Please welcome Mark Macaluso.
Good morning. Thanks everyone for coming again out to lovely Morris Plains, New Jersey. We're delighted again to be hosting everyone here. We appreciate everyone making the trip. Before we get started, if everyone could just please turn their phones to silent.
For those of you listening via webcast, you can find today's presentation, including any non GAAP reconciliations on our website at www.honeywell.com /investor. I'd like to remind you that today's presentation will contain forward looking statements. These statements are based on our view of the world and of our businesses as we see them today. These elements can change and we ask that you interpret them in that light. We identify the principal risks and uncertainties that affect our performance in our Form 10 ks and other SEC filings.
Let's turn to the agenda. Similar to last year, we have enhanced the technology demonstration to provide a much more comprehensive and interactive demonstration of our leading edge technologies and software across all our business groups. During the registration process, you hopefully signed up to see 2 of the 4 tech demos. Please check the back of your badge to find your assignments and we'd ask you to adhere to your assignments and the times for each. At each tour, our business presidents and their teams will take you through an in-depth review followed by Q and A with their leadership teams.
The sessions will last 30 minutes and we ask that you quickly move in between the sessions to keep us on time. The tech demos will take place in the learning center across the hall and in between lunch will be waiting near the main lobby. There will of course be adequate time for Q and A throughout the show. We ask that you wait until the designated Q and A time to ask your questions. We have a lot of exciting content to share in 6.5 short hours.
So with that, it's my pleasure to introduce Honeywell's Chairman and CEO, Darius Adamczyk.
Good morning. Welcome everyone. I don't know nothing better than the smell of burgers frying at 8 o'clock in the morning. It's kind of my welcome in today, but I think it's a very exciting time to be here. Welcome all of you to our 2019 Investor Conference.
And the reason I say it's an exciting time to be here is really entering what I call is the Phase 2 of the Honeywell Transformation. We marked the Phase 1 completion by the completion of 2 spins that we did in Q4 last year that being Resideo and Garrett. We complete that in Q4. And although we're continuing to execute on our 4 key priorities, we are going to be supporting those 4 key priorities. Just to remind you what those four initiatives, 4 key priorities are, which is enhance organic growth, continue to expand margins and drive cash conversion, transform to a software industrial and more aggressive capital deployment.
Those are the 4 things that I laid out a couple of years ago. We're going to continue to be driving those same four things. But now they're going to be underpinned by 5 key initiatives. Some of these are news, some of those are not so new. The first one and following me is going to be Kew Dell'Arac, who's going to be talking to you about the Honeywell Connected Enterprise, which is really our transformation to a software industrial.
The second one, which is industrial transformation, Thorsten Pilles is going to be talking to you about that a little bit later this afternoon, which is really changing how we everything we do on the back end of the business and I'll discuss that in more detail later. The third one being a Honeywell Digital. Ken Stacharski is going to be up a little bit later. Honeywell Digital is all about making Honeywell internally a much more contemporary digital company. The 4th and something that I promised you a long time ago that we're always going to be doing, which is no matter when it happens, what we do, what we don't do, which is continue to optimize the portfolio.
We're not done. I would say some of the more major things that we're going to do were complete in Q4 last year, but we're going to continue to add as well as subtract from the portfolio to make sure that we have the best set of businesses in the industry. I've always said, I don't want to necessarily run the world's biggest company, I just want to run the best one. And continuous portfolio transformation is very much part of that playbook. And the last one, and maybe as important as anything we're going to talk about is innovation.
Innovation is the fiber and the heartbeat of Honeywell. You can't have an organic growth engine and you can't have a successful company unless you drive innovation. And we've threw out everything we talk about is going to be that common theme. One of the things I really dislike that we get lumped into is we get lumped into, you guys are an industrial company. We are not an industrial company.
We're actually a technology company. And if you look at what we do and the kind of solutions we deliver to the world, it's hard to argue we're an industrial company. We're much more of a technology company. All of this is underpinned by something else, which is our balance sheet. Obviously, the obvious statement is, yes, you guys have a strong balance sheet and you have a lot of dry powder on the balance sheet and an under levered balance sheet.
Those things can be argued that they're probably true. And there's a good reason for that and we're going to discuss it a bit later. But the other thing, which is just as important, is the change in the makeup of our balance sheet, thing being the risk reduction, the much different liability profile that's now reduced, that's being environmental as well as asbestos. And then the pension, I mean, our pension is now funded at 115% and half of it is in fixed assets, which are maxed at a liability. So that may not seem like that's all that important right now because generally, economies are good, companies are generating cash and it's not a big deal.
Well, that changes, that equation changes when there is a recession. And now would you rather be investing in a company that has funding of 70%, 80% or one that has 115% and really has no concerns during a recessionary period? That makes a difference. And last and certainly not least, and we're going to talk quite a bit about this towards the end of my presentation, which is, yes, Honeywell is a performance culture. We love winning, but we're also a company that brings great things to humanity, great things to the planet and ESG is at the forefront of what we do.
Those things are not opposed. You can be a tremendously successful company, a culture that is based on performance, but also focused on ESG. And we're going to I'm going to talk about that and give you some examples a little bit later. So a little bit about the new Honeywell after the spins. How does it look?
How is it different? A focus on 6 primary end markets, so we're a much more simplified company, which are company which is less cyclical rather than more cyclical, as many of you know. Garrett was our most cyclical business segment. Also it's one that's much more B2B versus B2C focused. We lost a lot of our B2C exposure, particularly with the Resideo spin.
We enhanced our organic growth profile, also streamlined our Honeywell Connected Enterprise to less verticals and continue to drive free cash flow conversion. And I've always said that I like simplicity. Complexity is not necessarily my friend. Simplicity is my friend and having a much more streamlined and focused portfolio is certainly the direction that we've moved to and I think it's going to pay off. So a little bit about the say do.
I think all of you know me, I like to generally like to do what we say and vice versa. And I think it's time to reexamine our scorecard. So if you take a look at the scorecard that we put together a couple of years ago and you take a look at the 4 primary objectives that we're trying to do, let's see how we did. Take a look at organic growth rate, it's been about 1% from 2014% to 2016%, 2017 we grew 4%, 2018 we grew 6%, Q1 we grew 8%. I'm not declaring full success here, but I'm declaring progress has been made on this objective.
And granted the economies have been good, but I can tell you this, there's absolutely no way we would have grown at these kinds of run rates without some of the things we did on the commercial side of the business, whether it be innovation based, whether it be continued investment in high growth region, whether it's commercial excellence and a lot of the other things that I'm going to be talking to you about today. I'm very proud of what we've been able to accomplish along this number key strategic objective. The second one, which is margin expansion. I think frankly speaking with some of you early, I think some of you had concerns that are you going to run out of room for margin expansion because we're history says we've been pretty good at this. Well, I can tell you and we're going to tell you how we're going to continue to deliver that 30 to 50 basis point expansion every year.
And by the way, we've done a little bit better than that as you see by the recent trend.
Cash conversion,
really nice progress on cash conversion and we did the right way, which is through reducing our working capital. And as you see, our turns are improving. We've just done a tremendous job there. And now what I committed to is that we would get to 100% conversion sometime around or roughly 100% conversion sometime in 2019. Well, the good news is we got there about a year early.
And we did it the right way, not by constraining capital, because that's kind of the silly way to do it, which is to constrain your capital investment, not invest in high IRR projects and we did it the right way. Becoming a software industrial, which is really all about what Kew is going to be talking about today. We've kind of bounced around, we did 23%, we did 14%. But our overall long term target is roughly a 20% compound annual growth rate. We are not changing that objective.
I'm very confident we're going to deliver 20%. Kew has the right strategy for her group. We've got the right passion around this and this will be the future of Honeywell. And then last, certainly not least, we have deployed capital back to our investors. Yes, it's taken more of in the form of share buyback than M and A, but I would tell you that's a function of the environment today.
This is very much a sellers rather than a buyers market. Greg will have a chart later on in the presentation, which will tell you the elevated multiples that are out there today. And frankly, the best investment that I could see is Honeywell, and it continues to be the best investment I can make. Having said that, you do have to we do want to do M and A, particularly bolt on M and A because it enhances our capabilities for the futures. For the future, it builds technical capability, positions us better, and we're absolutely committed to doing bolt on M and A.
But we're also committed to being smart with capital deployment, not overpaying. And you can see that kind of valuations that are being paid for today, which sometimes leaves us scratching our head. Next slide. So I think there's only a couple of punch lines on this one. So whether you look at Honeywell in the short term, a 1 year timeframe, 5 year, 3 year, 10 year, meaning short term, mid term, long term, we do one thing, which is we perform.
And whether you look at versus XLI, whether you look at S and P versus our peers, we continue to outperform the markets. I think one of you, I can't remember who said this, it's your sleep at night stock. Well, I guess I take great pride in that. That means that this is a very reliable investment. It's one that delivers year after year.
It's not based on CEO. It's not based on who is running what. We continue to deliver because it's never based on one person. It's based on what we do and how we do it and the culture and the innovation that we have within Honeywell. And as you can see, the engine keeps going.
And I can tell you that we are far from done. We are just beginning. And the future is just as exciting or more exciting that's been in the past. Honeywell Connected Enterprise, I don't want to steal too much of the thunder from Kew because she actually follows me, but I just I do want to just go over a little bit of what this is, which is really it's our play in the industrial IoT, which is a combination of our physical products as well as the software that's primarily developed by CUES Group. And it is not a broad industrial platform play.
We only participate in the markets that we currently play in, where we have a deep level of domain expertise, rich and deep installed bases, trust of our end customers. We build out these end customer centric solutions on something called Sentient, which is our IT stacks that we leverage the common, but we have end customer focused solutions around the aircraft, around the building, around the industrial worker, cybersecurity, etcetera. And it always combines that strategy, which is we take the best of our hardware, we take the best of our software to create that hybrid solution. And I'm proud to say that this has been a really nice success. I can tell you today, I've probably been to see, I don't know, well north of 70 to 80 CEOs of various industries.
We don't have a demand problem here. We do everybody understands that Honeywell can add tremendous value to their sites, their aircraft or whatever it may be. What we need to do is accelerate our own efforts. But this is one of the most exciting things we're going to do for the next several years and is one of the key strategic levers for Honeywell, and Kew will tell you a lot more about it in her presentation. The second one, supply chain transformation, Torsten is going to talk to you a little bit more about this this afternoon.
As you look at what's happened with Honeywell in the last 15 years, we've had over 80 acquisitions, a lot of complexity, a lot of footprint, a very complex supply chain. He'll show you an unwieldy number of manufacturing facilities, warehouses, inconsistent planning structures, talent that's uneven throughout the organization. And what we're going to be doing here is simplification of that supply chain, a deep level of effort into consistent planning, enhancement and investment in education and training of our workforce to not just save a lot of money because you can see it's about a $500,000,000 run rate savings and benefits particularly on the inventory side of things. But really it's all about serving our customers better because we're going to be able to shorten lead times, improve our on time deliveries and get into the very, very high 90s where our customers deserve to be. And frankly, when we grew at 0% to 1%, not that high hard to be in the high 90s.
Given some of the strain on the supply chain, particularly in the Aerospace segment, it's becoming much more difficult. But the fact is this whole effort is really preparing us for growth at that accelerated rate. And we want to be a world class company when it comes to supply chain. Thorsten and his team are well positioned to do that. We don't think this is a short journey.
We think that this is a 3 to 5 year journey, but one that's going to generate IRRs around 20%, $500,000,000 conservative in terms of fixed cost reduction as well as nearly $1,000,000,000 savings in inventory. So some pretty bold goals that we laid out for ourselves, in terms of doing this for the future. The next initiative, which is going to underpin our 4 key strategic priority is Honeywell Digital. Honeywell Digital is fundamentally about 3 different things. The first one, and I think the most important, which is data governance, consistent data fields, defining the critical data elements, whether it's supplier master, the customer master, all the masters that we have out there.
And we're currently in the process of cleaning up all that work, all those data elements throughout Honeywell. A lot of heavy lifting, a lot of manual work, but it's something that has to be done because without good data, you can't be a digitally contemporary company. The second element here is consistent processes across the 6 primary business models that we see across Honeywell. Last, it's all underpinned by consistent and common IT architectures. Those are the three things.
It sounds easy, and it's maybe not the sexiest work you have to go do, but it's absolutely essential. And we've quantified this for you in terms of some of the benefits. We think it's about a $500,000,000 potential run rate benefit in terms of both commercial and productivity side. But there is something else that's much more important here, and I can't quantify it for you, but I'm convinced it's there. Honeywell is a company that's based on analytical and database decision making.
1 of the fundamental things that Honeywell Digital is going to be able enable us to do, which is to make better decisions, whether it's the general managers, whether it's the functional leaders, making better decisions based on data is going to make us a much better company. What's that worth? I can't tell you exactly, but I'm convinced it's there. We've been on this effort for a couple of years now. We're accelerating now, and I think this is going to really transform internally Honeywell.
A little bit more of a scorecard to give you a little bit of an update in terms of how we're doing on the this is a little bit of the how when it comes to enhancing organic growth. So where there's high growth regions, Honeywell Connected Software, new product development breakthrough initiatives, we're performing well on those. You can see our performance in 2017, 2018, estimated 2019, we're making progress across all of those. Because I think it's really important when I say enhance organic growth, well, that's fine, but how? And you have to have specific actions and the right metrics to really be able to measure it.
And the key point to emphasize here is the following. There's one thing in common across all four of these things. They're all underpinned by innovation. None of this happens. We don't get these successes unless we have innovation that's taking place.
Because even you'd say, well, high growth regions, how is that innovation? Well, part of that innovation engine in high growth regions is our East for East and East to Rest strategy. There's a is our East for East and East to Rest strategy. There's a great deal of innovations taking place today in countries like China and India, which they're innovating for their local markets as well as using a lot of those ideas for some of the other high growth regions. It's exciting.
It's actually at arm's length from control by headquarters here in the U. S. Those teams have the freedom to develop and spend the money the way that they see fit for their local markets and it's generating results and it's just tremendous to see. Breakthrough initiatives, and maybe a little bit of a redefinition of what's a breakthrough. A breakthrough is a higher risk, higher reward initiative, which bends the curve of growth for each of our gold business enterprises.
If you recall, we have roughly 40 gold business enterprises within Honeywell and each of them is required to have 1 to 3 of these breakthrough initiatives.
And I just want to give
you an example of 3 of them. Quantum Computing, let's start with that one. That one is actually mine. I'm actually incubating quantum computing. I'm personally funding it with the help of Ann Madnick, who's actually the co sponsor of this thing.
We're pretty excited. Now you're going to say, well, what is this thing worth from a financial perspective right now? It's worth exactly 0 because it's pre revenue. But what I'm very confident about is based on the trapped ion technology that we have for quantum computing, we have very unique technology that we believe is as good or better than anything that's out there today. We do expect revenue, by the way, from this effort late this year or next year.
And based on any all the research that I've been doing and all the time I've been spending on this, we have something here. And it creates a great option value for Honeywell because when it takes off, it's really going to change the vector of who we are and bring tremendous value to customers to solve some very unique problems that can't be solved with computing that's available today. The second one is in a different category. This is a great idea that was really thought of by the aerospace team, which is they used a lot of their coating technology that they used to coat a turbine blades for the aircraft engines to now apply it to industrial applications. So why don't we take this technology and use it somewhere else?
This is now worth 100 of 1,000,000 of dollars and growing at a double digit growth rate and it's something that basically was at 0 as recently as 2, 3 years ago. Really a nice one that's gone from 0 to several $100,000,000 of a rich pipeline and backlog of activity. And then the last one, and actually, Peter Crenna, who runs our Intelligrated business, couldn't be here today because he's got $100,000,000 plus market opportunity on this very third breakthrough idea, which is the connected DC. And this is what is the connected DC? Connected DC is the continuum of the path for us to create the dark warehouse, dark warehouse meaning that you can operate without the use of operators, which is by the way where a lot of the retailers and the e commerce space and the people who really want to get much more into e commerce where they want to go.
So whether it's through the use of robotics or software, which gives you a lot more capability in terms of know how about the assets, about the processing of what's happening within your warehouse. We're on a path to be able to create this. And this is not embryonic. I mean, this is something that we have prototypes that are out there today and we're offering to customers today. And we have literally a real opportunity.
It's about $100,000,000 plus that Peter is trying to close. Segment margin, I talked to you a little bit about, maybe one word of caution, talked to you a little bit about ISC transformation, I talked about Honeywell Digital and you'd say, okay, start adding up these numbers and say, well, wait a minute, that's a lot more than 30 to 50 basis points, it should be like 100.
Well, I'm telling you a
little bit about how we're going to get there. What we're committed to is the 30 to 50. But I think it's important that our investors understand the how, not just the what. And based on what I'm seeing in our supply chain, Honeywell Digital continues to use of OEF, the productivity power of 1, the commercial power of 1, we have a lot of room to continue to expand our margins at that 30 to 50 per annum kind of a rate. We've been able to demonstrate that.
We've actually slightly exceeded the upper end of that margin expansion and we're far from done. And as you can see, the targets for each of our businesses are substantially higher than where they're operating today. And I can guarantee even when we get to those targets, we're going some new ideas to go even higher. Because if you look at our overall gross margin rates, we've got a lot of room for improvement. I think overall, when you bench our gross margin and our SG and A, I think we're fairly efficient on our SG and A, but our gross margin rates have room for improvement, and that's our point of focus.
