All right, I think we're gonna get started. Very happy for you all to be here. Again, most of you know me, I'm Andy Kaplowitz from Citigroup. Very excited to welcome you to the Citigroup Industrial Tech and Mobility Conference. We've got a great lineup for you guys over three days, 115 companies. We start with one of the best companies, one of the largest companies in Honeywell. Very excited to have Honeywell with us. I don't think Greg Lewis needs any introduction. It's been sort of a great time over the last few years. We appreciate Greg being here with us. Greg, I know you have a few slides that you wanna talk to, you'll talk to slides, then we'll get into sort of normal fireside chat format.
Again, we very much appreciate you being here.
Great. Thanks. Well, thanks, Andy. It's hard to believe, it's been a year since last time we were together. Can you advance the slides? Thank you very much. I'm optimistic. I mean, the, if anything, I've learned over the last five years as the CFO of Honeywell is, there's always some surprise around the corner. I don't know what 2023's surprise will be, but I'm sure it will make itself known. It was only a couple days after we were here last year when the conflict actually stirred up in Ukraine and Russia. As I sit here today, I feel great about where we are as far as Honeywell is concerned. We've talked about it in our guidance.
You know, we're very well positioned this year with a really strong backlog, almost $30 billion. You know, we are gonna grow sales, margins, cash, et cetera. You know, the transformation of the company has been enormously helpful in so many ways, in which we operate. You know, we've hit on the transformation that we started out in 2017. We're, we're growing our software and recurring revenue base, which again, about $9 billion of software and services in 2022. You know, HCE is growing, double digits. We're going to deploy capital. That was the promise we made last March at our Investor Day, as we were gonna accelerate our deployment of capital, $25 billion over the three-year period.
We've already done eight in in 2022, we're excited to deploy the balance sheet. You know, Examples here. For us, it's never been just a story. It's something we at Honeywell have done for a very long time. You'll recall, you know, roughly 60% of our sales and our R&D are on, you know, ESG related solutions. This is not a new thing for Honeywell. It's actually part of our DNA, and through all that, we continue to deliver a very compelling long-term growth profile. This is what it is. I mean, we've gotten some, you know, questions about why aren't we growing more and so on.
If you peel it back a little bit and look at the numbers, you know, prior to 2017, we were growing at 1% organic growth, right? That was the knock on Honeywell, great at margins, but, you know, where's the organic growth? We were 5% 2017 to 19. We have 5% the last two years. We put up 6% organic growth this past year. We've been delivering on that. We've pushed, you know, that was one of Darius's biggest objectives was to drive the organic growth machine, and we're doing that through our BTIs, through our new products, et cetera. You know that we're a margin expansion machine. You can count on us for that.
Once again, we did 70 basis points this year, delivered, you know, 15% free cash flow margins the last two years and as I said, $8 billion plus the last two years in capital deployment. You know, we raised our algorithm in March of last year, 4-7, 40-60, and we're delivering on it. We expect to continue to do so, and that's really, I think, the power of Honeywell is we are going to outperform, we're going to out execute, and now the next challenge is really to deploy capital. Just briefly, again, ESG is what we do. These are just three quick examples. We have a win with ExxonMobil.
We're gonna be working with them at their Baytown, Texas facility, and they're gonna be using our CO2 fractionation and hydrogen purification system. That's a mouthful. We're also partnering with others. We're partnering with Johnson Matthey. Our technology is going to allow carbon capture to be that much more efficacious, which is gonna open up access to some of these incentives that the government's offering. You know, we're partnering with others to go do that. Same is true with Nexceris in EV. Again, this is for electric cars. We have sensing technologies that are gonna help do gas sensing to make sure that the lithium-ion batteries can remain safe.
When you think about that energy transition and all the different ways that it's going to affect our lives, you're gonna find Honeywell there to help drive that energy transition. You know, I'm excited about the next stage of transformation. We talked about this at Investor Day. You know, the great integration of 2016 to 2021. You've heard the statistics. You know, we had over 140 ERPs. We're now down to about 10. You know, we've pushed our ISC transformation. We've driven digital throughout the whole company. We, you know, we've paired the portfolio with the spins that we had done. Now we're really pivoting and looking to accelerate growth. A lot of that through innovation. Digital is not done yet.
