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

With that, we're going to kick off right on time. We have Honeywell. We upgraded Honeywell last week. The stock is neglected, for a lack of a better term. And we think there's a lot of good news happening below the surface, both in terms of execution and end markets. We view the stock as inexpensive. This morning, with us, we have Mike Stepniak, Senior Vice President and Chief Financial Officer of the company. And I think we're going to go and just do a fireside chat. And Mike, thank you for joining us today.

Thank you for having me. Appreciate it.

And of course, Sean is sitting in the audience. Thank you, Sean.

Good morning.

Good to see you, yes.

So yes, so maybe to kick off, thank you for joining us today. There's a lot going on at Honeywell. Just to start, can you just give us an update on the business performance and separations?

Sure. So we obviously are extremely pleased with the first quarter. We delivered on top line commitment and had a beat across the board, if you will. Orders in the first quarter were strong. They're strong again in April and what we're seeing in May. So we're quite confident about our guide and what we said during the earnings. I think the only, I would say, just hesitation and pause is the demand piece in the second half of the year, specifically in the businesses that have more exposure to China and how that's going to play out. From a tariff standpoint, tariffs are -- we said, I think they're a $500 million gros growth impact for us. We're offsetting with price escalations in other actions as far as our supply chain. Just yesterday, they came down for us another $100 million. So it would become a less, I would say, impactful or relevant bump. But we're watching demand, and we build a little bit of contingency in the second half into just monitoring the demand and -- but largely feel good about all of our segments.

And Mike, you just sort of highlighted, you brought up that you strength in April and May. Any verticals that you want to call out having the strength? It is May 13, anything -- what are you seeing in May?

Building Automation for us is performing well, specifically products, fire. Europe is doing well. We can see green shoots in Europe as far as short-cycle demand. China has been good for us, too. Even China is not a big revenue driver for us, it's about 5%, but China demand is there. So we're seeing that. From a project standpoint. Middle East, Australia, APAC. So we'll see, I would say, broad strength as far as demand.

Terrific. So maybe we can talk a little bit about -- one thing that we've noted, the company has changed I think its planning philosophy. So you've been in the CFO seat for about 4 months now. Honeywell seems to be guiding more conservatively and also consistently in the past couple of earnings seasons. What changes have you made in your approach to guide? And what changes have you made in managing the different business segments?

Sure. So as far as the guide -- and I've been -- even though I started in February, I've been essentially building the guide and the plan for the year since about September. And what -- my philosophy is that we need to drive the business for short-term performance, but also for long-term performance. And what I'm focusing on is really looking at leading indicators and focusing on leading indicators as far as how we guide. And what I want to guide and how I want to set the plan is, is I want to have a high degree of confidence in what we deliver, and that's what we're guiding. As far as what I focus the team on is really a couple of things. First one is really focused on making sure that we hit our milestones on NPI, product introductions, offering management refreshments in the offering. That's because that drives really a midterm strength growth for us and hitting those milestones. And then the commercial, I would say, commercial intensity as far as how we go into our markets, how we pivot to higher growth verticals and how the team shows up as far as the commercial intensity.

And just to go back with the initial guide, as long as we sort of -- we're going to go talk about other things. You have sort of talked about slowdown. It doesn't sound like have you seen any slowdown so far in April, May? Anything slowing?

Not a broad slowdown. I would say in our ESS business, we see some of the customers just, I would say, hesitating again on some of the investments. But that's not broad-based. And this is more, I would say, anecdotal versus a big trend. I think once tariffs stabilize and the backdrop -- macroeconomic backdrop stabilizes here in the second half, we'll see those investments continue.

Excellent. Maybe we can talk about the spin. So the company is breaking up in 3. Now what's interesting, if you do just some of the parts, I think it does suggest that you're trading relatively in line, and there are a lot of puts and takes here. But how do you think about the benefits of breaking up the company just beyond the sum of the parts math?

Yes. So first, I would say, the Board and Vimal, there was a major consideration. What we really looked at, and if you followed Honeywell for a while, it's we went through the period of Accelerator and optimization, I would say, for cost efficiencies, et cetera. As you look forward and you look at our 3 large segments, their needs are diverging in terms of the capital investment needs, as far as innovation, the themes in each industry. And we're a big believer that businesses, being by themselves, then can be more focused, they can allocate capital more efficiently, they can manage their growth CapEx better. And that's really the reason why where we're separating.

