ago, so I guess that means that the -- Darius' announcement was like 10...

Yes.

Okay. That was a good start. So externally, it was a big surprise. I guess going back to the Vimal becoming COO back last year, maybe not so surprised. But internally, how surprising was it when Darius announced his decision?

I don't think it was that much of a surprise. I mean, again, the timing aspect is all about readiness, Board comfort, Darius' comfort, et cetera. But him taking over as COO was certainly an indication that, that was a possibility, right? So I don't think a big surprise. And again, he's been there for 34 years, has run a couple of the biggest businesses in the company. So it makes a lot of sense in terms of him as an internal candidate, and he's got a lot of credibility within the organization.

Great. They gave me the idiot mic. Okay. So -- and then obviously, it's pretty clear from I-Day that the changes are more so chiropractic in nature as opposed to surgical, that's fair. But underneath the surface, are there more things going on in terms of organizational structure, the way you do things going forward?

Yes. I mean, first of all, I guess, I would say the company is not in need of an overhaul, right? So let's kind of start with that. We're in a great position. We've transformed the company successfully over many years. And so we're actually in a great place to have a next leg of acceleration. So you're right. The things that we and Vimal will be driving are going to be more double-clicks on certain areas, and again, with the tweak of Accelerator. So in terms of level-down deeper, will there be changes? I mean, we'll see. Every leader has the opportunity to reassess certain things and could make a change or 2. But I'm not expecting to have dramatic changes to the company from an organizational perspective. But again, that's the CEO's -- that's up to them, if he feels like there's something that will add value. And again, we've demonstrated before that making change to adapt to circumstances, this is something we've done. We broke up ACS back in 2016, it was $18 billion in the company. We thought that was a good thing to go do, and we executed that and created the platforms that we have today. So that's certainly something that he's got all the opportunity to decide if he feels that, that's going to be helpful. But that's -- we'll see how all that unfolds.

Okay. Maybe one more question before we get on to kind of macro trading type questions. The focus -- maybe the sharper focus on innovation to try and accelerate growth, what does that actually mean? Because we've been hearing about the BTIs now for the last 3, 4 years under Darius. So what changes under Vimal?

Well, I'll connect it a little bit to even the -- our Honeywell Digital and our transformation efforts because many of the things that we've talked about with becoming a more data-oriented company means that you've got the fidelity and information to be able to manage things a bit more specifically. I talked about this at Investor Day. It's not about just having the analytics to see what to go do, but then it's about can you turn around and actually confirm that what you thought you did happened? To be honest, the same is true here with R&D. I mean, being able to go down to a lower level of depth with a level of fidelity and precision is going to allow us to do what Vimal talked about, which really is capital allocation on R&D, right? He wants to ensure that our investment dollars in R&D are going to higher-impact programs and projects that things that are truly NPI, new and not all necessarily NPI core, and again, try to create a bigger lever on the R&D and the NPI impact. That's possible now because, again, a level of fidelity around being able to see that up and down the organization is much greater because of the digital capabilities that we've built. So I think what you're going to see, just to be clear, like corporate is not going to take over the technology organization to decide what the businesses can do or should do. That's always got to come from kind of customer back, and those who are closest to the customer know what problems need to be solved. But we do get to bring our technologies to bear across the enterprise to do that. You see that with things like Quantinuum. Quantinuum is actually the marriage of technologies from both PMT and from Aerospace, right? So that's part of the beauty of being able to bring Honeywell to bear across the enterprise. But I think that's what you're going to see, it's really -- is you can think about that as like an internal capital allocation theme around where the money is being spent and also continuing to drive the execution rigor so that we get the outcome we're looking for from it.

Great. So your 2Q guidance calls for 1% to 4% organic growth. You did 8% in 1Q, which is fantastic. Maybe just remind us what you're seeing as we go from 1Q to 2Q in terms of deceleration by business. I know you had some supply chain good news in HBT, but maybe just walk us through that.

Yes. I mean the biggest difference is we had 4 straight quarters of double-digit growth in PMT, and you can't do that forever, right? So while we feel very strongly about their growth trajectory, I think you're going to see that step down a little bit from the last 4 quarters to the next few, and it's still going to be a very healthy mid-single-digit type of a growth rate. And then we've talked about being down double digits in SPS, and that's going to be that way again here in Q2. So those are really the 2 biggest drivers to kind of that headline number. But again, that's not a concern for us. That's -- essentially, that's embedded in our guide, has been all along. That's not a surprise to us that, that's happening. We've talked a lot about this year a lot of strength in our long-cycle business, $30 billion backlog. Short cycle is going to take a little time to see where that actually starts to inflect back up again. And so we've always said that we're going to have to wait and see how 2Q plays out to know how that will go, and that will be a bit of an indication of where we land on the overall year in terms of are we going to be nearer the top end of the 6% guide, or something else. So -- and with, again, debt ceiling, interest rate hike cycle, all those things aren't quite done yet. So I'm sure all of you are channel-checking the various industries and you're seeing things like retail start to really come down. I think it was Home Depot that lowered their guidance for the year. So I mean, I think all of these things are still very much in flux. But that's why the things that we laid out in our guidance in the beginning of the year, in our view, allowed for that volatility. Again, people would like to call that conservative, we call it prudent, just because there's so much that has to play out during the course of the year. And so I feel very good about where we are, and we'll see how the rest of the quarter plays out and what that means for the back half.

So there's obviously a healthy amount of caution around the short-cycle trends. I mean -- so I think one of the canary in the coal mine businesses you have is the EPS within SPS. That's obviously down quite heavily. I've been surprised by the resilience of Advanced Materials because there are some consumer-facing business in there. Maybe just talk about what you're seeing there within Advanced Materials.

