Well, thank you everybody for being here. I'm super excited to be here. And no better way to kick off the Twelfth Annual Laguna Conference than with Vimal Kapur, Chairman and CEO of Honeywell, the largest U.S. industrial company by market cap. So you've been in the CEO role now for a bit over a year. So I guess, where do you think Honeywell stands today? And looking back over the last year, what have been the biggest challenges for you in the role, and what do you think have been the biggest successes for Honeywell over the last year plus?
So thanks, Chris, for getting me. It's my year two to this conference, and we were debating it's the same hotel or a different hotel. I and Sean have not concluded that argument. But, it's good to be back. And, last year when I came here, I was early days into my job, and I would say that I was more in the strategy formation stage. Now, I can say confidently, we are more in the strategy execution phase. And if I reflect back, my fundamental thesis was two-fold. The first is, the Honeywell portfolio needs some active management if we have to be growth-oriented. Because we have set up some excellent assets, but we also had a few things which dragged us, and at the same time, we are missing some opportunities.
So if we do not do active management of the portfolio, we are gonna not make progress on expectation, which our shareholders have. And the second learning was that we really don't have one consistent business model across Honeywell. What is Honeywell business model? Okay, we have four segments, and every segment know how to make money, but there has been no consistent team. So I made a choice that Honeywell business model is all about creating installed base and monetizing installed base. We largely do that, but do we do that consistently? It, to me, is a set of opportunity, and when I say monetizing installed base, software fits in right there, because you can monetize the services, more so in today's world, with connected services software.
And I took on those two fundamental principles to say: We need more active work on portfolio, we need more active work on business model transformation, and then took on that journey from execution from that point onwards. And one year down the line, I would say the portfolio work has made progress. We've made several acquisitions across all the three segments. One of the other thing I did was, I should have added in my comments, is I said I want to just limit Honeywell to three mega trends: aerospace, automation, and energy transition. It's too wide a company, it's hard to understand, let's make it simple. And then, on the progress on the two items, essentially on M&A, many would have observed, we have made, several acquisitions.
They're all either in aerospace or in automation or in energy transition, so we are extremely disciplined now to what we stated. On the exit side, we're doing work. We have been quiet about it, in the best interest of our shareholders. I can only share that a lot of work is being done, and I'll be personally very disappointed if we don't demonstrate progress in 2024 . A meaningful progress, not, not on the edges and say: Okay, this seems like a check in the box. I do expect to, you know, make progress on that. So I think on the portfolio front, we have activated the wheel, and I do feel now we have the right trajectory. We need to keep on it.
I wanna make portfolio management as an active part of my tenure in Honeywell. On the business model side, again, we have done a lot of work to run Honeywell with this four business model: project services, and products, and software. And really develop a culture that a business model is for growth. Because business model, the moment you think it, you always think about, Oh, it's a, it's a cost takeout model. You know, that's how we all grew up with Lean and Six Sigma and those tools. But we are challenging the notion that we can have a business model for growth, and we are putting that at each segment level to make sure that we have this whole culture of create installed base, monetize installed base. And we're making progress on that.
I would say more in the middle innings versus the later innings, but we're making progress. On your question on disappointments, I would say, I'm typically a restless person, so speed of execution is, could be better, but also, I recognize that it's a company with, you know, 95000 people and operations in, like, 20 major countries, so things are not gonna move at my pace. We have to take the organization along with us, change the mindset of the culture. So speed. And I would also recognize that I'm personally disappointed on how the stock has performed over one year. It's been flat, you know, $200, give and take, and obviously, we fully understand we need more work to demonstrate growth across all four segments.
So those are two, I would say, more of a disappointment, but I feel confident on the progress we are making and the direction we are headed for.
Yeah, no, appreciate that. You know, and as you try to return Honeywell or, you know, make it a more growth-oriented company, you've listed delivering organic growth on the upper end of 4-7% as your number one priority. You know, certainly, end market's getting better helps that. But when you think about what the company can do, whether it's the active management of the portfolio whether it's, you know, maybe more investment into the business lines, you know, how would you think about that active piece, or for, first, the more organic investments to get growth going?
