Honeywell International Inc. ($HON)

All right. We'll kick off the fireside chat session here with Mike Stepniak, CFO of Honeywell as well as Mark Macaluso, who's back and running Investor Relations.

So let's just maybe start with some opening comments on -- I know you guys have a bit of Middle East exposure, but what are you kind of seeing out there in this fluid environment in the near term with everything that's going on in the world? We'll start with that.

So Middle East is obviously very fluid, but maybe I'll just start with that and make a small clarification based on some comments and write-ups I saw earlier today. So our annual revenue, if you think about Honeywell's annual revenue, high single digit of our annual revenue comes from Middle East on average. With that said, given what's happening in Iran, we do not see any impact to us right now for the quarter or for the year. So there are some shipment delays, et cetera, but they're are minimal, about $20 million to $30 million of top line revenue pressure for the quarter, and the team is going to figure out, obviously, we offset it within our overall cost structure and framework as we have contingencies, et cetera. So right now, we don't see any impact from Iran conflict and what's going on in the Middle East.

Could you just talk about the various angles of attack from this issue, whether it's what happens if oil price stays higher for longer, aero traffic, like just maybe the variables at play here that you guys are watching more closely with all the various, I mean, knock-on impacts?

Sure. So I would say if oil prices stay higher for longer, that means that there will be more investment. Our customers will have more money, more investment. I think you'll see more investment in refining, more investment in catalysts, et cetera, as the spreads getting better and the pricing gets better. On the other hand, you have to watch inflation because inflation will rise, and that's really where you have to have good pricing discipline. As far as traffic and hours, et cetera, we don't see a slowdown right now in -- due to Middle East. And Jim is going to talk about it in a while. But right now, everything is still intact. So if this conflict doesn't last for much longer, I think we'll -- will be a good outcome overall for the industry.

And as far as the other businesses, I guess, heading into the beginning of the quarter pre what's happening over there, what are you guys seeing on the ground in the other businesses or just in general from a macro perspective?

Sure. So I would say a lot of moving parts. But net-net, things are the way we plan them to be. So I'll just talk maybe through our segments. Building Automation is performing extremely well. Orders are strong across the board. All our regions last year in Building Automation grew. That seems to be -- continue to be a trend this year as well. Overall, our orders for total business while automation were about 5% quarter-to-date, and March tends to be strong for us. And I think the orders will be mid-single digits. PT will have another quarter with double-digit orders growth. I think there are a couple of big projects that we're working that will close out. So they're continuing to be building backlog, and we're just waiting for the backlog to start converting, and we see line of sight to -- for that backlog to start converting in the second half of the year. So we'll see about $100 million of incremental revenue coming on the back of those orders they had in the fourth quarter and early this year.

So orders remain pretty strong in that kind of a positive aspect of second half of '25.

Quarter-to-date, orders grow 5% on the 3-month rolling, high single-digit growth.

So high single-digit growth on a 3-month rolling basis.

Yes, so which includes strong December. So we don't see any deceleration. Pricing is good. Demand is good. I heard -- I listened to Delta talking this morning, their demand is still very strong. So I think right now, our end markets and macros are holding pretty well.

And when you think about kind of how this year is going to play out, you talked about the second half -- or is this kind of a -- I know normal seasonality is tough to call these days given what's happened in the last several years. But is the trend from 2Q into the second half, is that a normal seasonal trend, putting Iran aside? Or is that what you were seeing and thinking about as far as the trajectory of the year?

So just remind everybody on our framework and the guide for the year. So we guided 3% to 6% top line for the year. We guided 20 to 60 bps margin expansion and 6% to 9% EPS growth. I'm extremely confident in us achieving that guide. What's happening right now is Building Automation will continue to perform strong. Industrial Automation is starting to grow in the second half, I see them starting to grow. They're getting much more focused and PA machines starting to work. We talked about PT and PA. They're starting to have some backlog and the backlog is converting into second half. So if you look about seasonality, we see much stronger, I would say, tailwinds in the second half for our automation business. And on Aerospace, Jim will talk about it, but I think they're extremely confident in their total year guide as well. But as you know, with our supply chain, things are -- things tend to be choppy, and it's hard to kind of hit everything quarter-to-quarter.