We have a lot more room to both impact our own businesses as well as our customers. We're focusing on automation and again, deploying capital. That's really what underpins the long-term objectives that we shared. Then, you know, really pushing our Honeywell Accelerator operating system, which is really what helps us drive that execution performance that you know us for. Excited about the year in front of us. Don't know where the curveball's coming from. I'm sure there will be one. Again, you can count on Honeywell. One of the things I think we've demonstrated is our ability to adapt and overcome under any circumstance and still deliver for our investors.
Thank you. All right, great. I'll try to provide no curveballs for you, Jeff. Let me just ask you briefly about one of the slides. You know, you had that ESG slide.
Yeah.
You talked a lot about sustainability. I believe you're targeting $700 million in sales in your PMT sustainability business.
That's right.
by 2024, $1 billion on sales in your HBT sustainability business in the next three to four years.
Yeah.
All right, tell me about these businesses. Are they still going to hit their targets?
Yes.
You know, I do get a lot of questions on IRA. How is our IRA, if at all, helping you?
Yeah. Maybe I'll kind of start there first and then work backwards. I mean, the IRA is going to help. Again, think about the Johnson Matthey partnership, right? That's about them partnering with us to use our carbon capture technology to increase the, you know, the efficacy of carbon capture to hit some of those.
Mm-hmm.
thresholds to unlock IRA, right? There's absolutely gonna be a cause and effect between, you know, those incentives and our offerings. Will that turn into, you know, hundreds of millions of dollars of sales overnight? No, that's gonna take some time to work its way, you know, through the chain. But that's absolutely gonna support the future, you know, growth trajectory and this theme around sustainability. That really is, you know, as you highlighted both in buildings and in PMT, that's why we created those BTIs, and then, you know, that we birthed them as their own GBEs to give them the attention and the love that they need. Yes, they're doing great.
I mean, we grew the STS business, you know, by over 20% in revenues, you know, roughly 50% in orders. You know, the sustainability building business and buildings is already around $400 million, you know, growing nicely. So yeah, I think those things are going to persist over time and they're gonna be one of the things that's going to underpin, you know, our confidence in our 4%-7%-
Mm-hmm.
-you know, growth algorithm. That's the thing, like, one of the beauties of Honeywell is we have a number of different, you know, arrows in the quiver. There's not any one thing that we need to count on to make sure that that happens. you know, this portfolio is very strong in its ability to deliver that.
Got it. Look, I know earnings were not that long ago, Greg, but, of course, we all kind of want to know an update, so.
Sure.
Let me ask it to you like this. I think, you know, during the earnings call you mentioned you're seeing some short-cycle weakness when you reported Q4. You did mention sequential orders growth though in Aero, PMT, SPS.
Yeah.
Have orders actually held up maybe better than you expected so far in your short cycle businesses? Obviously you seemed a little more cautious regarding HBT. Maybe talk about that and, you know, maybe just one other follow-up there. How's China shaking out in Q1 as Chinese New Year's ended?
Yeah.
Have you seen sort of an improvement in that?
Yeah. Maybe again, I'll start at the end and work my way back. China's actually so far been okay. I mean, the concern that we are watching for is, you know, as Chinese New Year ends and, you know, everyone goes to their homes and then comes back together, was there going to be, you know, more lockdowns or some issues, disruptions? Far we haven't seen that, so that's great.
Mm-hmm.
you know, we talked about it before. We can manage disruptions. The challenge is if it happens at the end of the quarter...
Mm-hmm.
You know, we're still 50% leveraged to the last month of any quarter.
Mm-hmm.
So far so good. You know, with that, we really haven't seen, you know, many issues, as people have returned, which is tremendous. In terms of the longer term for China, I mean, that's just gonna be runway, right?
Mm-hmm.
I mean, China is reopening. There will be more activity. People will travel. There's no doubt that that's going to provide a tailwind for, you know, their economy in general and for us in particular. I feel very good about, you know, what that could provide for us going forward. As it relates to the quarter, I mean, we're kind of where we thought we would be, you know, no big surprises, you know, up or down at this stage. You know, we talked about the strength of the backlog and, you know, we continue to have strength in the orders cadence in PMT and Aero in particular. We're making our modest improvements in our supply chain.
