I think the live webcast is live. Greg Lewis, SVP and CFO of Honeywell, thanks for being here.
Thank you.
Greg, I know you've got some opening slides.
Yeah.
Please go through.
Just really quickly. Oh, thank you very much. Appreciate that. It's helpful.
Okay.
While that's coming up, it feels like a year ago already, but it was maybe 10 days ago, we just did our Investor Day. Really happy to be here. Thanks for having us. It's an exciting time for Honeywell. We've talked about this before, you know, the markets are continuing to be a pretty volatile place. You know, the latest, of course, is the debt ceiling fund that's happening right now. You know, Honeywell, you know, continues to deliver through all environments. I talked a little bit about that a couple Thursdays ago. When you sit here today, I mean, I feel great about where we are as a company. I'm proud to be with Honeywell.
You know, when you look at our markets, you know, we've got some really strong areas of growth for us. Vimal talked about that in terms of really focusing on four key themes: automation, digitalization, the energy transition, and aerospace. You know, multi years of strength behind all of those key macro trends, which our portfolio fits in, you know, very nicely. Again, our track record executing through all environments, you know, you guys can go back and look, has been pretty outstanding in terms of our ability to execute. You know, it's one of the things that I'm proud of. We're a big company, but we are actually very nimble. We're always making sure that we use our advantages to protect ourselves.
We did something just of that ilk right after Investor Day, went out into the debt markets and raised another $3 billion just to, you know, A, give us a little bit of flexibility for our capital deployment, but also, you know, as a little bit of a safety measure given, you know, some of the challenges that we're seeing in the debt markets today, really leveraging that strong balance sheet that we've cared for many, many years. You know, Vimal talked about Accelerator, our next lever to outperform. You know, we've done a lot of work on digitalizing the company, we're not done yet. There's a lot more to do in terms of the global design models around our four basic business models.
Some of them will be more focused on growth, like in software and in services, some a bit more on profit and cash generation and things like the projects businesses, but a lot of room left to run. Then, as I mentioned, our balance sheet's gonna be a big strength for us to take advantage of, particularly around capital deployment. You know, the numbers we talked about were, you see them on the right-hand side of the page, I think some, you know, some fairly attractive financial outcomes that we expect to generate here over the coming years. We spoke about our gross margins specifically for the first time in this area. We, you know, printed 37% last year.
You know, that's up 700 basis points over the last 10, and we see that going over 40 through both our own, you know, optimization efforts as well as our capital deployment plan. I think we've got a really compelling set of financial outcomes in front of us. We upgraded our long-term commitments in a few key areas. One of them was around the aerospace growth algorithm. You know, now with defense becoming a stronger portion again of the thematic, that I think is gonna be something that will give us some longer term leverage as well. We raised our margin targets in HPT and SPS given the fact that, you know, we've had such terrific performance over the last two-three years in particular.
Our overall margin rate, you know, 25% plus now is we see some runway beyond 25%. I think a lot of good things are happening. Again, last but not least, Anne talked a lot, as did Vimal, about his view of the portfolio and how we wanna go deploy capital, and that's both internally with a lot of really high ROI internal growth projects that we have, as well as deploying capital back into M&A. I think you're gonna see us continue to be more active in that.
We've talked about it quite a bit over the last, you know, two years in terms of not only our capability or bandwidth given, you know, kind of coming down the other side of the hill on the transformation efforts, but also just the, you know, the way we see the markets today, we see it as being Honeywell advantaged, given some of the challenges in the credit markets. You know, we've got a fortress balance sheet to deploy that, you know, many others don't have, the advantages to do so. I'm really excited about what's in front of us. You know, as always, we'll manage through the short term. You know, the medium and long term also look, you know, really terrific.
We're excited about where we're going from here. You know, with that, I'll turn it over to you.
Thanks, Greg. You mentioned, you know, Investor Day felt like about a year ago. I guess that means that the, you know, Darius announcement, was like.
Yeah.
Okay, that's a good start, wasn't it? You know, externally, it was a big surprise. I guess going back to the, you know, Vimal becoming COO back, you know, last year, maybe what, maybe not such a surprise. Internally, how surprising was it when Darius announced his decision?
