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

Great. Good morning, everyone. Thanks very much for coming this morning. My name is Julian Mitchell, the Barclays multi-industry analyst. It's my pleasure to start off today with Vimal Kapur, Chief Executive and Chairman of Honeywell. Please, Vimal start off with any prepared remarks.

Thanks, Julian, and good morning, everyone. I think being in Miami and not in the beach in the morning is not a right thing to do, but here we are listening to me. So I would say 1 year, Julian, we were here a year back and a lot has changed in Honeywell within 1 year. We completed 4 acquisitions, all in the areas which we talked about in aviation, automation and energy transition. We announced the spin-off Advanced Materials business, and then we announced a few days back spin-off Aerospace business. So one can say that what changed over the last 1 year, and we concluded to do these spins. I think essentially, as I was started in my role, it was evident that there was increasing difference in priorities between these 3 segments. And we wanted to make sure that the businesses are positioned for their growth potential, and we did all that work in 2024, analyzing does a stand-alone company can stand in itself? Do they have value proposition? If they were hypothetically a stand-alone company, will the value proposition stick and so on? And then the conclusion was, yes, it does make sense. And the value addition of Honeywell in the last 15 years was through an operating system. And that has, in a way, driven the value it has and the future value has to come from growth and therefore, creating a separate entity is critical to enable it for the growth horizon it has. So that was the basic premises here. So what's next is now, we'll come back to all our shareowners on value proposition of each of these 3 companies. We expect to complete spin-off Advanced Materials, hopefully by end of the year, Aerospace by second half of 2026 and we bring forward our stories in each one of them. We'll also make announcement of the management teams of these. We expect to do that for Advanced Materials in about a month's time, and then for Aerospace down the line. And Honeywell, just as a clarification, no change in Honeywell leadership. Honeywell is whatever Honeywell is, and it's spinning these companies. So there's been a question on what happens to Honeywell. So it remains the way it is. So I would say that's the headline. We have a lot of work to do. I'm excited in terms of the work ahead of us, and I do believe we are well positioned for Honeywell to come out as a strong company on the other end as Honeywell Aerospace, Honeywell and then our specialty chemicals business. So with that, I'll pause and open it up for questions.

Great. Thanks, Vimal. Maybe switching back to the short term a little bit. I think it's been a very sort of dynamic environment month-to-month for industrial companies. Your own business, for example, you had strong orders second half of 2024. You're not necessarily guiding for that to feed into stronger revenue this year. So maybe help us understand, is that natural conservatism, something in the types of orders that you've been looking, any thoughts around that please?

Yes, so orders were strong, both in Q3 and Q4. Q4, in particular, our orders growth was 11% with a book-to-bill of 1.1. Most of the orders grew were long cycle. So strong growth of orders in Aerospace, strong growth of orders in ESS in the UOP business, strong growth of orders in Building Solutions. So all that really helped us to print that number. Essentially, that means that our guide for 2025, as the year progresses, is well supported for the long cycle because we have the backlog, and so it's part of our planning process. And that's how that -- if you see the distance between orders in the first half of our revenue, it's just because of the long cycle nature of these orders.

Perfect. And when you think about the more short-cycle businesses, particularly parts of industrial automation or some of the products within building automation, you had a pretty good fourth quarter in both categories actually. You haven't guided for that to persist this year or get better in the second half, sort of why is that? And what are you seeing in those shorter-cycle product businesses?

So we had a good Q4. We -- specifically in building automation, we were able to print 8% organic growth and building -- and industrial automation was close to flattish. Essentially, we have guided, Q4 was a good performance, but not multiple trend lines with us, not enough data points to say this is a new baseline. For example, the building automation had a strong performance or a good performance in Europe in Q4. And I don't feel comfortable that's a trend, which could bank upon for the entire 2025. So we -- what we have guided is where's a proven history of delivering certain set of numbers. We have not assumed any recovery of any short cycle in any segment. It doesn't mean we are not working towards it, but also it's not prudent on us to make some assumptions and then they are not true. So we have guided what we are confident to deliver. And every quarter, we'll come back and report the progress.