As we said, the backlog is going to protect us in both HBT and SPS to some degree, although we know that HPS is not gonna grow this year. Again, that's not new news. When you take the whole thing together, we have a nice, you know, growth path. No surprises at this stage. You know, we're about halfway through the quarter.
Mm-hmm.
you know, there's a slide in there just so that there's zero concern. We are reaffirming our guidance for both the quarter and the year. you know, I think we're, you know, six, seven weeks in, we're in pretty good shape so far.
Got it. I should mention that, we will open it up for Q&A a little bit later. Let me ask you one sort of follow-up to what you said. One of the questions I've been getting a lot, Greg, is like, you know, you kind of talked about maybe orders picking up in the second half.
Yep.
There was sort of like, you know, a bit of an unusual pull forward in the first half of 2022.
Yeah.
You know, I think somebody asked you on the call around, you know, the 2%-5% guidance for the year organic, like the high end is more predicated on orders picking up.
Yeah.
so maybe talk about, you know, what gives you the confidence to see a potential pickup, like, you know, as we sit?
Well, that's why there's a range.
Yeah.
I mean, I'm not here to tell you that I'm confident in five.
Yeah.
Otherwise, I would have guided five.
Yeah.
Right? We guided 2%-5% for a reason because, you know, we have, you know, some short cycle businesses that we don't get a lot of lead time, you know, to see what's gonna go out. I can't tell you what, you know, HBT and SPS, you know, commercial trajectory is gonna look like as I sit here today in Q3 and Q4. That's part of what, you know, I mentioned on the call. We're gonna have to see how, you know, April, May, you know, shapes up and then we'll kind of take it step by step. The things we are confident in, you know, are Aero and PMT in particular. So you know, that's really what underpins the guidance.
Got it. One of the other things that I talk to investors about is sort of like, I think of Honeywell as a good bounce back candidate for 2024 in terms of growth, you know, sort of re-accelerating. You know, obviously you showed us the long term targets.
Yeah.
The 4-7 and the 40-60 basis points. You know, we know you've been focusing on software services.
Mm-hmm.
Talked about sustainability, you know, fixed costs.
Yeah.
You talked about sort of going to 10 ERPs , for example. You know, maybe if you talk about sort of the self-help that you have that could help us sort of get back to where the growth should be, you know, going forward.
Yeah. Well, again, I'll remind you that we just printed 6% organic growth this year.
Very good.
5% organic growth the year before that. It's not exactly like we're bouncing off of some bottom at this stage. You know, the self-help that we're doing is we continue to invest in our BTIs and our new product introduction programs. You know, the other thing about Honeywell, as you know, is we're investing for the long term as well as short term. We're not looking just to win now. We're looking to make sure that we've got, you know, a strong pipeline for the future, and that's why you see us investing in things like UAS, UAM, like the sustainability business both in buildings and in PMT, because those are, those are more in the future, if you will. I mean, they've got their, they're good businesses now, but they're gonna be bigger later.
That, that's a continuation of how we see the commercial engine of the business. Then, you know, as you said, HCE, it's a $1.3 billion business roundabout, growing at mid-teens%. You know, Honeywell Connect last November, we launched 15+ new offerings out of HCE. Really excited about what Kevin Dehoff and his team, you know, are doing there. When you think about what they're doing, digitization, sustainability, I mean, people are gonna need the offerings that he and we are going to deliver, and in many cases, there's not gonna be anyone else besides Honeywell that's gonna be able to combine the domain expertise and the technical, and software expertise that we bring to bear.
You know, That's the beauty of Accelerator, right? Accelerator is a total business operating system, and it addresses what we do commercially as well as from a productivity standpoint. You know, we don't do one or the other. We always do both.
Yeah. Just maybe an update on Forge also.
Well, again, I think Kevin launched 15 new products on Forge. Really excited about what he's got going on there. You know, he will figure prominently in our Investor Day in May. You know, really, really happy with what he's got going on over there.
Okay. Then you gave us a slide there in talking about, you know, the great integration at Honeywell and, you know, supply chain transformation. Can we go over, like, 'cause you mentioned pretty good performance over the last few years in a tough supply chain environment?
Yeah.