Okay. Just digging back into the BA side, the growth there has been pretty strong. Maybe you could talk about whether it's the technologies that you're bringing to bear or the verticals. It's obviously a much more global business than maybe some of the building business that we think about here in the U.S. with U.S. nonresi exposure. So maybe what's driving growth there and talk about the macros?

We're seeing strength in Building Automation across the board. So regionally, if you -- this is a business that's most, I would say, global for us. Last year, we saw growth in every geography, including China. The team spent a lot of effort over the last couple of years pivoting to higher growth verticals. So if you think about data centers, hospitality, health care, these verticals are about 20% of our revenue, and they're growing at 2.5, 3x rest of the business. So that's helping to the growth. And then NPI. NPI is really a big differentiator for the team, which that includes Forge, Forge cognition, connected. Our fire business last year alone had over 30 NPIs. Most of them based on Forge platform. And we're seeing that annual recurring revenue, software services being a bigger part of the business. So I think the team is doing something exceptional there. And you met with Suresh and Billal a few weeks ago. So I'm quite confident that we're something special here in this business will continue to grow this mid-single to high single-digit growth over the next few years.

Maybe talk about what you're doing there and how it's been so successful, how you're kind of leveraging the R&D and the innovation on the product side and how you're able to bring that globally because it is a global business, I believe that's the way it's structured.

That's right. So we -- it really started with channels, if you will. So our solutions are helping our channels deal with most common industry problems, predominantly lack of workforce, lack of skilled labor, et cetera. So our products focus on self-testing, self-diagnosis, faster commissioning, better predictable failure mode spotting, if you will. So when our channel partners go to the site and there's a problem in the building, they can already diagnose it before they go to the site, use fewer people, get the first attempt fixed and 100% yield through.

And just geographically, where are you seeing -- where are you having the most success with this innovation?

North America is extremely strong. If you think about hospitality, people are asking where are the most hotels being built. We're actually in U.S. Middle East has been strong. Asia, Australia. And like we talked earlier over the last year, Europe is starting to come back for us as well. So we're seeing some tailwinds in Europe as well.

Maybe just talk about your data center exposure here. I know it's not huge, but what you guys are doing there. I'm sure that's a growth driver, albeit from a low base.

Sure. So our data center business was 3 years ago, it was about 0% of our revenue. Today, it's about 5% of our revenue in Building Automation, and it continues to scale. We spend a lot of time with hyperscalers on updating our offering, getting into really security, safety, energy storage, fire protection modes, et cetera. So this business will continue to grow for us really nicely. But like I said, it's only about 5% of our business right now.

Right. And then just lastly, Forge on the building front, we saw the AHR Expo, it's pretty impressive what you guys are doing there, the connected assets. Maybe just the business model is always tough for us to chew on. How are you looking at that as the driving actual revenue business? What's the outcome of Forge from a financial perspective?

It's really about first connecting the installed base. If you think about our Forge platform, last year alone, we connected more buildings than we connected for the last 5 years prior to 2025. And we're still only about 10% connected. So we're focusing on -- first on connections and Suresh and the team have a really good, I would say, playbook as far as getting these assets connected. Once you get them connected, that's where you really start deploying your ontology, which essentially just understanding how the assets perform based on asset class. Obviously, hospital building behaves very different than a hotel or a school, et cetera. So we have over 300, I would say, ontology models, which we're deploying for our customers to help them run these buildings more efficiently, more secure, et cetera. And then it really comes to pricing in terms of how you value price. And historical model for us was really pricing by connection. That's I think that's where how you start the business. But now we're moving into value sharing, taking -- participating in the productivity and really leveraging the decoupled growth. So it's a business model that's quite similar to Aerospace model and RMUs. It behaves very similarly, but it's all about getting that asset base connected and penetrated from a services and ARR standpoint.

