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

Thank you for standing by, and welcome to Honeywell's Strategy and Portfolio Update Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Honeywell's Strategy and Portfolio Update Conference Call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time-to-time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business as we see it today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will walk through the strategy and portfolio updates that we announced today and outline how this will unlock shareholder value. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapur.

Thank you, Sean, and good morning, everyone, and I appreciate you all joining us today. Let's begin on Slide 2. During our Investor Day discussions in May, we outlined the ongoing transformation of Honeywell. Both my predecessor and his predecessor before him led Honeywell through transformational phases to take an organization with multiple challenges 2 decades ago, and mold it into the industry leader that it is today. I was an active participant in the entire process. And during that time, we created tremendous shareholder value. Under my leadership, we are now entering a new growth focus phase of transformation. Today's announcement is an important next step in that journey. After a comprehensive review of our portfolio, we plan to reorganize the business to anchor Honeywell's position as a premier technology company around 3 powerful megatrends: automation, the future of aviation and energy transition, all underpinned by digitization. The new operating structure, which will be effective of Q1 of '24, provides a more focused investment framework to enhance profitable organic growth. It also clarifies which part of our business are core for Honeywell and which are not, helping inform our inorganic growth strategies. It's important to note that the underlying operating business structure is not changing. You should expect that our execution culture and value creation framework underpinned by our world-class Accelerator operating system will remain intact. Last but not the least, these upcoming changes, along with all the transformation effort that we have done over the past few years, are positioning Honeywell to deliver on a favorable 2024 outlook in line with our long-term framework. Now let's turn to Slide 3 to reiterate my key priority as the CEO. Before we get into specific moving pieces, let's take a step back and revisit the priorities that I shared with you at our Investor Day in May. While much of our call today will be focused on discussing the changes we announced this morning, there are a few constants for Honeywell I want to highlight. First, we are fully committed to delivering on our upgraded financial framework. At Honeywell, we have a culture of performance and accountability, and we have a strong track record of matching our say with our do. Second, we are preserving Honeywell's execution mindset. We have gone through extraordinary effort to transform Honeywell over the last few years to become more agile and resilient, but the work is not done. We'll continue to evolve the Honeywell transformation to outperform in all cycles. Third, we are committed to maintaining and enhancing our long-standing leadership in ESG, especially in sustainability. These 3 priorities are constant for us. Now when we look at the areas, I shared, would be a greater emphasis for Honeywell during my tenure as CEO. We are making good progress already but there's much more work to be done. First, our aim is to deliver towards the upper end of our long-term organic sales growth target. And in order to achieve that, we are enhancing our innovation playbook, accelerating sustainability and software offerings, and maintaining leadership in high-growth regions. Second, we are evolving Honeywell Accelerator version 3.0 of our operating system to drive further value through business model optimization. We are making the organization simpler and more efficient to operate, and Accelerator will be another source of profitable growth for Honeywell. Accelerator enables Honeywell to be an integrated operating company and create value across its businesses. Third, we are never done with our portfolio. We'll continue to optimize our organization and assets to create shareholder value. After completing a comprehensive portfolio review, today's announcement is just the latest step in optimizing the Honeywell portfolio to accelerate our growth. Let's turn to Slide 4 and discuss the specifics of today's announcement. Since 2016, Honeywell has been organized into 4 segments: Aerospace, Honeywell Building Technologies, Safety and Productivity Solutions, and Performance Materials and Technologies. We've built strong organization and leadership team in each of these businesses. We executed major portfolio moves, including the spin of AdvanSix, Garrett and Resideo, exiting highly cyclical or commoditized markets, improving our margin profile and positioning Honeywell for the future. However, when we look ahead of the next data transformation for Honeywell, we see untapped synergies and further simplification that can unlock incremental growth potential, The [ what ] of today's announced portfolio changes are twofold. First, we are renaming our reporting segments to better address our strengths and strategic priorities. Effective first quarter of 2024 Honeywell will have 4 newly named SEC reportable segments. These are Aerospace Technologies, Industrial Automation, Building Automation, and Energy and Sustainability solutions. Second, to create more focused strategy and operation in the segments, our Process Solutions business will be moved from our current Performance Materials and Technologies portfolio to newly named Industrial Automation segment combining with the current Safety and Productivity Solutions portfolio. With these changes, it becomes clear that roughly half of the Honeywell portfolio is focused on automation with the balance split between aerospace and energy and sustainability markets. Even within Aerospace, our largest business includes our avionics systems, that automate flight management system for pilots for all types of aircraft and across energy and sustainability solution. We are leveraging the Forge IoT platform to connect UOP's vast installed base provide real-time insights to our customers. As you can see, automation and controls are foundational to Honeywell and underpin the core offering of each of our segments. It is important to note that the business