Excellent. So maybe we can dive into Aerospace first. Can you just explain the dynamic that drove Honeywell Aerospace organic growth of 9%? But at the same time, you have Commercial OE organic growth of negative 7% in the first quarter '25. And what gives you conviction that Commercial OE growth turns positive from here?

Sure. So I would say, first of all, we're super excited about what our Defense and Space business is doing and really happy with the aftermarket demand. On the Commercial OE side, we still have positive backlog of about $2 billion. And if you look at our OEM customers, they're not linear in terms of how they take product from us. So what I can tell you is our supply chain output has been growing double digits for the last, I think, 11 quarters in a row, including the past quarter. And we see this demand to continue. And there is, I would say, nothing that would tell us that demand is slowing down on OE. Now as far as how it translates to revenue, I would say, especially last quarter and this quarter, it will be a little choppy as, I would say, some of our OEM customers normalize their productions. Because they have been very linear as far as how they took product from us. Sometimes they get to inventory. Sometimes pass it to their end customers. Sometimes they slow down because they see that they have enough, I would say, safety stock. So it's not linear, but the demand, we can see it. We can see it, one, by new demand coming in; and two, the backlog that we have and the positive backlog.

Excellent. Maybe we can talk about bizjets a little bit. Who would have thought that bizjets would be the most economically cyclical part of the business. We sort of estimate roughly center of Commercial Aviation. Is that the correct way to think about the portfolio? And talking about concerns about slowdown, are you seeing anything slow there?

We're not. We saw ours normalize early coming out of COVID, but they stayed at that 4% to 5% growth year-over-year. And we see strong OE demand as far as the fleets. And like I said earlier, they're part of our positive backlog, and the backlog growth is driven by business, OE equipment. So I don't see a slowdown in the short term, at least not in this year.

Maybe we can talk a little bit about Defense and Space. What are the key trends, programs and noteworthy things in the latest President budget as far as Honeywell is concerned?

So looking at a Defense budget and looking at DOGE, we don't see a lot of impact there for us, actually none so far. A lot of these programs they're working on, they're multiyear, they're committed, critical to national security. So we haven't seen the slowdown. We, on the other hand, see a lot of demand both domestically and internationally. About 25% of our Defense and Space business is international, and we made the investments specifically in Europe, in engineering capacity and production capacity. And Europe is our biggest international market as we just see a strong demand there. And I think as we progress over the next couple of years, that demand will continue to grow as national security becomes much more important to Europe and to some of the Asian countries.

And one of the milestones we should watch for in sort of the evolution of international sales is just -- I guess, the world is not getting safer anytime soon, but any big competitions? Any specific programs you would highlight?

So obviously, Europe is thinking through how to source more locally, et cetera. We have -- we bought this company Civitanavi that's based in Europe that actually plays into that. We're trying to stand up more capacity, both from an innovation standpoint and production in Europe. But we think that, just given the needs of European markets and everything that's going on with trade, I don't think it's quite plausible strategy, if you will, to...

Right. Because there's plenty of U.S. content on all these?

Exactly. And I think it will take too long.

And how should we think about just DoD versus International business, which one should we expect to outgrow?

International business in the short term is going to outgrow, just much more pent-up demand. And I think U.S. Defense and Space is stable, but it's not growing at the same level.

And then the impact of DOGE?

I don't -- we don't see any point of DOGE for us. Like I said, the majority of our programs are committed. They've been there for years and are critical to national defense.

All right. So maybe we could go to Building Automation. So building products, and you've highlighted it has been performing better than expected in the past couple of quarters, 4Q '24, first quarter '25. What has been driving the upside relative to expectations? And maybe what is building products? Just for folks, just...

So if you think about it, building products, it's products and -- that go into building infrastructure, fire detection, security, building management systems, et cetera, and then projects. And we have projects and services predominantly to pull our content and continue to advance our NPI. I think the -- I would say the most exciting thing about the Building Automation business is the fact that this is a business that truly exemplifies what we're trying to do with the rest of the portfolio, meaning it's creating installed base and then mine that installed base with value-add services, connected offerings, et cetera. And that's been working very well for us. I would say the leader in terms of the growth for us right now in Building Automation is fire. Fire is performing very well. High-growth verticals for us are data centers, hospitals, hospitality. Clean science, if you will, as well. We play in that. Those are the verticals that are taking off. And we're seeing a lot of progress in Europe. In Europe, where we're partnering with our channel partners, we're having new offerings and that strategy is paying off quite well.