And just to give you a very specific idea of a little bit of the how we're trying to drive it. So one of the concepts that I introduced to our all of our business teams in the area of focus is really a metric that I think is pretty interesting and that metric is variable contribution margin. Variable contribution margin is sort of the source of all truth, right? Because you have in your variable contribution margin, you have a reflection of your mix, a reflection of your value capture, you have a reflection of your direct material, direct labor productivity. And if you do a good job managing that, which includes your mix management, you will be driving up your gross margins.
We've made that a predominant metrics that we hold all of our general managers accountable for and we will as we move forward. So I'm not I am not worried about Honeywell running out of runway in terms of margin expansion. Cash and working capital. One of the things that I was a little bit concerned with when I first took over as CEO was that we were tremendous at having a focus on the P and L. I mean everybody at Honeywell understands the concept that we need to deliver, we need to deliver for our shareholders, we need to deliver for our customers, our employees and everybody is very P and L oriented.
That's good. But to me, the balance sheet is just as important as the P and L because liberating cash and some of you use this term and I happen to like it, which is becoming a compounder, meaning generating cash to reinvest back in and provide to our shareholders something I want to do. And we've made really nice progress in terms of cash generation. And we did it the right way, not by constraining CapEx and doing unnatural acts, but by reducing our working capital. As you can see, we're already pretty good in terms of where we are versus our peers.
We're number 2, which is we're one place off where we need to be, which says we've got room for improvement. But overall, I'm pleased with this progress. And if you take a look at about a one point roughly improvement in terms of where we've been in terms of working capital terms, and when you're operating in the mid-7s, I'm not going to say that's a world beating number, but it's also very, very respectable. But we still have room to grow. I mean, we've shown good progress on payables and receivables.
But I can tell you, inventory is has a lot of room for improvement. And I'm very confident with the efforts we're trying to do on ISC transformation and what Torsten is going to be talking about, we're going to make further progress there. The how is, we got a lot of help from our legal team. In terms of relooking at our terms and conditions, making sure that they're consistent, that they're being enforced, we can actually do what our terms and conditions say we can do. It's not maybe the most work that's it's really just heavy lifting is what it is.
It's paying attention to the detail, making sure that we have the right metrics in front of us and we're heading in the right direction. And but more work to go here and I have further expectations that are going to be driving down our working capital. Cash deployment. So I have a view for 2019. Greg has, I believe, a 3 year view for a little bit later in his presentation today.
A couple of the givens and the knowns. So as I committed, we're committed to driving down our share count reduction by another 1% this year. Why? Because I continue to believe that Honeywell is a compelling investment. And I'll show you that that's just not me saying it.
You'll see the kind of IRRs we've enjoyed in that investment in the next slide, which is so we're going to do that. We're also going to spend roughly about $800,000,000 further on CapEx, continue to pay out our compelling dividend, which gives us about $7,000,000,000 roughly to spend hopefully on M and A, bolt on M and A. That's our priority. The pipeline is rich, but I can also tell you so are the valuations. So I think all of you see the same thing as I do, which is there's a time to be a buyer and there's a time to be a seller.
And this very much to me feels like much more of a seller than a buyer's market. That's I think that's pretty much fact based. Now that doesn't mean we're going to stay on the sidelines forever and do nothing. I don't think that that's appropriate either. And we but you can rest assured that the acquisitions that we make, we're going to have a high degree of conviction in and we are going to do our homework and do the proper due diligence to make sure that they deliver for you, for our customers and for our employees.
So here's the slide I was referring to in terms of the buybacks. So if you look at the IRRs, no matter what year that those buybacks took place, and as you can see, we've been investing in our own stock for a while, It's been a compelling return. So whether it's the 2014 investment at 17 or 16 at 22, when you can generate the kind of IRR, which is high teens, low 20s,
I think that makes for
a pretty compelling investment in terms of buying back your stock. And as I said, I have 100% confidence that it continues to be a tremendous investment because we're very bullish on our future, have the right strategies in place and we're going to continue to profitably grow the business while generating more cash. So as I promised, all of this comes with something else, but I don't think we spend enough time talking about, which is we're a great company for the planet, for humanity. And we do a lot of great things that maybe we don't talk about that much. And we take responsibility for our forefathers in terms of what's been done before us.
I mean, we've spent 1,000,000,000 of dollars to clean up things like Lake Onondaga, like the Baltimore or Harbourfront to make this a usable asset for the communities and for the people. And I'm proud to say these are places that are now being developed that were essentially unusable for many, many years. This has cost us 1,000,000,000 of dollars of investment to go clean a lot of this up. And we're proud to do it. We take accountability for what we've done and we've cleaned it up.
Also, ESG has to live at home too. We've enjoyed over 90% reduction in greenhouse gas emissions since the mid-2000s. And we're driving down energy usage and energy consumption of inhaling oil. So it's got to we've got to kind of start and point at ourselves in terms of that responsibility. Furthermore, we're known for solving some of the toughest problems in the world, but it's even more exciting when you can solve those problems and they're also positive for the globe and for humanity, whether it's protecting passengers and pilots who have a 3 d weather system, whether it's protecting first responders and the military, whether it's providing energy efficient solutions, whether it's providing safety for our industrial workers, all these things Honeywell does today And also having the world's friendliest refrigeration molecule is also something that we've brought back to the world and now we're bringing it not just for mobile air conditioning applications, but also for stationary ones.
And then ESG goes further. One of the things, if you remember, we have the 8 behaviors for Honeywell and we have the 3 principles. The 3 principles is something that everyone who works at Honeywell has to believe in or you shouldn't work here. Those three principles are integrity and ethics, respect for the individual and being a proponent for diversity. Those are not negotiable.
And I'm proud to say that we're becoming a much more diverse company, particularly in terms of the participation of women amongst our ranks Every year for the last 10 years, we've improved that rate. Yes, it's moving more slowly than I would like, but we're making progress. And one of the couple of examples of what we're trying to do to make Honeywell a destination, career destination for life is this year, we've launched a program for 50 kind of mid career women up and coming so that we provide them the right level of training, development, access to senior executives for them to continue to build their career at Honeywell. Because what we want to do is we want to retain these people for their entire career, not be able to bring them in later. We'd certainly welcome that, but the whole thing here is all about retention.
We also have a rule that when we bring in somebody from the outside, it has to be a diverse slate. We will no longer entertain non diverse slates. Our recruiters know that and something we're enforcing it. We will hire the best person available. Let's be clear.
We'll hire the best person, but we have to have diverse slates and that's the way we hire people. And then finally, diversity is not just within Honeywell. Our Board has 3 Latinos on the Board, which was recognized last year, a nice award we we've closed the Phase 1 of Honeywell Transformation. There's much more work yet to be done, but you see the traction that we're getting, which is reflected in the metrics I've showed you. The second phase to support those four initiatives can be underpinned by 5 things: Honeywell Connected Enterprise, ISC Transformation, Annual Digital, continued work on the portfolio, both pluses and minuses and finally, and maybe most importantly, innovation.
That's going to enable us to continue to bring value. All of that is supported by a balance sheet that has a lot of firepower and is also the most de risked balance sheet, I think, in the industry out there today. So when we do go into a recession, which at some point I'm sure we will, there's not a lot to worry about in terms of funding the pensions and etcetera. We do all of this while promoting ESG and ESG is part of the fiber of Honeywell. I'm very confident to tell you although we've delivered the results in the past, the best days are still very much ahead of us.
So in closing, let me introduce you some others who will be following me today. Kew will follow me directly and talk to you about Honeywell Connected Enterprise. Then you're going to have our SBG CEOs. So you're going to have Tim talking about Aerospace, Wim will talk about HBT, Rajiv will follow about with PMT and John will close with Safety and Productivity Solutions. And then in the afternoon, I don't know, Horstin, how you're going to hold out this long, but he's going to be talking to you about ISC transformation.
Ken is going to be talking to you about Honeywell Digital, and then Greg will wrap up of our financials and we're going to do some Q and A in a couple of different segments. And I would strongly maybe one last commercial, which is I'd strongly encourage all of you to spend some time with the tech demos. The teams have put together a tremendous I actually walked through all of those last night, and I think the teams have done just a have done just a tremendous job getting ready for those. I think you'll find the kind of offerings, the kind of technologies that we have compelling. So on that note, I'll close and, Q, if you could come up the stage.
Well, good morning. I'm really excited to talk to you about the Honeywell Connected Enterprise this morning. 3 core themes. One is share with you a bit of context for why we created this organization and how it works within with the SPGs. 2nd is really give you an update on the progress that we're making.
And in particular, share with you Honeywell Forge, which is our enterprise performance management software to help our customers achieve operational and safety excellence. And the last part is share with you the impact that the connected enterprise can have on the value creation within Honeywell. So we in 2018, we established the Honeywell Connected Enterprise Organization to really accelerate the Internet of Things offerings that we have for the market as well as build out our software development capabilities. And this organization is 4,000 strong with more than half focused on technology and product. We commercialize our offerings through the SPGs.
And 2018, like following 2017, was a productive and pivotal year for us, with over with about $1,500,000,000 in software sales in total sales. The software growth rate for this business was 14%. But if you zero in on the recurring part of this business, the growth rate was roughly double that. So our SaaS part of the business is compounding quite nicely. Another $1,500,000,000 sits within the SPGs in terms of other software.
And this is software that is very in strictly linked to the hardware solutions that we provide. The way that the Connected Enterprise supports these offerings is with world class software engineering execution, and that lets the SPGs focus on commercialization and future innovation for the customers. This market is very large and we're very excited by it. And then on the surface, it may seem that the industries that we serve are very different in nature, but actually our customers have a lot in common. They're in critical industries.
They invest 1,000,000,000 in assets. They also employ a lot of workers that don't sit behind a desk and they run a lot of processes. And we're one of the few players out there trying to stitch a digital thread across all three across assets, process and people. So what we're trying to do is help our customers achieve 3 things. The first one is around asset reliability.
How can we help our customers get more of their asset investment in terms of uptime, availability and for longer? The second aspect is process optimization. Today in the industrial world, a lot of operational processes are optimized at a local level. We want to give our customers an enterprise holistic view of their entire operations. Then lastly, our customers deploy scores, thousands of workers that think of these as your people who have to interact with a physical good or material.
They're your material handlers, your delivery truck drivers, your technicians and operators. And these workers have a dearth of solutions available to help them do their jobs. And we're bringing safety, proficiency and productivity solutions to our customers. So with Honeywell Forge, what we're trying to do is provide a comprehensive solution across these three value propositions. All of this is built on a very robust cybersecurity foundation.
Already, we have $7,000,000,000 in our sales pipeline that's growing. So let me talk to you about Honeywell Forge, our solution for operational safety and excellence. Now I think we've all seen what happens when you take technological innovation to the office. We see that in ERP and CRM solutions. And what we're seeing now in the industrial and operations world is the same technological trend.
So when you look back
in the last number of decades, this industry is littered with point solutions, isolated point solutions. And so we think about it in terms of the OT space, operations technology, a software that interacts with physical devices or events or processes that happen in a, say, industrial facility, All of these points tend to be isolated. What we want to do is bring them together. This OT technology was never built to talk to each other. So as a result, customers have one of everything.
They have multiple hardware and software vendors in their environment. This is very complex. It's costly. It's inefficient to maintain or to upgrade if they want to produce more performance out of their operations. And these disparate systems don't work together to give the customer one comprehensive view of their operations.
So the solution to this is Honeywell Ford. We want to bring enterprise performance management software to give our customers for the first time visibility across their entire safety and operational environment. We want to do this in a way that doesn't require customers to rip and replace legacy systems. That's a very costly upgrade cycle. We want to make these systems also open and extensible, meaning that it works together with 3rd party applications as well as our customers' own applications that they can build.
So whether we think about this in terms of asset performance management or process performance management or people performance management or the confluence of all three And oftentimes, the excellence that you achieve in operations is actually bringing all three together, Honeywell Forge is the solution that will help our customers achieve safety and operational performance. So we created the connected enterprise because we realized that many successful companies that have been around a long time struggle to do 2 things at the same time. One is really optimize and run their core business well and the other is to innovate, and have a fresh innovation mentality startup mentality to the business. And we feel that the Connected Enterprise is a struck the right balance between doing both, harnessing the best of Honeywell paired with the autonomy of running a startup business within the company. So the Connected Enterprise works hand in glove with the SPGs in 2 primary fronts.
One is with product integration. Every SPG continues to enhance our core offerings with sensors and software. It's hard to imagine anything we release today without those components as core to what we release. The connected enterprise works with the SPGs to from the to bring these software solutions out to the market, but also focuses on the gateway all the way to the user application. In this way, both groups are bringing fresh innovations to the market.
The second part is we commercialize everything through the SVGs, meaning that think about every business as a channel access to market. And we've trained over 300 specialist software sellers to augment our existing sales force within the SPGs. And we're already seeing a benefit from this organizational structure. Today, when you see the tech thermals in the room, you'll see a very consistent look and feel for how our customers are going to experience the product, and that lowers the barriers to adoption. We're able to marry domain with the world class modern software development.
We're also able to build things in one way. We're able to spread our R and D investment dollars across all the verticals that you see here. So the good news around customer adoption that we've seen is customers are definitely trying new technologies. That's good. And what they're learning through this experience is actually they can prove maybe an asset to be made more reliable with software.
That's good. But what they're really realizing is that unless they can deploy at scale with a trusted partner like Honeywell, they can't reap the economic benefits of this transformation. So when you look at our installed base, Darius mentioned, we only focus in industries that we know, that we have customer access to. And the big opportunity here is not so much competing with players like ourselves, but actually competing with the inertia in the market to convert from how they do things today, the old way to doing things in a more efficient way in the future. Honeywell Forge is really focused on making it easy for customers to make that transition and migration from how they do things today in the operation environment to the new way, which is much more efficient.
So our strategy around software is really fourfold. We're very focused on the customer problem, operational and safety excellent. The first is, as I mentioned, the industry is full of point solutions, very difficult to manage. There's a deep degree of technical debt in the market. And what we're doing is we're refactoring this into 5 core platforms that solve these problems.
And that we do that with Honeywell Forge. I'm really excited to sort of see your reaction and get your feedback when you see the tech demos today. We're reducing the effort for customers to make this transition and we're also putting the control back into the hands of our customers. We're making it easier for them to take data from their core devices and being able to not just run Honeywell applications, but plug this into their own applications and third party applications. When we do this, we're adding tremendous value.
I'll go through some customer examples of where this value comes from. And we extract a proportion of the incremental value that we create. And we do this in 2 ways. 1 is through recurring economics. When you deliver customer extreme value, incremental value, they're willing to give you a share of that.
So that's an outcome based performance based contract. The other way is we want to see recurring revenue sales in the form of software as a service licenses from these solutions. The second part is all of our customer adoption. Whenever there's a new technology change, such as this digitization trend, there's some adoption curve. Customers are jittery, understandably, around is the technology nascent?
What does it take to deploy? What is the cost? How do I think about change management in my organization. And so we're working very closely with the customer when we build the product. We're building the product with them for them.
Every one of our 5 core platforms in Honeywell Forge has a customer advisory board that we work with in every Sprint release. And we get feedback on how they use the feature, what they find valuable. And we're pretty tough on each other because we want the best features to be released to market. The 3rd part of our strategy is to make our platform easy to use and we did 2 very fundamental things in 2018. We changed the way we thought about architecture.
We're going towards an API and microservices approach, that's one, There's only one way to do that. And we also changed the way that we deployed software practices. We call it DevSecOps. It's a way of delivering agile with modern software practices and test automation. And these two things compound each other.
You can't meet the tight commercial deadlines we set for the team without deploying this. As a result, the time it takes for us to release a new product today is 1 third the time it's taken 2 years ago in 2017. So we've produced enormous productivity in our engineering groups doing this. Darius, of course, talked about the Power of 1. But let me tell you what the Power of 1 is in the software business.
We have one way to do an API spec, one user interface. You can see very common look and feel in the products that we produce. One way to commit records to a database, one way to deploy code, one way to log bugs, etcetera. Whenever we stamped out duplication in how we develop, we add to our margins. It's really that simple.
That's the Power of 1 in software. The last piece here is foundational for us is really changing our software culture. We've put scrum teams in co location. Our headquarters in Atlanta has grown tremendously. This software capability has really reached critical mass in our core hubs.
We have a very rigorous software quality system that allows us to check the architecture, common structure and readability of the code that we produce. Our teams are really, really tough on each other in this process because we want to release only the most valuable features to our customers. Equally important is capability is that we're building our commercialization strengths in software selling, in how we design, in customer delivery because to support a 20 fourseven Software as a Service business, this is the expectation. So let me give you some examples. We have with Lufthansa, you know that a lot of customers buy airplane tickets based on fuel.
In the airline the commercial airline industry, dollars 700,000,000,000 was spent last year in the total industry on OpEx. And somewhere between 8% to 15% of this is spent on fuel depending on the oil price. So while 1.25% to 2% fuel savings doesn't seem like a lot, but for this customer, over 700 tails and over $5,000,000,000 spent on fuel, this makes a big difference to their ability to deliver economic and value added pricing to their customers. Crown Towers in Perth is kind of like a mini Vegas, but in Australia, they have a convention center, entertainment, 1200 room hotel, luxury hotel. 2 business objectives that this customer has is guest experience, but also the energy footprint because they're running this facility in summer temperatures that exceed 90 degrees on a daily basis.