Can we talk about what you've done, how these efforts helped you operate?
Sure.
all the supply chain challenges, and sort of where is the supply chain now? Is it continuing to normalize?
Good.
You know, what does the effort look like in 2023?
When I think about the supply chain transformation, it started out as a, you know, call it a network simplification effort, right? Let's shrink our footprint. Let's simplify the network. We pulled into that some of the digital capabilities that we brought to bear. Torsten was at the forefront of developing, I'll call it a digital dashboard for the way he runs operations. That was one of our first investment areas to make sure that he and we had the visibility needed to run that supply chain. We talked about a little bit, we've also been investing in our planning platform. We've got about 65% of the business on our planning platform to also increase our efficacy around planning up and down the supply chain.
You know, specifically, we were able to see directly into some of our supply base to mitigate risk. I mean, one of the things that, you know, we were able to do both from an engineering perspective and a supply base standpoint, you know, Torsten was able to leverage his suppliers in a better way, you know, knowing who we're doing business with across that broad network. Suresh and the engineering team did a lot of work during last year on doing engineering changes to try to, you know, change out some of the products that we were, you know, producing and offering to get to more available parts, right? If you can't see into your, you know, bills of materials and into the things that you're making, where you're getting supply, you're, you know, you're guessing at stuff.
I mean, to be honest, that's the beauty of our digital transformation. We're not guessing. We're not guessing at pricing. You know, when you think about the, you know, price cost was probably the story of 2022 for Honeywell.
Mm-hmm.
You know, we developed a 18-month rolling inflation model that was able to go backwards into the product sets to a specific enough degree that we could take pricing actions that were going to be targeted, right? All of these digital capabilities are, you know, they're germane to our ability to operate in, you know, in these volatile times. When things are smooth, you know, you don't have to have great process capability.
Mm-hmm.
You know, it's only when you start seeing, you know, things move around a lot that you really test, you know, what you're made of in terms of that, and that's really why I'll, you know, say it till I retire. So happy that we launched that journey back in 2017 because everything that's come, whether it was the pandemic, the supply crunch, inflation, whatever it is, our digital capabilities have really, you know, served us well, you know, managing through that. You know, for the supply chain from here, again, we're getting, you know, sequential progressive improvement.
Mm-hmm.
you know, it's gonna take time, particularly in aerospace. I mean, you can go up and down...
Mm-hmm.
The value chain, and that, you know, we talked about it ad nauseam. The labor shortage goes from tip to tail of the value chain. That's gonna take time to work its way through, but we're making, you know, sustainable progress. You know, Mike Madsen and his team have invested in a rate readiness team that's working with our suppliers to try to help them as well. You know, you are seeing shortages abate in semiconductors. It's not gone.
Mm-hmm.
It's getting better. Therefore, you know, you're seeing our past due backlog come down in HBT. It's coming down in SPS. It continues to grow in Aero. It will because the demand is still strong.
Mm-hmm.
Right? Although we're getting progressive improvements, you know, everyone would rather have, like, 3x improvements.
Yeah.
Right? That just bodes well for the future. That just means we're gonna have a really nice multiyear growth trajectory, you know, to enjoy, you know, through this period.
Is it the right characterization to say price remains relatively sticky across the portfolio?
Yeah. I mean, our assumption is that's going to be mostly true. Again, when you have 38 businesses in, you know, different environments, some that are regulated, some that are not, you know, some have more technology differentiation, some do not. I'm sure it's... You know, the answer to any question can be yes or no in Honeywell somewhere, right?
Yeah.
There's probably gonna be some parts of the portfolio where, you know, price may turn out to be difficult to hold on to. I think for the most part, it will be sticky. You know, we're gonna, you know, we update our inflation models regularly, and we are taking price actions, you know, dynamically, and that means not doing something as an action, right? Because we don't wanna destroy demand either, right? This isn't just a, you know, price, price. We have to make sure that we're monitoring, you know, the markets locally and by business to ensure we do the smart thing.
I wanna shift to cash flow, Greg, something near and dear to your heart.
Yep.
I'm sure. Like, you know, you guide, long-term guide 14%-17%. You were at 10% middle of last decade. Now you did 14% last year, 14% expected this year.
Yep.