structure of Aerospace and Building segments are not changing and Honeywell Connected Enterprise integrated software platform will continue to underpin each of our segments. Now let's turn to Slide 5 to talk about the changing market dynamics over the past several years, that prompted this realignment. To understand the purpose of this portfolio realignment, we first need to take a look back in time. In 2018, the world was in a much different place. Across supply chains and industrial manufacturing, the playbook for extracting the value was largely labor arbitrage. Supply chain became increasingly complex and spanned many different jurisdictions, relying on expensive trade networks. In Aerospace market, we experienced cyclical aviation demand and countries broadly decreased investment in national defense. And we also saw minimal investment in energy capacity or improvements and sustainability challenge was often viewed as a problem of tomorrow. Fast forward 5 years, after waiting through a global pandemic, large-scale supply chain disruption, heightened inflation, international trade disputes, unprecedented central bank tightening, and so much more, the world's priorities have greatly shifted. We have learned that there's a value in resiliency that can outweigh the lowest cost option and learned that labor is truly a scarce resource. Also, the use of data and AI will be important lever for industrial manufacturers. These points to simpler, smarter and more automated value chains. We've also seen how critical travel is to global economy and the challenges that the aerospace supply chain faces to meet growing demand around the world. We're also beginning to see the future of aviation and the benefits that digital aerial mobility can provide in our day-to-day lives. And then in the geopolitical sphere, national defense is moving back on the top priority list across the globe. All of these dynamics indicate a long runway for aerospace growth. We've also observed the importance of energy security and the value of alternative energy supply chains. In addition, we are beginning to feel the urgency behind energy transition, and we are seeing an increased commitment from both countries and companies to create a sustainable future. To position Honeywell to meet these important global needs, we are aligning our business structure around 3 compelling megatrends: automation, the future of aviation and the energy transition. These are the anchor points of Honeywell's portfolio. Let's flip to Slide 6 to see exactly how our portfolio is aligned to these megatrends. When we look at Honeywell in terms of the verticals we serve, the future portfolio structure will naturally align with these 3 themes we mentioned, automation, future of aviation and energy transition. Within each of these categories, we have several promising growth vectors. With roughly half of our revenue in automation space, we have offering in multiple growth categories, including process automation, building controls, warehouse and supply chain automation, sensing and more. We have a vast installed base across critical infrastructure, buildings, energy, manufacturing and warehouse exposures, and we serve our customers through products, software, projects and services. Our current Aerospace portfolio is very balanced with a 60-40 split between commercial aviation and defense and space. Within each of these categories, we have broad exposure to platform and content across air transport, business and general aviation and defense. Our technology is also empowering the advanced aerial mobility market. Lastly, Honeywell is in a unique position to both help the world meet today's growing energy needs, while also enabling the energy transition. Experts estimate that global energy usage will increase 50% by 2050, and Honeywell technologies are crucial to meeting these critical demand. In addition to our energy transition and sustainability solution, including low global warming refrigerant, we also provide key electronic materials and other critical offerings. Each of these megatrends are undermined by customer demand for digitalization, where we have a unique leadership position with Honeywell Connected Enterprise, the Honeywell Forge IoT platform increasingly enabled the digital transformation for our customers through enterprise performance management, our cloud-native SaaS-based solution providing an OT system of record. So let's now take our time to double click on each of these 3 compelling megatrends, and let's start with automation on Slide 7. On one hand, automation is a mature megatrend that has been growing for decades. However, on the other hand, we are facing multiple demographic and macroeconomic obstacle over the next several decades that will drive automation to be even more important than ever. Industrial Automation has the largest addressable market for Honeywell at $260 billion, growing at 6% CAGR over the next 3 years. While Building Automation is a $130 billion addressable market growing at 5% CAGR over the next 3 years. We anticipate that the drivers such as labor scarcity, increased funding for capital projects, both public and private, supply chain resiliency, and need for electrification and decarbonization will all stimulate further growth. Additionally, we are in the midst of Fourth Industrial Revolution, the rapid advancement in the industrial internet of things is enabling the manufacturing sector to unlock valuable efficiency through connectivity, advanced analytics, automation and advanced manufacturing technology. We believe this movement will only accelerate in coming years and will continue to drive demand for high-quality sensors, controls and software technology all of which are right in Honeywell's wheelhouse. Control and automation have long been the foundation of Honeywell. We have leading market position across industrial and building end markets. Our large installed base across all segments provide a great platform to enable growth through our service and software offerings. Our brands are valued and well recognized across the globe, and we have numerous long-lasting customer relationships. While we are already established as a leading player in automation, we see vast opportunity to grow in this space. We anticipate that our enhanced new product introduction focus, which leverages our existing automation expertise can fuel above-market organic growth. We also see opportunity to grow here inorganically through strategic portfolio shaping that aligns with this compelling megatrend. Automation