By deploying the connected building solution, Honeywell Forge, we're able to reduce for them within the 1st year 90% reduction in electricity consumption and then a 90% reduction in reactive work orders. So this is fixing problems in air conditioning before complaints were made by guests and staff. There's a big deal when it comes to the guest experience. And lastly, Delek is an independent refiner in the U. S.
They produce about 300,000 barrels of oil per day. And we deploy the connected plants to help them improve reliability and profitability of their refinery. The customer has been able to see $10,000,000 increase in output. We've deployed since then a second FCC unit and the customer now is deploying a 3rd unit in a NASA complex in another site. So these are real outcomes that customers have and when they have this, this is a chance for us to deploy Honeywell Forge, but also change the economics we enjoy.
So in summary, as a Honeywell shareholder myself, I'm very excited about the creation of this group and how this team is working with the SPGs to really accelerate the IoT solutions that we bring to market. We're bringing safety and operational excellence to the industry. We've got great traction as evidenced by our double digit growth the last few years. And we have plenty of demand, as Daria said. The issue is not demand.
It's our ability to deliver and help customers through the adoption cycle. Honeywell Forge will help us continue this trend to grow at 20% compounded growth in the long term. We also believe that the value creation impact of the connected enterprise is really significant in the form of higher gross margins and higher growth than the Honeywell average. Recurring economics is a big priority for us. As we introduce new products, we want to shift the economic model to recurring economics.
And we love the SaaS model because it compounds growth. Not only compounds growth, it builds a lifetime relationship with customers. We no longer have transactional relationships, we have something that on goes for a long time. And this cost model is much easier to execute on because it's much easier to renew a subscription than it is to resell a customer an upgrade cycle of perpetual software. So we're very excited about the mix of recurring in our business and how fast that part of the business is growing.
If we do that, going
to be building a book
of business that Honeywell can count on in good times and in bad. Longer term, our target is to have our software businesses exceed 10% of Honeywell's sales mix and the majority of this coming from recurring economics. So I believe that Honeywell is well on its way to becoming their premier software industrial company. We're offering real solutions to real customers' problems. We're not talking about technology.
It's a real customer problems with real impacts that we can have. We're marrying the best of our domain expertise with world class software execution. I look forward to updating you on this progress. And thank you very much and I'll hand it over to Mohanee.
Thanks very much, Kew. A little bit of inside baseball before I tell you about this business. Which is at a certain point Darius was giving me some coaching and he said to me, so Tim, investors like consistency and boring. So I kind of lodged that away. And as I prepared for this presentation a couple of months ago, I've got all geared up for I provided it to him.
I walked in the conference room on a Monday morning and I'm all pumped up ready to tell my story. And Darius walks in and says, Tim, you don't need to say anything. He said, I read your deck this weekend. It's a major redo. And by the way, it's boring and consistent.
And I sat there and I looked at my CFO, Dan Satterfield and said, yes, yes, it's boring and it's consistent. Gary said, no, no, this is one of those times when it's supposed to be consistent and exciting. You've got an exciting business, you've got some exciting developments. So I'm going to take the next 19 minutes and share some things relative to this exciting business. And by the way, if you find this exciting, you can send him a note and send him a note telling him that it was exciting.
All right. So let me talk to you about 3 things. Let me look at this business through 3 lenses. 1 is our growth story. Secondly is our operating performance.
And third is an area of disruptive change. And I characterize it this way, from a growth perspective, think about this as the growth is accelerating, we're building momentum and it's going to deliver results both the near term and long term. So short term and long term growth, very, very good balance there. Moving into the improved performance drivers, Darius touched on one of the, I think, key elements relative to our change. So we've had 8 work streams relative to how do we improve our business performance from a segment margin perspective.
I'm here to tell you that
I think that the numbers that Darius presented relative to aerospace are very, very achievable. So consistently, I would say over the last 5 to 6 years, there's been questions around is there juice still in this lemon relative to operating performance? And there's no question about it. The 8 work streams that we've had continue to be maintained. And in addition to that, our focus on flawless launch, which embodies the focus on growth margin and design to unit product cost is we're starting to see green shoots of that actually this year.
And of course, that's going to go and feed us for a long time relative to this. And then of course, there's some disruptive changes. There's some we're on the cusp of new changes. We're not sure when this market will materialize relative to urban air mobility and so on, But there are changes relative to business models, new platforms, etcetera, etcetera. Of course, that's one of the areas that we're investing a lot of time and some investments relative to technology development and so on.
And I'd like to touch on that. So from a growth perspective, I would characterize it this way, which is 2018 was a good year. It validated a couple of things. One is we are on the right platform. So the marketing excellence around investing in pursuit alignment with those platforms that are going to be successful has been validated.
2nd thing is pursuing the right subsystems on the aircraft. 3rd is the fact that if you recall, the 1st week in 2017, we went through a slight reorganization where we had the 3 regions to liberate that capacity to have a dedicated focus on aftermarket, right? And that has been very successful. And I would say that the 2018 in summary is kind of validated or illuminated about how successful we will be in the future. This is less about looking in the rearview mirror and much more about how scalable the things that we are we can do going forward.
And then Darius touched on what we're doing with Torsten relative to the integrated supply chain, which is broad. But think about supplier execution and excellence as that is muting our growth. So that's one of the key themes that we have relative to our growth projection. And I'll touch on that both in the AGR area or the high growth region area. So 2018 validation, a year of validation of some things.
Okay. So the industry or the market that we're playing is all favorable, all three verticals. If you think about production rates, they're at a not an all time high. They're going to continue to go up. So this is about narrow bodies.
This is about business aviation aircraft and so on. There's flight hours continues to grow. There's new city peers that keep on getting added each week based on the airlines. So in upgrades driven by mandates and also some of the items that Kew just talked about relative to for the airlines to be able to operate more efficiently and so on, it all creates a very good pallet and environment for us. From business aviation perspective, we're not at the we're nowhere near at the peak of what was how the flight hours and so on was in 2,008 and 2,009.
But if you think about the new exciting platforms that were coming to market that we have a very enviable position on both in the avionics area and in our mechanical systems area, both engines, mechanical systems and so on very, very exciting. And I think the one area of uncertainty is around defense. Now if we think about this and I'll touch on the next chart, that environment, I think that that uncertainty is just a natural thing based on the fact of what happens in the U. S. DoD budgeting cycle.
But overall, the market environment is very, very friendly. It's very encouraging for us. Now from a defense perspective, just to drill down a little bit here, I'd share a couple of, three points. One is, if you think about the fact that order fulfillment and order placement are not aligned yet, there is a one, there is a still a bit of a sequestration industrial base hangover, meaning that as we went through sequestration, the industrial base in the defense area atrophied a bit and it hasn't come back to fully healthy. So our Honeywell Aerospace's order intake is here and order fulfillment is here.
The second thing is that if you think about the number of platforms and how diversified we are in this, so look at the number of platforms that we are on. As an example, just imagine the fact that every U. S. DoD air transport, fighter and bomber aircraft with the exception of 1, with the exception of 1 model has a Honeywell auxiliary power unit. Think about that as cap rate and pressurization, oxygen systems, etcetera, etcetera, right?
So second point is an incredibly diverse portfolio of platforms. And of course that lends itself for really three things. One is enhancements, 2 is technology insertions where it can't meet its mission again. And then of course, the third one is around creating as retrograde comes back, creating the next level and required level of state of readiness. So those 2 coupled with the fact that actually world peace has not broken out yet.
In some cases, a couple of our factories are actually at capacity. We can't fulfill all of the need that we have in demand. So from a defense perspective, there is uncertainty as there always has been relative to the budgeting cycle, but we have been very, very fortunate in the fact that we have a very good and very, very healthy order book. 2019, this is kind of one of the normal questions. 2019, we're fully booked for the entire business for in the defense area.
And we're actually measuring how much we are for and we are ahead for 2020. So we're working on filling the order book for the 2020 2021 in the defense area. Okay. So let me move on. This is an area that has been incredibly exciting for us.
I mentioned the fact that we had a structural change that we made in the 1st week in January of 2017, where we had 3 regions that went into place. And some of you may remember that we invested in adding some sales people. The exciting part about this is that there's really been a multidimensional approach we've had. 1 is sell the service, the aftermarket service long before the customer gets the aircraft. So you can imagine, right, if we have a 777 customer, a customer is operating 777s right now, we've been selling them 777X support already.
1, sell the service long before the aircraft ever gets there. Get the customer to think through what their support is. 2 is get as much content under dollars per flight hour program as you can. 3 is broaden the number of part numbers that is covered under those support contracts. So historically we've talked about auxiliary power units or engine programs.
There's contracts that we have right now with prominent airlines where every Honeywell part number, both avionics and mechanical is under $1 per hour program. And lastly, so that's expanding the part numbers. Lastly, extend the duration of the contracts. The new norm is between 10 15 years. Now why are we doing this?
Well, first of all, the aftermarket is a highly desirable workplace or place. And secondly is that we want to secure that business upfront. We want to eliminate that anxiety and those choices that customers have to make relative to support. So this has been a key area of focus for us. And of course, the organizational structure that we put in place has made this very, very exciting.
So this is a terrific success that we've had and very exciting. Okay. So as we've gone through this, you'll see that part of delivering the operating the segment margin is not about cannibalizing the future. We're making very, very conscious decisions. And I would characterize it this way, working from the bottom up, One is we're making smart investments relative to our core business.
So it's like power units, mechanical systems, all of the core business that we've talked about for years, we're making smart investment decisions there. And the reason that we can do that without increasing the percent of sales that we invest in R and D is because of what we've done relative to platform solutions, right? We've talked about core solutions where you develop something, whether it's a hardware or software once and you apply it many times. We've talked about FMS system, flight management system, where we develop it once and we apply it to numerous aircraft, right? So that is enabling us in order to do that.
Moving up from a if you think about the break if you think about the decoupled and growth areas, right? So this is about being entrepreneurial. This has to do with, if you look at what we've done relative to we've talked about decoupled growth. So this is discretionary spend that the customer can make because you bring the better mousetrap, a enhanced offering, something that they don't need to spend money on, but they will. Now this is in excess of $1,000,000,000 right?
And some of this is retrofitting ourselves on certain platforms. In other cases, it's actually retrofitting our competitors. And then of course, the next one is those areas for breakthroughs, right? So what is going to happen in the future? How do we make sure that we are making the right decisions both on short term decisions that have affect the income statement like Darius talked about as our coating business and also around that next generation of vehicles, right, that we are relevant and in a very significant position for 25 years now.
So if you look at this, I'd like to make a couple of comments. One is, yep, 70 OEMs. So this is an area that we are spending a lot of time on. We are on the cusp of new platforms being developed. When this market will actually materialize, don't know that.
I can't categorically tell you that. However, we will be positioned, very well positioned on those platforms and also being in the aftermarket stream relative to those platforms. So Carl's team has done a remarkably good job of working with a very, very host of in many cases, it's a hybrid. There's the customers or the OEMs that we know, Airbus, Boeing, Embraer. And then there's other ones like Uber, Pipistrel, names that you've never heard of that we've been spending quite a bit of time on.
And really what we've been doing is trying to focus on. 1 is what's their platform strategy? Does it make sense? 2 is what's the certification? Do they have a business model?
And lastly, do they are they capitalized such that that product or that offering can come to market? Now we have not just been solely focused on the platforms and getting prototypes on them. We've been really focused on how do we get into the aftermarket stream? How do we have the same business modeling that we have in our core business? And of course, the breakthroughs, Darius touched on this, but this has been one of the exciting areas.
And one of the findings that we found is where we have taken products that we know or that we have in our portfolio already and we've adapted them to adjacent markets, that's where we've had the greatest success. It hasn't necessarily been about inventing something that's new for our market. It's been to a greater extent, it's been associated with something that is a product that we adapt for an adjacent market. If you look at our industrial IMUs, okay, so inertials, that's one of the highest growth areas relative to breakthroughs. We've never done this before.
So very, very exciting from a business model perspective, platforms and so on. And of course, Q is not going to
be able to
have just the entire corner on connected, right? As we have invested both organizational capacity and investments from an innovation standpoint, we've been, I think, very, very thoughtful. There's been a lot of collaboration, right? And this is a fun area relative to continuing to invest in our core business, which is shown in the blue outlines and in the red areas, which is connected, right? And of course, there's a degree of segmentation around how we're doing this, but what's happening is some of the best practices that Kew talked about that is in connected is bleeding into the blue areas relative to our development areas.
So this has been an exciting area for us relative to innovation, both software, hardware and of course services. We're very, very focused on the business model.
Okay. For a
high growth region, we've had a playbook for a number of years. I'll tell you briefly what are the 2 different what's new. One is you see expand reach of channel partners. So there's 2 changes there. 1, there's less channel partners.
2, is there's more channel partnering, meaning that the thesis has been that why would if we're not selling direct, every salesperson that works for Honeywell has an annual operating plan. And they also have a strategic plan on what they need to attain over the next 3 to 5 years from a sales perspective. Why wouldn't a channel partner have the same thing? So we have thought about channel partners very, very differently for a long period of time until last year. Last year, we said, listen, one is we have too many of them duplication here, we're selling direct in a particular place.
So this is just dilutive. And 2 is we don't have the rigor around a annual operating plan and so on with that. So this has been actually accretive for us. So those are really the two changes. 1 is less channel partners.
And 2 is that there is a degree of consistency whether we're selling direct or whether we're selling indirect. Secondly is from a global source of supply. So
one of
the big realizations that we've had is our underlying supply base cannot support us at the growth rates that we're going to have over the next 20 years based on what we've experienced over the last 2 years. We need to expand this geographically and also domestically here, right? And so as part of that, what we've seen is we've expanded the number of the spend, the SKUs and a number of the suppliers that we've done supplier development with over years has now moved up the bill of material. So instead of a part provider, they're now moving up to providing an assembly, right? And this has been very encouraging because we want to buy higher in the bill of material.
This is very, very aligned and consistent with what we're doing with Torsten. Okay. On the left hand side, here's our growth projection. I feel great about the positions that we have on the platforms. I feel great about our products, feel great about
the people that we have
and most importantly, the value propositions and the offerings that we have for our customers. So I think that what you're going to see is the experiences that we've had in 20 18 2019 and beyond is going to continue for a long period of time relative to growth. On the right hand side, there's always been a perennial question. Tim, can you really do you think you can really get to 25% operating margin or segment profit? I've consistently said yes, and here's how we're going to do there.
Do this. We've had 8 work streams. The big fundamental thing that's changed this year is those 8 work streams stay in place. There's a 9th. And it goes back to we've talked about flawless launch that we would import automotive practices in the design phase relative to early supplier engagement, new product introduction and design to unit product cost.
And we are actually starting to see now based on those developments, we're actually starting to see accretive gross margins compared to our core base of business, right? So this is a very big opportunity for us. And Darius touched on this. This is a very big opportunity for us. So I'm very as I'm standing here, I have just as much confidence or more than I've ever had relative to our segmentation.
And by the way, or the segment margin expansion, and that is continuing to invest in all the right platforms, technologies, etcetera, etcetera. This is not about thinking both short just short term. This is thinking about the future and making sure that we get on the right platforms for the next 25 years. So in summary, 2018 was, I would say, an exciting year, was a defining year. We learned a lot.
But one of the key, I would say, learnings that we had was it really educated us on how scalable the foundational work that we had done for quite some time. And if you think about it, I think that the growth is now it's think about it as a flywheel. It's actually accelerating and it has momentum. It's both short term and long term. And of course, that accelerator for the aftermarket and the RMUs and the enhancements that has all been institutionalized and is operating very, very well.
I'm very excited about retrofits. I mean, this is a business where in some cases we retrofit ourselves. In other cases, we retrofit our competitors. And of course, getting into that business, then that's very, very accretive for us. And of course, shaping the future, we've been very, very active.
I don't want to understate that. Relative to, I would say relative to all of the next generation vehicles and business models. I'd say there's one deviation from what I've consistently said, which historically what we've said is from a marketing excellence standpoint, we need to pick the winners. In this case, we don't want to be too presumptuous. There is so much ambiguity relative to this next generation set of vehicles and business model that what we are doing is we are actually segregating who we believe to be losers that they won't those vehicles either the platforms, the business model, etcetera, won't work.
And what we're doing is aligning ourselves with the rest of those 70 OEMs in the future. And so with that, I'll turn it over to Vimal, who's going to get up in here and talk to us about business technologies. Thanks very much.
Okay. So I'm going to
walk you through the building technology story for the next 20 minutes, not 19. I started this role about a year back, just going to complete a year, a few days from now. And I feel pretty excited about this business and I hope you share my optimism and excitement at the end of my presentation. The 3 key messages I have about the building technology story. The first is probably what you know and what you share with me that we have a great position and a good industry.
Building technologies is a very fragmented space. We play in a segment which is about $100,000,000,000 and the segment grows nearly 4% for the last 10 years. And Honeywell, post spin has a pretty strong position in this segment. And I'll show you some of the segments where we have a pretty favorable position relative to our competitor group. And this market continues to grow greater than GDP as last 10 years have shown.
And the current megatrends are only giving us tailwinds. Think about urbanization, think about climate change, think about more regulation. They're only getting more than what it was in the past 10 years. So there's no reason market growth will change. The first message is about the market itself and Honeywell has a good position in that market.
2nd, we are really well positioned for growth. Post spin, our portfolio allows us to focus on commercial buildings. And I'm going to talk about 4 key areas where we're going to have a much more growth orientation, whether it's our new product strategy, which I believe is quite unique. When you come into the demo center, many of you today, I'll show you how unique we are building this whole H2 Cloud strategy, which is differentiated in the market. Then our focus on high growth regions.