Great. And I think to your point on guidance just now, there was a difficult time with some of the guides second half of last year. I think investors are trying to figure out what was the framework or the sort of impulse behind the guidance setting for this year in that context? Is it conservative? Is it prudent? Is it something else?

I think it's based upon, I think, what we have a conviction to deliver. So I think what we want to make sure that what we guide is what we are confident that those numbers are -- we could deliver on those numbers. So certainly, based upon how some events occurred in 2024, we have factored that into our guide process.

Great. And I suppose away from the short term on the top line, I think on the splits, I suppose people would wonder the motive around it, how much of it was sort of some of the parts valuation math? How much was it weighted to no, we're going to improve the operating performance of each of the 3 pieces in the long term?

So it's -- I would say it's more of the latter. It's really our strong belief that each business has a runway to grow of its own on a stand-alone basis, and it will play out as we separate the companies. We really didn't do this because some of the parts is greater and it's not based upon a math, it's based upon a conviction that each of these businesses can run and more efficiently and deliver growth, more importantly, and that's a driver for this decision.

And when you talk about the accelerated growth for the pieces, are there may be some examples that you might use where this business should have done X or Y, if it was stand-alone, maybe it would have done, any thoughts around that?

I would say -- I would respond to that, what opportunity we look ahead for each one of them. If I look at Aerospace business, we clearly see path of a strong demand for the next several years. But primarily, the biggest constraint is supply side. So we need to expand our supply base, our ISC capacity. So that's a problem to solve to deliver growth there. Aerospace also seeing good momentum in terms of end markets in electrification and autonomy. So those are the kind of drivers of growth in case of Aerospace. On other end, when I look at specialty chemicals business, it sees growth driven by the U.S. onshoring because there are materials in which we have a good position in semiconductor and in battery materials, but that requires capital, that requires capacity expansion. So therefore, businesses on a stand-alone basis, they're able to much better position to make those decisions versus Honeywell trying to optimize the decision for them. And in case of Honeywell, the opportunity we see is in terms of how our installed base will enable digitalization, leverage of AI. Also energy transition is going to have a lot of driver on our customers' business mix changes. So each of the segment has a very different driver. And that was a fundamental point that the next 10 years, the priorities have diverged to a point and that we will not be able to unleash growth opportunity each segment has to offer, and therefore, being an independent company allows to have its own capital strategy, its own management structure, its own organic or inorganic growth opportunities. And we have built the strong thesis based upon which this plan has been executed.

Great. And if we look at Aerospace, for example, there's always a debate in that industry around is Honeywell's growth what it should have been on the top line, has it undergrown peers, whichever the peer set happens to be that people look at, is there a need for sort of stepped up reinvestment in the business once it becomes stand-alone to get the growth moving faster? Any thoughts around that?

So I would -- I -- the Honeywell has always invested well in Aerospace, specifically on the product development side. I think that's where probably there's a more debate that is it under invested. If we look at the facts of our R&D dollars of Aerospace is at parity with the industry, just shy of 4%. That's where the industry is -- have ramped up that spend in 2025 because we had historic wins in -- of our normal run rate. So we need to accelerate execution of some programs, and we have ramped up that by 50 basis point. Another interesting fact is that Honeywell Aerospace set up a very global footprint for product development almost 25 years back. So we have a huge presence in Czech Republic. We have a presence in Poland and significant presence in India. If you hypothetically assume all those engineers were present in U.S. on a cost basis, then our R&D spend goes north of 5%. So I think it's just more of a perception which we have to work to overcome. I mean there's no evidence that we haven't really invested. And I just mentioned to you a few minutes back, we had a historic high wins last in 2024, more than 2x of our run rate. We cannot deliver that if we don't have the right offering. Nobody is going to give us business look ahead if we have poor product lines. So I feel confident that the business is well invested, where I agree that business of opportunity to work on the portfolio. And that's why as a stand-alone company, that will be left to that Honeywell Aerospace business to decide how they want to think about the portfolio additions they want to make to further strengthen their business.