will remain a key focus area for Honeywell. Now let's take a closer look at Aerospace. Please turn to Slide 8. Honeywell has long played a critical role in aerospace industry with a diverse portfolio that spans every major platform. But the future of the industry has never looked as bright as it looks today. Aerospace already represent a $180 billion addressable market for Honeywell, and we anticipate the market to grow at 5% CAGR over the next 3 years, supported by continuing post-COVID recovery in flight hours, an aging fleet with a lengthy backlog for replacement, an increasing defense budget, both domestic and international, in face of geopolitical uncertainty. We also expect strong fleet growth and increased flight activity in high-growth regions, which have long been a key component of Honeywell's growth strategy. In addition to these traditional growth opportunities, we are also at the forefront of next era of aviation. Aerospace is in a dire need of electrification and sustainability improvements in order to meet global carbon reduction initiatives, and Honeywell has a portfolio of solutions to address these challenges. And then beyond traditional aerospace, we are seeing the emergence of advanced aerial mobility, where we are steadily becoming a leading supplier of advanced technologies like next-generation Anthem flight deck. These technologies will help enable the success of the industry and drive the electrification of traditional aircraft. Our Aerospace Technologies segment will be well positioned to capitalize on the future of aviation. We have a diverse nose-to-tail portfolio of solution, and we are not overly indexed to any 1 platform or vertical. We continue to grow our decoupled revenue stream, already above $1 billion annually and growing at double digits. And on top of it all, our industry-leading cost structure enable us to reinvest in our business while still delivering best-in-class margins. We'll continue to invest in our Aerospace business to enable its profitable growth. Now let's flip page to Slide 9 to take a closer look at Energy and Sustainability megatrend. When we take a step back and think about the greatest opportunities of our age, decarbonization surely commands space near the top of the list. We need to find ways to reduce emissions and move to renewable energy sources. However, at the same time, we live in a developing world with increasing energy demands. Honeywell is in a unique position to help meet the world's needs on both fronts. When it comes to energy demand, experts estimate that global energy use will increase nearly 50% by 2050, we do not currently have the renewable energy infrastructure to meet these growing energy needs. Meaning that traditional energy sources will continue to play an important role in global economies for years to come. In addition, we expect continued growth in petrochemical market as the world demand in goods such as packaging, electronics, construction materials, specifically in high-growth regions will grow. Nearshoring, as a part of supply chain and energy resiliency effort is also creating new opportunities. These factors all combine to provide solid runway for Honeywell's core energy offerings. Honeywell as a trusted brand and 100-plus years of global and technological expertise in the space, including the largest installed base for refining and petrochemical operations. On the top of this stable core, investments in sustainability and energy transition will drive market growth over the next several decades. Countries and cooperation around the world have been setting ambitious emission reduction targets. Comments are driving the decarbonization effort with both increased regulations and incentives. While these commitment and legislative actions are important catalysts in energy transition, they are of no use without the actual enabling technology and offering that brings this change. For example, renewable fuels are needed to decarbonize the transportation sector. Hydrogen is a key enabler to decarbonize, and battery energy storage are critical to make renewable energy a reliable option for large-scale adoption. The list goes on and Honeywell technology span the list from top to bottom. We have one of the most comprehensive portfolio of solutions that enable energy transition, and we have provided sustainability offerings for many years. We have pioneered renewable fuels technology over a decade ago, and we are reaching an inflection point in adoption today. Our Solstice, low global warming potential molecule has helped avoid the release of over 300 million metric tons of carbon to date, equivalent of eliminating 70 million cars from the road, and we see further HFO growth opportunities with increased heat pump demand. Honeywell's track record in providing sustainable solutions, global reach and scale give us more of a right to play in this space than any other company. Let's turn to Slide 10 to take another look at the portfolio as a whole and talk about why this realignment matters. These changes will align Honeywell business structure with distinct compelling megatrends. This will empower our business leaders to prioritize R&D efforts, capital expenditures, M&A pipeline, go-to-market strategies and more, enabling us to address the world's toughest challenges. Additionally, these changes should provide a clearer, simpler message to our investors and customers. We are an automation, aerospace and sustainability-focused technology company. These changes will not be end of our portfolio-shaping journey, but the groundwork for action is yet to come, particularly bolt-on acquisition and select divestiture that further align with these themes. These type of portfolio updates are only possible given the deep bench of leadership talent at Honeywell. So I'll turn to Slide 11 to review who will be leading each of the 4 new segments. Honeywell has always been focused on talent development and our academy culture has created leadership strength that is ready to take the helm of new opportunities arise. As such, I'm happy to announce that Lucian Boldea will serve as President and CEO of newly formed Industrial Automation segment. He joined Honeywell in 2022 as President and CEO of our Performance Materials and Technology segment. Previously Lucian served as EVP of Eastman Chemical Company, leading its global strategy, business operation and financial performance. In addition, rising to the ranks of segment leadership, Ken West will serve as President and CEO of the newly formed Energy and Sustainability