Great. Well, good morning, everyone, and thanks very much for attending the first kind of formal day one of the 41st Barclays Industrial Select Conference. It's my pleasure to open here with Mr. Vimal Kapur, Chief Executive of Honeywell. I think Vimal will start off with some slides, and then we'll go through some questions. And obviously, anyone from the audience, please feel free to ask as well. There'll be the opportunity in a few minutes' time. So Vimal, thanks very much.
Thank you very much. Good morning, everyone. A few quick comments. I would say 8 months into the role, and what I can say is that, I feel confident about the strategy we are executing and how it's shaping up. There are three elements of the strategy, and I'm sure we're gonna talk about that during our conversation. First is how we accelerate organic growth, and there are elements of that I'm focusing on. There are three, three pillars of that: how we think about new products, how we think about monetizing install base, and how we drive our growth in high-growth regions. And we're making good progress in each one of them. Then operating system. Honeywell always is passionate and proud of its operating system. We continue to enhance it.
Historically, we focused on functional processes like supply chain commercial excellence, and now we are pivoting more towards business model standardization, and we can talk about that. And finally, optimizing portfolio and making the right capital allocation is a big part of our priority and certainly working on how do we continue to improve the portfolio quality as part of my priority. So on that point, you know, many of you would have seen the announcement we made on the Carrier deal, $5 billion of commitment, just shy of $5 billion. We expect to complete the deal during the course of this year. Adds another leg in our Building Automation business strategy. So a great demonstration of our execution of our strategy of bolt-on acquisition. Then Quantinuum. We completed the pre-money round a few months back, got $5 billion valuation.
So it continues to be on the progression to make it an independent company, and, you know, we'll see how we hit the milestones, but the goal is over the next, you know, time period, we do that. And then, the overall capital allocation has been in the $8 billion range. This year, just based on commitment we have on Carrier, it likely will be $10 billion, and we'll continue to stay active on all four elements of capital allocation: dividend, capital spend for our projects, share repurchases, and M&A. The overall, you know, this is probably my biggest focus: how do we deliver 8%-12% EPS growth to our shareholders? And that's what I work every day, whether it is driving through segment profits 6%-10%, and then we add to that share repurchases and M&A accretion.
Then 8-12, you know, that's what, what has been our focus. If you see our performance over the last few years, the top bar here is our long-term targets, and then you see our performance in 2023 and 2024, our commitment. They are well within the range of our commitment. That's a punchline. We continue to make Honeywell better every day. We're making it more focused on 3 megatrends and 4 business models and delivering 8%-12% earnings growth to our shareholders. With that, I'll open up to you, Julian, for questions.
Thank you, Vimal. Maybe, just to dial it back to sort of the short term for a second.
Mm-hmm.
Maybe just give us any thoughts around kind of current demand trends.
Mm-hmm.
And obviously, Honeywell has a vast breadth of business models and kind of short-cycle, long-cycle elements. So any thoughts on that, please?
No, as we spoke a few weeks back on our earnings call, you know, the two parts of our order situation, long-cycle order remains strong. We finished Q4 with 8% up in our backlog. Short-cycle, depending on the segment, they're in a different stage. We saw some segments showing recovery. We saw good bookings in our scanning and mobility business in quarter four. Some parts of our chemical business recovered. And that's a gaining item for this year, that how the short-cycle will sequentially improve every month and every quarter, and that's gonna determine 4%-6% range of our top-line growth. But I would say the strong long-cycle, short-cycle at trough levels, and sequential improvement is what we are really watching.
Perfect. On that, you know, organic sales growth guide of kind of 4%-6%, if we don't see that short-cycle pickup.
Mm-hmm.
Kind of where do we end up, in that range? And maybe help us understand, is the short-cycle pickup dependent on comps or an improvement in base volume demand? You know, what are some of the main things that people should be looking for?
I think the big, big punchline, Julian, is that we are not looking for some massive inflection to get to a 4%-6%. Just to do an easy math for everybody, if we simply grew aerospace by 10%, Honeywell grows 4%. So it means the rest of the business doesn't grow at all, which is just a hypothetical scenario, just to make my point. To your specific question, I think there are two factors. There are three important points in that. First, we are not looking for some massive inflection, some 10%. We're looking for small sequential improvement on a quarter-on-quarter basis. Why it is possible, why it's highly likely, is, first, the comps are easy. We grew much higher in H1 versus H2, so we simply benefit from our lower comps.