So to me, the growth is. First of all, I do believe that when we said 4-7% and upper end of it, not many industrial companies have done that for a long time, and Honeywell also hasn't done for a long time. So I'm a bit being contrarian to our own history. Now, for the last few years, we have demonstrated 5% growth. This year, we have forecasted 5-6%. Last year was 5%. So we have been in that zip code. The question is, can we sustain? Now, one can counterargue to say, Oh, that's because of Aero. The point is, if our portfolio is generally like Aero, we don't have to say it's because of one segment. That's why the portfolio becomes more important. I see four drivers of growth.
If we have to grow on upper end of four to seven, four things needs to be true: Portfolio has to be right, business model has to work.... We need to be pointed to the right verticals in our portfolio. Having a good portfolio, like in building automation, what if 100% of our business was in real estate, right? I mean, answer is wrong answer. Good portfolio, bad place. So we also need to be pivoted to the right verticals. And finally, we need to have the right new products, which make us compete and take share in the market. I told take the sum of all four. In the businesses where we do this well, you know, we can take the growth of aerospace for granted. We are growing at high double digit for several quarters.
It's not only the market demand and supply execution we are doing, but also the business. If you really look at our end position at the portfolio is great. It's a nose-to-tail business model, quite unique, because not many people practice that. They really monetize their installed base, they are pointed to right verticals, they move it very aggressively to defense as the opportunity is coming up, and their new product portfolio is impressive. So the growth is occurring because they're doing this, and when you don't do that, in some other segment, our challenges are, like in industrial automation, our portfolio is not growth-oriented in some portions. We are having headwinds on the end markets, or we are not positioned in the right verticals, even though we have the right portfolio.
So to me, fixing the fundamentals, but if I look ahead, you know, I'm sure many people are curious what's gonna happen in 2025, even though we want to keep discussion long term. I think the setup is good because when I exit, you know, Q4, where all the four businesses will grow after a very long time. I think it looks like a distant memory when Honeywell did that, but we are going to do that in Q4. We have, you know, good backlog, good setup for that. And 2025, we'd. That trend will continue. Now, there'll be variability.
There will be still an upper end and others may be in the other side of it, but it's gonna have this early demonstration of the dialogue I'm having, and Honeywell is becoming a growth-oriented company. All segments are growing. It's nice to have a debate now why this grow four, it could have grow six. Okay, that's a nice debate to have, but we will be posturing to the, you know, another good growth year coming ahead for us in 2025 .
Yeah, no, appreciate that, and you know, when I look at growth versus the peer group over the last, you know, three or four years, you know, the growth's been a bit softer. But margin expansion has been kind of the other side of that. A nd you've. You know, earnings and operating profit has stayed good on the margin side. I guess, how do you balance the two? Because it feels like on some level, you know, driving growth, you know, could be, you know, have negative implications for margins or a bit of a headwind if it requires investment.
I mean, I think what we have learned over the last since COVID is that we have really learned how to do balance between price and volume. And 2021, you know, we forget the history very quickly, the whole inflation when it occurred. 2022, we really pivoted heavily towards pricing, and our pricing was in high single, some businesses even 10%, and that delivered excellent margin expansion for two years in a row. But we are conscious of the fact what work we have done over the last, specifically in 2024, is much deeper understanding of price elasticity. Where there's an opportunity of volume versus price, we were a hammer in 2022. We want, because we are protecting Honeywell's margins. I mean, there was no other option. So Darius did the right thing by pushing it hard.
But now we are becoming more sophisticated. And interestingly, during 2024 , the inflation dynamics have become so variable in the planet, that having a universal pricing strategy is no more a game. I mean, other than China in August, and there, there's nothing, the word inflation doesn't exist. The word is called deflation there. So how are you gonna raise price there? I mean, you have to think about how much cost I can reduce and how much volume I can gain. And if you do not know that equation, you will keep losing share because domestic companies are doing that. U.S. inflation, we still continue to observe 3-4% range. Europe, it's somewhere in the middle. So to me, the balance is gonna be all about, we get a growth and a balance today, both from price and volume.