We have a pretty strong position, but we have a lot of runway to grow. One of the reasons is that high growth regions have far more construction activity compared to mature markets. So think about mature markets more as retrofit and HGR as new construction. And Honeywell has pivotal position in China and Middle East and India and we want to build upon that because a lot of construction activity is happening there. The third one is monetizing uninstall base.
HBT has a significant installed base and monetizing that whether for software or for services is a key part of our strategy. And 4th is breakthrough programs and I'll talk about it. So significant position for growth and of course margin accretion, whether we focus on margin accretion through changing our mix more favorably, looking at our fixed costs, our gross margin expansion and of course, transformation of our supply chain. When we look at our business end of 2018, dollars 5,400,000,000 was the Building Technologies revenue, dollars 3,900,000,000 was what went with Resideo and the combined margin for the combined business Homes and Building Technologies was 17.3%. Obviously, as we turn to quarter 1, you were seeing the margin accretion because of the portfolio mix has changed and it's more favorable to us.
The business mix I find our business mix is
pretty favorable. We have the right mix of products and solutions. In fact, I would say within our industry, many of you do a fair bit of research. I'll argue that Honeywell has got one of the best mix with a more leaning towards product, but have significant play in solution, which is quite unique position to be. In geographies, again, we are very well balanced, which allows us to grow on top of every platform geographically, which is available.
And on the vertical focus, I want to call out your attention on fact, most time building technologies equals to commercial office. Well, that's true, but that's not the only vertical we serve. We are very diversified business. We serve from you can see the verticals we serve. Think about data centers, a massive space for us.
Think about healthcare, think about hospitality, think about retail. Commercial office is a big part of our business, but this optionality allow us to grow in different directions as a business. I wanted to share this chart on because there's obvious question, what is Building Technologies? What is Remainco after the spin and what's left behind? So the top end of the chart gives you a total segment size, which is $100,000,000,000 as I said, grows little shy of 4%.
If you look at last 10 years data of this industry, it grew a little shy of 4%. So that's the space we play in. Honeywell has got good position in 4 of the segments in this market. The first is a building management system. Honeywell is a premium provider of the BMS.
Think about a BMS as a brain of a building. That's where all the data comes in and you we have been doing controls and energy efficiency in a building for many years. The second domain where Honeywell has a leading position is fire. Safety is a critical requirement in every building. It's regulated and Honeywell has a significant position in that market.
And then you go to the extreme right, we have pretty good position in install and service due to our Building Solutions business and we can grow more and more of that by more recurring revenue models. And then software, interestingly enough coming from process automation as some of you are familiar, one thing that stuck to me was in the building industry, there is no significant software player, which is optimizing building in itself. So there's a space in which Honeywell has a meaningful presence. And with the launch of Forge, we aspire to take a pretty meaningful role in the software space, good to relative less competitiveness in that space. And of course, there are adjacencies we can always expand where we don't have a meaningful play.
So all in all, if you look at in the segment, we have a pretty meaningful position and which makes me pretty excited about this business. Also when I think about relative to competition, as I said before, I do believe we have a portfolio which is the right mix of products and solution, which shows up in our margin rates. And relative to the single domain players, I also believe that we are very well positioned. First is our scale. And secondly, think about it that if you have to solve critical problems in any building, you need cross domain experience.
What is cross domain? The problems are interrelated. When a fire incident occurs in a building, a building management system have to act upon it. If something happens on security, there may be interrelation with other domains. So multi domain has a correlation.
So being in a single domain is inherently disadvantaged. So in any case, in both cases, it does position us very well from a portfolio perspective. I think another question in everybody's mind is, is all the problems of spin are over? Do we have stranded costs? Is it like a long time issue and where we are?
So wanted to give you a preview of that. I would say the overall situation is pretty good. I won't say that is such a significant activity which was performed that will not have any stranded activity. But when we opened our books on Jan 1, there are a lot of things which were working for us right at the start of the year. Fire business did extremely well in 2018.
It's a $1,500,000,000 enterprise. I continue to believe we'll have a pretty strong year this year too. Our high growth region performance have been tremendous. We have more than $1,000,000,000 sales in China, India and Middle East last year, double digit growth. We see that trend continuing in 2019 and we did very well in connected.
We launched offerings and I'll talk about it. We've connected nearly 400 buildings and we're collecting data, we're optimizing and that's building basis for us to launch Forge. That has been a tremendous success story for us. Now what will improve, obviously, it was not a flawless story in 2018. We have some few things to work upon.
First, I presume it's not a surprising that when we did a spin of that scale, we did a major separation of our supply chain and we got impacted on certain plant performances and some stranded costs. That's where it is really held upon. And we exactly know where is the problem. So it's not a mystery. We precisely know what are the issues to work upon.
And I have a high confidence as the year progresses, most of these issues will be gone and will run as a normal business flawlessly across the board. The other two areas we're working on is project execution rigor. We have a pretty large projects business. We want to run it consistently, efficiently and flawlessly. And one of the things we are doing is running it more like a global business model, projects and service, something which process solution business did very well and we're going to copy that model and that will be one of our priorities in 2019.
And then a small portion of our portfolio, about 10% is not working well, was not working well. We have plans for that and we'll definitely have recovery of that. So all in all, I believe there's a case here for something which is transitioning from a separation year in 2018 to a growth platform in 2019. And you will see some early results in Q1. They're pretty promising and will continue to maintain a growth momentum in the year to come.
But let's talk about, okay, what beyond 2019? Okay, that's great. 2019 is here and now and we all have to deliver numbers. So what are our levers for long term growth? Incidentally, it's the same four things that Jerry has talked about, starts with the new products.
The new products for us, we're taking a slightly different view. We're thinking about taking an architectural view on our overall portfolio. Smart Edge, every field device should be smarter. So any building can have 500 to 1000 sensors. This building will easily have something like that.
Now how do we make them more smarter by design so that they are easier to install, they provide better user experience, that's our first priority and you'll see that in the DAMA area. 2nd is once these sensors are installed, they have to collect data so that the data could be acted upon. Now traditionally, these are called controllers or panels. We have fire panel, we have access controllers, we have BMS controllers, but we are transitioning them to become intelligent or connected gateway. They become source of data collection and natively connect with cloud.
That's a new architecture we are making in all our products. And once the data is collected by connected gateway, they become enabler for forge. That's where our data is coming in. We can run applications and create value for customers. That's one of our benefit we have of a cross domain edge to cloud company and that's a central to our strategy which we are doing on our new products.
Apart from that strategy, we are also looking at cycle time reduction on our new product launch, really looking at 50% reduction. In my mind, we are targeting 9 months from initiation to launch. Now that's something which is not very common in our industry and can become a competitive advantage and we are in a path to deliver that. And when we do this all together, we're looking at about 3% vitality improvement every year. So 12% over 4 years, so divided by 4.
That's kind of a math we're looking at, new product really becoming as a vehicle for us. I mean, this year we're going to launch 70 products. You can say what's the big deal about it. That's almost 2 times of what we did typically used to do. So we're kind of starting with that momentum of new products really becoming heartbeat of how we drive our business.
So that's our first growth vector, which is central to everything. The second growth vector is high growth regions. 28% of our revenue comes today from high growth regions. We believe it can really add 5 points over the next few years. Why?
First is infrastructure built in the high growth regions. Think about smart cities like we are participating in Egypt's building of new capital. Airport expansion, if not been to Beijing Airport, if you thought it was smaller, they're adding even bigger terminal and Honeywell is automating that. So that's kind of infrastructure build. On other side, thinking about the mass mid market, creating right products for that and improving our distribution network to address these markets.
One point of which is not emphasized is that in these high growth regions, reach is a big deal. These countries are not small and distribution structure is not very matured. I spoke an example of India. Honeywell has 2,000 installers and distributors today and we operate in 45 cities, not in China. China may be even bigger, but I wanted to give a different example.
And that's kind of a scale we are operating, and we, of course, want to build upon that. Our primary model here is focus on 5 high growth regions, the 3 I spoke about and also Latin America and ASEAN, have a more autonomous model. We have GMs for each one of them who report to me directly so that we have much more straightaway decision making style and can act faster on that. So I'm pretty abeep about our opportunity in high growth region. So that's the 2nd growth vector.
The 3rd growth vector is services. We have a big installed base. So the way to think about this chart is think about our installed base equal to 100. 60 is something which we don't serve today because that got created by our system integrators or our channel partners. And in our mind, we thought it's the market which they should serve.
And 40 is what we should serve because that's installed base Honeywell created through building solution with a direct channel. About half of that is served today, which is 20% and another 20% of that is underpenetrated. We believe that business can grow better by better customer service, more share of wallet by making new offerings, selling them more spot, but more importantly, changing our delivery model to cloud based delivery model. This is something we have done quite successfully over the last 18 months. We are rapidly transitioning our traditional service contract to digitized service contract.
We connect the customer to our cloud and our ability to provide service have lower cost to serve and customer gets higher value. It's a win win for us and our customer and that gives us more service business. So it's a compounding effect of that. We are taking that learning and giving applying that to the balanced 60% to say, wow, we never serve this installed base created by our channel partners. But now the cost to serve angle has totally changed compared to what it was in the past.
We can serve much bigger installed base at a much lower cost and new offerings are being launched to serve that installed base working along with our channel partners. It's not that we're going to be ate into their revenue stream, but new revenue streams are possible for us while we keep their revenue stream intact. So all in all, I see services being an important growth vector for us. The 4th growth vector for us is software. Software is not new to HPT, but what has changed is focus of Honeywell on software and making it as part of our business model.
What we did in the past was the blue things we have been doing in the past. We have this products like EPI, Pro Watch, BMS Supervisors. We use them as a vehicle to earn more hardware, to sell more products, sold a license in a perpetual license fee. We didn't think about that being a monetization of subscription model, software as a service. And that's what we changed over the last 18 months as we created SCE, outcome based service was an offering we launched and that's what we have really completed 400 installs.
It's our ability now to collect the data from a building on top of Honeywell system. And on an average, we are able to offer anywhere from 5% to 15% energy optimization on top of what customers are already getting with this technology. But OBS also taught us something new is that there's an unmet need in the market because one customers had not only connected from Honeywell, they also had connected from different OEMs. You will hear are connected from a chiller supplier. You will hear are connected from an elevator supplier, many others.
So who is going to create system of systems for our customers? Is customer going to embrace 15 connected offerings and figure it all out? And that's the gap Porch is committed to fill to build system of systems and really take customers a whole portfolio strategy we're building as a portfolio for them, like Honeywell has a very large portfolio of building. How do we manage those building in a more optimal manner and really take cost out of it? And that's the promise of Forge and I'm really excited to work with Q and we think that's a big growth vector for us.
So that's software. And finally, the breakthrough programs. The way I think about breakthrough program is slightly differently. Every breakthrough program should link to a growth vector which is happening in our market because that gives me a kind of sustainability of that growth program. So in I believe in the building industry, there are 5 macros which are occurring, which are not going to change for the next 10 years.
First is urbanization, the second is connected, the third is regulation, the 4th is climate change and 5th is labor shortage. We can argue there are other 2 and we can argue about it, but these 5 are prominent, which are going to here to stay. If we carefully choose things which we do not do today and these are transformational either by product model or the problem we are solving, they're clearly a new revenue stream for us. So I'll take a couple of examples. Think about urbanization, the world population is aging.
So hospitals are getting more aged customer, hospitals are also asking us to get methods to reduce improve patient safety. Now patient safety is linked to infection and we are all familiar that infection control in hospital has been a problem and we all go and we see doctors should wash hands and nurses should wash hands. So say what Honeywell going to do that? The another big enabler for reducing infection is air quality. If you are able to move air in a certain manner with a positive air changes, infection reduces dramatically.
And when we launched that offering, it's a new revenue stream for us. And by the way, it still pulls up building management system and fire system along with it. So it's accretiveness of our core offering and we add new value proposition as an example. Another example I will give you is small building. If you think about enterprise of small building, think of FedEx having multiple small offices or Bank of America having multiple small branches.
They were never thought candidate of automation so far because their footprint was very small. But with the Connected, the paradigm totally changes because you can create more of a control center model to collect data from multiple small buildings and optimize them. Is people doing that? Not a lot, but are we looking at it? Yes, it's clearly a breakthrough because it's a new trend in the market.
So thinking in that sense give us accretion of our served available market and add more revenue stream for us. So clearly something 6% of our come from BTI programs in 2019 and we think this can get to almost double it over the next couple of years. So all this really comes together in our long term framework. I do believe that we can drive low single digit to mid single digit growth based upon these 5 growth vectors, but at the same time also drive a favorable mix. Look at our mix today, you can see our mix is 3,000,000,000 products, 1.3 service, 1.4 it's illustrative to give you a sense of our mix today.
And the way I think about it is grow products 1.5 times GDP, grow software and services 3x GDP and grow projects at the market rate. And that way when we do that, not we drive the growth, but grew in a manner which is accretive and change our mix in a more favorable manner. And then apart from that, look at other segment margin expansion opportunities, which is ISE simplifications, looking at our fixed cost power of 1 and our gross margin expansion with the smart pricing and direct material savings. So all in all, those give us enough headroom to keep expanding our margins and get up to a level of 23%. I have a high confidence in that.
So look, I do believe, as I said, I'm pretty excited about the business. I think we are started in the right trajectory in 2019. In Q1, as you saw the results, they look pretty good for us. But what I'm really focusing on, me and my leadership team, is the middle segment. We have pretty capable leadership team in HBTU, combination of industry experts and Honeywell and really focused to create a strong delivery engine, strong innovation engine and strong sales engine because that's what really drive a business like us and it's going to keep us humming and we're focused on shaping our future with forward to more conversation during the breakout sessions later today.
So with that, I think we're going
to go for a break for 10 minutes and we'll be back here after that. Thank you very much.
Good morning. I'm really pleased to be here this morning to talk to you about how at PMT we continue to drive growth and profitability. Let me begin with a few key messages. So we have a strong 2019 outlook. We ended 20 18 with a backlog up 10% organically.
We are getting some great growth from our breakthrough initiatives, which are growing 40% year on year. And all this growth has positioned us well. And a lot of it, as you'll see in the presentation, coming from acyclical parts of our portfolio and helps us perform through all the oil and gas cycles. And all this because we have a portfolio that is really positioned for growth. HPS, as many of you know, is transforming the automation market digital offerings, which is helping us win and gain market penetration in the automation space.
And UOP has a lot of unique technologies that are helping them position and grow in the fast growing petrochemicals, natural gas and clean fuels markets. And Advanced Materials continues to grow with its new molecules, with its Solstice molecule besides being in the automotive space, they are now growing in the stationary, but also personal care space. That's one of our fastest growing areas. And they are also finding applications for Aclar, which is our fluoropolymer films, which go into medical packaging. They're using them now for new applications because they have some unique properties.
I'll talk about that some more. Along with that, we're positioned well for our long term segment margin expansion. This is based upon our improving mix with as we expand our high value connected and outcome based solutions. I'll talk about that more and you'll see that more in our tech demonstrations. Our growth in the aftermarket and services, and this is basically monetizing our very big and growing installed base in both UOP and HPS and our continued supply chain productivity and fixed cost optimization.
So a quick overview of our business. Over the last 3 years, the business has grown mid single digits. In 2016, if you're doing the math, that has resins and chemicals in it. So if you take that out, it's the middle single digits. Good margin expansion, 160 basis points over the last 3 years.
And besides the growth drivers you see on the right, our growth in automation, our high growth region performance, Solstice and so on. Really, one of the things I want to highlight is our new product sales vitality, 37%. 37% of our revenue comes from products introduced in the last 3 years. And this is what is giving us growth, giving us competitiveness, it's giving us ability to grow on adjacencies, giving us ability to grow in the high growth regions and so on. And we are continuing to transform our portfolio to improve its exposure to a cyclical elements that is more OpEx related sales rather than CapEx related sales.
So we have grown that to 62% of our sales come from OpEx driven sales. And you can see that in this chart. Since 2013, regardless the price of oil, it has gone up to 109 down to 44. We continue to grow our segment profit. And why do we do that and why will we continue to do it?
The same themes, expansion of the aftermarket, increase in recurring software and services in HPS and UOP. And we are participating in very secular growing megatrends, environmental regulation driving investment in clean fuels, low global warming potential solutions and renewables. Continued petrochemical growth and we are well positioned participate in that, which is of course driven by the middle class and will continue to be so for many, many years to come. And Advanced Materials continues to grow adding acyclicality to our portfolio. So I want to take the next few slides and go through all the things that are driving our growth.
One of the key components of this is our breakthrough initiatives. These are growing at 40% year on year. A good example of this is helping us, for example, enter new adjacencies and verticals. A good example of that is pharma and specialty chemicals. Here, we are growing at 25% year on year.
We are doing this by improving operational performance and regulatory compliance through some innovative badge control technologies and software. This is basically we are taking capability and technology we have in the process industries and applying it innovatively to batch and pharma space that is allowing us to grow in this space. In addition, think you've heard this before, but it's going really well as renewables and distributed assets. Our software and control technologies for this area, for distributed assets, has got some really good traction. And in clean fuels, our hydro treating catalyst that I've talked about now for a few years has really grown to a really good business for us.