And this is a lot of where AI is coming into play. Maybe talk about how you've leveraged what you've done in the last several years in building that capability. And then maybe a little bit on why -- how you see it as -- what the moat is relative to development challenges.

AI is really the applications are built on Forge. Forge is just a platform where all this comes together, but we're building applications where we're co-innovating with customers to build these models to help run the operations more efficiently. And that's really what AI is. And these buildings you want them to be self-learning, if you will. So that's what we focus on. And moving -- I think if you think about AI, Building Automation is furthest ahead of us, furthest ahead from our portfolio standpoint as far as moving into full autonomy, moving away from automation to full autonomy and having buildings run autonomously. In Industrial Automation, in PT and PA, we still have a lot of work to do, but that's really what's exciting about the business.

And then just taking a step back, just to tie up the loop here. On the growth verticals, how big do you see those growth verticals? How big are those?

So the growth verticals are about 20% of our portfolio in Building Automation. We'd like them to be 25% to 30%, and that's what we're working on. We also are focusing on services and ARR. So right now, our services ARR is about 40% of our revenue, then we would like it to be 60%. And that's something that -- if you think about, and we'll talk about it during our Investor Day, that's something that we will move towards over the next few years.

So clearly, BA kind of leading the way on growth, mid- to high single-digit, $7 billion business, a pretty significant percentage of your portfolio. Maybe just moving to the other large business, PAT. You talked about some of the second half, the wins and the orders flowing through in the second half. Maybe what are you seeing on the verticals there, LNG and some of the other core businesses within HPS and UOP from an end market perspective?

Sure. So first, I would say we've been supplementing our current business model in UOP with diversifying to other aspects of energy stocks, specifically around LNG and then Sundyne, which is more for us an aftermarket play. Last year, in LNG, we booked about $700 million of orders, $500 million of those orders in the fourth quarter alone. So our LNG business now is essentially sold out for the next 2.5 years, and we have more demand. So we feel really good about the LNG business.

How big could that be at some point, LNG for you guys?

It could be...

On an annual basis.

It could be well over $1 billion. It's really just a matter of having capacity and building that capacity thoughtfully. You don't want to overbuild capacity and then in the event of a downturn, be stuck with a bunch of under absorption. So that's something that we're monitoring. On UOP, I would say we're seeing a lot of orders also in the projects that we talked about. So the backlog is extremely strong. Now the question is when these projects start to convert into revenue. And we have a good line of sight to the second half of this year where we'll start generating revenue for our projects. I would say catalysts, there's still a lot of overcapacity in catalyst because of, one, the oil prices, feed prices and the spreads were not attractive. I think with everything that's going on in the world, those spreads are starting to become attractive and that overcapacity industry is -- I can -- I get a sense is burning off. So I...

Capacity at the end user not in the catalyst or in the catalyst industry.

In the petro...

Yes, yes, in the end user, yes.

End user side. Correct. So it's a really good setup for the business. And on PA side, I would say it's predominantly PA from us is predominantly OpEx. The projects business is growing in MMM, life sciences, utilities, also LNG, traditional core energy is, I would say, still depressed, but that business should be a mid-single-digit grower for us in the second half as well.

So mid-single-digit run rate for the segment in the second half heading into next year? Is that the way to look at it?

Look, I mean, we're being, I would say, prudent. We're not assuming in our guide a lot of improvement in P&T, but the orders would indicate, assuming no significant disruptions in geopolitics that the market is coming back.

So a little bit of upside potential for second half relative to guide?

Maybe I wouldn't want to commit to it yet because a lot of things can change, but the backlog is strong.

But I guess longer term, if we think about what the growth drivers are here, what is the long-term algo? I mean, obviously, we think about these downstream oil and gas end markets as being relatively low growth. Can this be a GDP business? Can you have enough technology here to be GDP plus?