Yes. Yes, I mean, I would say if you just kind of think about Advanced Materials, between flooring products and the electronic and chemicals, we're seeing a lot of continued strength in flooring products and a little bit of weakness in chemicals like you've seen if you've talked to others in that space. So we still had very strong, I think 20% or so growth, in AM in the first quarter. That will likely start to come down as the year progresses. But feel very good about, again, the balance. We've got 38 GBEs across the company, right? So there's always going to be something that's in a little bit of a different place relative to the broader portfolio. But that's why I get a lot of confidence in how we see the year playing out overall because we've got a lot of strength in some very important places.

Yes. And then obviously, Intelligrated has been a big headwind for you now, quite a few quarters now. Any visibility? Is it too early to really call the turn in that business? 2024? Obviously 2024 is 2024. But do you have any visibility on a turn in that business?

Yes. I mean, as it sits here today, I mean, we're going to continue to be down year-on-year in the back half as we were in the front. I mean, it will dissipate a little bit in terms of rate as the year goes on. And I think, again, it's -- the orders we get from now until the end of the year will really dictate how 2024 turns out. And like others, we're trying to see how the market is absorbing the capacity that was built. So it is a little bit too early to tell. So will it be flattish? Will it be up a little bit? I think that the order pattern for the next 5 months or so is really going to tell the story for that. So as I sit here today, I don't know the answer to that specifically. But again, that's part of what we're watching. I mean, we're out there. We've said from the very beginning, 2023 in general across the company, is about going back and winning business again. 2022 was all about liberating supply, and we had more demand than we knew what to do with. And again, people across the businesses and the industry were advancing demand to try to get in the front of lines across industry. Now this year, we're back to commercial execution is a big focus for the company, and we've pivoted very heavily towards that, and we're going to do our best to make sure that we put a great foot forward for '24.

I want to come back to supply chain in a second, but I do want to talk about the backlog. You mentioned the $30 billion of backlog. I think your backlog grew 6% last quarter. Orders are up against a tough comp. Are you expecting to start eating into that backlog? And now that lead times are coming down, should we expect backlog to start maybe falling from here?

I think it's going to -- I don't think it's going to come down dramatically. And the reason that is, is because the order books, particularly in PMT and Aero, are still very strong. And so that -- while we're making progress -- I've always talked about our supply chain challenges kind of bifurcated into Aero and everybody else, right? And very simply, we said everybody else was all about semiconductors. And that's oversimplifying it, but you can use that notionally to kind of get the gist of it. And that -- the non-aero businesses have made a lot of nice progress and are getting close to a place where maybe we're going to be fully healthy, let's say, by the end of the year or thereabouts. We've talked about it a lot, the Aerospace supply chain challenges, the skilled labor shortage up and down the supply chain, that's frankly going to take years to correct itself. We're seeing a lot of great improvement, and we talked about that in our earnings call. At the end of Q1, last year, we were seeing de-commit rates of 22% and coming down to 20%, which in the first quarter, was down to more like 15% on bigger numbers. So imagine higher commitments, lower de-commit rate, which was positive, which allowed us to increase our own output by 20% in the quarter. So that's good, right? So -- but it's not enough to eat into the past due backlog or the backlog itself because the order rates are still pretty robust, and I expect that to continue for some time. So again, we don't guide things like our backlog, but I guess the punchline is, I wouldn't expect to see like huge chunks of that coming out here in 2023. I think we're going to carry a fairly healthy backlog into '24 as well.

Great. I'll take one more question and I'll offer up the room a chance for a question. But pricing. Maybe -- like pricing and supply chain have been 2 sides of the same coin. Customers, get me product, don't care about the price. But as supply eases up, are you expecting internally to see a bit more maybe discussions around price? Maybe some more incentives in a weaker economy? I think your price fell from 10% in 4Q to, I think, maybe mid-single digit 6% in 1Q. And just remind us, how that plays out through the year.

Yes. So I mean maybe just to start from the end. I mean, we expect the year to be something like 4%, right? And again, that's got a range around it as well. But you can imagine plus or minus around a 4% number for the year. So you would expect 6% probably comes down a little bit. And then my sense is we'll probably hit some stability level. Again, inflation is not going away. It's not going to be at the elevated levels that it was in 2022. Some of that is to what you're talking about in terms of supply chain or constraints. But the vigilance that we've built in, in terms of price/cost management, that's not going to go away. So I absolutely expect we'll continue to remain price/cost positive. But again, across 38 GBEs in the company, will there be places where that will be stronger and others where it will be a little bit weaker? Absolutely. I mean, if that weren't the case, then we wouldn't be following economics, right? So we talk about supply and elasticity of demand and trying to make sure that we take price appropriately, but don't destroy demand, right? So that's something we all learned in business school. And again, back to Honeywell Digital, we now have kind of tools in place to be able to do that a bit more precisely by business, by region, et cetera. So across 38 businesses and across the globe, of course, the dynamics are going to be different. But there's no -- there's no like one, oh my gosh, I'm super worried about that one thing, and that's a huge problem for us. It's all, again, kind of baked into our expectations for the year. And between the productivity focus that Torsten and the team talked about on Investor Day and the pricing acumen that we have in the business, I'm sure we're going to continue to manage that quite well.

All right. Got any questions? Any hands in the air? It's amazing. Everyone's listen, listen. Great. It is earlier, I can attest that. Let's move on to margins. The hallmark of Honeywell, right, consistent margin expansion. You've raised your medium-term targets for [ terms of ] margin expansion from -- by 10 basis points, 50 basis points, now at the midpoint, 30 to 50 is 40 to 60. This year is going to be a strong year for margin expansion despite the fact you've got some Aero headwinds. So just again, remind us what's driving stronger margin expansion this year.