Got it. And I think for this year, Aerospace has guided for sort of high single digit or so organic sales growth. The commercial aero cycles sort of maturing after a very strong 3-year recovery, defense and space may be improving, though. Sort of how do you see the growth rate medium term for the overall aero business?

I do believe that Aerospace will sustain high-growth rates for a while. There are a couple of drivers for that. First, we're still carrying a significant past due. It's going to take not only 2025, but even 2026 to retire that. Then our acquisition of CAES is much more accretive to the growth of the base business. So it's going to continue to help us shape that. We continue to invest in what we call decoupled growth, which means we develop products which are not linked to flight hours, and that also helps us to overdrive the growth there. So I would say that the current factors or the current upside may slow down as the commentary suggests, but our business mix is very unique. Our coverage of defense, our coverage of business jet, our coverage of commercial, our focus on electrification and autonomy aftermarket on decoupled growth. So I think all when it comes together, the confidence factor on continued growth in Aerospace is extremely high.

And then maybe switching to the automation RemainCo, or as you said, the sort of leadership will be stable. On that piece, kind of what are the most exciting sort of growth opportunities there, which are the biggest brands or businesses that you think will see the highest growth the next 3 or 4 years?

I mean, I think that's probably a question we'll answer in more detail, probably we'll do an Investor Day ahead of when we are ready for Honeywell being a new stand-alone company. I mean to your question, what are the -- I think we have an area of excellent businesses in each of the 3 segments in process and in buildings and in industrial. And then building automation, our product businesses are excellent franchise. I mean if I could pick one, it's our Fire business, which is extremely outstanding business. In process, we have 2 outing businesses, both UOP and process automation. And on the industrial side, we have good positions in some regulated product lines like our specified product lines, it's 1 of the 2. Like we have a good position in sensors. We have a good position in the safety devices. So I think there's an area of businesses which are highly interdependent. And I do believe that it's a compelling portfolio for Honeywell, our customers and our shareholders.

And on the process side of things, I know that's something that you yourself have been very close to for a lot of your time at Honeywell. How is the growth outlook there? And maybe sort of remind us the way you talk about Process Solutions, how does it differ from some of your peers?

Yes. So I would say the Process Solutions business, we expect 2025 performance similar to 2024, primarily driven by strength in our aftermarket and software business. I think the projects business is dependent on how the capital cycle will play. If there are more large projects which get decided specifically in energy sector, then there could be some better performance. But right now, based upon what we see, we see similar performance in 2025 compared to 2024. Now on a reported basis, within part of Process Solutions when we report it, we also have 2 Elster businesses, which we acquired 7, 8 years back, the smart energy business and thermal solutions. So there the -- on a combined basis, the numbers may look slightly lower, but that's something I aspire to change when we come out of the new business, probably to provide more clarity on the different parts of our business there.

Got it. And as you said, automation has a number of different parts inside it. Investors often ask kind of where will Honeywell prioritize within that? Could we see some asset exits announced or enacted before the full split takes place next year, what's your perspective on that sort of portfolio management element of the RemainCo?