So if you think about how we diversify the business and if you think about us getting into LNG, us picking up Johnson Matthey, us picking up Sundyne, which has a strong play in the aftermarket, we're diversifying the business. And our aim is for the business to be a mid-single-digit grower through the cycle and less volatile. Great portfolio, as you know, #1, #2 products in many of the markets. So we're actually quite excited about that business.

And I guess from a regional perspective, what should we be watching outside of obviously what's happening in the Middle East? What are the -- what are the big hotspots for?

So generally, what we've seen is Europe to be slow. Now that said, if you think about Latin America, if you think about Mexico, if you think about Brazil, so Pemex, Petrobras, huge opportunities for us. Customers are investing. Venezuela, we have over 400 assets in Venezuela. That's -- but short term, it's not going to grow, I don't think. It's really more of a 3-, 4-year type of cycle. And -- but we're cooperating and working with some of our customers like Chevron to assess the situation and be ready to invest in that market if the background allows it. Meta continues to be strong. We see a lot of activity in Africa as well. And China for us is doing a little bit better than it did last year. So we see a lot of growth and green shoots, if you will, but we just have to be patient.

I think there were some growth businesses here you guys had. There were some -- I don't know, like a $1 billion of orders or something you guys used to talk about. Is there still this pocket of growth businesses, whether it was like the plastics recycling or any kind of the new technologies that we're watching? Because I feel like we're back to now talking about the core of the traditional business.

Yes. So the new technologies are down right now. We'll continue to invest in R&D and NPI. We're quite confident that these markets will come back, but that's more for us a 2028 event based on everything we're seeing.

Okay. So a bit further out into the future.

What's offsetting it is really LNG right now.

Okay. If -- let's just pretend that the war in the Middle East ends pretty quickly. There is some supply coming from Venezuela, oil price goes down quite a bit. Is that a positive for you guys because you're going to see more -- a bit more activity and volume? Or is that a negative because that will have an impact on spreads? How do we kind of look at a normalization? What's the right price of oil for you guys, do you think that you're comfortable with for that business?

I would say $70 plus. Okay. So if the oil stays above $70, the spread should be good enough for our customers start investing in it again. And time is on our side because these short-cycle catalysts, et cetera, they have a shelf life and then deteriorate. So if demand -- generally, the industry demand improves, then customers will need to be load, and that's obviously good for us.

And then I know this is a little bit of an area where you have software. You guys were kind of a leader in software and HPS. How do you see that business? And any -- I kind of have to ask any threats from AI there? I mean I think it's very highly mission-critical and domain expertise driven, but anything on the software side there and HPS?

We're quite bullish about that business. So that business is about $900 million, approaching $1 billion. It's predominantly ARR, and it's growing at the high single to double-digit growth. So it's a great business. It's very CapEx light. And we have a tremendous installed base and tremendous products. And we're -- like I said earlier, we are moving away from traditional energy into MMM, life sciences, utilities, and that transition is working quite well for us.

And you guys have in HPS historically not had a strong position in field devices. Is that something that maybe is with a fresh look as a new company could be interesting? Or you kind of want to focus on the core in HPS?

Right now, we're focusing on the core. We think that what we have as far as our play on software and the software strategy, that's the way to grow and continue to penetrate our installed base. We still haven't penetrated our installed base as far as aftermarket and decoupled growth. So that's really the strategy. We're embarking on right now, similar to what we've done over the last few years in Building Automation.

Okay. And then one last one, just on Matthey. I know that acquisition, they had -- you guys kind of repriced that. Any -- what's kind of the financial update there? And what kind of impact will that have this year?

So I'm targeting August close, assuming we get for all the regulatory approvals, things are progressing well. That price adjustment you saw there just reflects the state of the catalyst business in general industry and how the business performed. But like I said earlier, we like this business for a strategic fit to Honeywell and to our PT business. And this is a long-term play, not something that we're expecting to get a return on day 1, given where the industry is right now. But great technologies, great team, and I look forward to having in the portfolio.

Okay. On IA, obviously, the smaller of the 3, I think roughly $4 billion. Maybe just talk about what's left in there and how you view the drivers going forward? Obviously, to me, this segment probably will evolve over the next couple of years perhaps.

