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

Good afternoon, everyone. My name is Sheila Kahyaoglu at Jefferies Aerospace Defense and Airlines Equity Research team. Thank you so much for joining us for our second annual eVTOL summit and our final presentation of the day, where we've the Honeywell team on. We've Dave Shilliday here, who's VP and GM of AAM for Honeywell and also Sean Meakim, who's a friend, VP of Investor Relations and former sell-side analyst who is ranked #1. So a little bit about Dave, who is going to be our major presenter today. He's VP and General Manager of Honeywell's UAM and UAS organization. Dave's been with Honeywell for over 17 years and most recently serving as VP and GM for the Power Systems business within the Engine and Power Systems subsegment. Prior to that, he served as VP of EMEAI Airlines, where he led sales, customer account and channel management functions for the Airlines Aftermarket in that region.

And with that, I won't read all your accolades, Dave. We'll just go right to it in terms of talking about Honeywell's business, which, as you mentioned earlier, we hosted all -- a lot of your customers in the prior session. So Honeywell, how does Honeywell play in the advanced air mobility market?

First of all, thank you so much for the opportunity, Sheila, and it's great to talk with you. Back in 2020, we established a dedicated business unit to support advanced air mobility, specifically recognizing that both the offerings as well as how we support those customers was going to have to be different. And we needed different solutions, and we did need a different MOS compared to how we salute -- we support legacy aerospace OEMs. And so when we think of what we do in AAM, some of it is just copy paste an existing aerospace offering, think sensors, think navigation systems. Some we modify a core solution to make it lighter weight or more efficient for an AAM vehicle and some is brand-new systems, a need that either the legacy air transport market or bizjet market doesn't have or doesn't have yet. They just haven't recognized in such a clean sheet application what they might be able to do with it. And so we like to say we don't make the aircraft, we make the brains, the eyes, the ears, the heart or lungs from avionics with our Anthem solution, flight controls, propulsion systems, both hybrid electric and electric through our cooperation with DENSO, cooling systems, which become very, very important for these all electric or more electric aircraft and electromechanical actuation. And more than just a Tier 1 supplier, we see ourselves as a partner or even a facilitator in the space whether that be helping to educate on best practices and time lines, coordinating with regulators and even hosting some events to help advance the market. And it's worth noting, and we've shared this with you before, the development work we've done to apply these systems to AAM vehicles has allowed us to mature these key technologies using this customer iteration in AAM, so that they're also going to be mature and certified and production ready for the next BizAv or defense or air transport platform.

That's great. And maybe given your leadership role in the industry. How do you think about the overall AAM or eVTOL market? Do you think about hundreds of aircraft flying around? How would you value it as well? What's the ballpark number you see as the market evolves?

So we think the tens of billions of TAM is absolutely appropriate over some time line. But to be clear, it's not day 1. And while we're optimistic on AAM being a meaningful and positive change to how people travel to how people live to how people transport goods and services, it's not material to Honeywell Aerospace Technologies P&L until probably the end of the decade. And the timing and the missions of those launch vehicles in the launch regions are going to continue to evolve, and I'm sure you heard a lot about this today, where regions such as China and UAE are aggressively moving on the regulatory framework to allow the aircraft to operate first in those regions. In addition, you're seeing U.S. DoD specifically through the Air Force starting to evaluate these vehicles for cargo logistics, even initially as well as special missions. So while regulatory timing will continue to be a variable, I think we've to look beyond some of the traditional type certification process as the unlock for revenue. So while tight certification in the U.S. or Europe is a digital event, it's not the only enabler of revenue. And one of the things we talk about a lot is perhaps the killer app, the really compelling mission isn't going to reveal itself for some amount of time, right? It's going to be like the early days of high-speed Internet or the iPhone, where until you've it and until you tested it, that most compelling application for it may not reveal itself.

And you've given some numbers historically, air taxi as a $20 billion Honeywell opportunity, and please stop me if I'm misquoting you. Middle mile cargo as a $10 billion Honeywell opportunity and local light parcel as $1 billion as a Honeywell opportunity. And you've given broader numbers for the other OEMs in terms of TAM by 2030. So can you walk or -- talk about your thoughts on each of these areas and how you're thinking about the mix of opportunities and the portfolio positioning towards them?