And all of this will grow to $560,000,000 by 2023. An area that we've been emphasizing and we are growing, especially with our software solutions now, are outcome based services and new business models to monetize those outcomes. Now things like plant and personal safety, this is growing at 20% year on year. Here, we are centralizing customer safety control systems, but we are also adding real time data to improve worker safety and to reduce their operational risk. So in the past that data wasn't always available to the worker, but by centralizing it, connecting the worker, this information is available on demand to the worker in the field today.
That's really improving worker safety and operational risk reduction. We of course, you know we have a very big catalyst business, but now we are supplying catalyst more on an outcome basis. It's in its initial phases, getting good traction on that. And the reason we can do that is that we can monetize that with software. We can monitor and provide solutions based upon software.
As you know, probably most of you know that we have very large UOP equipment aftermarket. We have really not monetized that to any significant degree and we are driving that now. We have of course, we continue to drive innovative technologies and products, which will amount to about $380,000,000 in 2023. These are things like a unique Uniflex bottom of the barrel solutions. This is for upgrading really heavy end of barrel converted refinery to a highly efficient small refinery, which can be a feedstock prep unit for petrochemicals.
That is, I think, where the future is headed. We believe that and we have solutions like this. Good uptake in this. We have already sold this and these are in plant design and construction. Alkylation platform, an important part of the gasoline pool is alkylate.
Currently, today, it is made using HF and sulfuric acid. We have come with a non acid based solution, already sold 2 of these units. I think this is going to be a big breakthrough in this area. Stationary refrigeration that we have talked about before and you will see that in the technology demonstrations. And we are growing into new growth verticals.
Now these are verticals, some that I'll talk about we are in already and have been growing, others that we have just entered and then we have big pipeline behind that. Healthcare, as I talked, we have Aclar, we're already in medical packaging. This is a $5,000,000,000 market that we don't participate in hardly to any degree. And now we are able to because we can with the help of PACCARLAR with its unique properties that it has in combination with other packaging materials delivers value to new drugs, the biologics and so on that you were not able to do before. And of course, in pharma and batch automation, we are taking a solution into this space.
Decarbonization is fuels and sustainability. It's a big trend and it's an area we are well positioned to participate in. So we the global regulations are driving this transition, right, to low carbon and sustainable solutions. You have heard of our low global warming potential solutions for automotive, but now we are not only doing the for stationary, really one of the fastest growing segments we have LGWP molecules for personal care solutions, very nice traction in this space. And then there's a new emerging area that you all know from the electrification trend with cars being electric cars coming along and 5 gs networks proliferating.
There is a lot of heat released in these transmission of the signals or in the electric car. And we have some unique molecules that we have already commercialized for the 5 gs networks, and we are working in the electric vehicles to create some unique refrigerant solutions for this business. When you look to new energy verticals, this electrification is, of course, driving a big change in the energy mix with a lot more natural gas being consumed and a lot more renewables coming on stream, both wind and solar. And we are with our control systems, cloud based control systems, we are participating in renewables, solar and wind. And of course, we have a renewables business in UOP.
And then in the natural gas space, with the Autolop acquisition now, we have a very big play with high ethane recovery. More and more in the U. S. Customers want high ethane recovery and not just leave them in the natural gas. The next piece where we are getting growth is innovation that is driving our software services and this is driving growth.
Again, on the left hand side, in the red, you will see Honeywell Ford solutions that we are providing. Blue is where we're monetizing our installed base with software. So let me just take that. I think you saw an example, and I'll show you some more examples where our Honeywell Ford industrial solutions are helping improve asset reliability and efficiency. Now this is basically doing that so that it can improve throughput and yield.
We also have state of the art world class cybersecurity solutions that defend the availability and safety of control networks and plant operations. We are also using the Honeywell Ford solutions to improve skills and competency. There is a consistent theme that is occurring in the industry as the aging workforce retires and there's volatility in the workforce, there's more and more demand for how quickly can I bring people up to speed, how can I make information available to them real time so they can actually operate like they were more experienced than they really are today? So we are providing skills and competency management online with software. You can actually monitor the competency of the worker through certain KPIs and metrics.
We also have worker productivity solutions and workflow solutions where we have automated the procedures and the procedures and information is available online real time to the worker in the field. So when they walk up to a unit, they actually know real time through connection to the central system, what they are dealing with and what kind of designs and diagrams they need to be able to service that. On the right hand side, in the blue boxes are things that we're doing enabled by Honeywell Ford to monetize our installed base. So I think you have heard about our process control and systems assurance 360 program. We are using software to provide outcomes to our customers, uptime on the control systems and so on.
Now we are taking the same set of software to other adjacencies. The primary one I mentioned was pharma and batch chemical and renewables, where we're taking the same approach to quality, safety and risk management and providing solutions to them that they value just like they value them in the process industries. And then the outcome based solutions and connected services, These are outcomes, whether it's catalyst performance, process performance, worker performance, we are providing outcomes. But the only way you can really do that is connecting with them through software, collecting the data so you can monitor and provide them instructions. Another exciting area is monetizing our installed base using software to provide connected services.
Let me give an example. In our Thermal Solutions business, where we sell burners, they're highly desired. They're in every possible burner installation around the globe, whether it's in paint booths, curing cars, in pizza ovens, they are everywhere, industrial and these were all managed by the local burner expert, right? So Bob used to go and service these things and he worked there for 40 years. He really knew how to do this.
Well, Bruno Bob retired and wasn't replaced. And that's actually not a joke. This is true across the industry and they need support in optimizing those. We are connecting with a thermal IQ program and providing the service today. So you can see how we can multiply this across our system.
These solutions are getting a lot of traction,
and you can see on
the right hand side a small sampling of customers we have around the globe who are using it. Let me give a couple of examples. And the Q Nordic talked about Delek Refining, we had sold them to FCC, then the second FCC, the naphtha blocker and this has been a great success story. But wherever we install this as a success story, is a good example, independent oil and gas company, which is having a lot of equipment issues, which is causing slowdowns and shut downs, and they always struggle with should I take a shutdown to resurface it or can I do some process turnaround, take some loss and just keep on going? Tough decisions to make.
What we installed the Honeywell Ford Industrial Solutions, which monitor over 100 assets, the performance and the equipment health of over 100 assets. This reduced unplanned downtime by 2% to 3% with predictive analytics and reduced the asset energy loss by $3,000,000 per year. Another great example on the right hand side, a very large aromatics complex in the Middle East was having problems running their system. They had these are complex operations. They had a higher turnover and that problem is not going to solve itself anytime soon.
So having difficulty running and getting the production they wanted out of the facilities. And of course, as the complex ages, there is more and more help required because there's more maintenance and so on. We installed the Honeywell Forge Industrial Solutions. First of all, it went from, okay, what's broken, let's go fix it, to actually proactively providing process reliability. Literally, the data, we help them see a problem before it occurs or as soon as it occurs well before it actually shows up in their product being off spec.
So we see it early. So we help them do that. And then with the help of digital twins, we improved their overall throughput and yield by telling them how they could improve it. This uncovered over $10,000,000 per year for the customer on an ongoing basis. So some two great examples.
So let me with that move to the next growth vector. This has been a really good growth vector for us growing in the high growth regions. 37% of PMT's revenue comes from these high growth regions. We have been growing and will grow, we estimate about 8% per year, 11% of that coming from China, about 8% coming from the Middle East and 7% coming from the other high growth regions. And so far we have grown just by expanding our sales footprint, our sales support footprint and service footprint.
Now we are going to the next phase. We are localizing our supply chains, manufacturing East for East, East for Rest products with local partnerships or in our own facilities, things like catalysts, refrigerants, waxes, fiber. And we are doing new product development so that we can fuel and support our mid market growth. And this means things like locally sourced meters, thermal solutions, new blend for additives and chemicals. And yes, we will continue to do sales and channel expansion.
We will do what we did in China and India, and now we're going to do it to the other AGRs, same expansion, and going to China Tier 2 cities. And we will our building now increase their capability and footprint, increase their size of engineers engineering centers of excellence that we can support this growth in the mid market and in local market. So we are growing our presence in India. We are growing our presence in China, adding a presence in Kingdom and Saudi Arabia and in Eastern Europe. And we'll continue to do that to support our growth.
And maybe the last piece in our growth story is our comprehensive gas offering. This is an area that's growing rapidly. Yes, it has its ups and downs, but the macro trend is going to be that the energy will become gas will continue to become a bigger part of the energy mix. And we have a very comprehensive set of offerings in this area, not so much in the upstream, but in the midstream and downstream. We have gas treatment, gas processing, we have pipelines, we have terminals, we have LNG liquefaction treatment as well as natural gas liquids recovery.
And then downstream, we take those natural gas liquids and convert them into petrochemicals. So a complete set of offerings over here. The $30,000,000,000 market that's growing about 6%. We already generate $2,000,000,000 from this space and will grow at 1.5 times the market growth rate. We have been and this is what we expect to do.
So across the portfolio, we have growth. In UOP, our technology is enabling the energy pivot for the customers through petrochemical growth, digital transformation using Honeywell Forge offerings and participating the energy mix to renewables and natural gas. AM is expanding its Solstice platform giving us 15% growth in healthcare packaging that I mentioned, we're getting high single digit growth over here. And HPS is using digitization to unlock value. Digitization of services that you will see in the where we in the tech demo, where we'll talk about how we have digitized the life cycle of the industrial plant, we are getting 25% growth year on year, providing customer outcomes that I mentioned, 20% growth year over year.
And then of course, digital migrations using our ELC and framework and software is giving us high single digit growth. So long term, I feel pretty good about our forecast based upon things that I mentioned, Solstice, petrochemicals, software. I feel good about middle single digit growth for our revenue and good strong margin expansion, the highly accretive aftermarket and outcome based services, ISC productivity optimization of footprint, improved mix through our new high value offerings, I feel very good about our 25% margin long term forecast. So with that, let me conclude by saying that we are accelerating our growth in 2019. We had double we have double digit orders growth in process solution in the Q1 and also UOP.
Their licensing engineering business is up. That portends well for their total cycle. And this has resulted in the backlog actually at the end of first quarter growing to 12% and it was 10% at the end of the 4th quarter. And we look at the drivers for growth, digital migration and services going at over 10%, petrochemical and refinery of the future sales going high single digits and Solstice sales growing at 15%. So when we look to the future, as we shape our future, we seek how to grow.
Good news is we have 25% sales from those breakthrough initiative programs I talked about, 15% growth from the Connected Enterprise CAGR and the segment margin expansion I mentioned at 25%, along with reduced cyclicality. So when I look at this robust plan, I feel pretty good about our 2019 forecast and as well as about our future. Thank you.
Please welcome John Waldron. Please welcome John Waldron.
Okay.
Wow. Double the fun, I suppose. Well, thanks for being here today. Thanks for giving me a few minutes to tell you about how excited I am about the Safety and Productivity Solutions business. We have a terrific portfolio.
I'm going to tell you a little bit about in a moment. But we have a very positive outlook on our opportunity. We have a $1,000,000,000 backlog in our long cycle business, largely the Intelligrated platform. We have tailwinds, positive tailwinds in all of our segments. And I'll tell you a little bit about the macros we've talked about before, in our businesses.
And I'm going to give you a bit of a deeper dive into the Productivity Products business because we have some work to do there, but I do feel good about the outlook for that part of the portfolio. Our portfolio is positioned for growth in our markets. We do have a huge opportunity to connect to our devices, our products, our tools and technologies and deliver software outcomes as well as services for the long run. We have a pipeline of exciting offerings we'll talk to you about and you can see in the demo room as well. And then we have what I'd say is an unlimited amount of opportunities around M and A.
We're not going to talk about those targets specifically today, but we have a really broad array of opportunities available to us. So in terms of our outlook, our long term outlook for the business, we have a great long term sales growth outlook around our core business, our connected solutions and breakthrough offerings, And then we have the opportunity to really grow margins over the long term around our productivity initiatives, our fixed cost management platform and programs, and then continuing to manage the OpEx profile of
the business. So let's get
in and get started and tell you a little bit about the business further. So we've had a good run over the last couple of years in this business. This business has really matured to the 4 platforms you see there around automation for warehouses, safety solutions, our sensing business and our productivity solutions platform. We've been able to use the tailwinds at our back to grow this business as well as drive margin growth over the horizon. And then our business is broadly exposed to many different vertical markets.
That puts us in position to engage end users across these markets and really deliver value from our 4 business platforms. And when we formed this business, we had the opportunity to call it safety or productivity solutions, but we chose to call it safety and productivity solutions. That's important. I think you'll see that when you look at our solutions today. We're starting to bring those together and that really is the basis for the next phase of growth in our business is bringing those outcomes together for our customers across verticals.
And then as you can see, increasingly, we've got a long cycle mix in the business underpinned by the Intelligrated platform. So let me give you a bit deeper view into each of those business platforms. But all of our businesses participate in very large markets that we address some subset of. Safety Solutions today is a terrific business where we have leading positions in fall protection, hearing protection, respiratory, gas detection and many other protective technologies. We participate in, as you can see, a $50,000,000,000 market.
It's a huge space and we have a very small share of that space. So we have a tremendous opportunity for growth both organically and inorganically in this business. Productivity Solutions is that business where we deliver productivity tools to our customers, barcode scanners, printers, mobile computers, increasingly software, where we help make the workers in the workplace more productive. Sensing and IoT is a terrific business. We deliver high value sensing technologies for smart devices, whether those devices fly or whether they are medical devices that help you as a consumer.
We have high value content that increasingly makes those devices perform better and make them smarter for the companies that use them and make them. And our warehouse automation business, I'll talk about this in a bit more detail, but what an exciting business we've put together that has just a tremendous amount of growth opportunity ahead of it. In all of these cases, as Kew was describing earlier, we are delivering connectivity technologies and solutions around the distribution center, the worker and increasingly around logistics. This space around the factory, the distribution center and the consumer are converging and we have to deliver connected technologies to make those things more efficient. So those macro trends that I talked about, e commerce is a phenomenon that everybody knows and loves.
We are right in the thick of this. E commerce is going to continue to grow. And while we talked about 20% sustained growth rates 3 years ago, those growth rates are muting a bit, but still strong double digit growth rates in e commerce and e commerce is changing shape a bit. It used to be about the giant fulfillment center. Increasingly, it's going about the more highly automated fulfillment center that's actually going to be closer to the consumer because the next war that's waging in e commerce fulfillment is around time to deliver.
You've seen this in the public domain. It used to be 2 days and then now it's one day. Increasingly, it's moving to the number of hours it takes to get to you as a consumer or even as a business. B2B e commerce is also emerging as a great trend and opportunity for us. I mentioned sensing.
Devices are getting smarter. What does that mean? That means they have to have more sensors. We're right in the middle of that marketplace. I think we're going to benefit from it tremendously.
And safety is increasingly more important in the workplace. Darius talked about it in his opening presentation in terms of how we are behaving in our communities. All companies like to be known as good operators for their employees and the communities that they serve. And regulations are moving to match that phenomenon. And we're right in the middle of that, while, we have great solutions to play to deliver on that macro trend.
So with that, let me talk a little bit about the platform that we put together in warehouse automation because we talk about this sometimes like it's just Intelligrated. Intelligrated is a huge part of this. And as you can see, I think will turn out to be a terrific investment for Honeywell and our share owners. We've delivered 18% or so return on investment so far. It's really been a nice platform for growth.
We've more than doubled this business since we bought it, but that's not the only thing that we've done. We've actually brought together with that core platform we bought some exciting organic and inorganic investments. Brooks Technologies is a Chinese warehouse management company that we've invested in and partnered with to bring software technology to the platform. Transnorm we acquired last year is a European footprint for this platform that we're expanding from throughout the European marketplace as well as around Asia Pacific. We've partnered with Carnegie Mellon to invest in our robotics initiative, where we've got we're leveraging their capability and their expertise, our ideas about how to innovate for growth and we're moving those initiatives forward.
And last but certainly not least, we've brought together our voice guided work platform together with this business, which has more than a 1000000 warehouse workers every day touching our platform and system. So together, we're able to bring this legacy business. We bought it in Telegraded with some terrific organic and inorganic investments to form the basis of a really exciting global warehouse automation player that has a lot more opportunity for growth beyond this. So with that, I'd like to talk a little bit about the Productivity Products business. Because Q1 was very challenging for this business, we had some short cycle challenges in terms of delivering pipeline conversion and growth and as such had to take some decisions around inventory levels in our channel.
So, as we've gone and done our diagnosis on this business, we've come to realize a few things. One is, we have great technology. Our customers tell us we have the right technologies, we've developed the right platform investments to deliver on the value propositions that they need. What we have to do though more importantly is, we have to make sure we are going directly to the key end users in those vertical markets where those opportunities are happening. We have to capture sales at the point of attack and we have to do a better job engaging our channel.
We're launching new platforms and technologies to add on to what we've already done in warehouse automation as well as healthcare. Those are 2 very important high value markets that we have to engage through this business. We have to continue to innovate and deliver on next generations of technology in this business as well as deliver on software content to connect to our devices as well as deliver value with our independent software vendors. You'll see some of those examples in the demo room where we're bringing those together to really bring a broader value proposition to the market. And then, as I mentioned, we have to make sure that that terrific technology value we have can translate through our channel to get to the end users.
And so over the course of the next several months quarters, we're going on a campaign to engage our channel partners, make sure that they have the messaging, that they have the playbooks to help us increase our win rates and convert our pipeline in the market. So more to come, but that's the game plan we're executing. We think we have a positive outlook on this business and a great opportunity to drive growth in the second half of the year. So with that, I wanted to lay out the landscape as we see it in terms of our opportunities for growth. We see ourselves participating kind of at all points along this value chain in terms of the industrial manufacturing and supply chain landscape, all the way from source and manufacturer through distribution onto the consumer or the business user.
