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

Welcome to the 31st Annual Transportation Airlines and Industrials Conference. I think the name was a little bit, I would say, out of date maybe, because we've put -- we've decided this year to put a lot more industrials into transportation airlines. And so this is, in a way, a reboot of the event at a much bigger scale in New York, and I'm very happy that all of you are here. And we have a lot of multi-industrial companies here, a lot of other industrial companies. Now look, I think the big themes that we're going to be focusing this year is industrial recovery. I think investors are waiting for a bounce back in the PMI. I think people are looking at the churn in order activity among industrials. Meanwhile, I will say, for the first time since the '50s, U.S. has a meaningful industrial policy which is shaping a lot of growth in the sector. Our work indicates that 1/3 of the industrial verticals has generated over 100% of growth in the industrial space over the past several years, and it's really aerospace plus the key verticals that the U.S. industrial policy is focusing on. We actually see a very, very bright future for industrial growth over the next several years. We do think it's structural in nature. So we think we're still in very early innings of what's going to be a multiyear growth cycle. And with that, very lucky to have Honeywell here. And we have Jim Currier, who's President and CEO of Aerospace Technologies. Honeywell is one of the biggest aerospace players globally. And obviously, I said that aerospace is one of the most exciting sectors that we have in our coverage. And aerospace is one of the crown jewels of Honeywell portfolio. Jim, welcome. And we'll go into the Q&A. Thanks so much for that.

All right. Well, Andrew, first of all, thank you so much for allowing me an opportunity to spend some time with you and the broader audience here to talk a little bit about Honeywell, Honeywell Aerospace in particular, and some of the things that I'm really excited about. And I thought maybe I'd just open it up just with a couple of slides to give some background and context a little bit here. A couple of things I would say is, when I think about Honeywell Aerospace, our positioning in the market segment and how we look about our ability to grow, I kind of look at it as the framework of a home ultimately. And do you have the foundation? Do you have the walls? And do you have the material to kind of pull it all together, ultimately? And so when I think about the foundation of this particular business, I think about the long-term tailwinds that we have that are set up. The continued growth that we're seeing in our biz jet market in terms of OEM growth, continued growth in flight hours that are occurring, industry-leading positions in terms of some of the platforms that we're on, our cost positioning as well within the market segment, our growing defense business, all are the foundational basis from which we can build upon. And then I think about where we are in terms of the walls and the roof of the business and our positioning with respect to what we call the future of aviation. I think about the massive amount of wins that we've had; the record backlog that we have on our books today from wins that we've had across the market segment; how we've been investing substantially in our portfolio across all of our business segments, across all of our strategic business units; with a lot what we're doing in terms of flight deck, electrification, electromechanical actuation as well. And then I think about the system that brings it all together, the operating system, kind of the glue, the nails, the hardware that kind of pulls it all together. And I would argue we've got a best-in-class operating system across Honeywell Aerospace and across our industry. We've digitized most of our processes, if not almost all of them. We have a single instance of ERP. Data-driven analytics across the board. Access to immediate data to make sound decisions. And then the incorporation of Gen AI in our business and our portfolios going forward kind of brings it all together ultimately. And then when you have that backdrop, you start now thinking about the market and what's occurring in the market and are we positioned properly? And some of this here just talks a little bit about what I was mentioning beforehand, about where we are in the business jet market. But the one thing I would highlight on this page as well is what we call decoupled portfolio. This is our decoupled growth that's not aligned to what's occurring in the market segment, not aligned to growth on OE production, not aligned to growth in the aftermarket in terms of flight hours that are occurring. This is where we introduce our retrofits, our mods and our upgrades across the portfolio to drive that decoupled growth. And that business for us is substantial. It's largely attributable to the installed base that we have across the industry and across all three market segments that we serve. And as well, that's a business that's well in excess of $1 billion a year and growing at about a 10% CAGR. You combine all of that together and you start to look at our long-term growth algorithm across where we report out on our three segments, whether it's commercial; original equipment, where we anticipate high single digits long-term growth; our commercial aftermarket, mid-single digits; and then our defense and space also growing at mid-single digits on a long-term horizon. But then I think about, why are we in this position that we're in? Why do we win? And what's our competitive offering that we have? And again, I think it's really around the value that we create across our portfolio and the strategic focus that we apply across our portfolio. Not just from a tactical perspective, but the strategic overlook of where we are investing. And that represents the four blocks that you see on that page, which is all four of our strategic business units, whether we're talking about innovation in the cockpit in terms of safety, in terms of autonomy and autonomous operations to reduce crew interface, reduce crew operations; whether we're talking about sustainable aviation fuels, electrification, electric power units, hybrid power, fuel cells; whether we're talking about electromechanical actuation, thermal management and then our digitalized processes and services and offerings that we have. And then that lays out the foundation of this competitive advantage that we feel that we have across this particular industry. It's the investments that we're making at the tip of the spear in terms of technology and our advanced technology work that we do. You combine that with our differentiated products, our differentiated offerings. You combine that with our broad exposure to multiple market segments where we serve both business aviation, air transport, defense and space. It's not monolithic in terms of the end markets that we're serving. That large installed base is a great foundation to build upon when I would refer to those decoupled growth opportunities with RMUs, and then the best-in-class operating system that we have going forward. Those five elements that we truly feel are competitive advantages for us, combined with the market outlook, combined with where I think we are in terms of our tailwinds that we have and our growth opportunities. And that's why for me, it's a really exciting time to be a part of Honeywell Aerospace and our growth algorithms going forward.