I don't think it was that much of a surprise. I mean, again, the timing aspect is all about readiness, you know, board comfort, Darius's comfort, et cetera. You know, him taking over as COO was certainly an indication that that was a possibility, right? I don't think a big surprise. Again, he's been there for 34 years, has run, you know, a couple of the biggest businesses in the company. You know, makes a lot of sense in terms of, you know, him as an internal candidate, he's got a lot of credibility within the organization.
Great. They give me the idiot mic. Okay, then obviously it's pretty clear from IDE that, you know, the changes are more sort of chiropractic in nature as opposed to surgical. That's, that's fair.
Yeah.
You know, underneath the surface, are there more things going on in terms of organizational structure, the way you do things going forward?
Yeah. I mean, first of all, I guess I would say the company is not in need of an overhaul, right? Let's kinda start with that. We're in a great position. We've transformed the company successfully over many years, and so we're actually in a great place to, you know, have a next leg of acceleration. You're right, the things that we and Vimal will be driving are gonna be more double clicks on certain areas and again, with the tweak of Accelerator. You know, in terms of, you know, level down deeper, will there be changes? I mean, we'll see.
You know, every leader has the opportunity to reassess, you know, certain things and could make a change or two, but I'm not expecting to have, you know, dramatic changes to, you know, to the company from an organizational perspective. Again, that's the CEO's, you know, that's up to them. If he feels like there's something that will add value and, you know, again, we've demonstrated before that, you know, making change to adapt to, you know, circumstances is something we've done. We broke up, you know, ACS back in 2016. It was $18 billion of the company. We thought that was, you know, a good thing to go do, and we executed that and created, you know, the platforms that we have today.
you know, that's certainly, something that, you know, he's got, you know, all the opportunity to, decide if he feels that that's gonna be helpful. you know, that's. We'll, we'll see how all that unfolds.
Okay. Maybe, one more question, before we get onto kind of macro trading type questions. You know, the focus, maybe the sharper focus on innovation.
Yeah.
to try and accelerate growth.
Yeah.
what does that actually mean?
Yeah.
you know, we've been hearing about, the BTIs now.
Yeah.
The last three, four years under Darius.
Yeah.
What changes under Vimal?
Yeah. I'll connect it a little bit to even our Honeywell Digital and our transformation efforts. You know, many of the things that we've talked about with, you know, becoming a more data-oriented company means that you've got the fidelity and information to be able to, you know, manage things a bit more specifically. I talked about this at Investor Day. It's not about just having the analytics to see what to go do. It's about, you know, can you turn around and actually confirm that what you thought you did happened. To be honest, the same is true here with R&D.
I mean, being able to go down to, you know, a lower level of depth with a level of fidelity and precision is gonna allow us to do what Vimal talked about, which really is capital allocation on R&D, right? He wants to ensure that our investment dollars in R&D are going to higher impact, you know, programs and projects that things that are truly NPI new and not all necessarily NPI core, and again, try to create a bigger lever on the R&D and the NPI impact. That's possible now because, again, our level of fidelity around being able to see that up and down the organization is much greater because of the digital capabilities that we've built.
You know, I think what you're gonna see, just to be clear, like corporate is not going to take over the technology organization and decide what the businesses can do or should do. That's always gotta come from, you know, kinda customer back and, you know, those who are closest to the customer know what problems need to be solved. We do get to bring our technologies to bear, you know, across the enterprise to do that. You see that with things like Quantinuum. Quantinuum is actually the marriage of technologies from both PMT and from aerospace, right? That's part of the beauty of, you know, being able to bring Honeywell to bear across the enterprise. I think that's what you're gonna see. It's really..
You could think about that as like an internal capital allocation theme around where the money is being spent, and also continuing to drive the execution rigor so that we get the outcome we're looking for from it.
Great. Your two key guidance calls for 1% to 4% organic growth. You did 8% in 1Q, which is fantastic.
Yep.
Maybe just remind us, you know, what you're seeing as we go from 1Q to 2Q in terms of deceleration by business. I know you had some supply chain good news in HBT...
Yep.
Maybe just walk us through that.