Second, the self-help actions we have put in place, they scale to a certain degree and offset some risks we may carry. So all that put together gives us a confidence that, we're gonna have a sequential improvement. And that's gonna leave us in 2024 at an exit rate which are gonna be attractive for 2025 because we are seeing sequential improvement every quarter, and that's how we are executing for the year at this point of time.
That's helpful. If we think about, you know, Honeywell, the last two decades really become kind of synonymous with very strong margin execution.
Mm-hmm.
It feels like very short-term, the topic of investor questions is more on the revenue line.
Mm-hmm.
Clearly, Honeywell has a very strong kind of productivity per degree. Maybe flesh out that a little bit more. You know, what are you doing self-help-wise to keep the margins moving up, you know, regardless of what the top line is.
Yeah.
Is doing?
Look, the margin expansion in Honeywell happened through a systematic operating system. It didn't happen by brute force. It didn't happen because we cut costs randomly and hurt the business. So it has always been an and question that we want to drive operational productivity while we want to drive growth. But I'll admit that our results were more impressive on the margin expansion side, while we deliver earnings growth more on the basis of margin expansion versus top-line growth. Top-line growth has been of the order of 5%. If I look ahead, our focus is to continue to drive organic growth, and those are the actions I'm putting in place, that's how we drive focus on new products. That certainly drives the baseline for any business to growth. Monetizing our install base, our aftermarket business is $11 billion.
So if that grows at 5% versus 7%, it's a meaningful difference, or 10%. So how do we really maximize our offtake of aftermarket and software in our install base is our focus. And then I mentioned before, high-growth region represent nearly $9 billion of Honeywell revenue. So how do we continue to do that? On the margin expansion, I also remain confident that there is a concern sometimes we max out, but every year, we continue to get better at 40-60 basis point. Last year was 100 basis point. And it's not a magic. It's a constant improvisation of our operating system.
So, if one thing which I can say with 100% confidence, that margin expansion machine continues to get better, our operating system gets deeper, it gets more sophisticated, and we have more and more levers to drive margin expansion ahead of us for the next few several years.
One element of that, I think, is the sort of Accelerator.
Mm-hmm.
program where you've, you know, sort of split Honeywell up into sort of four business models. I think sometimes people from the outside worry, you know, is Honeywell too big, too complex.
Mm-hmm.
To drive this kind of operational change, from the top. So maybe kind of give us some perspectives on what have we seen from that accelerator program so far.
Sure. Yeah. I mean, if you look at operating system, you know, the immediate thought comes in when we launched operating system in Honeywell, that was in 2005. I was still a young leader and, sitting on that side of the table, embracing it. And it was really focused on supply chain. We really took on how we deploy systematic processes in supply chain. Honeywell embraced their production system as a guidepost and developed our own operating system on that. So that was under Dave's leadership. Under Darius's leadership, we substantially moved that to think about standardizing other processes which cut across organizations. So think about sales excellence, commercial operation like pricing, customer experience. So a question really I had was, what's the next value addition pivot for Honeywell?
The way I thought about it is that you can look at Honeywell by businesses: Aerospace, Building Automation, Industrial Automation, Energy, and Sustainability, or you can look at, regardless of the segment we serve, by the business model they create value. So when we look with that lens, projects, services, products, and software are the four business models, and standardizing that creates value because the value creation algorithm doesn't change whether you do projects in buildings or in energy or in industrial.
Mm-hmm.
That standardization gives us, depending on the business model, in case of projects, we see benefits in cash generation, reduction of risk, so it improves margin. In case of services, we are looking at how we standardize penetrating install base, which becomes more of a growth vector. In case of products, we are looking at more looking at new product introduction, which is an element of growth. So it varies depending on the business model, and more and more we practice it, my confidence of that continues to increase every time. I would say 18 months back, like any other, you know, practitioner, you start with hypothesis, and you have a belief in it.
Now, having walked that journey, the belief is turning into a conviction because we're seeing results, and that is becoming the basis of profitable growth of Honeywell to make this machine work both on the top line and on the margin expansion and on the cash too.
Perfect. I, I think one of the businesses that's proved the most volatile has been Intelligrated or warehouse automation. You know, how do you see that since you've become CEO? How should we think about any change in approach to, to managing it, for example?