You know, maybe talk us through the moving pieces that could help you get closer to the high end of that range.
Yep.
You know, obviously, you won't have the legacy liabilities that you've had, so that'll help.
Yeah.
You know.
Yeah. That's already, like, baked into the.
Yeah.
into the number. In fact, as you saw from our walk, I mean, we're going to be having a headwind because we got the last of the Garrett payments in 2022, so we'll have to leap over that, which is something like $400 million to start with. The short answer to your question is working capital, right? You know, inventory for everyone has been a challenge. You know, lead times have lengthened. Not knowing which part won't come in means people have things 98% complete, so they're holding more, you know, raw and work in process than they otherwise would. That is going to take time to, you know, to normalize. I can tell you know, that's a big target of what we're working on.
Yeah.
You know, we're also starting. You know, we talked about in our, in our transformation, you know, the early parts were, I'll say, like unifunctional, if you will. You know, finance is transforming. Now we're moving towards more end-to-end transformation, one of the big ones we're working on, this year is Quote to cash. You could think about that going all the way back from, you know, who's doing the estimations and the contracts to, you know, actually invoices to delivery, and to collections. That's gonna run the gamut of the whole value chain. It's gonna be like a big Six Sigma program, right? You know, that's something that we're really gaining momentum on right now.
It's gonna be a little bit different in every business model that we run. Products business model will look different than a products one will look different than service and software. This is sort of the, some of the next leg of the, of the digital transformation we're on. It's, it's not about the shiny, you know, toy. It's not the technology that you buy. It's about how you do the work. All of those things, though, between that and, you know, the planning execution processes and systems and our 80/20, you know, effort, which is gonna again simplify our portfolio, those things are really gonna be what underpins our working capital improvement program, you know, here over the next, you know, one, two, three years, and that's gonna be what's gonna support us.
You know, we'll continue to grow earnings, as well, and that will be the differentiator to, you know, to overcome the Garrett hurdle and stay in that range that we talked about.
Greg, let's talk about what to do with the cash. You know, as Vimal settled into the COO role, Darius has freed up to do a little bit more. What's changed at Honeywell? Then I wanna make sure I get this right. Darius mentioned that he wants to do smart M&A and that it should be focused on controls, automation, digitization, or sustainability.
Yeah.
He also said that Honeywell would acquire an asset where shareholders could be confident that Honeywell will create a lot of value.
Yeah.
Could you elaborate on what that means?
I mean, I don't think any of our shareholders want us buying things we don't know anything about, right? I mean, one of the big questions that we always have when we're looking at a property is it better under our ownership? You know, is there something that we can add to make that business better? Do we know enough about how it works, that us applying our Accelerator operating system is gonna be helpful to that thing?
Mm-hmm.
If we can't answer yes to those questions, then we're just paying a premium for something that I'm not, I'm not sure how it's gonna be better.
Mm-hmm.
Right? When he talks about that, I think that's a little bit of what, you know, he's alluding to. You're not gonna see us buy something that's totally foreign-
Mm.
to Honeywell, either in, you know, end market or business model.
Mm-hmm.
Right? I think you'd be surprised if you saw that. you know, of course, we're gonna do smart M&A. I mean, people are willing to pay, you know, sizable checks for things just to get stuff done. That's not us.
Mm.
You know, we're a disciplined organization every way we work, and here in particular. I mean, this is our shareholders' money, and we take that very seriously. You know, we have not gone away from, you know, our major metrics. We wanna have, you know, GAAP accretive earnings in year two. You know, we want our 10% book ROI by year five, you know, a 10% IRR overall. I mean, those are still the metrics that we operate by. I don't see that really changing. Yes, I mean, when you think about us as a controls, a digitization, and a sustainability company, I mean, that's what we do, right?
You know, there's some interesting end markets that, you know, those things may apply into that may be adjacencies to us. I think, again, it's gotta be something that looks a bit like what we are good at, or else, you know, we're just bolting something on that we have no way to help make it better under our ownership.
Just one follow-up on that. Like, is the sweet spot still in, call it, the $1 billion-$5 billion range, something like that for you guys?