And just on fire, maybe it's -- like it's actually a serious question. It seems that incidence of fires in the U.S. are actually going up because of the lithium batteries. Is it related to that? Or is it just related to structural business model changes and how you...

I would say the battery fires are quite difficult on the lithium battery. They're very hard to contain. And I would say, regular fire suppressants don't address those fires or contain those fires. That's why you don't see a lot of lithium batteries in the buildings, because building codes doesn't allow for it. But we're working on technologies to maintain and contain it.

Right. So for commercial buildings, lithium fires are just not an issue?

No.

Okay. Okay. Okay. So it's more -- so it is your business model working?

That's right.

Right. Because we've definitely seen it on the residential side, but yes.

In building code, I don't think you have lithium batteries...

Yes, I don't think we're allowed to have like these scooters in the building for that fair reason. So maybe we can talk about it, just to build on that. So how is cross-sell and putting Access Solutions Honeywell International channel going? Is it contributing to growth? And when do you expect this to contribute to accelerating growth?

So it's contributing right now, and you can see it in Building Automation reported sales. And you'll see it starting in the third and fourth quarter, the business will become organic for us as far as growth. I would say we are really pleased with the Access Solutions business, and it's a great addition to our product portfolio and project cross-sell. But it also is accretive as far as growth and margins. And per our pro forma, this business is outperforming right now. So really, really excited about this acquisition.

Excellent. So maybe shift to Industrial Automation. And why don't we start with Honeywell Process Solutions, because you have some capabilities in LNG, we addressed it. But what's the competitive landscape right now for Honeywell Process Solutions? Who do you consider your key competitors?

Process Solutions, I mean, we compete with several players. But really, we're just looking at what we can do in Process Solutions. And for us, it's really about how Process Solutions can partner with UOP and create cross synergies there and focus on new technologies that we've developed. The business has been growing at mid-single digits for us. We're really pleased with it. We're focusing on life sciences there right now, and that's a new growth vertical for us.

And if we go sort of to legacy, so we think sort of downstream, we sort of were thinking about sort of this 3-way competition between Emerson and Honeywell and maybe Yokogawa. And this is BofA's view, I think other players have a very nice installed base business. But I think for greenfield and brownfield, it's really been a 3-horse race in our view. Clearly, your competitors are not asleep. And when we were at Hannover, clearly, there were Chinese competitors coming out. So how is the competitive landscape evolving, I think, over the next 3 to 5 years?

Yes. So the landscape is competitive. And like you said in your opening remarks, Chinese competition, as you can see, coming up, especially in China and Middle East. That's why in those locations, we have now localized in China because of the technology concerns, et cetera. But we feel very, very good about our offering, both from a UOP standpoint and from HPS. And I think that's a differentiator for us, and we're just investing monies and our engineering efforts just to continue to create new technologies, more efficient technologies, et cetera. Generally, I think I feel good about the space because the world will need more energy. Where it comes from, it really depends on a lot of things, on geopolitical landscape and how governments think about their own energy security. But generally, we play across the spectrum, and we know that demand for energy will continue to increase and we're well positioned.

And does the spec in China for automation, does it look differently for you? Because historically, what happen, right, people have taken high-end, Western technology, brought it to China, and now the Chinese are evolving their own standards. So as that evolves, are those Chinese standards sort of decoupled from the rest of the world? Do they start dictating their own terms, right, because they're doing some projects in the Middle East? Or does it remain fairly the same? And so you have this global standards and everybody performs to the global standards. What does the evolution of Chinese competition mean for what sort of product looks like?

Yes. So I think it really depends on technologies. And we obviously like to play and we compete in high-end technology areas, and that's where we take pride in. And from a core and values standpoint, we're at heart an engineering company. So we compete, whether we take our ESS business, Industrial Automation, Building Automation, we try to compete in the high-end markets, which technological, I would say, entry barriers are high, where you need to be specced in or it's always essentially the technology is demanded by the code. With Chinese right now, what we see in our markets is competition in lower end.

