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

Thank you for standing by, and welcome to the Honeywell Fourth Quarter 2023 Leadership Webcast. [Operator Instructions] Please be advised that today's call is being recorded. I'd now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead.

Thanks, Kevin. Good morning, everyone, and welcome to the fourth quarter 2023 installment of the Honeywell Leadership Webcast Series. The purpose of these webcasts is to provide our investors with the opportunity to hear from a wide range of Honeywell leaders on topics of special interest. For example, in March, we hosted a discussion on the many ways that Honeywell is driving decarbonization for ourselves and our customers. These webcasts are available on our Investor Relations website. Today, we'll host a discussion on Honeywell's upcoming realignment and other key topics with our senior leadership team. Joining me today from Honeywell are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. In addition, we have Nigel Coe, Managing Director and Senior Analyst for the electrical equipment and multi-industry sectors at Wolfe Research. This webcast is available on our website at www.honeywell.com/investor. Honeywell also uses our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcasts and social media. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and our business as we see it today. Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. All right. With all that out of the way, good morning, everyone. Vimal, Greg, thank you for being here today. Let me first start by turning the call over to Vimal for some opening remarks.

Yes. Thanks, Sean. And first of all, welcome, Nigel.

Thank you.

Thanks for hosting this webcast today, and welcome everybody on the call. Six months into the role, coincidentally today, I started my job on June 1, and today it's December 1, so 180 days, nice coincidence. And I talked about my 4 priorities during our May Investor Day. I'll just start with a quick update, and we'll open up for Q&A to Nigel. So 4 priorities I talked about was, first, simplification of Honeywell. Second, how we make higher growth orientation in Honeywell, make it more growth-oriented portfolio and business. Third, portfolio optimization work, rejuvenation of M&A process. And finally, continue to work on Honeywell Operating System. So those are the 4 priorities identified when I picked up the role. I'm making good progress in each one of them. On simplification of the portfolio, we announced a realignment of the Honeywell portfolio into 3 mega trends: energy transition, automation and future of aviation. We'll talk more about what it means and where we are headed with that, but I feel pretty excited with that move on simplification. On growth orientation, I have specifically put in place 3 actions, which are going to enable Honeywell growth, how we accelerate our new product introduction. Number two, how we continue to drive our growth in high-growth regions. And number three, how we monetize our installed base with services and software more actively. So that's -- those are actions already in place, and I feel pretty good about it. Number three, the portfolio rejuvenation work is important. I'm very sensitive that you have to build a higher quality portfolio. That will happen with the additions and subtractions. And I look forward to the discussion on that, actions we are putting in place on this. And finally, Honeywell Operating System. Honeywell Operating System has done a great outcome for Honeywell over the last several years. But we are not yet done. There's more opportunity to keep enhancing our capabilities as a company with operating system. And we are in version 3.0 of Honeywell Operating System, which we now call it as Honeywell Accelerator. So when I put these all 4 priorities into execution mode today, my confidence factor on taking Honeywell to the next level is very high. I feel we are heading in the right direction. Not only we're going to have good 2023, 2024, but many years ahead. We are programmed for a pretty good runway ahead for us. So with that, I'm going to pause here, Nigel, and I'll open up for you for Q&A.

Thank you very much, Vimal. It's great to be here. Thanks, Greg. Thanks, Sean. Thanks, Rena. So I'm glad that you set the table that way because a lot of the questions I've got addressing these topics. So we're going to double-click into some of that. So I thought we keep it a little bit high level to begin with and then perhaps get into the businesses and then maybe wrap up on 2024 and how you're seeing '24 right now. You mentioned some of the changes that are happening. And we see the segment realignment, we see the new leadership, et cetera. But what's actually changing day-to-day to accelerate growth, to improve efficiency actually at the business level?