Yeah. I mean, we would love to, you know, do a couple deals a year, you know, $1 billion-$5 billion. We don't feel like we need to go do some big transformational deal. We've never felt that. We still don't. Yes, getting into a rhythm would be great. Now again, you have to find the intersection between, you know, actionability, you know, valuation, you know, attraction, and so on. That's always gonna be a hard trick to turn. It's easy to say and hard to do if you're gonna stay disciplined and you're gonna try to find, you know, that sweet spot, which is why, you know, getting more at-bats matters, right?
Anyone who's ever done M&A knows that, you know, it's, you've gotta get a lot of at-bats because you're gonna do deals, I don't know, 5% of the time, 7% of the time, 4% of the time. It's not a 50/50 type of thing. You gotta be willing to walk away.
Yeah.
That's what we're working on, you know. We continue to build our pipeline. Back to your point about what's different at Honeywell and how is, you know, Vimal as the COO helping Darius. I mean, you know, Vimal's taking over the operating cadence along with me, and Darius is now freeing up his time to go, you know, explore more the things that he said he was gonna go focus on was really people, strategy, and M&A, and that's really what he's doing.
I know you're targeting $25 billion you did $8 billion last year.
Yeah.
Like, do you feel confident that more of the game in quotes this year is gonna be M&A?
That's our goal. I mean, you know, we spent $4 billion in buybacks in 2022. Again, part of that, everybody was like, "Wow, if you think you're so undervalued, why don't you go buy your own stock?" We did.
Yeah.
You know, I feel very good about having done that last year. I mean, we would rather, you know, that deployment go, you know, shade it more towards M&A. We're not gonna, we're not gonna force that issue if it doesn't happen.
Yeah.
That is certainly, you know, our objective or our bias would be to do that.
Let me ask you a few questions just about your businesses. You know, just Aero, for example, you talked about a little bit, but, you know, you've got mostly strong, right? Business jets, for instance, had a good couple of years here. Defense has been, you know, weak, but it seems to be turning a corner. You know, if you roll it up all into your guidance of high single digit, low double-digit growth, maybe just talk about how you expect the individual businesses to fare?
Yeah.
-in there.
you know, if you just start with, you know, the OEM businesses, I mean, that's gonna be a long-term multiyear growth trajectory. The OEs need to ramp up production lead times for new airplanes are long. That, you know, that's gonna be a really strong growth driver for a very long time. You know, on the, you know, on the flight hours side, just in terms of flight activity, you're right. I mean, business jets, you know, have already surpassed, you know, 2019, you know, flight levels. The remainder of growth vis-a-vis, you know, the ATR business is gonna be different, right? We would expect that ATR will grow, you know, faster than, faster than BGA at this point. We'll see. Do you know, do people trade back down?
You know.
Mm-hmm.
I don't know how that's gonna. You know, what's behavior going to do, and we'll see how that goes, you know, as time goes by. Then to your point on defense, I mean, again, we have lots of orders. This is where, more than half of our past due backlog in aerospace is in defense.
Mm-hmm.
You know, there seems to be this strange dynamic in the supply chain where, you know, anything commercial, it makes sense. People are making more money in that area. It gets a bit of a higher priority.
Mm-hmm.
The, you know, the defense business customers seem to be a little bit more patient. People the profit pool is different, so there's a, you know, there's probably a bit of a different incentive to drive that harder. Defense and space is where a lot of our past due backlog, you know, is really growing at a greater level. We've got so much demand, you know, again, as that, as that progresses forward and the supply chain improves, I expect that to be a nice grower for, you know, some time to come. Again, the world is not a safer place today than it was a year ago or two years ago.
You know, trends for, you know, defense, I expect, you know, to remain strong for some time.
Just related to that, I think Darius mentioned that, you know, the Aero margin algorithm was ahead for last year, but the margins were still down year-over-year from obviously supply chain stuff. To get to 29% margin over the long term, which is your target, what business conditions are required? Where does R&D fit into the equation? What self-help is Honeywell doing to ensure, let's say, normal, you know, 30%+ incremental?
Yeah. Yeah. Just to be super clear, we're very confident in our 29% long-term target.
Mm-hmm.
You know, we have paths to get there. You know, just the volume growth alone is gonna provide some margin leverage. We are going to spend on R&D. You know, we're not going to milk the business. You know, as opportunities make themselves known, we are going to, you know, put money back into development for the future. Again, we're doing that in things like UAV, UAM, and with our Anthem platform. We'll continue to do that. You know, I think the team there has done a really nice job to have a world-class cost structure.