So I would say RemainCo portfolio, the way I explain is I'll explain that in 3 parts. The first is RemainCo is all about a single consistent business model that you build installed base and then you mine installed base. Large part of Honeywell is built around that in RemainCo, and we'll continue to work on that. One can argue that's heavily influenced by Aerospace. Yes, I shouldn't be surprised. Aerospace is part of Honeywell for like 75 years. We obviously influenced by that. It really works because you have less cyclicality in that business model. Now when you look at the markets we serve, we serve 3 markets in automation business, buildings, process and industrial. In buildings, our business model is products which are equipment agnostic. And we sell it through channels. That's a business we have built over the last many years through separation of our spin-off Homes business in 2018 and we have invested both organic and inorganic to build that business there. So that business model is very clear. We have a strong conviction in that business model. It's now $7 billion-ish business in 2025. So it's in a good position. When we look at our process business, our business model is lead with process technology, follow by process equipment, process automation. And in process technology, we're really building our capability in 4 sub-verticals, refining, petrochemicals, gas and renewable fuels. And we made acquisition of LNG to strengthen our gas position. On renewable fuels, we are doing organic -- we'll continue to look at organic opportunities there. And then when we are having a strong position in process technology in these areas and automation really follows through in that. So that's kind of a 2 in a box model. We truly believe in that. It gives us a lot of leverage with the customers. It will give us a lot of capability from an offering perspective. And when you look at our industrial segment, there the strategy is to have products which are either regulated or specified so that you have a high entry barriers. Specified products typically go to an OEM into their equipment and machines. So it's difficult to replace. That's a lot of our sensors, a lot of our thermal solutions. And certified products or regulated products are like our meters. Meters are certified by utility. Once you certify with them, it's hard to replace it. A lot of our safety products are certified by different certification agencies. So it's more of a niche product lines, which are not commoditized, which are narrow niches and we built our business around that. Now the question is how these 3 segments align with each other. This sound different. I always look at 5 factors, which combine us. The first is customers. We share customers, like we share customers in the process segment. We share some customers across segments, too. We share offerings, technology because automation is like LEGO blocks. If you do something in Segment A, you can carry that in Segment B. It's -- we do that very, very frequently. One of the biggest LEGO block we all use is our Forge IoT platform, across all Honeywell, we use it. So it's not really belong to any one particular organization. Then we share operating system. We talked a lot about it, so it still binds Honeywell together. We share people. Someone like myself has worked in 80% of the Honeywell businesses, but I'm not the only one. There are many people like me who have worked across company. And finally, the Honeywell presence and global brand helps us to have a unified strategy for government relations. A large part of Honeywell business is regulated. That requires you to work with the government for policy and there's IRA in U.S. and there's a Green Deal in Europe and there's some other deal in some other country, you need a scale of a company to have a seat on the table. So when you kind of look at these drivers, to just kind of summarize it, build installed base, monetize installed base into 3 verticals of buildings, process and industrial and then bind together by these 5 factors. So it's a heavily interdependent business model. This is not a RemainCo of leftover thing, this is a purpose-built business which we have built to give ourselves optionality but also optionality to our shareholders because now we have diversified business in different end markets, and we'll continue to improve it moving forward.

Maybe away from the portfolio a second and just think about Honeywell has always had a very strong operating culture, pushing up margins. Maybe talk about the confidence in the margin expansion between now and the spin. And I know in Aerospace, there's some mix issues. And then any sort of further clarity on how to think about stranded or stand-up costs?

So margin expansion in 2025 is going to occur in all businesses, except Aerospace. Aerospace, core Aerospace margins will be flattish. But when we take the CAES acquisition, both integration costs and its margin pulls the margins down for Aerospace only for 2025, but we'll grow margins in building automation. We'll grow margin in industrial automation. We'll grew margin in ESS. To your question, so fundamentally, I think we have -- our operating system to drive margins continues. So there's no change in that. The levers could be priced, levers could be productivity. And we continue to feel very confident on our ability to deliver on that. Stranded costs, I think it's a work in progress. We already have identified stranded cost implication of specialty materials business, working on in terms of typically 12 months for the elimination of that. We are obviously behind to do that work for Aerospace, given that we announced it 10 days back, so we have to do the same work. But that we will finally get on other side of it and eliminate it, the confidence is high on that.

In terms of kind of reducing distraction risk for the businesses in all this, kind of how you're approaching setting up offices to run this program versus having the base businesses involved with it?

So we have set up a separate project team for specialty chemicals spin in October, think about it that being a project leader with a dedicated team, but also a lot of search capacity from third-party companies to bring specialized skills on that. Same thing we are repeating for Aerospace. And we'll actually have the third program office for remaining Honeywell because we also need to make sure that the RemainCo is also structured right from a cost base perspective. And all those 3 program offices work for Honeywell leadership team to remove any obstacles and any decision rights people need on a frequent basis. And having done the 2 spins in 2018, I think we have learned our lessons on how to organize, how to invest resources. And we believe that we have set it up in a rightful manner. I think the good proof point is we are executing the advanced material spins now for about 5 months. And that's not given any distraction to anybody because we have staffed it well. We have developed a very well-defined operating model, and I'm confident we're going to do the same thing for Aerospace.