Yes. So to drive a different growth orientation, the simplification of Honeywell is a very important step because it provides a strategic clarity on what we are and what we are not. So by defining the 3 mega trends on which we want to align gives us a clear direction on organic and inorganic growth actions. The future of aviation, automation and energy transition defines Honeywell. So that makes everybody a north star that there's -- this is how we really want to grow. Each of these segments are sufficiently large. Collectively, we estimate Honeywell SAM to be $650 billion between all these 3 segments, and they grow at around 5% on an average. So the baseline is good. Specific actions we are putting in place are 3 actions, which I want to spend a couple of minutes. The first is innovation playbook, how we invest our R&D dollars to make sure that we are growing our portfolio in the right direction, and our product vitality allows us to keep or grow our share in the markets. So spending that R&D dollars in a much more smarter manner. And we spent $1.5 billion of Honeywell money alone, plus there's a customer money, customer-funded R&D we do. So making that process more robust is my first action to drive growth. The second action is on high-growth regions. Honeywell has 25% of its revenue from high-growth regions. We have grown typically 10% in high-growth regions. I believe that we still have momentum to grow at that rate in the years ahead to come. So we're going to continue on our execution in high-growth regions. And I want to clarify that high-growth regions for us doesn't equal to China. China is an important country for us. That's out of $9 billion, a little over $2 billion. So we have a very good presence in Middle East, in India, in Eastern Europe, et cetera. So it's a combination of countries, which present that opportunity. Number three is -- the third action we are taking is how we monetize our installed base. We create a large amount of installed base by shipping our products and also delivering projects. Now monetizing then installed base, both through services and software, is integral part of our strategy. On the software side, Honeywell Connected Enterprise's actions have been in place for a while. It's doing extremely well. 15% growth in our software portfolio year-on-year is very impressive. But equal amount of focus I'm driving an organization on services that how we drive service contract renewal. We invest more R&D dollars to make sure that we are able to drive modernization of our installed base, new products, share of wallet strategy there. So all those 3 coming together, 3 actions is more of a self-help for us in addition to the end markets, which are -- which I believe are pretty, pretty strong. Now what are we doing differently on a day-to-day basis is both myself and Greg, we have changed operating system on how we spend our time. We have made more space for our available -- put more attention on growth-oriented action. Not to state that operation will not be our focus, not going to leave that message here. It's our adjustment to be made that we put equal focus on operational execution and growth orientation. And that's what we have changed. And finally, we are also changing effective Jan 1 incentives for our general managers and other roles to make growth as a higher priority. We believe we need to get -- measure people to what we are seeing, and that will be another important factor into -- different into our playbook. So compounding it all together is, I would say, significant changes we are driving on our growth mindset in Honeywell.

Yes. Maybe if I could just build on a couple of those comments, Vimal. Maybe just to begin, we're accelerating organic growth. We've already been doing it at a fairly healthy clip, 4% in '21, 6% in '22, and we're anchoring towards 4% to 5% here this year, which again, we own the whole portfolio, but if you took the SPS downturn out of that, those numbers look more like 9% last year and 7% this year. So we've actually got some nice momentum in a large portion of the portfolio to begin with. But then as Vimal highlighted, we're coming out of the post-pandemic supply-constrained environment where a lot of our emphasis was on, to your point, operations, trying to gain supply. That's obviously still a big focus in the Aerospace business, but now we've turned a lot more of our attention and time on to things that are more demand-driven. So think about sales deployment, aftermarket penetration, things of that nature. These are the kinds of things that as Vimal was describing that we're pushing much harder and spending more time on intentionally to ensure that we've pivoted now to the environment that we're in and left the one behind us on the supply constraint.

Great. That's fantastic. Maybe a couple more high-level topics. Perhaps we can come back to -- digging into the third evolution of HOS. But we're hearing an awful lot more about AI right now. And I think there's this -- maybe this notion is there's a bit of a bubble perhaps, a little hype. But I'm just curious, from a Honeywell perspective, to what extent are you using AI tools day-to-day? And then Quantinuum, how does Quantinuum sort of play into this kind of world?