As you can see, we have current offerings along this landscape in many different areas, many different technologies, many different plays that we run all around the world. But you can also see below that where we see the potential growth opportunities organically or inorganically for this platform and this business, where we are investing in some of our breakthroughs, investing in some of our software efforts, and then exploring the M and A landscape for opportunities. So with that, I want to talk a little bit about some of our growth vectors that we have in the business, in our current portfolio. I won't touch on all of these because some most of these you can see in the room around the corner, but we have some terrific investments going on to connect to some of our core platforms. One of the exciting ones on this chart is in the connected hearing space.
Hearing is the number one safety problem that puts people out of the workplace. Hearing loss is a chronic problem in industrial environments. Being able to connect to somebody wearing hearing technology and then give them feedback, give their manager feedback on when they should come out of the workforce or when they should be have given too much dosage of loud noise is a tremendous amount of value that you can deliver. I've talked about warehouse automation. We are delivering on the connected distribution center.
Darius talked about that as one of our breakthrough initiatives and we have many different investments going on around this area. But one of the most exciting is being able to go into our installed base or the installed base of 1 of our competitors and instrument an older system to show its owner and its operator where the challenges are in operation. From that, we can decide what to replace, where to service, we can show them where bottlenecks exist. That outcome based service opportunity is a huge growth opportunity for our lifecycle service business. So our breakthrough initiatives, you'll see some of these at play as well.
Darius mentioned robotics, we've got a lot of exciting opportunities there and some very specific IP that we're developing around machine vision and machine control. Biosensing is a new one. This is an exciting one because we acquired some technology that allows us to monitor workers' health in the workplace. Think about heart rate, breathing rate, oxygen levels being monitored directly from the industrial worker or from someone being put out on an oil rig all by themselves and being able to bring that data back through the cloud so that you can remotely monitor things about them that they themselves don't even know. We have this technology.
We're deploying it in many of our industrial safety applications in our connected worker platform and more to come. And of course, we're investing in machine learning and artificial intelligence. We are deploying this today with customers. There is now more computing horsepower in your hand with some of our mobile computing technologies that you had in the server room 10 years ago. There's tremendous power at our disposal and we're deploying machine learning algorithms to detect things like misbehavior, to detect things like out of specification usage, to detect things like safety labels put in the right place.
And those things, while they might not seem like they're earth shattering ideas, they're tremendously valuable to our customers that we're engaged with. So with that, we'll talk more about connected assets in the demo room. We have this live connected to an actual customer site here in Morris Plains, which is exciting. Another one we're working on is in that logistics space. Our China team has developed in partnership with some Chinese manufacturing and supply chain companies a platform that allows us to broker shippers, 3PLs and drivers and actually bid out to the drivers the work that they want on a real time allocated basis.
We have 40,000 drivers every day using this platform in China. We're equipping our own supply chain to use it and we'll be globalizing this offering in the year to come. So very exciting effort by our China team. And then as we've talked about, we're bringing all these initiatives, whether they're through forge in our connected enterprise, whether they're some of our connected IoT based solutions or whether there are new product breakthroughs and we're driving them through the SPS selling team, which is about 2,000 sellers around the world to our large end users and our small and medium business end users. We think there's tremendous opportunity to bring this software innovation and technology and value to our customer base.
So the next vector that is extremely important to us is high growth regions. High growth regions today in the SPS business is about 16% of the total. And this has the opportunity to be far greater. Our internal target for this is about 25%. And we really are trying to take from our playbook in China, where we've built a very significant, very sophisticated business that's entirely localized.
6 years ago, we committed to developing our own engineering teams, our own product roadmaps, our own budget control, And that has worked out tremendously well by delivering continuous double digit growth by that team across our businesses. We're taking that playbook to India. We're already delivering on growth in the local market, and we're investing in local roadmaps with that team as well. So we think by taking that playbook to our other high growth regions, whether it's east for east products, our products made local for local or whether it's East to rest, taking those solutions from China and India and globalizing them to our other high growth regions or developed markets. This is a playbook that will work for SPS and continue to drive growth around the world.
So with that, our long term framework is relatively simple. There's 3 real primary top line growth here. Our core innovation growth vector around our platform businesses, reinventing and reinvesting in those businesses, making them more software denominated. Our high growth region businesses, we think we can grow in the 15% range over the horizon. We think there's tremendous upside and opportunity in all of these regions around the world.
And then the big bets that we're making in connected solutions and breakthroughs will pay off. We've got some exciting opportunities. We think those will play through for our customers and we're getting a lot of tremendous feedback from the engagements that we're already driving. On the margin expansion side, we've got a lot of opportunity here. When Torsten tells you about what he's working on in the connected supply chain, we are a terrific partner for his effort.
We have a huge opportunity in our supply chain, whether it be for OpEx management, indirect management, or in some of our PowerOne initiatives around fixed cost management. We've got just a tremendous opportunity and think we can deliver 50 basis points of margin expansion over the horizon toward our long term margin target in the 18% to 20% range. So with that, I'll summarize. So we have to deliver in 2019. We've started with a relatively strong Q1.
We've driven growth from our important platforms. We've got some important work to do in productivity products to right that ship and bring it back to growth. Our growth drivers at our backs are clear and compelling. E commerce is a phenomenon that is not going away. Our participation in that market is still largely limited to the United States and North America.
We've got a lot of opportunity to globalize that. Industrial automation, smart devices, what a great trend that's also driving growth in our businesses. And high growth regions, at only 16% of our portfolio, we can grow that part of our business tremendously to be a much more significant part of SPS. And shaping our future is exciting. It's the thing that gets me up in the morning.
It's the thing that keeps me engaged. We have so many exciting technologies and opportunities to innovate. Those innovations, those connected solutions, those breakthroughs are going to deliver $1,000,000,000 or more of growth to the platform over the modeling horizon. So we're excited about our future and we appreciate your time. And at this point, I'll ask the other CEOs to come back for questions.
Okay. Let's start with Steve Tusa, JPMorgan.
Thanks. Just looking at the Building Technologies outlook, if you do the math on the spins and the stranded costs, you're getting to kind of just above 21% to 21.5% on margins alone as kind of a starting point. So is there some reason why you can't get beyond the 23 percent at least in the intermediate term? Are you investing more in this platform than we kind of see? And also I think if you add up the breakthroughs and stuff and the market growth you talked about 4%, you're guiding to low single digit to mid single digit over the long term.
So you're inherently saying that there could be an outcome. In a base case, it's below the market rate, but it seems like you got some interesting new products coming out. Is there any reason why those can't be a little better over the intermediate term?
Okay. First of all, thanks for your optimism to hear that. I would say that 2019 is a transition year for us. We don't want to run out of the gate with massive commitments and not able to deliver. 2019 is a true 1st year building technologies, learning if we are kind of a new business, kind of, I can put our analogy, we need to understand our cost structure, our business model and our growth vector.
So I won't disagree with your point of view that we probably have more runway than what we are suggesting. But let us deliver 2019 and then probably outlay subsequently can we do better than what we are committing? Probably yes, but I think it will be too early to commit that at this point.
And then just on the PMT side, when we hear about all the trade noise coming out of the U. S. And China, everybody kind of lumps China into one bucket is kind of monolithic. But clearly, there is kind of something in your business, from a energy infrastructure perspective that's maybe decoupled from that. I mean, is that the right way to look at it?
It's more driven by kind of oil price and they're very strategic about those investments. I mean, what feedback do you get on the ground as far as any impact from these trade concerns has on your specific business in China?
Yes. You're right about the macro picture that's determined by long term view of people have on investments based on the price of oil and gas demand and so on. So that we don't see changing unless it causes any slowdown in the overall economy. Well, then it will be a different issue. But it's too early to tell if that's going to be the case.
We have other impacts, both positive and negative that we have mitigated based upon just supply of catalysts and products and HFCs, but we have managed that. So our exposure at this point is fairly minimal in that regard.
Next question from Nicole DeBlase, Deutsche Bank.
Thanks. I want to right here. I just want to start with Intelligrated. I thought it was interesting that you put up a chart that said you can continue to grow double digits through 2023, comps are getting tougher. If you could talk a little bit about what you're seeing in the project pipeline to give you the confidence to put a target like that out there?
Sure. So we definitely have a long term view of that business that's positive and optimistic. Clearly, there's lumpiness that happens in any given period, month, quarter, whatever. But our customers are continuing to invest. And we see the outlook as being positive both in terms of digging into our installed base where we're pretty under penetrated on our LSS business, our voice technology business as well as pulling through some of our productivity products offerings into that installed base.
We also have a very U. S. Centric portfolio today. And so we're investing heavily for the European opportunity as well as the Chinese and Asia Pacific opportunity, which have in some cases higher penetration rates of e commerce, but lower levels of automation. And as those labor bases continue to inflate, time to deliver, the cost of a defect become bigger and bigger problems that they're trying to solve.
So we still view the opportunity ahead of us as pretty positive. And so that's why we've targeted ourselves to grow at double digit rates over the next several years.
Okay, thanks. And just following up for you as well, John, on productivity products, if you could just talk a little bit more in detail about what you can do to improve the performance there? It seems to me like it's about talking to the channel and improving the partnership with your distributors, but anything you can provide there would be helpful.
Sure. So the way that I break this down is to pretty basic fundamentals and it's really around sales execution. First, you have to test for do I have the right products for the market. The answer to that is no. Well, you've got some long cycle work to do.
Well, the answer to that is yes. We have great solutions, great technology for the markets that we serve. And it's not us making that up, customers tell us that. But then it's about sales execution and really looking at, do we have the right opportunities in the pipeline and are we closing those at an adequate rate? We have work to do on that front.
We do. And so that part of that is ourselves engaging the end user and part of that is us engaging a channel to educate them and compel with the same passion that we have to take that then to the next level in the market. That's really where the work is, which is already underway. We've got a full team, full scale effort around making sure that we're engaging that channel, engaging that end user base and then continuing to deliver new products into that pipeline as well.
Next question, Andy Kaplowitz from Citi.
This is for Tim. So obviously, a lot of exciting things going on. Darius, I thought it was exciting.
Andy, thank you. Yes, sure. So
look, decoupled growth and connected growth you said were sort of high single digits as a possibility and mid single digits as your total guide. So like the obvious question is you've been growing at sort of high single digits to 10% over the last many quarters now. And it seems like growth is actually accelerating in those sort of decoupled areas. You talked about aftermarket growth, you did 8%, which is the best we've seen. So why couldn't you grow higher than mid single digits?
I know you don't want to guide to that over the next couple of years given the visibility you have in defense and also in the aftermarket, again, assuming the MAX is okay?
So is there a question in there? So all kidding aside, I do think that that's within the realm, right? So I think that if we think about the 4 axis of growth, which is it starts with getting on the right OEM platforms and in particular with the right sub systems. We're there. We've got that in spades.
It's about the aftermarket, the conventional aftermarket. So this is coupled growth. This is tied to so coupled growth is tied to some utilization of the aircraft, whether it's spares, repair and overhaul or a service type of contract, powered by the hour type of contract. We've been really focused on that area and we have been in the last 2 years, we have started to take white space back. So this is business that was ours to capture from the beginning.
We didn't years ago. We're recapturing it now either directly with channel partner or indirectly with channel partners or via our folks. Decoupled growth, it's on the path that we've talked about for the last couple of years, which is the RMUs or the enhancement COEs have excelled. They exceeded in 2018. They're on a run rate to exceed this year.
So now it's a matter of, I think the double digit is really comes down to that 4th quadrant, which is the breakthrough. And I think that we have some it will end up in, I would say, Andy, in 2 areas. 1 is it will either be fail fast, right, which is that's okay, that's a success. Explore something, if it doesn't work out, button it
up and move on to the
next one or like the coatings, like the industrial IMUs. I really think that is the element, that's the plus, which brings us to consistent potential double digit growth.
Just a simple follow-up for Rajeev actually. So backlog growth of 12%, obviously, you've got some short cycle businesses in PMT. But when do you think the growth of PMT catches up more to the backlog? UOP in particular has been a little sluggish. So why has that been?
And when do you think that that sort of catches up?
So UOP's order rates are really up. I mean, think of UOP as the licensing and technology business and then the catalyst business and equipment business. So that comes more with the EPC cycle and the licensing business at the front end, actually ahead of most people, right? So that thing has been very strong, growing tremendously. So we expect to see growth coming out of that and translating into
growth as we
go to the future. Will we see the 2,000 6, 'seven type of growth or maybe 'twelve, 'thirteen type of growth? Probably not. But I think we'll see some very robust growth out of there.
Okay. Go to Deanejay from RBC.
Thank you. Back over here. A couple of questions for Vimal to start with you. You mentioned that 10% of your businesses are below plan. Can you take us through what the issues are and if you could size those?
And for Rajeev, I don't know, this sounds like a high quality problem when you say you have 30 7% new product vitality. Is there too much of a good thing? Are you cannibalizing any products? And what do you feel is optimal for your organization?
I think what I was trying to say was if you take a stock of last year due to the spin, one of the reasons was that we were so much focused on business separation. We some of the segments which were not performing well, we could not pay attention to that. Now thankfully, that segment revenue size is about 10% of the total revenue. And now we have a plan in place to recover them. Those recovery actions could be sales growth focus or supply chain operations or whatever it is.
And it's already reflected, as you can say, in the trend line, as you see our early results in Q1. We directionally see those plans are working, but we have work to do here. I'm not claiming all that work is done. But I'm pretty confident that underperforming portfolio or supply chain related issues which started will be behind us during course of 2019. Yes.
Good question, really. Actually, we have to manage that very closely. We actually monitor I didn't say that, and it's not enough time. But Azir, now we monitor what we call new revenue that we get out of the new products we are introducing. Now again, as you say, 37% of all the new revenue, while that would be great, we will really become non competitive in our existing spaces.
So we really have got to manage that. So we do that very carefully because as competition had heated up and we have good shares of demand and we do that we continue to innovate. Yes, we are replacing products, but almost always in those cases, we'll get some price and some margin expansion and some share gain. If we are just maintaining share gain, we'll at least get the price. So we do get value out of even the replacement portfolio, but then we monitor very closely what part of that is generating new revenue.
So a piece of our growth is coming from the new revenue that we are generating, true new growth.
Okay. Let's switch sides, go to Scott Davis, Amelius Research.
Thank you and good morning everybody. Tim, the elephant in the room in your business is obviously the Boeing challenges that are out there. And What are the learnings, I guess, from a Honeywell perspective? Is there a change in maybe how you bring technology to market? Is there a risk that new technologies are slower to be adapted?
Yes. So I think that the challenge there's 2 challenges. 1 is already here and one is coming. The one that's here is to re examine, I would say, the organizational capability in the technical area to make sure that you don't have single point failures. Not that Boeing experienced this,
I don't
know whether they did or not, but having the organizational capability in the technical community and in the program community is vitally important, right. So if you go back to when I was the CTO, I found that we didn't have adequate, in that case, architects. So we had people that were doing, as an example, doing a great job of doing coding, coding as in software, but software architects, we were pretty light on, right. So we looked at that and said that could be a single point failure. So therefore we need to double down in being able to track that talent.
So I think that part of this is if you are going to have differentiated technical products and technical is part of it, you've got to make sure that you have the right people with all of the different skill sets. So some of it is just a coding person, if it's enabled by software, you've got to make sure you've got to start with the right architecture and then you have to have the right capability relative to coding
and you have to have
the right people relative to testing, etcetera, etcetera. So I would say that, Scott, looking at this, it really comes down to a very fundamental system safety approach to to this. And then, I think the challenge that is ahead of us is that the industry as a whole, including Boeing, Airbus, ourselves, etcetera, a number of us have gotten a very high accreditation relative to delegation from the regulators. So for instance, things that were reviewed by the regulators 10 years ago are no longer reviewed by the regulators. I mean, we have us as a company have a very high degree of delegation from the FAA, YAUSA, ANAC, all of those.
And what we're going to need to do is work very closely with the regulators going forward to make sure that, that capability is still it resides within our companies. We have the right system safety analysis capability, etcetera. And so therefore, there's going to be a contraction and we need to avoid that because that's one of the enablers that we've had relative to development program performance is the fact that we have decreased our cycle time because of the degree of delegation that we've had.
And just a quick follow-up. I feel like other than 2,008, 2009, we've been talking about supply chain problems in your business, Tim. What is the common issue? Is it lack of capital? Do they just not believe the growth?
They just don't put the capacity in? Is it just limitations on rare earths and stuff? I mean, what is the common challenge that your supply chain seems to have? Yes.
So it's I think if you were characterize it into 1 or 2 answers, it would be for those parts of the supply chain that have a very high fixed cost element versus variable cost, they've been through this industry, the air transport market has gone through 3 cycles or we're in the 3rd cycle. And so therefore, investment in fixed cost, right, is something that they haven't done. So if you think about the casting area, forgings, tribology, bearing areas, that's a very high fixed cost. It's like a foundry. And so there's been an inversion to making those investments.
And of course, what's happened now is this cycle, structurally, this is very, very different than any other cycle that's going to be. And so that's what's affecting us, Scott.
Great. Go to John Inch, Gordon Haskett.