It will. Actually, that's the business I'm most excited about as far as the margin expansion and how it's going to contribute to the portfolio. With TLW coming out, what you will have left is really mission-critical applications in measurement and sensing. And that's a business that we know extremely well. It's highly fragmented, critical products, very high cost of failure, customers who are willing to pay price for performance. And we have a management team, specifically Pete Lau that joined us recently, who knows very well how to run this business. Pete ran fire business for us 2 years back, and we're deploying very similar play on that side. We'll -- probably if you look at the portfolio, that's one business where we would like to do some M&A, but we will be selective and we'll be patient. We -- vis-a-vis our last 7 transactions, we feel bolt-ons and tuck-ins are the best approach for us. That allows us then to plug in businesses that are accretive to growth in the right verticals, if you will, accretive to underlying business margin. And we're looking for businesses that we can actually, from a strategy standpoint, absorb into the portfolio. So you think about the strategy of creating installed base and mining installed base, that's something that we want to do. So we'll be patient, but definitely, that's the -- that we focus. I would just add that in the short term, I'm personally focused on paying down debt of the company and get our leverage ratio below 3 by the end of this year and then 2.5 on a longer-term basis.

That's on a -- on a gross basis. And just remind us where you're going to come out on day 1 of the RemainCo on gross and net?

Sure. On -- we'll come out somewhere around 3.7, 3.5 on gross. I think 2, 2.5 on net. And obviously, we'll take it down from there.

Right. Just stepping back to IA for a second. Just talk about how you look at the -- I think there's now maybe 3 pieces of the business left. I know your segment reporting is a little bit different than that, but I think you talked about it as sensing, maybe sensing and measurement, maybe those are the 2 -- how should we think about the 2?

Industrial measurements and control and smart energy. That's really in thermal solutions. So kind of that's the -- those are the big businesses. And what Pete is really focusing on is self-help story. So that business is for us in the short term, it's about better execution. So better pricing execution and say do as far as managing discounting, the business has a lot of channel go-to-market where we need to do better as far as pricing discipline. Better supply chain execution. Post COVID, we just took our eye off that. So we're working on that. Strong NPI. We grew NPI investment in our business, this business last year, about 10%. We're adding about incremental 6% this year. So -- and we're starting to see the benefits of it. And then focus on growth verticals and migrating to growth verticals. So I will be quite disappointed if this business is not mid-single grower second half of next year.

Second half of next year?

Next year, you think about NPI, NPI cycle in this business is 18 months. It's one thing to engineer the product and get it to the market, but then you also need to get it certified. Majority of our products in this industry, just like in Building Automation, they have to be either specified or certified. Ultimately, that process takes 9 to 12 months for most of the NPI.

So it's really low singles. It can still grow in the near term, but low singles and then you kind of...

It will be flattish in the first half. We have some tough comps in the second quarter, both in IA and PT. But post that, it starts inflecting in the second half of this year. And like I said, everything we're doing should -- we should be mid-single-digit grower next year in the second half.

Okay. And again, just remind us of what's in there. So it's the metering business, it's the sensors.

Sensors, smart energy.

Smart energy. And so on that front, are there any platforms here that you're looking at versus others? Is there a kind of a diversity of opportunity that's outside these platforms? Or is this really where you want to -- this is what you want to build off of synergistically?

That's something that we want to build off of. And the reason for it is, we want to protect consistency of the model and go to market. It's extremely difficult to manage a business that $7 billion and you have 12 P&Ls in it and each of them operates differently. So we're trying to get consistency, have teams focused. That's the reason we actually are shedding TLW to get more consistency in our business model and in order to -- for the teams to be more focused and have a better schedule.

Is T&M kind of an offshoot here that like whether it's electronic test or -- I know it's a little bit outside of what you guys do. Is that an area that could be of interest? Emerson bought NATI, that type of portfolio?