This year is a demonstration of that. I mean, we're gonna get price around 3%. That's what we had forecasted. Volume will be 2% to 3%. I would expect that that will be a generic model moving ahead. I mean, I can't give you a number for 2025, but it will be in a similar zip code if we have to look ahead for next few years.
Appreciate that. And, you know, Q2 was maybe a little bit opposite of what we saw in the prior quarters. You know, the growth picked up b ut then the margins, you know, kind of stagnated a bit. And when I look at the guide for the back half of the year, it's calling for a growth, you know, to continue to increase, and margins, you know, kind of more in the sideways range. Is that what investors should expect as you kind of try to turn back on the growth?
Not at all. I would say, Chris, what's—it's just a dynamic of within the portfolio, what's growing. And the growth is occurring more on the longer cycle projects businesses, and less growth is occurring relative to that on short cycle product businesses. And the gap difference of margin between them, depending on a segment, could be anywhere from 20%-30%. So every segment margin is expanding in Honeywell. We have a great year in direct material productivity, historic high. We are seeing productivity in our supply chain operations as volumes are coming up. So there's no margin issue. It's a math. Like in CAES of aerospace, the OE growth is continued to outpace aftermarket, and which is headwind for margin, good news for installed base creation.
Similarly, in building automation, the projects business have grown far greater in double digit, versus product business, which is more flattish. So it's simply a calculator.
It just says, this is the input, output wants to be this. I won't read too much into it. I would say that our algorithm of 40-60 basis points of margin, of margin expansion absolutely protected, but we need to view that on a horizon. We did 192 basis points in a row, so we have delivered essentially four years of margin expansion in two years. Should we continue to ram on it? I'd like to, but I think we are also conscious on volume growth. So it's a situation, I think how it's evolving. We probably... I don't want to read too much into it, very frankly, because every business margin expanding, VCM expanding, and we're managing fixed costs, that's what I really hold our GMs accountable for.
And if the economy is driving outcome in a different way, this is something which we can't control, and we just need to, you know, respect that.
Yeah. No, maybe moving over to the portfolio. You know, the company has a lot of dry powder. You know, $25 billion plus was highlighted in 2023. You guys have done, you know, maybe $10 billion of deals, but a lot's left. You know, you guys have been pretty clear that the focus is bolt-ons 1 billion is 7 billion. Big deals for most companies, but bolt-ons for Honeywell. I guess my question is, why do you guys believe that smaller bolt-ons are better than maybe something bigger and more transformational?
You know, if I have to simplify Honeywell and make it more focused, doing more transformational deal is not a smart idea. Every segment we operate have large opportunities by default. We have opportunities in aerospace, we have opportunity in energy transitions, we have opportunity in automation. Therefore, bolt-on gives us an opportunity to drive the better execution at lower risk. And fundamentally, I have a rule of five when we do an execution. I look at five things. It has to be bolt-on to a business. So some business leader has to raise their hand to say, "I really believe in it, and it's going to, we are gonna do X, and my business is gonna do even better." So it has to be bolt-on. It has to align with three mega trends.
Also, I look at very carefully: is it pivoted to end market, which are higher growth in the next ten years, and if you observe the investment we have made, they are more on defense, they are more on LNG. All those things are projected more higher growth compared to the base segment, so is it growing? That's rule number three. Rule number four is sales synergies. Honeywell will get cost synergies, make no mistake. I mean, that's, you know, we are a machine, and we'll get the run rate cost synergy, but if we do not get sales synergies, we are not adding any value as a..., so that's rule four, and rule five, of course, is a financial metric. We have to be disciplined. There are no trophy projects.
We did, while you are aware of, winning four, we did lose one deal during the course of the year, which we wanted to win, but the returns were not coming into our ZIP code, so we are not gonna do that. We do want earnings accretion in year one, after year one is over, and we want a 10% return in year four or five. That's our metric. So when I look at all this, this discipline actually gives us a strong momentum. It's rare in a large company when the rules are so clear. You can say, this sounds very logical, but it's not very common in large company, the rules are super clear like this. So inbounds have increased a lot from my own team, and interestingly, inbounds have increased a lot from bankers.