Yes. So AI has a natural fit for Honeywell. We are a controls and automation company and naturally have access to the customers' data. And our investments in Forge platform through FCE has built a pretty strong base on how we will evolve to use data in the future. So today, our applications are solving several customers' problem, but AI is going to accelerate using the data we have through our installed base. One thing I strongly believe in that Honeywell is going to lead the industrial world in a concept of autonomy because the biggest challenge our industrial customers have in Aerospace, in process industry, in buildings and warehouse is lack of skilled labor. The skilled labor shortage is a real problem. And autonomy is a combination of AI and the data we have to give them the tools so they can really make that problem less intense. There's no scenario I imagine that a process plant is running without people or a plane is running without people, but it can reduce the tasks with autonomy architecture we have built in. And I clearly see in my growth actions I talked about the whole monetizing installed base story, this really fits in really well. So we are actively looking at new products leveraging AI. We actually just yesterday made an announcement in our Aerospace business working specifically in Europe on autonomous operation in the cockpit. So that's a great example. At the same time, we are equally excited about use of AI internally. We are one of the early movers on how to use AI in product testing, product coding, customer experience, technical support, the range of actions. And what I can share with you, Nigel, is that we're going to see pretty substantial productivity benefits in '24 because we are -- I believe we are ahead compared to many larger markets because of our data work we have done over the years. So we are more ready compared to the wider market to take benefit of that.

Yes. And on the engineering side, as you mentioned, it's almost similar to the way we spoke about when we established our Honeywell Technology Solutions arms in low-cost countries to create more capacity. Same thing here. I mean what Vimal's talking about is going to expand on the capacity of our 15,000 engineers and give us even more ability to go pursue some of our NPI.

On your question on Quantinuum, we have stated publicly that we would have a plan to monetize our investment in Quantinuum in next 12 to 18 months' time. So those plans continue to get under execution. Our first important step was this year that we are hitting the technical milestone because unless I don't hit it, I think everything else is hypothetical because this platform has to work to its intended purpose. And we have made progress what we committed, and that's validated by the right people that Quantinuum is delivering the capability we committed. We hired a new CEO about 6 months back roughly and his remit is really to execute this transition plan on the new state of Quantinuum, but it's the right ownership to it. And as we speak, we are putting those actions in place to test the enterprise value and then take the subsequent steps in '24. So I think all things in, I would give ourselves 12 to 18 months' time window for transitioning Quantinuum to its future state. The reason we believe that is it's a great example of seed planting by Honeywell. We did that to create a new set of technology, but this we believe that we have added value to the extent we have at this step. And now the rightful owners should own it to continue to progress this technology.

And by the way, if you think about -- you started the conversation on AI. If ever there is a place where AI is going to be relevant, it's going to be with quantum computing and Quantinuum.

Great correlation between AI and quantum, and that's what we are hearing from different customers.

Okay. That's great. Greg, if you want to quantify the benefits, [ the point of new ] benefits from AI in '24?

Yes. I mean we're expecting tens of millions of dollars of opportunity of either savings directly or additional capacity by being able to do more with less. And as Vimal mentioned, think about engineering, customer service, a number of other places where that foundation that we have laid with our data platform is going to allow us to go do that.

Okay. Great. So let's just get into the portfolio in the businesses. Obviously, you announced the realignments in October. A skeptic would say, all right, you moved one business into SPS. You've changed some names. What actually changes? So maybe just talk about that. What do you think this does for Honeywell?

Yes. So I think it's important to say where this decision came from. I had an opportunity to run HPT from 2018 to '21. And what I felt really good was that it's a business in one segment. It's much easier to define the strategy and execute the strategy because of the clarity of the purpose, not for me, but for the wider 20,000 people. When I went to PMT, I realized that PMT has a combination of energy assets and automation assets. So clearly, it was tough for me to balance my time and develop the strategy, which was coherent, which made me think about what's the easier way to drive execution in Honeywell, and that drove this decision. So first, it's based upon real experience and real success, not because I thought it's a fun idea to do it that way. Now the 3 mega trends or macros, we strongly believe in them, is how we are aligning in this portfolio. Automation is going to be nearly $17 billion of Honeywell into the 2 segments of industrial and buildings. Energy transition is going to be $6.5 billion of segment. And then Aerospace is about $13 billion of segment. Each of them grow at about 5% CAGR, and the market sizes are pretty attractive. So it lays the platform of what Honeywell future would be. The organic growth strategies are far more clear because you want to be these 3 things. The inorganic strategies are far more clearer because now we are pivoting our M&A strategy to further strengthen the team. We -- so if anything else, we will do both addition and subtraction, which take us to this direction. So my conviction that this change is going to enable Honeywell growth is extremely high because I've seen success in buildings. I've seen success in Aerospace. Aerospace business has proven its model of having a singular segment, clear strategy, high-growth margin expansion you have demonstrated. So those examples gives me a confidence that we are going to do that in industrial, and we're going to do that in energy and sustainability solution.