I mean, the biggest difference is we had four straight quarters of double-digit growth in PMT, and you know you can't do that forever, right? While we feel very strongly about, you know, their growth trajectory, I think you're gonna see that, step down a little bit from, you know, the last four quarters to, you know, the next few, and it's still gonna be a very healthy, you know, mid-single digit type of a growth rate. You know, we've talked about being down double digits in SPS, and that's gonna be that way, you know, again, here in Q2. Those are really the two biggest drivers to kinda that headline number. Again, that's not a concern for us. That's essentially embedded in our guide, has been all along.
That's not a surprise to us that that's happening. You know, we've talked a lot about, you know, this year, a lot of strength in our long cycle business, $30 billion backlog. Short cycle, is gonna take a little time to see, you know, where that actually starts to inflect back up again. We've always said that, you know, we're gonna have to wait and see how 2Q, you know, plays out to know, you know, how that will go. That will be a bit of an indication of, you know, where we land on the overall, you know, year in terms of are we gonna be nearer the top end of the 6% guide or something, or something else.
you know, with, again, debt ceiling, you know, interest rate hike cycle, you know, all those things aren't quite done yet, so I'm sure all of you are channel checking the various industries and, you know, you're seeing things like retail start to really come down. I think it was Home Depot that lowered their guidance for the year. I mean, I think all of these things are still very much in flux. that's why, you know, that's why the things that we laid out in our guidance in the beginning of the year, in our view, allowed for that volatility. You know, again, people would like to call that conservative, we call it prudent, just because there's so much that has to play out during the course of the year.
I feel very good about where we are. We'll see how, you know, the rest of the quarter plays out and what that means for the back half.
There's obviously a healthy amount of caution around the short cycle.
Mm-hmm.
trends. I think one of the canary in the coal mine businesses you have is the PPS within SPS. That's obviously down-
Yeah.
you know, quite heavily. I've been surprised by the resilience of advanced materials, because there are some consumer facing businesses in there. Maybe just talk about what you're seeing there within advanced materials.
Yeah. Yeah. I mean, I would say if you, if you just kind of think about Advanced Materials between flooring products and the electronics and chemicals, you know, we're seeing a lot of continued strength in flooring products and a little bit of weakness in chemicals like, you know, you've seen if you've talked to, you know, others in that space. I think that 20% or so growth in AM in the first quarter, that will likely start to come down as the year progresses. You know, feel very good about again, the balance. We've got 38 GBEs across the company, right?
There's always gonna be something that's in a little bit of a different place relative to the broader portfolio, but that's why I get a lot of confidence in how we see the year playing out overall, because we've got a lot of strength in some very important places.
Yeah. Then obviously Intelligrated has been a big headwind for you now. Quite a few quarters now.
Yeah.
Any visibility? Is it too early to really call or turn that business? You know, 2024 will mean, obviously 2024 is 2024.
Yeah.
Do you have any visibility on a turn in that business?
Yeah. I mean, as it sits here today, I mean, we're gonna continue to, you know, be down year-on-year in the back half as we were in the front. I mean, it'll dissipate a little bit in terms of rate as the year goes on. I think, again, it's the orders we get from now until the end of the year will really dictate how 2024, you know, turns out. You know, like others, we're, you know, trying to see how the market is absorbing the capacity that was built. It is a little bit too early to tell. You know, will it be flattish? Will it be up a little bit?
I think that's, you know, the order pattern for the next five months or so is really gonna tell the story for that. As I sit here today, I don't know the answer to that specifically. Again, that's part of what we're watching. I mean, we're out there. We've said from the very beginning, 2023 in general across the company is about going back and winning business again. You know, 2022 was all about liberating supply, and we had more demand than we knew what to do with. You know, again, people across the businesses and industry were advancing demand to try to get in the front of lines across industry.
You know, this year we're back to, you know, commercial execution is a big focus for the company, and we've pivoted, you know, very heavily towards that, and we're gonna do our best to make sure that we put a great foot forward for 2024.
I want to come back to supply chain in a second, but I do want to talk about the backlog. You know.
Sure.
You mentioned the $30 billion of backlog. I think your backlog grew 6% last quarter. Orders up against the top comp.
Yeah.
Are you expecting to start eating into that backlog now that lead times are coming down? Should we expect backlog stuff maybe falling from here?