Some of the colleague CEOs called me to express interest in, because there's a high level of clarity where we are operating, and this playbook will continue. As I said, I do expect Honeywell to be an active portfolio manager, both on addition and subtraction. I feel we are on the right trajectory there.
Yeah. So maybe, you know, following up on that and flipping to the other side of active management. You know, you mentioned earlier that I think you'd be disappointed if there's not material Divestitures in 2024. I know, you know, you can't tell us what you guys are thinking, but you also mentioned that, you know, you want businesses where you can monetize an installed base. And we see that. So is it fair when we look at the portfolio and we think, "Hey, what doesn't fit here?" Is that the main criteria?
That's right. I think the answer should be known, and I won't answer the question. I have to learn something from the debate. There are some questions you don't answer. And, but I think on a serious note. It should be obvious, because if I have to be true to our statements, so near-term work is gonna be all about fit into mega trends. I guess we have opportunity on that. But I also want to make sure that the portfolio management is not once and done. It should be an active process. So as we look ahead, just because you are a, say, an automation business, I have to think every automation business may not be good in Honeywell, right? You may be the tail end of it, you are low growth, you are low margin.
So that, to me, I call it phase two. Phase one is more oriented towards fit into the portfolio just by mega trend. And we have not done that work, so I don't want to preamble here. Let's think about more. I just want to make sure that. And also, let's not forget, the exit process takes a lot of internal time. 5 x, maybe 7 x, because we have to carve it out so somebody can run it. I have to spend a lot of my time to make sure that it's carvable, legal entities exist, factories are separated. You know, from the outside, it may appear we are a tightly integrated company as Honeywell.
So while that's a benefit for most part, when any separation has to happen, it does, you know, put some additional work for us, and we have to do that. But expect progress. As I said, we're working hard towards it. We can't make any commitment, but the efforts are in advanced stage in a few areas.
Appreciate that. And maybe before I, you know, ask about the markets and some of the segments, does anyone in the audience have any questions? All right, hopping back into it. You know, you mentioned earlier that the business is set up for good growth in 2025. You know, Aero should definitely stay good, maybe decelerates a little bit as the comps are, you know, law of large numbers. I guess, what businesses do you have the most confidence that are going to be better in 2025, maybe than they are in 2024?
I would say, I mean, across, from a, you know, we can spend a minute on each segment. Our Aero growth will continue. Our past year was still a few billion dollars. But I can't promise another double-digit growth here, but high single is highly probable. I guess that's, that's where we're gonna likely land. This is all organic. I'm not counting on inorganic revenue, because 2025 was also a year in which we have $2 billion of acquisition onboarded. So I'm just keeping it out, because reported numbers are gonna be higher.
On the building automation side, I do believe that we're gonna have, you know, our desired profile in that business is mid to high, and I think we have a-- If the economy behaves the way it's behaving today, we have high probability to hit that ZIP code. The reason is, our solution business backlog is historic high. That's about 30% of the business. So 30% of the business, if it grows 10%, 3% is in the bag. Then there's the product side of the pricing. So if products don't grow and we just get price, I think that you can do the math there. You know, there's a high probability it sticks on that. And if products grow, depending on the end markets, there is a further spend there.
So I think buildings year on year will do better. That segment disappointed our shareholders for the last, say, three or four quarters. I remind everybody, we grew 14% in 2022. That should have been an alarm bell to me also, that why it grows so much in a single year? Compounded growth does remain at a high level, 14 mid-single, and we're gonna grow probably low single this year. It's gonna revert back to distributor stocking. That business also went into a unique shift of moving away from commercial real estate. Let's not forget, people like us are heavily exposed to it. Just because I want to go away, it's not gonna go away, just because I want it.