We're not shutting down any, I would say, any targets right now and keeping the optionality for us. The key for us is to make sure that the businesses are in areas where the technology stack is quite high. So where you need to innovate, you need to get the product certified or you need to be specified where you have not only creating installed base, but this installed base as aftermarket. And in terms of M&A standpoint, we're looking for businesses that can be accretive to us on day 1, meaning they're in better end markets, better verticals, et cetera.

But I think the key point here is you guys talk about it is Industrial Automation. this is not meant to be, hey, look at the discrete systems automation players. We want to kind of replicate that type of business. This seems like it's a little more of a, for lack of a better term, niche market approach in a bit more fragmented.

Industrial Automation is extremely fragmented. And whether it's...

You need a PLC, do you need to go in that direction?

No, we do not. And for us, it doesn't really -- I would say, ultimately, it doesn't matter kind of which end market it is as long as it has those characteristics that fit our business model.

Okay. Any questions out there? I know it's early. Just moving to the bottom line on the margins. This year's margin expansion is fine, but not necessarily what we've known Honeywell for over the years. How should we think about the algo here going forward on an incremental margin or a year-over-year basis?

I feel really good about our margin story and how the business is going to evolve. And we spend a lot of 2025 setting this up, one, from a portfolio transformation; second, just from a company transformation inside out. So as we're separating Aerospace as we separate Solstice, we got ahead on our stranded cost takeout, which is going to be a significant driver of margin expansion over the next 12 months. We have better pricing discipline. Our NPIs are delivering better pricing as well. And M&A is accretive. So you'll see it on June 11, but I feel we have a very compelling story on the margin expansion.

And then just thinking about the moving parts, you guys have always had a pretty complex below-the-line dynamic.

That's right.

So just corporate for clarity there, maybe talk about what that number will be on day 1 and then what you're able to work out of that over a 12-month period. There's some moving parts there.

So our corporate number you see today is about $650 million. $400 million of that is net corporate costs $250 million is -- about $250 million is continue. So that's $650 million on day 1. On top of it, what you'll see on day 1, you'll see $350 million to $400 million of stranded costs. So essentially cost that we're assessing today to Aerospace that will come back to us. And then we'll work for 12 months to take this cost out. And we'll also be receiving from Aerospace and trademark, which is about $150 million a year. So that's going to be net down to the corporate cost.

And that will run into corporate. So we'll just see one line item that will start. This might go roughly $1 billion, whatever, and then $150 million -- $1 billion plus and then $150 million off of that.

That's right. I'm trying to keep it simple.

And then the $350 million, $400 million comes out over a 12-month time period?

12-month period. Yes. So we are talking about 12 to 18 months where we are today and based on how the teams have executed, I'm confident we'll take the cost out in 12 months.

Got it. And is there -- is that cost to take that cost out embedded in the onetime cost that you're thinking about in the deal? Or is this something you'll see in restructuring running through as well?

So it's both. It's because some of the restructuring we're doing are related to the separation, others are not. So you'll see from us probably going forward annual basis, $50 million to $150 million of restructuring costs. I would say this year, next year, those costs will be lower as we essentially took care a lot of the restructuring with the onetime costs.

And then lastly, just the pension elephant in the room has always been a big debate for you guys. How are you thinking about reporting the pension income going forward?

So maybe I'll start with this. Pension is overfunded. It's over 40% overfunded for Honeywell. The way we're handling pension, we'll split the pension between Aerospace and RemainCo based on essentially how employees fall out based on their service and the overfunding will proportion go with that. So for file commission, we're discussing whether to keep the pension in our financials or keep it up. We're gathering feedback and we'll -- obviously, our Board needs to opine on it, but there are 2 schools of thought on it. But like I said, I'm trying to keep our financials very simple going forward and make sure that there is a very, very clear connection between earnings generated and free cash flow generated.

Maybe we can -- who thinks that Honeywell should remove the pension expense from the income statement despite it hitting earnings even though it's noncash?

So for those not in the room, it's about 80%.

Anyway, right.

Thank you for the feedback.

Really appreciate it. Thank you.

Thanks, Steve.