Solutions segment. This year, Ken was named as President of UOP business. Previously, he served as President of advanced materials and has held roles increasing responsibility supporting Honeywell's PMT's businesses, including Vice President, General Manager of Fluorine Products. These changes will be effective Q1 2024. Billal Hammoud will remain President and CEO of renamed Building Automation segment. Billal has been CEO of our Building Automation segment since April. Prior to his current role, Billal was President of our Smart Energy and Thermal Solutions business, where he executed a significant turnaround and delivered strong financial performance. Jim Currier will remain President and CEO of renamed Aerospace Technologies segment. Jim has been CEO of our Aerospace segment since August, and he has 17 years of experience with Honeywell across multiple roles of increasing responsibility in Aerospace, most recently as President of our Electronic Solutions business. All the 4 CEOs will report directly to me. Our segment leaders are well positioned to lead Honeywell in both organic and inorganic growth. They have demonstrated a deep understanding of our customers and end markets and are capable of delivering strong results across all industries. Their combined experience and drive to create value for customers and shareholders leave us well positioned for the future. While we will be renaming the segment and making changes to our leadership team on a day-to-day basis, our operation will not change significantly. Our Process Solutions business unit will move to newly announced Industrial Automation segment, but all of the underlying lines of business will remain the same. This ensures that we capture additional value from our newly streamlined structure without disruption for the bulk of our employees and customers. Now let's turn to Slide 12 and discuss how our Accelerator operating system will enable us to drive profitable growth in each of these new segments. While each of our segments has a capable leadership team, focused strategy and mature market position, we are not a conglomeration of individual businesses. In fact, over the last 6 years, the effort of great integration has transformed Honeywell into an integrated operating company that deploys world-class capability and multiple growth enablers that benefit each part of our organization. Honeywell Accelerator version 3.0 of our robust operating system is a unifying and enabling secret sauce that drives Honeywell to create more value than the sum of the parts. While we rebranded our operating system as Accelerator back in 2021, it's root dates back to 2005 when we implemented HOS Gold. Over the years, we have refined and improved our operating system beyond its early supply chain-only focus to include other processes, and we have digitalized our operation and customer experience. We have demonstrated the power of Accelerator and our digital backbone in handling hyperinflation and supply chain constraints effectively in recent times. Now we are in the process of completing the build-out of our full IT platforms covering all different aspects of value chain and we're implementing digital thread to provide valuable data that will improve our businesses. We're also rolling out our global design model specifically for our projects and aftermarket service businesses that leverages best practices to standardize the way we operate and improve our business unit towards their best-in-class benchmarks. Accelerator is comprised of 7 different world-class capabilities and growth enablers each owned by a member of my leadership team. When effort from these areas are pulled together, the result is a One Honeywell approach that creates significant value across the organization. Accelerator is our foundation for profitable growth and enhanced cash generation. And as you can see, we have made continuous progress on maturity of our operating system and the momentum will continue. Now let's turn to Slide 13 and discuss some of our capital deployment focus areas. We have said this before, but the market for M&A looks more promising than we have seen in a long time, maybe ever. And Honeywell is in outstanding financial and operational position to capitalize on current market. At our Investor Day back in May, we re-upped our commitment to deploy over $25 billion of capital between 2023 and 2025 with capacity to do much more. We anticipate that roughly $12 billion will be committed to dividends and capital expenditure, leaving over half the commitment directed to share repurchases and the M&A. Our preferred use of this capital is towards bolt-on acquisition targeted on 3 megatrends I mentioned earlier as well as digitalization, which is a key growth vector across all of our segments. We have a robust pipeline of the deals to execute over the next 12 months with an ideal size range of $1 billion to $7 billion. Our balance sheet is flexible and underlevered, providing plenty of firepower to execute on our pipeline. Over time, we also plan to divest around 10% of Honeywell's sales that are not aligned to our new structure, providing another source of reinvestment in the portfolio. Additionally, we are preparing for public filing for Quantinuum assuming favorable market conditions. M&A is clearly at the forefront of our capital deployment strategy. We will maintain our disciplined, balanced approach to capital allocation. We'll continue to fund the Honeywell's innovation engine with priority given to growth projects. We'll also continue to return cash to our shareholders through our share repurchase and dividend program. Before I turn the call over to some Q&A, let's turn to Slide 14 to reiterate the key takeaways that we want you to take from the call today. As CEO, my key priority for Honeywell are to simplify the portfolio, accelerate organic growth, enhance our M&A capability to shape the portfolio and strengthen Honeywell's operating system. Today's announcement is a step towards completing these priorities, simplifying our portfolio by aligning it to 3 megatrends while unlocking key operational benefit will enable us to accelerate growth. However, we are by no means finished. We look forward to providing you with more exciting update about the future of Honeywell in coming quarters. We'll discuss this realignment in more details at our fourth quarter leadership webcast on December 1 and we'll announce our third quarter financial results, which we are tracking as expected on October 26. With that, Sean, let's move on to the Q&A.