I think its going to.. I don't think it's gonna come down dramatically. The reason that is because the order books, particularly in PMT and Aero, are still very strong. You know that, you know, while we're making progress, you know, I've always talked about our supply chain challenges kind of bifurcated into Aero and everybody else, right? You know, very simply, we said everybody else was all about semiconductors, and that's oversimplifying it. You know, you can use that notionally to kinda get the gist of it. That, you know, the non-Aero businesses have made a lot of nice progress and are getting, you know, close to a place where maybe we're gonna be, you know, fully healthy, let's say, by the end of the year or thereabout.
You know, we've talked about it a lot, the aerospace supply chain challenge is a skilled labor, shortage up and down the supply chain that's frankly gonna take years to correct itself. We're seeing a lot of great improvement, and, we talked about that in our earnings call at the end of Q1. You know, last year we were seeing decommit rates of 22% and coming down to 20, which in the first quarter was down to more like 15 on bigger numbers. Imagine higher commitment, slower, you know, decommit rate, which was positive, which allowed us to increase our own output by 20% in the quarter. That's good, right?
It's not enough to eat into the past due backlog or the backlog itself 'cause the order rates are still pretty robust, and I expect that to continue, you know, for some time. Again, we don't guide things like our backlog, but I guess the punch line is I wouldn't expect to see like huge chunks of that coming out here in 2023. I think we're gonna carry a fairly healthy backlog into 2024 as well.
Yeah. Great. I'll take one more question then I'll offer up the room a chance to question. Pricing, maybe like pricing and supply chain have been two sides of the same coin.
Yep.
Get me product, I don't care about the price. You know, as supply eases up, are you expecting internally to see a bit more, maybe discussions around price, maybe some more incentives in a weaker economy? I think your price fell from 10% in 4Q to, I think maybe missing a digit.
Six.
6% in one Q.
Yeah.
Just remind us how that plays out through the year.
Yeah. I mean, maybe just to start from the end, I mean, we expect the year to be something like 4%, right? Again, that's got a range around it as well. You could imagine plus or minus around a 4% number for the year. You would expect, you know, 6% probably comes down a little bit, and then my sense is we'll probably hit some stability level. Again, inflation's not going away. It's not gonna be at the elevated, you know, levels that it was in 2022. Some of that is to what you're talking about in terms of supply chain or constraints. You know, the vigilance that we've built in terms of price cost management, that's not gonna go away. You know, I absolutely expect we'll continue to remain price cost positive.
Again, across 38 GBEs in the company, you know, will there be places where that will be stronger and others where it'll be a little bit weaker? Absolutely. I mean, if that weren't the case, then we wouldn't be following economics, right? We talk about supply and elasticity of demand and trying to make sure that we take price appropriately but don't destroy demand, right? That's something we all learned in business school and, and again, back to Honeywell Digital, we now have kind of tools in place to be able to do that a bit more precisely by business, by region, et cetera. Across 38 businesses and across the globe, of course, the dynamics are gonna be different.
But there's no play, t here's no like one, oh my gosh, I'm super worried about, you know, that one thing, and that's a huge problem for us. You know, it's all again, kind of baked into our expectations for the year and, between the productivity focus that Torsten and the team talked about on Investor Day and, you know, the pricing acumen that we have in the business, I'm sure we're going to continue to manage that quite well.
Great. Thanks. All right, guys. Any, any questions? Any hands in the air? Oh, it's amazing.
Early.
Everyone wants to listen. Great. It is early. I can attest that. Let's move on to margins. The hallmark of Honeywell, right?
Yep.
Consistent margin expansion. You've raised your medium-term targets from segment margin expansion from, you know, by 10 basis points, 50 basis points now, midpoints 30 basis points-50 basis points, 40 basis points-60 basis points. This year's gonna be a stronger year for margin expansion.
Yep.
Despite the fact you've got some Aero headwinds.
Yep.
Just again, remind us what's driving stronger margin expansion this year?
Well, again, I would tell you a couple things. One, our price cost management has a bit of a carryover into the year. Then frankly, we're gonna get margin leverage or sorry, we're gonna get volume leverage because the company is going to grow and as always, you know, we use the principle of reallocation to fund things as opposed to everything being an incremental dollar. You know, we've talked a lot about our fixed cost Power of One construct, you know, which really always challenges the business to make sure we're driving productivity to fund investments that we do make.