Excellent. Look, I think I had an opportunity to thank Lucian, for -- spend time with the senior management. And I think there are changes afoot at Honeywell. You have new CEO, changes in corporate structure. Before becoming CEO of Honeywell Aerospace Technologies, you ran the Electronic Solutions business. So how does your experience in electronics translates to the entire aerospace group? And what are your key learnings since assuming the Honeywell Aero Technologies mantle?

So I think it's important that I've had an 18-year career at Honeywell Aerospace that spanned multiple dimensions of different portions of the business that I ran. The Electronic Solutions portion of our business is the largest strategic business unit that we have. So coming into that role, I would say a couple of key learnings that I had that I've been able to bring into my current position. And that is just understanding the more complex nature of our entire business, all the way from front to back of the business, in terms of supply chain in the back, customer support, and then all the way on the customer-facing end of the equation. The other element that I would say is, while I was in that seat running Electronic Solutions, we launched our flagship avionics product portfolio, which is Honeywell Anthem. And so as we've launched a new product, we've launched this flagship product, another good learning that's come out of that as we look at the rest of the portfolio that we're doing in terms of other flagship products that we'll be launching currently and in the future as well. And I think some of the learnings coming into this role, I don't know if I was saying necessarily, Andrew, that was learnings as more of a reaffirmation of things that I believe. And that is that, in this seat that I'm in today, I have the ability to touch the over 20,000 employees that we have across Honeywell Aerospace. And I've always been firmly convinced about the drive, the motivation, the commitment, the intellect that our employees possess and the innovation that they drive across the board. And that was more of my optically in the world that I was operating in within Electronic Solutions. But now that exposure across the board, it just reaffirmed that, as I touch and I interact with all of our employees worldwide, it just never ceases to amaze me what they deliver, and their commitment, and their commitment to customers. And so I think for me, that was one of the bigger learnings that came out of it, which was kind of more of a reaffirmation of what I believed beforehand.

Got you. Maybe just a little bit just to just the current aero outlook. You reported first quarter earnings, pretty dynamic situation out there. What have you been seeing in the business? And how has the commercial and defense supply chain trend that -- I guess commercial is more electronics, defense more mechanical? And what are the near-term sources of uncertainty?

So I think some of the things I would say is we did have a very good Q1 this year. I mean, our growth is fundamentally limited by our supply chain. It's not limited by the demand that we have. We've got a record backlog currently within Honeywell Aerospace. And so that is still a little bit of a choppy environment. And we did have some good tailwinds that happened in Q1 that enabled that growth that we've seen. We continue to see growth in the commercial OE segment, aftermarket segment. defense and space had a very good year. And I think it's largely attributable to our continued investment in the supply base that's resulting in continued unlock of the supply base. So we had double-digit output out of our factories this quarter in Q1. That's our seventh quarter in a row where we've been able to demonstrate that going forward. We continue to expect that on the longer-term horizon as well. And so that's kind of been the framework and the setup for us and why we feel the commercial part of it has been a big driver.

Excellent. And just a growth target, you raised the growth targets for aero, to mid-single digit, high single digit. Can you walk through the components of that? And just a question we're getting, does this assume that aero is going to grow with the industry? Or are you guys going to outgrow?