Thank you, Vimal and Greg are now available to answer your questions. Given that we are in a quiet period, we don't plan on answering any questions about the third quarter or our full year 2023 guidance. [Operator Instructions] Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research.

Thanks for the details. Just one question. So Vimal, you mentioned the new segmentation. I mean, clearly, it makes a lot clearer kind of naming of the segments. But how exactly -- or maybe just provide more details on how you think this new segmentation and leadership will accelerate both growth but also clarify the core versus noncore businesses?

So I think you have 2 underlying questions, how this enables growth and define the core and noncore. I think from a growth perspective, this gives us absolute clarity on the vectors we need to grow Honeywell. So we want to grow Honeywell, both organically and inorganically into automation, aviation and energy transition. So our R&D investments will be highly focused to pivot Honeywell towards this. So that will provide a strategic direction. On the inorganic side also, this gives us a North Star of type of acquisitions we are looking for. In fact, if you see some of the acquisitions we made earlier this year, Compressor Controls, SCADAfence, they're right in the center of our automation journey, and it kind of shows our thesis on where we are headed towards in the times to come. And the same applies to subtraction, the part of Honeywell portfolio, which doesn't fit these megatrends are therefore part of -- should not be part of Honeywell in the times to come. And we'll run those businesses as well. And when we find the right value, we'll find a way to get this business divested from our portfolio.