Yep. So, the good news is now the Intelligrated represents less than 4% of the Honeywell revenue. So hopefully, we get less than 4% of our questions on that moving forward. But, that was on a lighter note. The way I think about the business is, the value proposition of what it does is very strong. It improves productivity in a distribution center, which is key to operation of any company within the business of distribution of different products. So it's not a value proposition issue. It's a how this business performs because customers are concentrated, and they make decisions in sequential time. So if Walmart decides to do something, they will decide something this year, and that will plow on for three years, and then they don't make any decision for a couple of years.
So it's the bit of lumpiness which we are observing because there was a high volume creation in 2021, which is unwinding itself, and as it's unwinding, no more decisions are being made. The question is why people are not making decisions even though we have a strong pipeline. It's a cycle of economy where many of our customers are in e-commerce, retail, logistics, postal and parcel. Most of these businesses have moderate margins, so their cash flows are not strong. So if they, the automation is hundreds of millions of dollars , so they wanna match their cash flow and capital spend to a certain degree, and the timing right now is not in sync at this point of time. But I remain absolutely convinced this is the right business for Honeywell. This was the right acquisition.
If you think specifically of 2024, even if we, we may not grow the business, it's around flat to slight shrinkage, you know, but margins are gonna expand. It's gonna be an earnings equivalent to Honeywell in 2024 regardless of that. So, so what's the secret sauce there? How are we gonna do that all of a sudden? This will be the first year where aftermarket will match the projects business more or less. So it continues to grow. We grew almost 15% last year. We aspire to do that again this year. So aftermarket is becoming the bigger engine of our profit pool, and then we have reduced our supply chain costs by repurposing supply chain to a more favorable cost location, so we get a fixed cost leverage on that.
So those two reasons make the profitability lesser of our challenge in 2024 while the top line will depend upon how the project actions take place. And the final comment I'll make is, given the lumpiness of it, it takes two orders to change the equation. This business has that, unfortunately, that unpredictability, which that portion I don't like. But overall, the segment is attractive. We are well positioned. Customers love the Honeywell position in that. And long term, it will remain a mid to high single-digit growth segment. There is no doubt about that. That's what it has done over the last five years. It grew too much for two years.
Yep.
But if you still take a CAGR of the business from 2018 to 2023, it still is high single digit. So those dimensions are not gonna change.
I think, you know, one other aspect that sort of exercised a lot of people in your biggest segment the last few years is in Aerospace. It's around supply chain.
Mm-hmm.
Kind of where are we on that, and when do you think we can stop talking about that as a big headwind?
Mm-hmm. Look, the supply chain made good progress in 2023. Our volumes grew 20%, and top line grew 14%, and that will continue in 2024. This segment will be constrained by supply side and not by demand side. Demand continues to be strong by OEM and Aftermarket. Supply constraint remains. The good news is now, if you look at split the supply chain of aero into electronics and mechanical, electronics supply chain has healed. We don't have any component constraint or supply constraints on that side, and that's a large part of the Honeywell business, given our place in cockpit systems, in avionics, radars, etc. The mechanical supply chain is still under healing, and that's where it is narrowed down to three product lines, three areas. It's bearings, it's machining, it's casting. And that's common for entire industry. That's not a Honeywell-specific constraint.
If you go to other OEMs, other supplier base, you're gonna report you think the same three, and then they're all linked to more or less same suppliers. So it's really the last mile of this. So how it's gonna get relieved is continue to focus on those suppliers to help them get better and develop alternative suppliers to those, which takes time given these are certified products. You not only have to redevelop the supply base but re-certify the product itself with the new part. So 2024 will be my view is that 2024 will be the supply chain will get healed to a point that the constraints which it presents will not remain a point of commentary from next year. But if specific to us, we have already guided double-digit growth in Aero. For 2024, there's no doubt in my mind that's gonna happen.
The supply chain actions remain robust, and we will deliver on that.
Great. And then maybe switching to capital deployment.
Mm-hmm.
You know, I think you've made it clear with that, kind of earnings algorithm slide earlier. You know, 1-2 points of earnings growth annually from acquisition. That's maybe, you know, $100 million+ of net income.
Mm-hmm.
So maybe, you know, $2 or $3 billion a year baseline M&A spend. Is that the right way to think about it? Then you have the scope to sort of move that up if the right target comes along.