Yes. So what I would say is the components that kind of make up our growth algorithm. I think about the commercial OE portion of our business, both air transport and business aviation, that's going to grow roughly 20% going forward. Our aftermarket will be growing at double digits and our defense and space will be growing high single digits. And so in that algorithm, you can kind of see that mid- to high single-digit overall that we've been forecasting for aerospace. And I think that is going to continue going forward for us.

And maybe just market outgrowth on the commercial OE business, what are the opportunities? Because I think in the past, you've sort of guided to outgrow, but what are the key initiatives for you to be able to drive above-market growth in the commercial side in this environment?

Yes. So I think part of it is obviously being on the right platforms that are growing with the right set of content and the right set of products, ultimately. And I think where we end up driving a little bit more in terms of commercial is going to be going back to the comment I made a moment ago, which is around the aftermarket and that decoupled growth. That truly is a muscle within Honeywell Aerospace that we've been exercising now for well over a decade and continuing to grow that. So I think you combine the OE aspect of what's happening in the market, combined with what we're doing in the aftermarket, particularly in the decoupled growth, that sets up this algorithm for us to be able to outgrow the market ultimately in commercial.

Got you. And just the uncertainty about -- one of the questions that was raised, I think. What is the uncertainty about the OE deliveries due to visibility on the aftermarket, how the two balance each other?

So what I would say is there are some uncertainties, obviously, on the OE market in terms of what's happening. I mean, Boeing has been making a lot of headlines relative to that and what they're going to end up doing for full rate for the year. We stay very, very closely tied out with Boeing in terms of what they're doing. If there are some adjustments that are happening in there, I don't feel they'll be meaningful overall to Honeywell. Again, thinking about our backlog and thinking about still where we are overdue on some of our shipments and deliveries to customers. But if there is a change that happens in terms of that OE demand cycle, it does afford an opportunity to maybe reallocate some of the capacity and some of that material, either to other OEMs, whether it's common parts, and/or into the aftermarket as well. So again, there could be a mix differential that happens depending upon the amount of change that happens on the OE demand forecast profile. A little too early to tell at this stage. But that could be a potential upside for us that allows us then to reallocate more towards the aftermarket because of the demand...

Right. That's exactly what I was asking. Okay. So let's talk about flight electrification because clearly a theme for you. So electrification and autonomous flight is likely several decades away from commercial aviation, right? Sort of weight, power requirements, safety standards. But what are the latest developments broadly in electrification, autonomous flight? How is Honeywell positioned here? And what differentiates you from your competition? Key hurdles, investment, technology? I would imagine regulation figures quite a bit into it. And ultimately, what makes this investment profitable for Honeywell over the long term?

And so in terms of electrification and autonomy, I think one of the end market segments that's driving a substantial amount of technology advancement is what we call our advanced air mobility market segment. eVTOLs is an example. So they sort of have been tip of the spear in terms of driving some of these technologies going forward as opposed to those technologies being driven in the traditional air transport market and/or business aviation as an example. And so we've been doing a lot of investment in that area. But it's not -- I think the thing that I would say relative to electrification and autonomy and the investments that we're making in that space, is that it's not bespoke to the advanced air mobility market segment. Those technologies that are being developed have the ability to transcend that market and come back into what I would refer to as traditional end markets, whether, again, that's commercial and/or defense. So allowing that market to mature the way it's been maturing has been very beneficial, not only to that end market segment and the development of that end market segment, but it will have direct benefits to the rest of the industry as a result of the investments that are being made there. Now in terms of adoption, technology advancement and maturation of that, it's at different levels depending upon the technology that you were referring to a moment ago. Electrification is here and now. Battery technologies, I think, are still developing going forward. But then you've got fuel cell technologies, hybrid electric power technologies as well. Electromechanical actuation is not an advanced technology in terms of futuristic and adoption, that's something that could be happening here and now. But the one thing that I would say is what's very interesting about that end market segment for, and I think what positions us a little bit better than others, is the breadth of technology that we bring. So if you think about some of this advanced air mobility market segment, we provide integrated cockpit systems, flight control systems with our compact fly-by-wire, we provide electromechanical actuation systems, we provide electric motors for that. It allows you to actually integrate everything that would have been at a subsystem level to a fully integrated system onto the aircraft. And by having that entire system of a fully integrated architecture, it avoids the issues around integration, it avoids the issues around commonality that can be applied. And you're actually able to maximize the efficiency of the performance of the aircraft at that point in time because everything is talking to one another off of a common set of architecture from one OEM. I think that becomes for us a clear differentiator in that segment. And the fact of the matter is, is that we know how to certify products in this segment as well, and that becomes also a differentiator.