So much clearer alignment with strategic priorities. And I think it's fair to say that one of your goals and strategies is to accelerate the M&A pipeline and deploy more capital. And I'm sure this is part of that strategy. So maybe just talk about that, Vimal, in terms of kind of the process of getting more deals through the pipeline with these 3 obviously priorities.

Yes. So these 3 priorities gives us a north star on how to think about acquisitions. But fundamentally, I look at M&A strategy to improve the portfolio quality of Honeywell. That's how I think about it. We are looking for acquisitions, which are bolt-on because they complement the business. If you have a business X, they have an organic growth strategy. And there's a strong belief that when we add this extra asset to this, not only that asset brings revenue, but it compounds the growth of the base business. That's a fundamental principle. That's why we emphasize bolt-on acquisitions. The bolt-on acquisition enterprise value range is $1 billion to $7 billion. So it means that revenue we bring in is anywhere from $150 million to $1 billion and change. So that's the principle on which we drive execution. The types of M&A you can think about is going to be more -- of course, it will vary by segment, but in Aerospace, think about bringing new technology because we have a good position in each of the segments we address. But we're looking for more technology vectors where the world is going in future of aviation. Electrification is a big deal in Aerospace. So do we have all the portfolio? Or do we need to do anything? Same is true in our energy and sustainability solutions business. We have a pretty strong portfolio, but we don't have everything required for energy transition. So can there be some attractive opportunities there? And in automation, we feel the sensing is very attractive. We have a very good position in sensing. We certainly like to increase our position in that. We also have a good position in software in automation. So we have done a great job of organic growth. We did make acquisitions like Sparta. So we keep looking at software additions into our portfolio. So that's basically the blueprint. Our pipeline is way better today what it was 1 year back. The activity level is high. We are working very hard to increase the level of activity because it's the best way for us to give more outcome on M&A. I can't make a commitment on number of deals unless I don't have 10, 15 things to really play on. Final comment I'll make is that the M&A strategy is highly focused on bolt on. We are not looking for any transformational M&A. We have pretty strong conviction on 3 mega trends on which Honeywell wants to stay aligned. So within that, we will flex ourselves. And I don't see any necessity for us to go around and chase some different directions.

Yes. Anne laid out in the Investor Day that whole pipeline process. You kind of saw the way we've worked the funnel to Vimal's point, we are expending a lot of energy around that today. So there's a lot of activity in that funnel. We've done a few deals this year. We've spent close to $700 million on a few things, not super sizable, but they're more tuck-in like and give you a little bit of a sense of the kind of things Vimal was describing with compressor controls. Again, very much a business that looks like what we do but opens up a little bit of an adjacency. We made the acquisition on the heads-up display technology in Aerospace that's going to go along with some of the cockpit technologies and offerings that we have. And then, of course, we did the SCADAfence and in HCE. So it's -- these themes are real, and I think you're getting to see a little bit of a...

I think SCADAfence deal is a great example of a compounding effect. I mean in the end, it is a small asset we acquired earlier this year. Our cyber business is already in hundreds of millions of dollars. We believe this is going to keep compounding our cyber business in a 15%, 20% range every year. So that's my whole point. It's not that deal value is small, the base business which is -- if they keep compounding with this acquisition higher, that's why we acquired it. So sometimes, the bigger picture can get lost to say, "Oh, this is only a small deal." But the compounding it creates on the base business is pretty impressive. And we're already seeing some impressive results with the SCADAfence acquisition. We always had a strong position in OT cybersecurity, and this is going to make us even stronger player on widening our execution in OT cybersecurity space.

That's great. Maybe talk about subtractions now. So you laid out, I think, at the I-Day back in May, I think relatively surgical, maybe work on the portfolio going forward. Maybe just bring us to speed in terms of where you are in that review process.