Good morning, everyone. So Darius' opening pitch on the cost side talked about simplification, too many plants effectively, right, redundant systems and so forth. Could each of you talk about those opportunities specifically in your business? Tim, you just touched on supply chain a little bit, but not really clear to me like why would PMT have too many plants, for example, or even the SPS businesses.
So if you could just
touch on
that. Okay. So we do have too many plants. We have 85 of them. So our goal is to reduce that significantly.
There's no reason for that. The supply chain is spread out all over, procurement is spread out all over, logistics. I mean, it just doesn't make any sense. So yes, we have opportunity to simplify and reduce our footprint, and we plan to do that over the next few years.
I think from HPD standpoint, a lot of simplification came due to spin. So I would say that probably footprint is part of our opportunity, but much bigger opportunity is process maturity. How we do how we become world class in planning, how we become world class in automation and how we produce goods, how we become world class in lean or HOS in Honeywell language.
That's a massive opportunity for
us because that's a sustainable cost out versus taking one time to move this from X to Y. Probably I see that the process maturity is a far bigger opportunity in terms of ISC transformation compared to the footprint. Footprint is reality and you deal with it, but the process maturity is a much bigger part. That's why it's 3 to 5 years because it's a new capability creation, which is different than just taking something and moving it around.
Yes. I would answer that in 2 ways. I mean, we certainly have our share of opportunities relative to the overall footprint simplification. But what really struck me was when we did some analysis around how things move through the supply chain, whether it's from our suppliers to us or from us through our own distribution network. And things we have 70 factories and 30 distribution centers or something.
And so we will often move things 2 or 3 times before they're ready to then go into a distribution mode. And that's just the way that the supply chain has been structured and has been set up over time. There's a big opportunity to simplify that from a cycle time to a number of touches, which then leads to quality opportunities. But to do all of that, we have to do Honeywell Digital because you can't really even begin to understand it until you can digitize it and model it. And so that's for me kind of where the excitement begins is bringing together this digital idea with the supply chain transformation idea to get to a common understanding of what we're doing and what's possible and then move through that transformation.
John, I would say a couple
of things. One is this isn't just about footprint reduction relative to our factory. So a couple of years ago, we did what was called core, non core. We defined those processes and those manufacturing process capabilities that we should have that would be non core and core. Core would be something that would fall into 2 categories.
1 is something that was, it was a distinguishing or differentiating factor that we wouldn't want a third party to have. And the second one was best value. We could do it either from a cycle time perspective, from a cost standpoint better than those that are in the market. But I think that what's happened and so we established a core, non core roadmap, both from a process standpoint and from a factory utilization standpoint. We've been on that process, but I think that what's happened since Torsten has joined us is we really opened this up and looked at and said, what are we doing in the planning area?
Like for instance, MPS planning, what are we doing in the MPS planning area that we shouldn't be doing? What are those things that we're doing with supplier development? What are we doing relative to vendor managed inventory that we shouldn't be doing that suppliers are doing? So let's just think of this as not just about our factories, but the entire valuation from the point of demand planning all the way to logistics. And I think that's what's really opened up our aperture.
Just as a quick follow-up. Honeywell Forge, Bimel, you actually have it as part of your pitch. Does it apply to the other businesses? And actually, do you charge for this? And sort of how big do you think it could be?
No.
You can take 1, it's flying outside. It's not really.
I mean it's a
big part of the new subscription model. The point I was trying to make was our culture was we always develop software. And software was seen as a means to the end that okay, we're going to sell a project, we're going to push a product out. But we never thought software as a monetization model as an income stream. What Force does is really forcing us thinking about subscription model, software as a service.
And that's what is different than from earlier generation. The value creation is also different. You will see in the demo area in each of the 4 businesses, the value which are being created is a different set of applications for in the plant area or in the area and worker and buildings. And that was the point I was trying to emphasize.
So John, it does apply. And 2 is, yes, we do sell the service. So there's 2 things that happen from a monetization standpoint. 1 is we actually have standalone contracts relative to forge and services that you'll experience some, Ben will provide an update. The other thing is it creates a high degree of stickiness in services.
So think about this as this is kind of centering software and services. We see this as a key element to the next degree of aftermarket services in this area. And that's the adoption that's taking place.
Great. And our last question for this session comes from Jeff Sprague of Vertical Research.
Thank you
very much.
I got one for John and one for Rajeev. First, for John, Darius mentioned this potential $100,000,000 opportunity in Intelligrated. Not expecting you to mention name customers by name, but what would an order of that magnitude look like? We're talking single customer multi site or we're talking some kind of next level lights out type of opportunity? Just give us a sense, it's obviously a mega order.
Given that that meeting is happening at the moment, I'd probably need to not dimensionalize that too far. But the way that I would describe the answer, Jeff, is that increasingly these programs are more integrated. Increasingly they are more software denominated. So we're being asked to basically take over the building and install in it everything that's going to be used, whether it's a crane and a set of robots for depalletizing and then a storage array for keeping slow moving inventory and then some sort of sortation and mixing array for the outbound. And those can be 1,000,000, 2,000,000 square feet, 40, 50 feet high.
So I mean think about these as enormous investments by their operators that have to work 20 fourseven. They have to perform at peak periods and they want us to own obviously the installation and the commissioning, but then in some cases, operation and maintenance on an ongoing basis. And so just one of those can be in the 100 of 1,000,000 of dollars. If you want more of them, I'd love to sell you 4 or 5. But every customer has a slightly unique circumstance.
But the reason we brought it up is because we have a number of those engagements going on at the moment, and they are very sophisticated. And we talked about kind of the need for this connectivity and software world where the outcomes are very to achieve the outcomes that we propose to customers, we have to own the entire design. And to do that from as Tim was describing, you have to have the right architects, you've got to have the right design methodologies. And so that's why in this particular case, Peter is engaged with the customer in question.
Forward to the press release on that. Rajeev, I was wondering if you could provide a little bit of additional context on LNG in particular as it relates to your set of business opportunities. And I don't know how best to frame it maybe in MTPA or some kind of framework, but kind of legacy process versus gas processing side versus maybe the UOP pull through that would happen and just help us kind of get our head around the overall Honeywell opportunity there?
Yes. So LNG is one of the opportunity is a midstream that is finally beginning to happen. So that's the good news. Though I'm pretty sure many of you know as I do that a lot of those projects will not go forward. But there's enough going forward that there is pretty good excitement around that.
What we offer is what we don't offer is the liquefaction cycle in the back. We offer everything upfront of that. So you take the gas, you clean it up, you remove the sulfur, you remove the CO2, remove the moisture, remove the mercury, if it is present, remove everything. Then we remove the natural gas liquids because you don't want them freezing inside the cycle. So there is pretty substantial part of the plant along then the control system.
So we do all of that. In the past, we have the trains used to be very large and they were all stick built and we would license this technology and we would compete on each of those. For the first time, we are now able to offer that whole thing as a modular design. And what that does is modular means that we fabricate it in a shop and then we deliver it to the site. And while they're doing that, they do all the foundations and so on.
And so let's say it takes 2 years to do. They do their stuff, they do our stuff, we plop it in. It reduces the overall project cycle, which is pretty exciting for the owners, pretty exciting for us because we need cell technology as a complete modular solution. So that's the thing that is exciting for us as we go forward. In terms of MTPA and so on, I don't have the numbers handy yet, but I'm sure we can work with you to give you that.
Okay, great. Thank you. At this point, we're going to stay on time and move directly to the first technology demonstration, which will start in 2 to 3 minutes. All the Honeywell people are going to walk there with you and then there'll be lunch after the first demo before our second rotation. Thanks.
Your attention, please. The technology demonstrations will begin in 5 minutes. Your attention, please. The technology demonstrations will begin in 5 minutes. The technology demonstrations will begin in 5 minutes.
Your attention, please. The tech the technology demonstrations will begin in 5 minutes. Your attention, please. The technology demonstrations are about to begin. Please take your seats.
The Honeywell Investor Conference will resume momentarily.
Well, thank you for being here and thank you for giving me the opportunity to talk about the wonderful world of supply chain and how we're going to transform supply chain here at Honeywell. You heard, I think a lot today already from my colleagues that we're doubling down on the so called IC transformation, that's the integrated supply chain transformation. And I hope that I can give you some more details about how we're actually going to go do this and what does it mean for us and what kind of value we believe this will create for the company. The IAC transformation, supply chain transformation program sits on 5 different pillars. First, we're going to talk about how we're going to simplify the way we operate.
The next pillar is that we really want to invest and build out world class planning and execution engine. Procurement for us is a huge value driver and we have room for improvement, how we execute procurement, how we strategically go to the market. I'm going to talk about this, what this actually means for us in the future. And then you heard a lot about data and supply chain also today is nothing without data, correct data, right master data, all is very, very important for us not only to run our operation for today, but also to prepare the organization for Supply Chain 4.0 for the next generation of supply chain for true digital supply chain. This all requires a team that is actually capable of executing this.
This requires different skill sets, other types of skills and different types of capabilities. And hence, I'm going to introduce to you what we think about talent upgrades and talent transformation in our program. Now first, let's take a look at the Honeywell network. We've talked a lot about footprint and this is actually our current footprint. So we have more than 240 factories across the globe and we have more than 160 distribution centers.
So that is to some extent a result of acquisitions over the past couple of years. And of course, there's opportunity for us to simplify that network. But it's not only about simplifying production or distribution center network. When we think about supply chain, we think it end to end. So it includes the way we produce, where we produce, the vertical integration that we have in our factories, how we distribute to the market.
And we see, especially in the distribution center world, we see a lot of opportunities, especially across different SPGs. So we have situations where we have multiple warehouses of different SPGs in very similar locations and we believe there is opportunity for us to do this. But then there is this entire simplification of how we execute production actually. We have hundreds and hundreds of different applications actually in supply chain, manufacturing applications, distribution, handling, everything. And we are on a pretty radical path to simplify those applications and to decommission a lot of those.
So we will end with way, way less probably less than 50% of the applications that we had in the past going forward. So all of these things will help us simplify the way we operate and how we operate. The next topic is planning. Planning for us is like the brain of a supply chain. And in the end, what we do is as supply chain organizations, we balance supply and demand.
And in a world where your growth is probably 1% or 2% and you have a very stable supply chain, that's actually not super difficult. But when you grow 6% to 8% and you have capacity constraints at some areas of your supply chain, it requires a different level of sophistication when it comes to planning. And that's all what this is. So what we're going to create, and we're already rolling this out, is a standardized way, a standardized set of record for Honeywell planning. So that's one way how we want to do planning and how we want to connect demand with supply and how we want to connect our gold business enterprises all the way down to the plant level and to the distribution center level.
The result of this is not only a better capability, it's also true performance and you can measure this. And we are very customer obsessed. And you heard Darius talking about this earlier today that our goal is actually to be really, really excellent in how we service the market. And that's why we have a goal out there to be way more than in the upper 90s in delivery performance. And it also will help us to free up cash through a better inventory management.
When it
comes to procurement, the main shift in how we think about procurement is, we used to be we used to go to the market like 4 different companies and we really want to consolidate this. So the rationalization of suppliers is at the forefront of what we think we need to do. At the same time, we have to manage our supply base in a way different way. It's way more strategic than it used to be, a tactical buying. And the way we do this, we're going to do this is, we launched a significant program for robotic process automation in procurement that helps us streamline the way we operate.
But it also helps us to be able to rebalance our portfolio in terms of who does what. I don't need as many tactical buyers, I need more strategic buyers that can shift my resources. So this is what it actually helps us doing. So all of this will result in a significantly higher productivity going forward and we are very, very dedicated to doing this right now. We're already in the execution phase of this.
Data and analytics, I think there is no way a supply chain team can actually operate without the correct data. But it is a roadmap, it's a journey. So right now we do many, many foundational things, fundamental things, which means taking care of our massive data, putting the right controls in place, creating right governance structure. Those are things that are necessary for us and they actually we're actually able to doing this because we are on a good path to reduce our ERP systems. We have a good roadmap to simplify our ERP.
Landscape and that enables us to be actually very, very thoughtful about our data and how we manage our data. The next generation is then what we call supply chain 4.0 and this is the real connected supply chain. And I think Honeywell is in a very, very good spot to be able to doing this because we are not only a tech company, but we also are a company that is very good in sensors, it's very good at software. And if you connect all these dots, then it's we are actually one of the companies that is in a prime position to execute through supply chain 4.0. But it is a roadmap, it's a path.
So we're currently building this roadmap and 2019 for us is a foundation of the year, but going forward 2020, 2021, I think you'll hear a couple of really cool things from us. I already touched about that a true supply chain transformation is not possible without thinking about the capabilities that you have in your team. So, we made this a very foundational building block of our supply chain transformation to increase the capabilities of our teams. And we've been doing this in many different ways. One of these ways is that we launched the Honeywell Supply Chain Academy.
And in this academy, this is a learning platform where we actually define certain modules, planning could be one of it, procurement another one, where we very structurally improve the capabilities of our teams through learning experiences, real experiences in the workplace. And that already launched like 2 months ago and we've seen very good pickup and tremendous interest in this. So our teams are really, really eager in learning more and going to the next level. It also means that we will become a way flatter organization because the way we think about this is that we really have connect leadership with the workforce in factories and distribution centers. We do this with leadership Kaizens, HOS is still at the forefront of what we do.
So all these lean principles really are helping us to understand really what's going on the shop floor level and that's the foundation for us to become better. So after this, overall, the supply chain team will be equipped to execute the IC transformation, but also to be one of the best supply chain teams there is in the industry or there is in the world. And if you summarize this, our supply chain transformation has started in this year. 2019 for Honeywell is the year of IC. We actually call this the year of integrated supply chain 2019.
This is the year where we and the company made the decision that we will focus a lot of effort in improving the way we operate and that's called IC Transformation. And it has 5 different pillars: want to simplify our operation, want to be world class in planning and procurement, want to take care of our data tools and systems and we want to build a world class team. Those are the 5 pillars. And the result of this will be that we not only have way, way better performance, this can be in supply chain very well be seen in KPIs, metrics, it's very measurable in supply chain, But we will also be equipped for the future. We will have a team that is actually able to execute real transformation into a real true digital supply chain in the years to come.
So not only are we fixing some of the things that we see right now in our supply chain, we're also preparing the company to execute a real transformation into a digital supply chain going forward in the years to come. And with that, I'll hand it over to Greg.
Well, thanks, Thorsten. In the next 15 minutes, myself and Ken Stachurski are going to just take a few moments and talk to you about how we're going to create this digital transformation across the enterprise at scale. And it's really going to build on a little bit of what Torsten had highlighted. But first, let me just kind of ground you in where we began. And we've had capabilities across different parts of the company
to be able to do
some of the things that Torsten spoke about. But doing it across the enterprise is really the big pivot that we've made. And in order to be able to execute this at scale, Kew talked about the software power of 1, doing things one way. That's a really important thing for us here too, because we're going to have to transform our process, our data and our technology in such a way that we can scale this capability to be able to build these data driven insights, make data accessible at the point of use for all of our employees. And the only way we're going to do that is to create consistent touchless processes across the company.
We talked about poor data governance and I'll speak a little bit about that in the context of where we jumped off in 2016 to start getting that squared away. But Thorsten mentioned it as well, having high quality governed accessible data is key to being able to make great decisions. It also has to do with the IT landscape. And we've talked quite a bit about the ERP, but it's actually much, much more than that. And if you think about 2016 as our point of departure, we had about 2,200 applications in 2016.
We've made a lot of progress. We're already down to 1400, but we're on our way to 750 across the enterprise. We have 1500 websites, imagine trying to manage 1500 websites in 2016. We've made a big push on that already down to 421 in 2018 and on our way to 25 in the longer term. We've talked about this quite a bit.
We had 148 ERP systems at the end of 2015 going into 2016. We've now cut that over in half. We're down to 71 at the end of 2018 and on our way, as we mentioned before, to 10 core ERP systems. So really simplifying that landscape and standardizing both process and data is the only way that we're going to be able to create this capability across the company. Now what I want you to take away from this slide is, this is not new for us as Honeywell.
We started off 2,003, a $23,000,000,000 company at about 11 points of margin. And over the 15 years, we've always transformed. And that's part of what's allowed us to be able to create the kind of operating leverage and growth that we've enjoyed. And you can see the gradations along the way where we improved our margin percentage. In the 2002 to 2016 period, it started with HOS and that was a focus on the factory with lean principles.
We've been doing transformation in functions, mostly in the back office, finance, IT, HR, legal, but that was really heavily based on creating COEs and moving work to emerging markets. We really didn't do the hard work around the systems that we're talking about here. And it was really focused on the back end. And then HUS Gold came along and we tried to build a common framework for all of our businesses, our Gold Business Enterprises to operate with a real focus on breakthrough growth. And then in 2017 2018, the two big changes that came along was really this portfolio transformation where we've now spun 3 businesses, 2 in the last year alone.
And Ken Stachursky led the spin of both Garrett and Resideo during last year. And then Enterprise Information Management, which was what I kicked off in early 2017, which is really that pivot to transformation with a focus now on the front end, things like the integrated supply chain, things like customer support, things like sales management, but really the single biggest thing that we were changing was standing up an enterprise level master data management capability across the company. That's the one thing that had always been missing as a company. And if we do this right, and I know we will, what we're going to get through this digital transformation is a differentiated experience for our customers as well as our associates. We are going to get data driven decisions, as Darius mentioned, and that is going to help us drive operational efficiency across the enterprise.
So with that, I'd like to turn it over to Ken Stahirski, the Vice President of Enterprise Business Transformation to tell us a little bit more about how we're going to go do this and what it might mean for Honeywell.