And just from regulatory, just to throw it in. From regulatory, which part of the world do you think is the further ahead in terms of regulatory environment?

I would say today, you're seeing a lot more of the AAM space opening up in China, as an example. They're already flying there today from a regulatory standpoint. I don't necessarily see any time in the short term where any of these Chinese manufacturers of eVTOL aircraft are going to be bringing them over into the West -- for flying. I think that's not going to happen. I would agree. I would say Europe leading definitely in this space. I think they've taken a very, very leadership position. They've been very vocal about that in setting standards in how to certify these types of aircraft going forward. And I think others are adopting to standards that are being set by EASA in that regard, the FAA being one of those. I think with the -- hopefully, with the FAA Reauthorization Bill hopefully being signed here this week will allow a little bit more harmony of those requirements between the FAA and EASA going forward in this particular segment as well. But I see, if there's going to be where the first launches of some of these markets will be, you're going to see it in Europe, you'll see it in the Middle East as well. The Middle East has taken a very aggressive posture in terms of wanting to bring in this technology and this infrastructure and looking towards EASA for the standards that they are establishing there for local standards to be incorporated. But I ultimately see that, that's going to be a great growth potential for them as well.

No. And you guys have commented in the past, too, we had a technology conference. And I don't know if people appreciate how dominant you are in terms of systems for that industry. So...

We've been playing very heavily in that regard and very proud of what we've been doing.

Maybe we can talk about defense and space key drivers. And I think for us, it's been international sales. So how do you see the evolution of the international sales over the next several years? We've estimated that this part of the business grew at north of 6% from 2017, '23, and picked up to double-digit growth in '23. What's happening? Is it rising defense budgets in Europe? And what's the growth trajectory from here?

You actually nailed it. It's the rising defense budget that...

So we're finally seeing it in the numbers.

We're finally seeing it in the numbers across the board. I mean, obviously, regional conflicts that are occurring between Russia and Ukraine, conflicts that are occurring down in the Middle East and the heightened pressure and tensions that are occurring in Asia as well are creating a lot of investment from both NATO and/or our allies in Asia that are starting to drive more investment. I mean, Japan is a great example of that, where they've indicated that they're going to double their investment in terms as a percent of GDP going forward. That translates into literally tens of billions of dollars on an annual basis of increased investment going forward. And we have a lot of product that we sell into Japan, as an example. South Korea is another example. Australia is another example where investments in defense are increasing at a rather a rapid clip going forward. So we see that as a great growth potential for us in terms of international defense and probably will outgrow our domestic defense business on a percentage basis. Not in terms of absolute dollars, but on a percentage basis, it will outgrow our domestic defense budgets. And that also plays into our strategies that we have in terms of Europe as well. I mean, we recently announced our intent to acquire a company called Civitanavi in Italy, that forms really a foundational, I'll say, block in our strategy to develop technologies that are non-ITAR-controlled through what they do there at Civitanavi. It establishes a manufacturing footprint as well in Europe for us for those particular products. It allows us now to open up more potential to sell those types of products into Europe as well, which right now, there's a strong drive for more indigenous capability within Europe to be more self-sufficient and not as reliant on U.S. technologies. And so that actually is going to be an enabler for us to do that going forward.

That's fantastic. Now you also do have a commercial aerospace business. So maybe we can talk about aftermarket. So what are your key priorities in running the commercial aftermarket? How do you manage this part of the business? And what do you think is done particularly well in the business?

So first and foremost, the priority whether we're talking commercial aftermarket or OE, is truly unlocking our supply base. We still have a substantial amount of overdue orders to our customers in the commercial aftermarket space specifically, and we're continuing to address that through unlocking the supply base. So it is absolutely the #1 priority for Honeywell Aerospace, is to continue to invest in the aftermarket in terms of unlocking the supply base and continuing to support our customers going forward. The one thing I think that we do very, very well in terms of our aftermarket business is what I referred to beforehand around this decoupled growth enabler, these retrofit mods and upgrades that are enabled through the foundational basis of our large installed base. It's truly understanding what customers value in terms of features and functions. It's a true understanding of how to enhance situational awareness in the cockpit for pilots to enhance safety across our industry as well. So having a really good understanding of what our customers value, have a really good understanding of what their needs are in terms of return on investment, and continuing to provide those products into the aftermarket, I think, is something that we do exceptionally well. And I think it's as evidenced by the growth that we've been seeing in that space, specifically around these RMUs at that 10% CAGR.