Yes. I mean, as you saw, the enterprise value for Carrier is $5 billion. I'm not looking to do deals with a target to spend $5 billion or $10 billion a year. It's driven by the fact that we are focusing on three megatrends: automation, aviation, energy transition. As long as we have a right target, it makes sense to our business. We are able to compound growth, improve quality of earnings. We should do the deal 'cause our commitment of $25 billion spend in three years is the lower end of our bar. It's a floor. We have capacity in our balance sheet, and through our cash generation to go all the way up to $40 billion. So that's a kind of a range. So if more deals come in which make business sense, we will do it.
Corollary is also true. We're not gonna spend money just because we have a target. I have no target that we are gonna spend money, but we have a bias that we want to improve quality of the portfolio and do M&A more actively, and look for the opportunities across all segments.
When we're looking at the sort of types of target you mentioned, the megatrends as kind of the main.
Mm-hmm.
Areas to think about. But I guess when we think about, say, cyclicality, you know, has the Intelligrated experience made you.
Yeah.
Wary of buying cyclical businesses? And maybe just characterize kind of the health of the M&A pipeline overall.
No, the pipeline is active in all four business segments: Industrial, Buildings, Aerospace, and Energy and Sustainability Solutions. Some has more targets versus others.
Mm-hmm.
Fundamentally bolt-on, with an enterprise value of $1-$7 billion, and they should be additive to the growth of the core. That's a fundamental principle I look at. So if you see we acquired spend towards $700 million to acquire Compressor Controls, it's additive to HPS. We do process automation. Reliability is a big problem for our customers, so it adds capability of that business, which does that. Similarly, Carrier acquisition adds to the capability of building automation to add one more pillar in addition to the two pillars, strong pillars we had. So that's the theme on how we are thinking about it. I would argue that giving organization clarity on three megatrends provides absolute north star on the nature of acquisition we should be looking for 'cause these markets are very wide and very big. We are not really looking for discovering a theme.
We already have themes which are long term.
Mm-hmm.
Specific to the target, apart from the objective of improving quality of our portfolio through gross margins and recurring revenue, indirectly says that we are, we will avoid businesses which are cyclical. I personally like businesses which are more product business model. It's simple. You ship the product, and you get cash. You know, the project business models, there's nothing to dislike it, but it's inherently more difficult. You have risk in the projects. The cash flow is choppy. And we love what we have but likely not add more there but add more in terms of software, services, products which are more attainable in from a cash flow perspective.
That's helpful. When we're looking at, you know, you mentioned that sort of range of $25 billion-$40 billion of total cash to spend, you know, should we assume that Honeywell may run just with higher leverage perhaps on the balance sheet than the past or not necessarily?
No, not necessarily. We are proud of our A rating. We don't wanna lose it. So the short story is that we may have an elevated level for a while, but we work with the A rating agencies to show them, demonstrate to them how we're gonna have our cash flow bring our leverage back to normal. And that's a work which we constantly do with them all the time as we are doing in case of Carrier acquisition. But I have no plans. My predecessors have worked too hard to get this credit rating, and, you know, I'm not gonna destroy it. This is one of the crown jewels of Honeywell, and we're absolutely gonna protect it.
On the, you know, the sort of divestment side of the portfolio management, you've talked about this sort of up to 10% of sales. How should investors think about the what determines the, the timing of that? Would you rather buy first then sell later, or they're independent? Any thoughts?
I would say that we are not. I'm not hurrying up to sell businesses at a pace. So needless to say that we will do that when there's a right valuation, but more thinking about doing it over a period of, say, three years. So do something every year is a model. And hopefully, the additions outpace the subtraction from a beta perspective. It may not be from a top line because sometimes we may have a top line business we want to divest with the lower margins, but what we bring in may be a lower top line. But that's a fundamental principle. We have identified the assets. We are putting action. I think Quantinuum is a great example which is in a public domain.
Yeah.
I was very proactive about it since I started to say we will put a path to monetize our, you know, our stake in that entity.
Mm-hmm.
We are executing it. We hired new CEO. We got a pre-money round. The clock has started consistent to what I said. It's a few things you have visibility, a few things you don't, but we will see progress, as the year progresses, on even some of the subtractions we have to do apart from the additions what we are making.