So the first step is when we define our alignment to mega trends, it clearly tells us what doesn't fit into it, and that's roughly is about 10%. There is no one big thing which makes that 10%. So I'd like to clarify, there's not going to be any spins like Garrett or Resideo. There is -- but there are smaller businesses or meaningful product lines, and where we are executing is prioritizing what makes more sense from our shareholder returns perspective. And when a business is ready on a certain metric, we like to execute the process of its divestiture from Honeywell. The good case in point is that I'll share with you like Quantinuum. Unless it did not hit its technical goals, there was no point for us to start the process. It's going to be not meaningful for our shareholders. So that's a good example of how we think about our assets. It has to have a certain milestone. When the milestone is hit, we're ready for the process...

And businesses have to earn their place in the portfolio. To Vimal's point, that's something we look at each and every year. We know what that waterfall looks like. We've got metrics around the health of those businesses. And again, to ensure that we get the value for any of the things that we'll exit, we want to make sure the business is in a healthy place and the markets are receptive to deals.

Okay. That's great. Maybe just to touch on some of the business trends now. So let's start off with industrial automation, a new name for SPS and process. Obviously, the legacy SPS segment has gotten a lot of attention, big decline this year, 15% or so. But the outlook for warehouse starts next year, it still looks pretty dismal, I would say. But then we've got some channel headwinds that we're hopefully not going to have next year. So how should we think about how this business develops, the SPS business in the next 12 months?

So let's kind of first look at what the new IA segment is all about. To me, there are 5 distinct subsegments within IA. We have our process automation business. We have our sensing business, our scanning business, our safety business and then Intelligrated business. So there are 5 components of it. The first and important step for me is to look outward to say what we really want to build, taking these very critical assets, what we already have. So expect from us a reveal sometime in '24 what's a new strategy for IA. Our baseline is pretty strong because of the capabilities we have. But it's a great opportunity for me to think about what do we do next as the next step. Part of it will be thinking about synergies, which it brings in. There are clearly synergies in technology because SPS businesses had a lot of products which are software-oriented, hardware-oriented, same as HPS. So there are clearly technology synergies, and there are synergies in supply chain. So all that reveal will happen in the next few months when we are able to build the strategy. To your specific question on '24, I would say that the short cycle recovery is an important element of SPS performance and future IA performance. HPS has carried forward pretty good backlog. So they are certainly going to help the new segment. And I do expect that IA segment on totality will grow. Intelligrated, in particular, it's going to be less than 15% of the new IA segment. So -- but I do expect that to have more of a flattish year. Your point is valid. The market is still not spending a lot of money, but we see a lot of momentum in aftermarket in Intelligrated. Where it is helping us is, as I look about '24, I look at Intelligrated as a margin expansion story for IA and for Honeywell because we have better quality backlog. It's more diversified customer base now. Historically, we were dependent on 1 or 2 big customers. That's not the case anymore. Our aftermarket services business is more than $0.5 billion now. It continues to grow 15%. So that's an important element of the margin expansion there. And finally, we have taken some very major supply chain actions to drive productivity, which flow in on a full year basis. So even in a flattish year scenario, the margin expansion story in Intelligrated is going to be good. And all that put together, we should have a good year for IA in 2024.

And the warehouse space, particularly like you said, the market outlook is not great. We're not -- we don't have a different call on that. But given the concentration that we did have in terms of the customer base we were serving before to Vimal's point, we are going into different end markets and a different customer set. So there's a little bit of a benefit we're getting just because we're trying to diversify that a bit. But if you think about it, this business has grown on a CAGR basis 10% since we bought it. I think the long-term outlook for this space, 8% to 10% is not unreasonable to believe. Okay. That's with the pandemic whipsaw that's happened. That's not going to happen in 2024. But certainly, when you zoom out longer term, we still think it's an attractive end market.

But longer term, I look at IGS business, Intelligrated business as more of continue to expand margin story because the baseline is low. We are -- that's the reason we bought it, monetized installed base more. We've taken other actions. So really, that's how I think about this being a part of our margin expansion story.