Our next question comes from the line of Steve Tusa at JPMorgan.

So I guess just a bit of a follow-up on Nigel's question. Back in the day, when you were, I think, running the business, I mean PMT used to say UOP and HPS had some synergies there. I mean I know HPS and Intelligrated or automation assets, but really not a ton to do with each other. So I guess, like more organically, what are the synergies? And then secondly, is George -- the former Head of SPS, is he still around? Or is he leaving the company?

Okay. So you have -- let me answer the first question. You're absolutely right. The UOP and HPS have strong synergies. In 2014, we made a decision, and I was at time HPS President to realign HPS into PMT. And I would say over the last 10 years' time, we have considerably solidified our processes on how these 2 organizations work together. So when we look at 2023 versus 2014, today, we have deep processes, how these organizations work together. We have digitized our CRM, sharing leads, et cetera. So today, we feel very confident on the backbone of Honeywell Operating System, Honeywell Accelerator. We are not going to lose the commercial collaboration between UOP and HPS. We are very confident on that. But by making HPS as part of the entire Industrial Automation segment, we will have synergies on product development because there are natural technologies, which Automation segment shares. So we are going to unleash those capabilities through this transition. George will continue to be in Honeywell as a -- support me to run SPS business during quarter 4 because we are still running in our structure by end of this year. And he's going to support me until end of '24 -- end of '23, and we'll announce this next role by end of the year.

And that will be internally or that will be externally, that role?

I haven't made any specific decisions. Steve, at this point of time, it's too early to tell. I would say at this point, we are focused on making this transition and finishing our year. At the right time, I'll make the decision, and we'll communicate that.

Our next question comes from the line of Julian Mitchell at Barclays.

Maybe one question was just around the sort of capital deployment point, I think most people would come away from this call assuming you'll double efforts to get automation M&A done, but assets there tend to be very pricey. So just wanted to sort of understand any implications for that around your M&A discipline or perhaps widening the aperture of the type of stuff you'll look at in automation. And then there was just a sort of a fiddly, sort of bookkeeping one. Aerospace, you've talked about in the Slide 8, only a 5% CAGR. That seems pretty low, I guess, for the market given how much Aero is outgrowing the rest of the company at least within Honeywell this year. So I just wondered, should we read anything into that relatively low CAGR, which is sort of lower than the long-term CAGR you target for the business?

Thanks, Julian, for both the questions. So on the M&A focus, I would say we are going to focus our M&A in all the 3 megatrends we mentioned, automation, aviation and energy transition. Today, our pipeline is well balanced of our acquisition opportunities across all 3 segments. So I -- specifically on automation, the market size and opportunity we have across the wide end markets we serve, just opens up the aperture for us, it gives us more opportunity and optionality to look at the segment we serve and adjacencies we can move in. We will always, Julian, remain disciplined. We are not going to lose the disciplined approach, but we absolutely also want to do deals to progress our strategy. On your question on Aerospace CAGR, we are showing a 3-year CAGR here. You are spot on that the market remains pretty attractive for 2023 and likely 2024, but we are taking more of a longer-term view to show the normal growth of Aerospace segment. So this doesn't suggest that 2024 will grow at 5%, this is more of a longer-term growth rates. Maybe Sean...