I think that's, you know, between price costs, volume leverage, we're getting a little bit better mix in some areas, SPS in particular with the Intelligrated business, you know, becoming smaller, which again, a sales issue, not a profit one. Those are some of the things that are really helping us as we go, you know, through. Again, even whether Aerospace margins are, you know, flattish or not, they're still, you know, above the line average at, you know, 26, 27 points. Grow a business like that at double digits, that by itself is going to be providing some leverage too. I always say that with our margin expansion story, it's not triggered on or it's not anchored on any one thing, and actually that's the beauty of it.
There's a lot of irons in the fire, you know, that's one of the things that we're always able to continue to deliver on because we've got our repositioning pipeline always driving productivity. You know, we talked about price costs. You know, growing our software business at double digits, at accretive margins, you know, also helps volume leverage in general. We've got a lot of different things that we have, that we're gonna be able to take advantage of this year.
Yeah. There's certainly nothing wrong with your Aero margins, that's for sure.
No.
They are flat this year. You've called out obviously the customer incentives.
Yep.
which you've, you haven't quantified, but I think they're quite significant. You've also called out mix despite the fact that aftermarket is growing above the average. Just to help us understand.
Yeah.
that mix and how that, maybe how the incentives and the mix evolve over the next 12 months, 18 months.
Yeah. Yeah. We've talked about it. I mean, basically the delivery of aircraft, you know, carries with it some incentives to the airlines themselves. You all know that the aircraft deliveries, particularly in the 737 MAX, you know, came way down and now they're ramping back up again. That's gonna be a 2023, 2024 type of headwind. Again, you can follow along the aircraft delivery schedules to kind of see what the ramp rate of that is. You know, that's going to, that's actually part, it's a contra revenue thing. When you look at, you know, your observation around aftermarket growing more than OE, why do we have a mix headwind?
Well, part of that revenue growth is being tamped down by the contra revenue associated with the incentives. Yeah, I mean, we all know that OE and aftermarket profit profiles are, you know, pretty different. I think those two things are really what's going to drive the, the challenge, if you will, that we have here in the near term on Aero margins. Again, to grow Honeywell margin rate, it doesn't mean that every single business has to, you know, grow. I mean, Aero growing at double digits or high singles, you know, is going to be very accretive to the overall margin trajectory for Honeywell.
2024, again, not asking for 2024 guidance, but Aero margins in a very sort of general sense, we've still got the incentives probably in place.
Yep.
-for next year. next, how does the military ramp up, how does that impact margin rates, for
Yeah. If you think about one of the, one of the really nice aspects of our defense business is that there's an aspect of it that carries some commercial margins. It's, it's actually a very healthy margin rate relative to the total portfolio. As you noted, you know, we grew again for the first time in a while in defense. We put up 4% or 5% organic growth in Q1. I expect that to be, you know, a help for us as we, you know, kind of continue forward, you know, from here.
You know, the ramp rate of that, we've said it many times, we're not exposed to any one given platform, so it's not like we're gonna have, you know, one big thing drop and all of a sudden, you know, everything goes up in, you know, a vector like this. The, the whole theme of security is going to be one that's, you know, not going away anytime soon. I mean the, I don't think the world is gonna be safer tomorrow than it was yesterday. You know, I think that is going to have a pretty, a healthy tailwind associated with it, for, you know, the foreseeable future. We haven't seen huge changes in that demand level just yet, but we are starting to see some of that come through.
International business actually grew greater than the U.S. business in Q1. You know, I think that back to my kind of opening comments around, you know, our comfort or, you know, optimism about the whole portfolio, that's another one of the, you know, the big macro trends that I think is gonna be with us for some time.
Okay. Free cash flow. You know, if we strip away the noise with the legacy liabilities.
Yes.
this year, about $1.25 billion of that, right?
Yeah. About 13, yeah.
I think your underlying conversion is, what? mid-80s in that, in that zone.
That's right. Yeah.
We've got the R&D tax headwind coming through. That's tapering, I think.
Yeah. It will taper over time.
By 2026, 2027, we're back to square one. What other impediments do you see right now to free cash flow conversion getting back towards 100%?