Right. So like these teapot refiners?

Yes. But how the world is going to develop will...

Right, right, right. And maybe just before we go, Intelligrated, signs of life? I think some of your competition sort of also is talking about that it's looking better. How sustainable it is? How hopeful should we be? And I know your guide is actually quite conservative. Thank you. So I appreciate that. But what are we seeing in Intelligrated?

So I would say our guide is pragmatic. But on Intelligrated, we're happy with the first quarter performance. Revenue, I think, was up 5%. Orders coming in. The business over the last couple of years has been -- we resized the business, which now we think we have a really good mix of aftermarket and new projects. And the pipeline looks -- of orders looks good. I would say, with tariffs, though, it's a little bit lumpy and choppy. And I think that's where you also see hesitations in customers as far as most recent tariffs and how they want to invest and which facilities they want to invest. But generally, I would say, yes, the backdrop is improving.

So maybe we can talk about sort of Energy and Sustainability Solutions. So you targeted mid- to high single-digit served addressable market growth through the cycle for UOP. But UOP grew 8% in '23 and 0 in '24, and the framework suggests low to single digits in '25. So how do sort of these internal expectations fit within the framework for UOP?

So UOP will -- for this year, will continue to lead growth for us. And if I look at our catalyst business demand, there has been pretty stable. And I would say this is almost like an annuity. Every year, there are catalyst sales and customers reload, and that business has been stable. Where we see, I would say, some lumpiness right now is in the projects businesses because they're more dependent on the capital investment cycle and decisions. And in UOP, any given project could be a couple of billion dollars of someone's money to invest. So these tend to be more lumpy. But I would say what we've seen more recently in terms of our acquisitions, the one that we just announced, Sundyne, and the prior ones, we were looking at essentially more stable business models, and where the product specified has higher aftermarket portion of revenue, which will help smooth out those peaks and valleys, if you will.

Can we talk maybe about -- maybe we can talk about sort of UOP's exposure to -- UOP has these dominant market shares in a lot of key markets just due to its history. I know you guys have invested to increase your presence in the LNG Sundyne acquisition. Maybe you can talk how are you pivoting UOP, which is clearly one of the company's crown jewels, for sort of where the world is going under the new administration?

Yes. So this is really just us trying to diversify. And like I said, our thought is that the world will need more energy. Where this energy is going to come from will depend on a lot of different factors, geopolitical and others. And -- but we play -- we want to play across the spectrum. Right now, business, our LNG gas processing is doing very well, but we also have a pretty rich portfolio in ESG. The demand has softened for it, but we know it's going to come back.

Can you talk about the Sundyne? Like why did you buy it? It's a very interesting deal. Can you just talk a little bit more what did you buy and why did you buy it, right? Because clearly, this is where the company is putting capital.

Yes. Sundyne is a great technology first, and we know this company very well because their product is a lot of times specced in, in the process of when we design plants in UOP, so we're quite familiar with this company. The reason we also like it is because it has a large installed base and it has lower aftermarket. And we know -- just understanding our UOP business, we know these pumps are high-technology pumps. They're quite complex. They're very difficult to reverse engineering, if you will, and replace, and actually a derivative of aerospace technology, those pumps. And that's why we invested in it, because it helps support our UOP business and it's less cyclical. And we really well understand the end markets where those pumps play in and understand the technology.

And once again, we're on ESS. Can we talk about Advanced Materials? Just I know it's going to get spun out. But what are the latest trends? I mean, I think folks who cover HVAC space are obsessed with was happening with the availability of the refrigerant. Can you just talk about what's happening there? Just explain to us, because people -- and I think I had this conversation with Sean, that refrigerant for HVAC is like the biggest part of the business. Just maybe explain to us what's inside the business and what are the key drivers for the business.

Yes. So I mean, refrigerants, predominantly HVAC, cars, et cetera, that's the biggest part of the business. But what I would say in this business what -- and when we talked about our 2025 and going in 2026, what we like about this business is we see a cycle coming up again. And we're actually investing in growth CapEx in this business this year, and we're quite confident this business will continue to grow quite well. The reason we're separating Advanced Materials -- by the way, the name is Solstice Advanced Materials now, and it's going to be spun out at the year-end, is we see a lot of growth potential in the business. But the business just from -- in terms of its capital investment requirements around growth CapEx, needs a little bit different profile, and we think it will be better stand-alone.