Mm-hmm.
You know, when you think about the volume leverage that we have and, you know, that's gonna create some room for investment. I talked a lot about, you know, some of the near-term headwinds around selection credits and so on, but those are exactly that. They're near term, right? There's a dislocation between, you know, shipments of finished airplanes from OEs and the, and the production of them and our materials going into the OEs. That's just a dislocation that's gonna go, and it's gonna come back again, and probably by the end of 2024, you know, we'll be back to normal. You know, we talked about that just to be transparent and clear, but it's, you know, it's sort of a short-term thing that's gonna come and go.
The 29% margin target is very much intact. I am not ashamed at all at printing 27% margins today.
Okay.
I'm sure there's probably a lot of people out there in this industry that would love to have, you know, this portfolio and that kind of earnings power.
Great. Shifting to PMT, like you guys mid-single digit growth, but, you know, there's a lot of late cycle flavor to PMT HPS-
Yep.
Be ramping up. You know, when I look at mid-single digits, right, a fair amount of that is probably price. You probably don't have that much volume dialed in. What is holding you back there, especially when businesses like advanced materials are still doing well?
Yeah. Well, again, I would say, you know, when you look up and down the portfolio, we've talked about price is different in various places. Advanced materials had one of the highest price captures in the portfolio, because of the nature of its contracts and the commodities that are inside of it. You can imagine, like, that's a place where we're not going to get the same amount of price in 2023.
Mm-hmm.
In advanced materials that we did in 2022. The other thing you got to keep in mind is it's a little bit of a lead lag thing between, you know, the UOP business and the HPS business. We've always said, you know, UOP probably leads the way and HPS kind of follows behind. The good news is we had double-digit orders growth in every single business in PMT in 2022. They're part of the confidence story around the backlog and the orders growth. But you know, it's going to, it's probably going to evolve at a little bit of a different pace in each one of the three businesses.
Got it. Maybe a similar question on PMT margins I asked you on Aero. You know, you got a 25% goal.
Yep.
Margins have been kind of a little stagnant over the last couple of years. What does it take to have more of a breakout year? Why can't 23?
Yeah.
I know you're only talking about modest margin.
Yeah. Yeah. Well, I think the thing you have to keep in mind there too is, the mix of that business, and it, you know, it can, it can shift from quarter to quarter in particular. That's why, you know, in some of the, in some of the businesses, you're like, "Oh, I'm at a run rate, and now I can kind of hold that and continue to grow it from that run rate." PMT bounces around a bit more as you wind up with either, you know, mix of projects going up and down or mix of catalysts, you know, sales coming in and out, and also where that catalyst goes, because the profitability levels, depending on, you know, whether it's in petrochem and refining are different.
I think you're, you know, like it or not, we're gonna have to live with the fact that there's always gonna be some, you know, bouncing around in their margin rate. What I would tell you is I'll go back to Honeywell Accelerator as an example. All these things that we're talking about in terms of operational excellence, they're gonna happen there too. You know, like we started something in 2022, we call it GPMO. It's the Global Project Management Office. Think about that as that was our first foray into really designing in a sustainable and formal way how we run projects businesses and then permeate that across the whole company, including with the technology stack. That's happening now. Like, we really got momentum in 2022.
You know, IGS, for probably obvious reasons, was the first, you know, in the boat on that, given some of the challenges that we had in 2021. Now that is, that's gonna be in full swing here in 2023. Both UOP and HPS are going to participate in that as well. I think we're gonna have some nice operating leverage gains from just productivity and execution, you know, there also. Again, when you think about the software content of HPS and, you know, Sparta, you know, HCE is throughout all of the four SBGs. There's a fairly heavy part of that that's sitting in PMT.
I think the software content is gonna continue to grow in that business as well, which is going to, you know, help give us a bit of a margin lift. I feel very good about where we are going on margin rates there as well.
Greg, I have about 12 questions on SPS, but I'm gonna synthesize them into, like, basically 1.
Yep.
you know, maybe just a two-part question.
Okay.
Like, margins obviously much, much better.
Yep.