Great. Moving on to ESS, energy sustainability solutions, slim down PMT, if you will. Obviously, UOP becomes much more central to this business. And I think most investors would lately say UOP's an oil and gas play. But it feels to me like there's a pretty significant new energy story there, be LNG or hydrogen. So maybe just talk about how we see the sort of the yin and yang of old energy, new energy playing assets.

So to me, the energy transition is always an and question, not an or question. The old energy will be sustained for a while until the new energy molecules start penetrating in our daily lives. And that's the strategy we have been executing for the last couple of years. UOP will grow nearly 10% in 2023 as we have seen the performance in the first 3 quarters on a runway to do that. And it's going to carry forward a pretty impressive backlog for 2024. What it is driving is -- the reason of the good performance is the base business continues to perform well, specifically on aftermarket on catalysts. The demand remains high because people are running their plants harder, and the demand for catalysts remain strong. The new energy vectors are slowly scaling. We have seen scaling of biofuel/sustainable aviation fuel since 2022. We have now licensed about 45 projects. Think about that as a billions of dollars of life cycle value of these projects from license fee, engineering fee, equipment, catalysts, which will flow over the last 15, 20 years. I see the inflection coming in, in future years on hydrogen and carbon capture. IRA is certainly helping for customers to think about returns because it certainly enables a return. But it's in a stage where biofuels were 3 or 4 years back, where there was activity was strong, but decisions were less. So all in all, I believe the energy and sustainability business is in the right position of energy transition. So the current energy position stays while the new energy position grow. And one of the commitments we had made is Sustainable Technology Solutions business within UOP will be $1 billion by 2026. We are directionally in that path. Our bookings remain very strong to support that projection, which means that -- which makes me confident about the overall UOP growth. So I would like to absolutely clarify that UOP is not oil and gas business, it's an energy transition business. And Honeywell has a great set of portfolio, but this will be one of my top priority in terms of where I believe there's a lot of momentum in growth in the years to come ahead.

Yes, again, the UOP technology, as I think you know, separation technology, catalysis and that licensing model that's going to play through in the new energy sector just as well. And there really aren't other competitors who can...

That's an important point Greg made, we are not changing UOP business model. UOP licenses technology and then monetizes installed base to catalyst. Just because we are moving from traditional energy to new energy, our business model hasn't changed. Same thing. The margin rates aren't changed. Cycle hasn't changed, but we are selling different offerings now. Fundamentally, that's a shift. And the business margin rate and growth projections remain pretty attractive.

And then on the -- not to take away from advanced materials, but the floorings business also continues to be extremely strong. And I think that's another one we're pretty excited about in the future. And Ken having to run both of those businesses, his strategic clarity of what he wants to do here, I think, is quite good. So we're looking forward to the impact that he's going to have as he takes control of the entire portfolio.

So time is running by here. So I do want to touch on '24. But before we do that, maybe some perspectives on the Aerospace cycle. I mean I think investors feel very comfortable with the OE side of the commercial market -- aftermarket, maybe some concerns on '24 perhaps defense, supply chain steps. So maybe just fill us in on how you see the moving pieces progressing here.

As I said, OE demand remains pretty strong. 2023, as you've seen our results, we are growing double digit in Aero. We expect strong Q4 also from Aerospace because OE demands remain high. Aftermarket, we're still not pre-COVID levels of 2019. So there's still some runway left on aftermarket on commercial aero side, in particular. Defense and Space growth is pretty impressive. Our orders rate growth is 30% in Q2 and Q3. And quote rates are pretty high, so which means this momentum is continuing. There are 2 underlying reasons. One is unfortunate ware in 2 places. And second is many countries have committed GDP growth of defense budget to their GDP. So they are really driving our Defense and Space business. Finally, I would say the urban air mobility is a future growth vector. I don't want to undermine that. We have 10 billion of wins in that business. At the right time when the approvals will come through, that will become '26, '27 time frame, the fourth revenue stream, commercial, business jet, Defense and Space and urban air mobility. So I can't feel more bullish about Aerospace. The outlook looks very promising for the years ahead.