Great. And then when we look at free cash flow, I think people often try and think about, okay, with the 3 pieces, how does the free cash look across each of them, what does that mean in turn for their capital deployment outlook? How would you characterize kind of the free cash flow conversion, I suppose, at the 3 pieces versus say Honeywell?

Look, each piece have an entitlement for 100% free cash flow. I mean, there is -- the drivers will change year-to-year, but fundamentally, businesses are positioned for that. Near term, if you look at Aerospace, they clearly have opportunity to retire the inventory build out and generate more cash, and that's part of our plans for 2025 too. But then there's more runway given the inventory build out is almost $1 billion. For specialty chemicals business, depending upon how the capital plans happen for the future expansion that will modulate the free cash flow in one direction or the other. The remaining Honeywell is probably more predictable towards natural way, high 90s free cash flow, but we also have nonoperating -- noncash income of pension. So we have to deal with that. Net of that, the numbers change automatically. But fundamentally, principally speaking, businesses generate 100% free cash flow, absolutely, there's no real fundamental driver, which doesn't enable us to deliver that performance.

Great. And I think last question before we go to the sort of audience response survey questions. I think would be around the uses of cash between now and the spin. And then I realized they have their own Investor Days, but for, let's say, dividend or income-focused shareholders sort of how should they think about the dividend policy of automation and aero down the line?

I mean, look, the dividend policy of each company has to stay competitive to its peers it competes with for shareholder dollars. So fundamentally speaking, Honeywell, I don't expect to change Honeywell dividend policy substantially. We'll have to review it. Once we complete the work that we had at parity with our peers, but generally, our peers of Honeywell is not going to change. So I don't expect any dramatic shift there. I think the same applies to Honeywell Aerospace. They will have to benchmark relative to their new peer set and determine because they are competing with capital there. So I would leave that decision to them. But I think the short message will be that each of these companies will be offering a competitive proposition to its shareholders for the dividend as is the market practice.

Got it. And between now and the spin, there's the big buyback and probably M&A takes a bit of a backseat.

Yes. My priority is the way I'll put M&A is that we absolutely want to make portfolio transformation as a priority in Honeywell. We demonstrated that in 2024. 2025, I want to be a bit cautious given the spin work we have to execute, but at the same time, we have to watch for any deals which are critical for our future, and they are available in the market. So timing sometimes can change our decision, but we are not expecting a $9 billion what we did in 2025 based upon the facts I know today, and we are prioritizing the execution of the spin here. Share buyback. Right now, we said $3 billion during our earnings call. But given how the stock is performing, we think there's a value opportunity for us there. So we'll evaluate how the year progresses and how our M&A pipeline is, we can reprioritize things, but for now, the -- what's on record is $3 billion of share buyback for 2025.

Perfect. And then with that, I think we'll switch to the audience response survey questions, please. So you've got those boxes that hopefully are functioning well. Do you currently own the stock? [Voting]

So there's a lot of room to persuade people. The second question, if we switch to that general sort of bias aside from ownership, positive, negative, neutral? [Voting]

Okay. So people are willing to sort of take a look at least. The third question, what kind of earnings growth versus, let's say, the multi-industry, average, above, in line or below? [Voting]

So broadly in line, I suppose, because of that sort of broad portfolio as it sits today. The fourth question is around what should Honeywell do with excess cash? [Voting]

So mostly buyback, which I think fits with what you just mentioned. Then I think the penultimate question is around looking at kind of gating factors on the stock. So if we switch to that one, looking at sort of the multiple, where should it trade on, let's say, near-term PE? [Voting]

Okay. So sort of high teens-ish, 20x. And then I think the last question, if we switch to that, what kind of the main factor holding back Honeywell right now? [Voting]

So organic growth, the biggest concern. Great. Well, thanks, everyone, for participating. Thanks so much.

Thanks, Julian. I appreciate it.

Lovely to see you.