Yes. So air taxi is going to continue to get the most attention, not only because of the large TAM it has, but also because we, as travelers can imagine some of the benefits that it brings, being able to get to locations that are very challenging today. It's also going to have the most hurdles relative to regulatory scrutiny. So the revenue timing around air taxi is always going to be the most challenging. However, in 2024, I think we're going to see a number of milestones that really showcase how far it has come, whether that's Farmborough or Paris or Dubai or going into Osaka and Shenzhen next year. But just listing those cities, it should be very clear that the first air taxi revenues are not going to come from operations in the U.S. because of the regulatory scrutiny. In our solutions for air taxi are extensive, everything that we talked about above, eyes, ears, heart, lungs. Middle Mile Cargo may be the least sexy, but the likely launch application. And the reason for that is both the regional, where people live, where people -- where goods and services are located, the operational flexibility and the immediate operational savings you can get out of Middle Mile Cargo using AAM vehicles is an easier win for regulators, for operators, for OEMs. So you can start to drive revenue and you can start to showcase the benefits of these operations fairly rapidly. And so our offerings for air taxi and middle mile are very similar. And when we talk about customers, you'll see there's some commonalities there. Local light parcel trends towards low-cost, high-volume depending on how the final set of regulations play out. But even there, things like a ground control station that allows you to operate a fleet of light local parcel drones in a certifiable way as well as provide continued communications with that fleet is a really interesting place for us to play. And so while we tend to spend more time because our offerings fit more neatly within air taxi and middle mile, that's not to say that we're not deeply engaged on smaller drones in part because that's where a lot of the advances are going to be shown.

That's super helpful. And maybe can you talk about -- I'm just going to ask one follow-up on the middle mile cargo because you guys are going to be first to market. Where is Honeywell's offering with that? Are you paired with like a Textron or Beta? Can you give us some color there?

Yes. Underneath Textron, specifically the Pipistrel Nuuva, which is a cargo aircraft they've developed, we provide the actuation systems and some of the flight control systems that support that vehicle. And so that's one example of where we're engaged on the middle mile cargo. But you can imagine across the portfolio, even up to and including a ground control station that allows you to operate one-to-one with a larger middle mile cargo vehicle or one to many at some point in the future, we've a lot of very interesting work going on with customers in that space.

Okay. And maybe if you could talk about the Anthem opportunity. I went to a really cool event, Sean and Reena invited me to do -- 2 or 3 years ago now where you launched Anthem. So what is Anthem? How do you think about when it enters service and the broader opportunity set across Commercial and Business Aviation?

Yes. So Anthem is our integrated cockpit of the future and without completely going wild on it, it has a number of advances for the future of aviation. If we think about being connected all the time as people expect to be, but it's very difficult in some cases, in an aircraft. If we think about pushing more tasks, more critical tasks to the pilot and more mundane tasks to the systems on the aircraft, what we call simplified vehicle operations. Anthem also has an excellent road map for how we advance as the regulations and the needs of those future aircraft advance. So we've announced 3 AAM platforms for Anthem, Lilium, Vertical and Supernal, who's division of the Hyundai Motor Group have all committed to using Anthem on their vehicle, along with an unannounced business aviation platform where we've been selected. So right now, we're -- our priority is quality executing on those programs, right, because we need those vehicles to launch successfully with our platform. And I think we'll see as you probably talked about cert timing with some of those customers today, I think we'll see 2025 and 2026 EIS in -- on those vehicles. And maybe the other thing to touch on with Anthem is it does create retrofit opportunities for all the reasons that I highlighted that it gives you a path towards simplified vehicle operations and in some cases, reduced crew operations all the way to some level of autonomy, you can imagine that operators of existing fleets might look at Anthem and what it's able to do in AAM and say it's worthwhile for us to upgrade to that in order to simplify the operations for cargo or for some specific mission in a way that an existing cockpit cannot.

And on Anthem, you mentioned 3 customers. So how do you think about Anthem versus its competition? Is it in-house providers for the avionics and how do you think about expected market share there?

So in general, we've won in most of the areas we wanted to win. And so I'm being a little bit cagey about that. But one, there's a certain set of customers who are going to value those unique attributes I described in Anthem more than others. And so we try to focus on ensuring that we've established a position with those customers. The other is we've to be very choosy about where we can deploy the resources to ensure a flawless integration, a flawless EIS and support for certification. And so I don't think as much about market share, although particularly at AAM, we've a very strong market share compared to the next best alternative, which is typically going to be an in-house solution or a federated solution. But more importantly, we're selecting the customers where we think the technology is a great fit. The cooperation between the 2 companies is a great fit.

That makes sense. And then maybe you talked about UAM pipeline being about $10 billion plus, and I think that's the figure we got a year ago. So where are you seeing -- where are you seeing and winning the largest opportunities across the portfolio?

It's pretty broad across the portfolio. Everything that I've described, we continue to announce new wins on, whether it's sensors and navigation and whether it's flight control computers, whether it's electromechanical actuation. One of the biggest growth areas where the demand has ramped up significantly is around our cooling systems. And so one of the things that OEMs are realizing is as they develop these electrical solution -- these electrical systems, whether it's all electric or hybrid electric systems, the amount of heat they're generating in those electrical systems is significant. And so Honeywell's cooling systems, what we call our micro DCS, which can offer both passenger cooling as well as cooling for the electrical systems as well as battery cooling in some cases is a really important offering and it gives them some ability to scale as those cooling requirements go up. The other element of that is within those cooling systems, you also have seen defense players as they try to add more and more capability on to either new aircraft or existing aircraft, their cooling needs ramp up significantly. And so our micro DCS system, which is designed for a very small footprint with a significant cooling power has been compelling even as they try to upgrade existing aircraft as well.