Perfect. And then I think now we have to switch to the audience response survey questions. So if we could, and I think you can press on the button hopefully, and then we'll get some results. So do you currently own the stock? overweight, market weight, underweight, or not at all? Okay. So a lot of people to be won over there. Next question, please. What is your general bias towards Honeywell's share price right now? Positive, negative, or neutral? So fairly neutral, 70%. The next question, how will its through-cycle earnings growth rank versus, say, broad, you know, multi-industry peers above, in line, or below? So in line, about 60%. The next question, what should Honeywell do with excess cash? There's a long list of alternatives. So we could yeah, we can start with that.
Everything.
Do it so hodgepodge, internal investment, the main one, and then non-internal would be big, bigger buybacks, let's say, and, and the dividend seems satisfactory to most. The next question, number 5, what multiple of current year earnings should, should it trade at? Shouldn't be much in 1, 2, or 3, but let's see. So the most popular answer is sort of around 20x, so maybe a, a market multiple or slight premium. Question number 6, what's the most significant kind of headwind? You know, why is most of the audience, you know, neutral on it or not? Owners, growth margins, capital deployment, or strategy? So mostly core growth, which, yeah, goes back to a lot of what we've been discussing. Next question, please. I think that's yeah, that's the main wrap of it. So I think.
Oh, nice.
Yeah.
I wish our politicians get to do that.
Right. Real-time feedback.
I'll try next time.
No, so I think there's a couple of things. I think one is on core growth. Yeah, I, I think Vimal, you know, when we've this has come up in conversations around, you know, does Honeywell focus - I don't know how to put it - you know, too much on.
Mm-hmm.
Margin? Is there a need for catch-up investment? You know, that discussion comes up again and again. Any thoughts you'd give.
Good.
And also the point around, you know, is the portfolio too broad? So there's always something going down, offsetting something else, getting better. They're, they're two different questions, but they both go back to that point on core growth.
Yeah. I think, look, the Honeywell portfolio was impacted both on the entry and exit of COVID on either side of it. When we entered the COVID, we were impacted in aerospace and energy. They were probably the three worst segments: travel, aero, and energy, and we had two out of three. So.
Mm-hmm.
So that was 2021 picture. We took much longer to unwind given nature of the supply chain we have and distributor stocking. We talked about Intelligrated, so it rolls a lot and unwinding. So I think we were a little bit dispositioned with the portfolio, but the good news is that's behind us. All the COVID noise up and down is behind us. I find this year is more normal as the short-cycle recovery happens in the second year and the organic actions we are putting. I have no doubt in my mind that we are gonna deliver on our organic growth. This is not if. This is a cyclicality which we dealt with due to COVID, and we are gonna deliver performance on the strength of our organic action. I wanna make sure that everybody is nobody carries the impression that we put underweight on growth action.
This is where I spend my time, and this is where we will spend our dollars. So and I know we have to deliver results, and we will as we have guided for this year.
Do you feel on that complexity point, you know, it's been eight months in the CEO job, you know, do you find the organization kind of sufficiently responsive?
Absolutely. I think organization likes, and I think most of our customers and shareholder likes the clarity on three megatrends. I think it makes Honeywell simpler to understand. And that provides us a north star on what Honeywell we are building, for the times ahead. It's easier to consume but also easier to understand, and organization is excited on the simplification. And my past history having run multiple segments in Honeywell, when you have the segment clarity I was leader for process automation for about four years and building automation for about three years. Single segment, very clear purpose. You execute. You get results. But when you have a little bit complex segment, fragmented, lack of clarity, you do not get the long-term flywheel impact of it. And I'm a big believer of that, and that's why we did the simplification of Honeywell.
Last question, you know, for those who might say, you know, the solution to the core growth question is, you know, disaggregate, break up, what have you, you know, what would you say in response?
I would say that, look, my goal is my, my job is to deliver 8% to 12% earnings growth. We are putting actions to deliver that by running Honeywell as an Intelligrated operating company. We are proud of our operating system. It creates value. But if any situation comes, which I do with the board every year to look at optionality, does the breakup is a superior option versus being together, we'll absolutely look at it. But current focus is to run it effectively and generate the earnings growth.
Perfect. Thanks very much.
Thank you.
Thank you, Vimal.
Thank you, Julian. I appreciate it.
Thanks.