It's gonna take a while for me to shift from away. So all those things have occurred. Industrial automation, again, I would expect, our shrinkage is gonna stop in Q4, and we expect to print a positive result. So relatively basis, we go from negative territory in 2020, you know, this year probably be zero to maybe slightly negative. We'll be in a positive territory there. And energy business will be year on year on a similar profile, low to mid-single. So you can see directionally, we do expect a normal year, in which few segments are in high single, few are in the middle, and few are in the low single, and overall, we should stay at four to seven. I will see where the numbers land.
I would say December will be the good time to consume everything, because there's a lot of dynamics happening in the markets, in the economy, and I think right now, trying to project it'll be going a little bit ahead of time.
Yeah. You know, you talked earlier about the margin headwinds really just being a function of, you know, long cycle doing better than short cycle. You know, Q2, we started to see some signs of short cycle getting better. You know, when you look at the short cycle businesses, do you see end market demand improving, or is it, "Okay, we're just done lapping the destock, comps are getting easier, and-"?
It's a mixed story. I mean, we saw the first business recover in Honeywell portfolio was chemicals business in Q1, which got reflected in our energy and sustainability numbers. Then we saw recovery of our scanning and mobility business since late Q1, and that has a nice trend for rest of the year. Building automation, we saw... Now we are seeing recovery. It's bottomed out. It's in the recovery portion, but few businesses in industrial automation are still at the bottom. How much of that is channel destocking and how much is market? I've been asking that question to myself very honestly, and I would admit that we did not have a system of record where we could observe the distributor inventory at Honeywell scale. Now we have it.
Last year, you know, our $39 billion of Honeywell, $38, $39 billion of Honeywell, our business through channels is $11 billion. That's rough numbers. And about half of that is through distribution channels. So we should know a hundred of these folks, and you're supposed to stock 60 days, and you're sitting at 70, and we had the data in spots, and therefore, a judgment was made on recovery without the input data. Now we have fixed it. Now we have a system of record at Honeywell, where all distributors are onboarded, and we have record of sales in and sales out correlated, and therefore, planning will be far more sophisticated. It's a lessons learned of this whole destocking.
When you have hundreds of distributors spread over so many countries, the rules of, you know, PMI is gonna be up, and those are directionally correct, but they are not accurate enough. That's a subtle difference on where we felt the year will go, versus what actually happened, you know, and we're gonna be far more accurate in our projection in 2025 .
Appreciate that. Maybe some questions on the segments individually. Aero Tech, you know, biggest segment, you know, best growth, obviously. You know, how do you see the Aero supply chain today? And when you look... I mean, I know aftermarket's a lot bigger than you guys in OE. But, you know, is there any concern on the OE side that there's a lot of work in process inventory, and ultimately, there could be, you know, it could be the only end market that hasn't destocked yet, and could that be coming?
Yeah, I mean, I would say our past dues are still so high that they are delinked from the demand side. I mean, it continues to be a supply-constrained market. That fact hasn't changed. We had forecasted that will change by Q4 this year. That didn't occur. I think it slipped on to 2025 now. So I would say that the commercial aerospace, the demand of Airbus, Boeing, would not really determine our growth rate next year. It will be our ability to supply them. But also, let's bear in mind that defense has become the highest growth vector in aerospace, and that's about 35% of Honeywell business, give and take. This is without the acquisition of Case, so probably it's gonna inch in a slightly higher number. That's gonna grow at a higher rate next year.
So when you do the sum total of past year recovery, defense growth, I do believe we are on the right trajectory, and not only for 2025. One of the, you know, learning for the last 12 to 18 months is, aero is highly cyclical. That won't be true till 2030. We have done our modeling. Now, I wish I won't be wrong, having stated that, but our modeling suggests that how this market is shaping up, between the demand in business jets, commercial aerospace, defense, this is gonna be a long-term growth market, and those projections are without any revenue for urban air mobility, which we have not modeled. We have more than $10 billion of wins in our backlog, and I personally believe that's gonna happen.
Someday, if large cities have to resolve their issues of traffic, this is the most elegant solution, but it's hard to do because it's the new regulations are required, so we're working very hard to create that. So aero, therefore, when you add it all together, defense being a new growth vector, urban air mobility, the continued growth in commercial and business jet, it's a long-term growth trend for a while.