Yes. And the supply chain, while it's not going to heal as fast as people would like, keeps making sequential progress quarter-over-quarter, year-over-year. That's what's helping us deliver 20% output growth to Vimal's point mid-teens revenue growth. That labor shortage is going to be -- it's industry-wide, and it's going to be with us for a few years. So as we go into next year, we're probably going to continue to grow pass-through backlog. We're having more output, but the order strength Vimal's describing is probably going to have our pass-through backlog continue to grow. Bad news is we're not going to have the straight up vector. The good news is we've got a multiyear growth path that we feel very confident in.

Okay. So it sounds like the revenue outlook for '24 looks pretty good overall. The urban air mobility, when do we start to see some commercialization in that business?

I would say more like '26, '27 time frame. That's where the testing of the different platforms is happening. I believe that the need is compelling. Every time I go to New York, I think we need urban air mobility. So we are walking on the street 2 days back.

As we're jumping out of the car.

Right, jumping out of the car. I think we need it, but hopefully, [indiscernible].

This mobility would help. So '24, let's just talk about the framework. Before we get on to that, Greg, I think you reaffirmed guidance in the slides on...

Yes. So just to clear the decks there, I mean, we're just entering December. Half our quarter happens in the third month. So we still have 50% of the way to go. But yes, as you mentioned, we reaffirmed guidance for the quarter and for the year. We feel good about how the finish is going to go here, and it'll set us up well as we enter into 2024.

Great. That's fantastic color. So back in October at the 3Q earnings, you kind of gave us a broad framework for '24. Any sort of evolution in the way you think about the macro or the business trends within that?

As we said during our 3Q earnings call, long-cycle backlog remains strong. Our long-cycle backlog, up 8% end of Q3. The orders rate for long cycle continues to look good. And I do expect that 8% number, if anything, will only get slightly better, which will position us well for 2024 carrying that backlog. The short cycle remains to be seen, to be determined. And where the short cycle will pivot in 2024 will really determine we are in upper end of our long-range guidance of 4% to 7% or lower end. That's kind of a variable factor. The self-help we are driving to improve our performance in spite of these conditions is 3 things I mentioned upon: executing on new products, how we monetize our installed base better, how we do grow in high-growth region. It's in our control. So we are going to drive those actions to deliver better results in spite of whatever is there in the end markets. And that's how we are thinking about for 2024 ahead.

Okay. So it sounds like the 4% to 7% still feels like the right range. It depends on where...

Okay. Just to be clear, we're -- that's not formal guidance. We'll do that in about 60 days. The framework there is just meant to be kind of directional in nature. And we'll be a bit more specific as we get into the end of January, early February time frame. But it's -- I think it's illustrative of what you'll see.

Okay. Great. And again, just thinking about the sort of the broad sort of moving pieces, we still have PMT and Aerospace at sort of the upper side of the curve and then...

And then the products businesses will probably progressively get better as the year goes on. So whether they're growing in the first half or not, that will remain to be seen. But I think what you're -- we've talked about stability in our short cycle in the back half of this year. And so the length of which that is stable before it starts vectoring up, and it's not going to be all in one go. There will be different parts of the short-cycle businesses that will inflect up before others. And I think as you see the progression of the year, we'll just get better as we go.

And Vimal, can I just clarify one thing? Did you say you expect maybe some acceleration in the long-cycle orders?

I do see -- I mean the Q4 tends to be a big quarter even for orders, apart from revenue. And we do expect to finish strong. And depending on where we will finish, we'll determine our backlog, and we'll report to you during our February earnings call. I remain optimistic that we should have a good finish. So we should maintain this 8% or make it slightly better.

Right. Fantastic. Maybe touching on margins. I think you said, Greg, the 40 to 60 basis points still looks like the right range going forward.

It's going to be in the neighborhood of that, yes.

We do have some headwinds though. I just want to just touch on that. So we got the Zebra royalty income falling off in '24. It feels like Aerospace margins might still be flattish in '24. Maybe you tell me if that's wrong, but maybe just talk about some of the offsets to those headwinds.