Yeah. One of the biggest things, I mean, think, if you think about the supply chain challenges and what that meant to industry broadly, inventory. I mean, we're carrying more inventory from a days of supply perspective today than, you know, we had in 2019 by, you know, a healthy margin. One of the biggest levers we have is really bringing that back down as the supply constraints ease. Again, on top of that, we've invested a lot in our digital platforms around things like network planning. You know, Torsten's done a lot of the work that he described about simplifying the network of the supply chain itself, both our factories and our warehouses. I think you're gonna see us putting a lot of focus around inventory in particular.
If I go to Accelerator for a moment and back to the, you know, the first business model that we launched headlong into, driving an enterprise-wide GDM or global design model around it was projects. Why did we do that? Risk and cash, right? If you think about running global projects, you're trying to manage the risk associated with delivering, in some cases, $100 million plus projects over 18 to 24 month time frames. Now we're also, that's gonna bring along with it a very different cash focus as well.
I expect both, you know, due to just, you know, things ramping back up as well as the, you know, the discipline we're putting in place with the work around the projects business model and our GDM and our digitalization effort, that's gonna be another area. Between inventory and call it receivables from a projects perspective in particular, I think those are gonna be two big things. We're also moving, you know, things to e-commerce, right? I mean, there's places in the portfolio where we can move to more of an e-commerce model that's gonna have some growth aspects to it, but it'll also have, you know, some cash acceleration.
There's a number of things we've got, you know, going on in the portfolio to improve that cash trajectory as we kind of go forward from here. As always, we'll just have to balance our CapEx requirements, and there may be some. That's good. That's because we have a lot of really great growth opportunities internally, and we've talked about that a lot too. I mean, our, you know, call it median return rate on internal growth CapEx is in the 30s. You know, I think if you see us telling you that we're gonna raise CapEx, you should be excited because that means growth is coming. Because that's really where, you know, the call on CapEx will wind up being if we get there.
Yeah, we like CapEx. It sounds like with supply chain easing, free cash conversion should improve.
Oh, yeah. Again, that, I absolutely expect that to be the case. You know, we won't have to hold as much inventory in general. You know, as I mentioned, we'll drive some of the network effect with the transformation, you know, work that Torsten and team are doing. I totally expect to see working cap improve as we go forward.
We've got one minute and 40 seconds left. This is the rapid fire round now, I'm gonna try and get three more in before we hit the deadline.
If I talk really slow, it'll only be one.
So clearly-
Make sure I like it.
Okay. Clearly, no major portfolio actions, on the table today, but it did seem like there might be $2 billion-$3 billion of asset disposals.
Yeah. For sure.
Just remind us, you know, what, you know, I don't expect you to name and shame.
Yeah.
What kind of criteria are there for non-Honeywell businesses going forward?
Yeah. Yeah. Well, I mean, it's very simple. It's almost like the same screen we do for M&A, right? It's gotta be something that, you know, is tied to a strong macro trend. It's gotta be something that's got a technology differentiation associated with it. Therefore, it likely will have, you know, high gross margins. You know, if you just take a couple of those things, you know, we now are running an ESG screen through our M&A program. I mean, if you just take a couple of those as an example, you can kind of reverse engineer that and go, "Okay. Does something not have, you know, a strong growth trajectory? Is it commoditized?" I mean, you can work through the portfolio and is it overly cyclical?
I mean, these are some of the things that, you know, that we look at and, you know, as you alluded to, I mean, we do this every year. It's a bit of an evergreen process. We always know what those things are, It's a matter of, you know, when is the right opportunity to make a change, because we're not just gonna, you know, give it away for, you know, no or low value. You gotta make sure those things have to happen at an appropriate time as well.
Let's get one more in. Compressor Controls, I guess like an old school.
Mm-hmm.
You know, M&A at 13 times EBITDA, I think we're all expecting more Spartas at 13 times revenues. Going forwards, do you see more Spartas or more Compressors?
If we can find them. I mean, I think the... It's again, it's back to finding those opportunities. That's, it's not just a matter of will. You actually have to have two willing parties who are willing, you know, to make a deal and someone who's willing to part ways with an asset. We love Sparta. We love Compressor Controls. They're actually, for different reasons, both exactly the kinds of things we wanna go buy. Our pipeline is active and, you know, this is an area that, you know, Vimal, Darius, and myself, you know, expend a lot of energy on and, you know, I'm hopeful that we'll be able to do more.
Great. Thanks, Greg. We leave it there. Great conversation.
All right.
Thanks.
Yeah.