Appreciate that. Maybe going over to industrial automation and process solutions, specifically. You know, you guys are calling for a growth pickup here into the back half of the year. You know, how are customer conversations going in the process market, and around projects over the next twelve months?
Look, the core business is more around... the growth is more around aftermarket services. That's where we have very well-established franchise. That's a larger portion of our process solution business. Our software, it's probably one of our showcase of our business model. Software and services are way greater than projects. So when projects come down, our growth goes down, but not the income. Projects, we don't make much money, and that, to me, is more of our showcase to say, "Yeah, the good looks like this." To your question, the growth in process solution is gonna come by pivoting to new verticals. How much we're moved towards hydrogen and SAF and ammonia. We are focused very heavily on energy storage.
We believe that the planet needs battery energy storage at scale, and battery energy storage is a complex control problem because you can't just keep a battery. You have to manage it, you have to connect it to the grid. So we have established a base position in that. So shifting our pivot to some of these new verticals, but continue to monetize our installed base at a high single, that's gonna be the model in process solution.
Appreciate that. Maybe going over to advanced materials. I think at the conference, we're gonna hear a lot this week about the refrigerant changeover t hat's coming on the HVAC side. What does that mean for advanced materials and, I guess, Solstice, specifically?
To me, it's a mixed change within the product line. I mean, our fluorines business is now, you know, excess of $1 billion, so I see that as multiple SKUs. So for us, 410 shift to 454 . Yeah, so 410 was higher margin, four fifty-four is slightly lower margins, but then, at the same time, the new SKUs are coming, like for heat pumps, which are higher margins. So overall, it's a wash for us. I mean, there's no one category which swings the profit profile. We have a business which is high income business, and we expect the margins to stay at the business level flat. Within the product line level, yeah, there could be some movements up and down.
But for Honeywell, yeah, you will hear that from our HVAC peers, no Carrier and Trane, both will be... They are our huge customers, so their commentary may not match with our commentary because we have fixed long-term price contracts with them. So we, what we observe, they may not observe the same because we have very different dynamics between us.
Appreciate that. You know, only a minute left here. Maybe going, staying in ESS and going to UOP. Can you maybe talk about, you know, the strategic nature of UOP, how it gets you close to the customer, and ultimately, what drives growth in that business above just, you know, refining flows?
I would say, the best way to think about UOP is, UOP is McKinsey of energy, or BCG of energy, if you don't like McKinsey. This is a company which invents technology by which the new process operations gets created. Done it for a hundred years. We talk about energy transition. UOP says this is number eight times energy is getting transitioned since the last hundred years, so this is not new. We create new molecules. The business model is simple: You sell technology to build a plant, charge a license fee. Historically, it was refining. Now, it's increasingly gonna be petrochemicals and new energy molecules like SAF and hydrogen.
And then make money through selling catalyst, which is evergreen, because nobody shuts down their plant, and our catalyst sale way exceeds our process technology sale, by a wide margin, and that's a cycle on that number. I mean, if one business I want personally bullish on in Honeywell, it's UOP. This business will grow at the same rate like aerospace for the next many years, because energy transition is a slow journey. This is. There's no fast train, and the slower it takes to happen, the better it is for UOP.
Faster it happens, the projects will grow faster and catalysts will lap up to. So I think there are scenarios here, but we remain extremely bullish. I think it's important also to say that that business gives us a lot of exposure to customers. Customers, I practically know CEO of all large energy companies because of UOP. They need to know what UOP is doing or will do, and therefore, it impacts their strategic plan, because any plan there is a few billion dollars, and our views matter a lot in that. So it's a great part of our portfolio, gives us a lot of tailwinds and process solutions, because every time we sell UOP, process solution gets the benefit of you know, catching on with the elder brother, so we definitely get benefit on that.
Yeah. No, definitely feels underappreciated, but we're up on the half hour, so thank you so much, Vimal.
Thank you.