Excellent. So maybe we can talk a little bit about Quantinuum. So back in October of '23, Honeywell announced that it would not monetize Quantinuum in the next 18 months. It sounds like IPO is going to be the method to monetize it. Just any update on how you're thinking about monetizing this business and whether an IPO is still the right method?

So we're working through it. As you know, the markets are quite volatile right now as far as valuations and investment base. But the business is -- that work is progressing very well for us. But I would say what's probably more exciting about this business is the technology invent in Quantinuum. We have a couple great pursuits in terms of the equipment. We -- where we feel very close to 100 logical qubits capability, which essentially that, in our view, validates a commercially viable product. And from a technology standpoint, this technology has matured quite well for us. So you should see some -- I would say, over the next 12 to 18 months, you should see some really interesting and nice announcements from us on -- in the area of Quantinuum.

But the key here is you want to see some stability in the market?

Yes. I mean, the valuations are great and just trying to pinpoint right now, it's quite difficult. So we're working through it. But it's -- month-to-month is -- I would say, it's quite volatile right now.

And is IPO still the right framework of thinking about it?

We're thinking through several different options at this stage.

Okay. Interesting. So we do have a couple of questions that the management has asked us to ask every company on stage, so I'll ask those. And then I have -- so the first one, do you expect to shift incrementally more production to the U.S. or to source more from the U.S. because of tariff policy? And do you expect your customers to source more from the U.S. because of these trade policies?

It will really depend how the tariff landscape settles. We've made some tweaks in our manufacturing footprint over the last 3 months, but that's probably in low single percent basis as far as our manufacturing footprint. So nothing ordinary, it's more just surgical.

And the other question, the tax bill yet to pass is expected by many to include bonus appreciation incentives for domestic manufacturing as well as some individual tax relief. Do you expect this to have a significant impact on your company? And which are the potential tax changes that could have the most impact?

So like everybody else, we would like, I would say, the tax regime that's in place right now to remain. I think that will be most beneficial for us, with the exception maybe of the R&D expensing. Obviously, that would be, I would say, beneficial to most companies if that was allowed.

Excellent. You've been very efficient in answering the questions. So a couple from me then. So structurally, how do you think about your pricing strategy across the different business units? Where do you get the most pricing power? And what's sort of an area of caution for you?

So with tariffs, obviously, pricing got quite more complicated. But I would say, going to year -- into the year and what we're trying to accomplish via pricing is get pricing where we can, but not destroy demand. And we're very careful about as far as learning from last time in terms of managing our overall price cost equation. We have -- this time around, we have, I would say, much more opportunities in terms of supply chain efficiencies and how we manage that, and that allows us to be more choosy as far as how we drive prices and where we drive prices to be able to stimulate demand and manage our share of the market.

And are you guys doing more pricing? So far, have you done more pricing or surcharges?

So we have regular [ way ] pricing which we issued during the year, and that's 2%, 2.5% for us. With the inflation, maybe now that will be north of 3%. But the tariffs we manage more for surcharges. We want to be very transparent to our customers where the surcharges are and what's driving there. And we found that that's a better way to drive the type of type of cost recovery.

Got you. So if the tariffs go back, you'll pull back?

That's right.

Okay. Excellent. And maybe the last question, how -- you bought back more stock this quarter. So how have the company's view on buybacks have evolved over the past maybe 12 to 18 months?

I would say going into -- going through the first quarter and into the second quarter, we just felt that the stock was very attractive from a pricing standpoint. So we wanted to front-load that and take advantage of that, if you will. And as we go through the year, we'll see how -- just how our capital allocation evolves priorities, whether it's M&A, stock or dividend. Dividend, obviously, will stay the way -- where it is. We're not going to impact it. But we'll be opportunistic, I would say.

Okay. Would you say you are more open to buybacks than in the past? Or any change or...

We will continue to maintain our capital allocation discipline and allocate capital appropriately. I would say, in this year, we felt that going to the year in the first half, the stock was attractively priced for us to do more buybacks.

Well, ultimately, we're going to agree the stock is attractively priced. Mike, thanks so much. Right on time. Everybody, thanks so much for attending.

Thank you very much. Appreciate it.

Of course.