You know, you set out last year, you know, things like 80/20, supply chain transformation.
Yep.
How much have you accomplished that led to that sort of 20%? Then the other side of that is you did seem somewhat maybe cautiously optimistic about Intelligrated pipeline looking better and orders coming back, you know, as you go throughout the year. Maybe you can talk about that and also the, you know, PSS business. you know, it seemed like you also thought short cycle productivity solutions might be able to come back in a second.
A lot in there.
That's all right.
Yeah. Yep, a lot in there. That's the, you know, the fun way of getting one question that means seven.
Yeah.
Um-
Our job.
I know. I know. You know, let's maybe start with PSS. Absolutely PSS, you know, had really strong back end of 2021, strong front end of 2022. You know, they were part of the supply chain constraints on semiconductors, I am sure that order patterns, you know, shifted as people were trying to accelerate their place in line for orders. That's part of, you know, we talk about, you know, orders had declined during the back end of 2022. Now this is why it's hard to say, like, with confidence what's exactly gonna happen. What I feel great about though is our technology is best in class.
You know, as the market does, you know, recover or re-normalize, if you will, I do expect we are going to win more than our fair share. We took share in 2022 from our favorite competitor, and I'm sure that we will continue to be successful in 2023 in that, in that regard. We'll see how the, you know, channels shake out and the end user demand, you know, evolves. We're in a really good position as a company there. You know, IGS, you know, we talked a lot about our largest customer who has substantially reduced their build-out. The focus and effort that we've been putting on is really two things. Number one, we've got the service business, which was the whole point in the first place, right?
We built a $400 million plus service and software aftermarket business behind that install base, which is growing strong double digits at very accretive margins. That's doing terrific. You know, we are working back to, you know, diversify our pipeline outside of our largest customer. That's a work in progress.
Mm-hmm.
We'll see how that develops during the course of the year. The software and service business is doing quite well. Just broadly speaking, are we where are we in terms of the transformation or the execution improvements? It's still early days. I mean, we did a lot that business. I give them a lot of credit for planning ahead. One of the beauties of Honeywell is we don't run away from problems. You'll hear people say this in the hallways, "Problems don't get better with age," right?
You know, probably in the May, June timeframe, that team took a really sober look at, you know, what's the revenue base gonna be really. They were a big part of our repositioning at the end of 2022, in terms of subscribing to the repositioning funds that we put to work. They've put their cost structure where it needs to be to handle what will be, you know, again, a down year on the top line here in 2023. I feel good about where they've positioned themselves from a cost perspective. You know, they're doing 80/20. You know, they're, they probably still have more of the footprint. Like, if I think about the businesses that have Footprint remaining to be, it's just to be simplified.
A lot of the work is there, right? You know, a couple of the other businesses are done or close to, they still have some room to go there. They probably have the lion's share of what remains in terms of footprint simplification. Again, that's part of why we feel very good about, you know, their path to their 20% target.
I'm quickly running out of time. Let me ask you, I've got one question I'm gonna ask all the companies, I just appreciate.
Yeah.
your sort of view. What are the top two or innovations, megatrends or structural changes that have affected or will affect your company over the next five years? Are there any emerging industry trends that are perhaps being overlooked?
Yeah.
in the current discourse?
Yeah, I don't know if it's overlooked. I'm not sure people appreciate it, but it's the things that we've been talking about. Digitization, automation, sustainability, those things are not going away. They honestly are not going away. When we did the Honeywell Connect event, I participated with Kevin, and then afterwards I talked to him and I said, "Hey, Kevin, next time you do this, invite more CFOs, because I learned some stuff about, you know, what's coming from an ESG reporting standpoint, the need to be able to, you know, publish and stand behind data around those things.
Mm-hmm.
Not to mention the solving of the problem, right? You know, sustainability and so on, that's not going anywhere. Again, automation, the labor challenges in the world are not abating. You know, solution automation, right? That's gonna continue to be a big deal. Like I said, digitization is the way, right? If even in our own teams, if people aren't evolving and using our digitization capabilities, they're gonna get left behind inside Honeywell, and the same is gonna be true, you know, in the marketplace.
Awesome, Greg. We really appreciate your time.
Yeah. Thank you.
Thank you.
Appreciate it.