Yes. And just maybe one point on the automation comments and capital deployment. I think we've shown that the attractive assets we're willing to pay for. Again, if I go back to Sparta as an example, that was in both software, but also automation, that was a roughly $100 million business that we paid $1.3 billion for. So I think we've said in the past, while we have disciplined approaches and certainly, we've got hurdle rates, those are not such a red line that we won't do things that we think are attractive in these spaces.

And then Julian, this is Sean. Just to add on one point on the Aerospace, distinguishing what's in the deck. You see there a CAGR for the overall market. But I think it's fair to say that Honeywell expects to outgrow that market rate over the next few years. So that I would not view as a change from your prior expectation.

Our next question comes from the line of Deane Dray at RBC Capital Markets.

Just -- what's the plan for the 10% noncore revenues that were identified, you expect product line shutdowns, actual asset sales, any potential spend? What do you think that -- how does that all play out?

Yes. So Deane, for most part, this is going to be mostly asset sale or business sale. The work on product demise or 80-20, as we call it in Honeywell, that's a constant process. So part of this focusing on 3 megatrends allows us to really think about the product line, which are really here on demise curve or really not focusing on our core, and we'll do -- that's our business as usual for us. That's part of our operating system. And incrementally, the segment, which are lesser fit -- aligned to this portfolio, we have established clear financial measures. And when we -- at the right time, we'll find the right deals, we'll divest those businesses. So expect those to happen over the next couple of years. And we are in the active process in a few of them at this point of time.

Yes. I think again, if I could just build on that. The message is it's not a big chunky something that we're going to spin out 1 big piece of anything. Each of these product lines or properties are spread across the portfolio and would likely look more like some smaller things that we've done before, like our retail footwear business. As you recall, we divested 2 years ago. It's going to be more things of that nature as opposed to any 1 big chunk coming out.

Our next question comes from the line of Andy Kaplowitz at Citigroup.

Vimal, you mentioned a simpler and stronger strategic focus on the new alignment. Maybe you could elaborate on that because I know you've been focused on productivity projects that will help Honeywell deliver on the 40 to 60 basis points of margin improvement per year. Does the realignment allow you to accelerate these projects in some way, which is going to allow Honeywell to deliver outsized margin growth?

Yes. So I would say Honeywell Operating System really provides us a consistent framework to drive margin expansion. And there are different levers for margin expansion, could be price, could be productivity, could be supply chain volume leverage. So if I look ahead at, say, near-term 2024, where we're going to focus upon is, one is definitely material productivity. We saw high inflation, we'll be on the other end of it. We also are seeing benefits of AI into our operations. We are early adopters of AI. We see it's benefiting our operational processes, and we see that as a lever of margin expansion. And I would say price also, it's not that the price -- we are not going to focus on price. The inflation has come down, but it's not gone away. And we're going to continue to focus on price-cost equation. So all these things really come together under our operating system. It's no one thing, which drives our margin expansion. It's a combination of focus on material productivity, people productivity, pricing, and also I would say certain managing the mixes of our businesses, so it all come together to help us constantly drive margin expansion.

Yes. And again, if you think back to the great integration of the last 6 years, a lot has been done, whether it's the footprint rationalization, the simplification of our ERP landscape, the building of our digital thread throughout the company, which, as you know, has helped us in terms of pricing, productivity. And that productivity mindset does not go away to Vimal's point, I think back to the strategic focus, the areas we're really going to be able to leverage now because you should expect. We built this platform and we're able to now leverage it in this next phase are going to be more growth focused. Even when we talked in Investor Day about Accelerator, and we looked at the Harvey balls and where, looking through these business model lenses, will be most helpful. You'll notice in products and in software and in the aftermarket services. The focus on Accelerator is actually going to be more oriented around growth, driving installed base penetration, driving more efficient channel programs, driving our software optimization and launches. So I think the energy and effort is now very much more on the growth agenda, and we're going to continue to leverage all the benefits that we are accruing from the work that we've done in this last 6 years.