Yes, I mean just to maybe start with Aerospace, the margins have gone up pretty dramatically in the last few years. We've gotten to 27 faster than we had expected given some of the dynamics between the OE and the aftermarket. And as we've talked about at length, that OE mix is -- that OE mix headwind is probably going to be with us again into 2024. So we don't see Aerospace margins as being a big mover on -- in and of themselves. But they are going to continue to be the highest growing part of the portfolio. So growing 27 points at a high rate is going to be accretive to Honeywell overall. You're right about the Zebra license payments. Those will roll off in 2Q. We've talked about that at length. The way I would just think about that though is Vimal mentioned the margin expansion opportunity in IGS. Those 2 things are going to largely offset not dollar for dollar, but that's the way we're thinking about it. And then as we see short-cycle businesses around the company begin to ramp up, remember, those things carry very high variable contribution rates. And we've done -- the team has done a good job to make sure that we keep our fixed cost base aligned to the volumes at which we're operating now. So I expect to see some nice volume leverage as we go into next year as well.

Yes. I mean if -- also just to add on margin expansion perspective, next year, [ if brought at] Honeywell level, I also expect price cost to be a slight tailwind, not it was in 2022, but it's somewhere to be a headwind. The tailwind is going to be also stronger in direct material productivity because we clearly see those higher productivity benefits coming in, in this year. But next year, we'll see that benefit for the entire year. So that certainly is going to help. And I mentioned to you the benefits of AI in our P&L, which will show up. So when you see a combination of things, we feel that our general guidance of 40 to 60 basis points will hold well for 2024 also.

Okay. Great. Time is flying by, so I think maybe one more question. And what better way to finish off the discussion on cash flow? We've had a couple of claims on cash this year, Greg. I think this is for you. Maybe just give us some perspective on how you think about cash flow [ into 2024 ] and maybe beyond that.

Sure, sure. As you mentioned, our free cash flow on a reported basis, we had $1.3 billion in settlement payments, which I think was a good decision for us to take some legacy liabilities long term off the balance sheet. So very happy that we got that done here. And so right off the bat, that's kind of off the deck for next year. And then when we think about the multiyear inventory build that we've all experienced in the industry because of the supply chain constraints is going to start cresting and turning over into '24 and '25. So that's going to be the single biggest accelerator of free cash flow is going to be that inventory multiyear decline that's beginning. And again, I feel very strongly that, that's going to be something we'll be very successful for a few reasons. Number one, obviously, the supply constraints are easing. But don't forget too, we've also basically simplified our supply chain network almost by 50%. Torsten Pilz, who runs our supply chain, laid out a path of simplification of 300 sites down to close to 150, and we're going to be there as we exit this year. And then when you layer on top of that all the digital capabilities that we've built in the supply chain as well, our capability just continue to get better from a digital operations standpoint. So in fact, my expectation is as we get past the structural aspects that's happened, we're going to go beyond our capabilities that we had in 2019 from an inventory perspective. So I think we're going to start to get on a multiyear cash flow from operations run. And then the last part of that will be how much CapEx do we have to expand it. Do we have some very attractive projects coming our way? So we'll talk about those as they become more real. But if I think about cash flow from operations, in particular, that should have a very healthy growth rate attached to it. And then I think, as you know, our internal growth investments are the highest ROI investments that we have. And so we're not going to [ start ] the business to growth. So I don't know if there's anything you want to highlight on the growth side there.

No, I think I'll only add on the capital expansion. Energy and sustainability solutions business, we do see some very attractive growth levers. When we are ready for those capital spend, we'll, of course, share with everybody because those are long-cycle investment but also very long-term revenue at attractive revenue streams. So we're working on a couple of big ideas, which can -- we can reveal in 2024.

Thanks, Vimal. We're out of time. So let me hand back to you for closing remarks.

Thanks, Nigel, first of all, for a very interesting set of discussion. In closing, I will say that first, we love where Honeywell is going. The setup we have made in terms of 3 mega trends really gave us a clear clarity of strategy for organic and inorganic growth. The long-term setup is very favorable. And we are positioning Honeywell for organic growth actions, which we discussed here. And the portfolio optimization offers an upside. We are going to work on our portfolio and make it more contemporary and more higher quality, and we are absolutely committed to that. So looking forward to another strong year ahead in 2024 and a strong run for growth for Honeywell in times ahead. So thank you very much. Thanks for everybody being on the call, and happy holidays, and stay safe.

Thank you. This concludes today's conference call. We thank you for participating. You may now disconnect.