Okay. Thank you, Greg. As you said, I'm Ken Stachurski. Just a brief introduction. I've met many of you actually during the spins, but my career with Honeywell came up through the PMT ranks.
I was running the Catalyst business in UOP for a period of time. And as Greg mentioned, the spins last year. So it's my honor to be here today. I'm really excited about talking about Honeywell Digital because it truly is going to help transform what it is we're doing as a company and I believe is very exciting. So let me share with you our approach.
It'd be easy to stand up here and give you a couple of just examples and I am going to go through some examples of some of the great results, but I think it's important to understand how we're doing this to make sure that it's clear that this isn't just this isn't an action that we're taking, but actually is fundamental to how we're changing, how we do our work. So first off, we took an approach across our 35 GBEs and looked at the various business models that we have as part of our company. And as you can imagine, they vary quite differently. But we came up with 6 different business models that are predominant across our organizations, product services, you've heard a lot about software, projects businesses, and that's how we're fundamentally focusing the work that we're doing to make sure that we're honing in and we're able to rapidly scale these digital capabilities across the company. The second piece that we did, you've heard it a couple of times, Darius started with it, is our master data management, fundamental to any digital transformation, but it's about having that data governance discipline.
And yes, that's not really sexy work, but at the end of the day, this is the foundation of any digital transformation. And it's really about getting data as a culture, data as an asset as part of our culture, crucially important. The 3rd piece is deploying global design models. And what that means is that this is where that non one point solution comes in. This is crucially important because it does a couple of things for you.
Our businesses, although they're very different, they have a lot of things in common where we can scale these processes very quickly. And by having this global design model approach, it helps us to make sure that we've got an optimal design that we can scale it across our enterprise quite rapidly, as well as we continue to learn, as we continue to advance, we can scale those things across the organization as well. The 4th piece is of course the connected IT systems. I'm going to talk just briefly about the ERP consolidation, but you've heard about that, but it's really about the rest of the technology stack and how that all comes together. So it's an end to end look at our processes.
All of this enables that digital capability to differentiate at the end of the day, the experience for our customers, the experience for our suppliers and for our employees. So what does that mean in terms of financials for Honeywell? Well, I've bucketed into 3 groups, sales growth, cost productivity and working capital and sales growth 1st and foremost for a very purposeful reason. I'm going to share with you one of the examples, but our primary focus of our digital transformation is 1st and foremost around that customer experience. We believe wholeheartedly that with the processes that we've got in place and the ones that we're continuing to work to roll out that we're going to really be able to differentiate this in our B2B market.
And I'm going to talk about that more here in a minute. Cost and productivity, you heard from Torsten about some of the great things that he's got going in the ISC. You've heard from our business presidents about the power of 1. This all comes together and actually becomes even more real with the digitization efforts across our ERP systems, the sourcing system and our planning systems. And last but not least is the working capital.
Again, the ERP systems, the planning systems, but also the customer to cash. The faster that we can turn those orders into cash back for the company gives us an reinvest it in more aggressive ways. So we're excited about the opportunities. In total, greater than $500,000,000 we expect to be able to bring in for these programs across the digital transformation.
ERP reduction, we touched on
this enough, you've seen the numbers. What I want to talk about is, so what's different? We have been on this journey. We have been working on reducing our ERPs over time. This isn't new.
What's different is we've centralized this organization. As you can see by this slope, we're not this isn't just continuous improvement. This is very rapid change. By centralizing the organization, we're able to learn from our past ERP deployments. We're able to shrink that cycle time, do it faster, do it for less cost.
And as you can see, we're on a path to get to 10 ERPs across our core. Why 10? It'll help improve our system resiliency. It helps scale for future growth both organically and inorganically, as well as reducing our maintenance costs to keep these systems in flight. We believe that when we have this in place, we're going to have the right core structure of our ERPs that coupled with our data standardization to really create some firepower for our businesses to make really informed decisions.
Let me share with you an example on the customer experience. This one I'm very, very excited about, happy to share with you. If you think about how we interact these days on a personal level, that B2C experience has changed and it changes so rapidly. We heard some examples today about the expectations on delivery times. Think about how you place an order 20 fourseven, 365, you can place an order online, you can track that order online, you can even get a mortgage they claim in a matter of minutes these days, right?
So all of these things are now starting to transfer to the B2B world, and we believe that this is going to be a differentiating experience for Honeywell. So, how do we do that? We started first with defining the personas across our customer base, as well as and mapping that against every one of their touch points internal with our sellers, our customer service reps and our technical support people to make sure that we understand end to end how are we touching our customers in each and every way and make sure that we understand what their needs are and how to make it feel like one seamless experience. From awareness on the digital end, you can see the 5 stages here around the circle. The 5 stages of that customer experience from beginning to end, from the digital demand to the personalization, when you contact us, we want to have that feeling no matter which business you're connecting with that it's one Honeywell.
To the transfer and the self service, how do we make sure that when they somebody goes in online, it's that one feel, that one touch, that one Honeywell, advocacy and support, leveraging virtual reality, augmented reality, not just to train our own, but to train our customers who actually are utilizing and want to extract as much value out of the great technology that we have. And lastly, how do we close
the loop? How do we
make sure that we've got our aftermarket lifecycle ready to go with auto replenishment, contract renewals and the like? This is a very powerful tool and we believe it's going to be a huge differentiator for Honeywell going forward in the B2B space. So let me share with you a couple of real examples of some of the results we're seeing. In our customer contact center, initially we were unable to recognize even when a customer were to call or they'd have
a different experience if they
were to call 1 of our businesses versus the other. It didn't feel like the same Honeywell. We consolidated used the COE approach. We now have 4,000 customer service reps on one contact call center, all standardized with automated history pop up. You can call any one of them and they will know real time what's happened with your last phone call, how order status and be able to give you that one touch, that one touch feel across Honeywell.
So far, we're seeing improved customer satisfaction score already by greater than 20%. We're very excited about this impact across that customer experience. And we've coupled that with the seller experience because we think that's important as well. Why? Because when we started, we had 120 very complex different sales incentive plans disconnected to that customer experience at the end of the day.
Very important to make sure that those things are aligned. So we aligned to one plan around 6,000 different sellers all through a COE. And what does that do for us? A couple of things. One is it aligns their incentive program to making sure our customers experience as a positive one and they're feeling that end to end one Honeywell, but it also frees up their time.
The value of that is really being able to have them spend more of their constructive time making that personal touch with the customers. In total, we've reduced their average payout time by over 4 weeks already and with the goal that we believe wholeheartedly that we're going to be able to reduce that total by 75%, which is a great step forward for our sales people. We get the 2 of these together, our sellers spending more and more time with our customers and for a great relationship with Honeywell. So let me talk to you about the roadmap and where we're going with this. So, so far, we've been able to create a really strong digital core.
We're pleased, but certainly know we know that we're at the beginning of this journey. We have a very aggressive master data management and governance process to be able to make sure that these gains that we put in place are sustainable as well as focusing in on differentiating that customer and seller experience without ignoring the fact that we know we're going to gain significant efficiencies in our internal core processes. By 2020, we're going to have our customer relationship manager fully complete, NPI enablement underway as well as that frictionless sourcing and digital ISE that you heard from Torsten. By 2021, the ER roadmap will be on our core, our 10 core ERPs as well as have our contract end to end lifecycle management in place. And as you can see, the digital ISC well underway.
So we're very excited about what this is going to bring both in efficiency and that customer personalization for Honeywell. I'm excited about the opportunity to lead this on behalf of the company and I look forward to coming back again to share with you our great results going forward. So with that, I'm going to turn it back to Greg Lewis for the finance section.
Good job.
Thanks. Okay, we're down to the last mile. All right. In the next 20 minutes or so, I just want to talk to you through a few things. We'll talk a little bit about the 2019 outlook.
And as you've seen already, we're well on our way relative to the guidance that we gave for the Q2. Although the macroeconomic concerns that we did talk about in our earnings call, they're very much there for us to be considered. We're going to talk about some of the changes that we made, and Darius referred to them in our balance sheet, in our portfolio and how that set us up to be able to perform over the next period of time in any economic environment. And then I'll update you on our long term financial framework, which by the way is very well intact with all of the specifics that you would expect from us in terms of profitable growth, strong cash generation and very strong capital deployment, all building a strong foundation for long term outperformance as we go forward. But let me just start off with the 2019 outlook for a moment.
So you know the numbers, what we guided for the 2nd quarter, 4% to 7% organic growth, 20.8% to 21% segment margin, and $2.05 to $2.10 from an EPS perspective. And we're 6 weeks into the Q2. And so far, we're seeing long cycle strength continuing to be a bullwark from us, business aviation, OE, U. S. Defense, warehouse and process automation as the teams talked about today.
We also are continuing to see strength in our short cycle commercial aftermarket and our building products businesses. But as I mentioned earlier with the news out last week from U. S, China, trade relations, we're staying close to our short cycle businesses to see how things are going. We talked a little bit about the challenges that we're having in productivity products and we signaled that in the earnings release. But we're also on track for the full year as well.
As we sit here today, we feel very confident that the framework that we laid out for the full year incorporates many of those areas. So 3% to 6% organic growth is what we had shared and we still expect 20.7% to 21% margin for the year, dollars 7.90 to $8.15 from an EPS perspective, which is 7% to 10% ex the spins from a year ago with $5,500,000,000 to $6,000,000,000 of free cash flow or $95,000,000,000 to 100 percent on an adjusted basis given our strong growth and our working capital improvement. So very much on track for the Q2 and confident for the full year. And so the portfolio has changed as Darius mentioned and as we think about it now, we've taken some of the cyclicality out with the removal mainly of the automotive exposure in the end markets. And now we're sixty-forty short cycle and long cycle.
And again, as you look at the short cycle part of the portfolio, very strong across the commercial aero aftermarket. Defense remains strong, as I mentioned, Solsys and commercial fire. So feel very good about that with some of the challenges in productivity that we spoke about. And then from a long cycle perspective, the visibility at this point remains very strong. The momentum Tim spoke about in the deliveries in the aerospace side, Warehouse Automation, John spoke about it with $1,000,000,000 backlog.
Certainly, the comps start getting tougher and that's going to happen here in the second quarter as well. Building solutions, Vimal talked about the demand, particularly in the high growth regions and you heard from Rajeev about the strength that he's seeing in UOP. So overall, the market dynamics for us remain very positive, and we feel very good about the balanced portfolio that we have. And then from a high growth regions perspective, this is about 25% of our portfolio. It's been a key part of our playbook and will continue to be so during the course of the year.
Some of the key items that you heard from the teams today was really around focus on the mass mid segment opportunities in China and India, particularly with SPS and HBT and then a focus on connected in China, Middle East and India. And again, Kew and the SPG presidents, I know, have been working through some specific key account approaches there to try to capture some market share. And again, we know as Darius mentioned, there's a lot of demand. Demand is not our issue. Everyone is looking for us to come in and play a role in delivering the outcomes that they want.
So the proven HCR playbook is going to continue to drive significant growth and we expect that to be a double digit outcome for us for 2019. I do want to spend a little bit of time on this chart. We've gotten a number of questions about whether our track record of margin expansion and now most recently free cash flow growth is at the expense of investment in our business. And what this chart is meant to show you is you're looking at our R and D investment, both Honeywell funded as well as customer funded and our CapEx over the course of 2012 to 2018 with an estimate for this year as well. And it's represented as a percentage of sales.
And so what you can see is we're investing a 9% to 10% of revenue pretty consistently over this time horizon. And that line that you see is our peer group. So we feel like we're investing at a fairly healthy level. Darius talked about innovation being the lifeblood of our company. So we feel like we are absolutely putting the right amount of money to work to continue to drive that innovation pipeline.
We've continued to invest in capital for plants and capacity expansion for new growth opportunities and also for repositioning. So I think here it's a good proof point that our performance has actually been both short and long term focused, driving the margin expansion and free cash flow, but at the same time reinvesting for the future of our business. So now I'm going to talk a little bit about cash and our balance sheet strength. Here again, you can look at our free cash flow performance over the same 2012 to 2018 period and I hope the message that you see here is a lot of momentum that we've built over this timeframe on free cash flow performance. There's really 3 key points I'd like to make.
Number 1, Darius has made this specifically an important emphasis and effort for management. And you see that through some of the things that you've heard from the teams today as well as from the amount of our management compensation, which is tied to our cash flow and working capital performance. The second is the things that we're doing are working. If you look at the last 2 years, we've improved from a percent of revenue perspective from 11% to 14% and from a free cash flow conversion perspective from 86% to 100%. So the things that we put in place are having results.
And I guess the third message that I would share with you is we're not done. And you heard from Torsten with the integrated supply chain transformation. There's still a lot of opportunity there, particularly on the inventory side. I know that he's putting together a lot of the simplification. He talked a lot about planning.
And when we really get the digitization of the supply chain going, there will be waste that will come out of that system and there's going to be a help here in free cash flow and working capital. Now I just want to spend a minute and talk about our balance sheet strength. And you can see the numbers for both our net debt as well as our leverage ratios, and they're very healthy. We have ample liquidity in order to navigate whatever comes next in terms of market volatility. We've got significant cash mobility better than we've ever had post tax reform.
We repatriated over $5,000,000,000 of overseas cash in 2018 back to the U. S. The weighted average cost of our outstanding debt is the lowest in our peer group. And we've continued to have a premium credit rating, which I'll talk about in a few minutes because that was a competitive advantage for us, particularly as we went through the downturn in 2008 and 2009. And then on the bottom part of the slide, this is what Darius mentioned earlier around our pension plan.
The actions that we took in early 2018 to go and actually de risk the pension plan are going to be incredibly helpful to us as we go forward. We're now about fifty-fifty in terms of risk seeking assets versus fixed. The reason it's up to 53 is because the stock is performing really well. So I'll take that problem all day long. But what this means for us is really there's no significant pension contributions going to be anticipated in 2019 or beyond.
So when you think about it, our balance sheet strength really is world class at this stage and is going to be helpful for us no matter what environment that we face. And then if we turn to capital deployment, and I know this is obviously a question for everyone, I would look at our capital deployment and I would call this pragmatic and consistent execution. When you look from the left hand side from a capital expenditure perspective, we've consistently reinvested back in our business. The 2016 2017 timeframe was the end of a long investment cycle in PMT, but we're deploying more than 800 $1,000,000 of capital this year in 2018, continue to reinvest back in the business. Our dividend policy has been very consistent.
We've always grown dividends in line with earnings. And in 2018, we increased our dividend again by another 10% despite spinning about 20% of the company. So showing you a lot of confidence in our ability to deliver free cash flow. And then from an acquisitions perspective, I'll talk a little bit about the environment that Darius referred to in terms of the sellers market and show you some of the numbers. But we did deploy a $500,000,000 last year into both the Transnorm and the Ortloff Engineer acquisition.
And again, we're pursuing a very disciplined acquisition approach. And then lastly, from a share repurchase standpoint, you can see that we accelerated our share repurchase program last year from the $2,000,000,000 to $3,000,000,000 range up to $4,000,000,000 And we've taken our share count down from $775,000,000 to 7.53 dollars And as Darius showed you earlier, those are very high IRR repurchases that we've made over that timeframe. So we're executing on that capital allocation strategy. Now when we talk about the availability of cash and what do we have to deploy, Darius showed you the 2019 numbers, we're going to have between $28,000,000,000 $30,000,000,000 of cash available to deploy over the next 3 years, 2019 through 2021. And again, the math is fairly simple.
We have about $11,000,000,000 of cash in the balance sheet today. We keep about $3,000,000,000 of that just for liquidity purposes. And then with the operating cash flow that we expect to generate over the next 3 years, which is, call it, between $20,000,000,000 $22,000,000,000 that's where we get our $28,000,000,000 to $30,000,000,000 And when you take out dividends and a reasonable amount of CapEx over the next 3 years, that's going to leave us $17,000,000,000 to $19,000,000,000 a substantial amount of capacity to deploy to both M and A and share repurchase. As we spoke about though, our top priority does remain both on M and A, but we can continue to generate strong returns through our share repurchase. We took share count down 2% last year.
We committed to an additional percent this year in 2019 and we're well on track to doing that. So very, very strong balance sheet, significant firepower in order to add to our value creation story. Now let me just step back and talk a little bit about the business development framework that we do have and I use that phrase for a reason I'll come to in a minute. When you look at the environment in, call it, 2010 to 2014 timeframe, you can see the multiples we're in, call it, the 9 to 12 times earnings. And this is Barclays Research numbers.
These are not these numbers are not mine to make. And then that clearly had a tick up in that 2015 to 2018 timeframe. We're now many of these deals are going from 14 to 15 or even 16 times. And then if we just pull this out and talked about software deals, then you're even getting into much rarer era of 2017, 2018 and more. So what that means for us is we're going to continue to be disciplined in our screening approach, make sure that our valuations are solid and that we're convicted in the things that we are going to go about.
Because as we've said many times, you build a reputation over a long period and you could lose it very quickly.
But the good news is
when you look at our pipeline and that circle in the middle is just really meant to represent the amount of deals that we're looking at for each individual business that each of the 4 SPGs is open for business. So there is no business that we have now in our portfolio remaining that we're not willing to invest in. And so a lot of potential opportunities exist across all regions and markets, and we're looking forward to deploying capital into each one of these businesses. But we're going to do that the way we always have, which is making sure that we stick to our knitting. And that means when we look at the kinds of businesses that we want to own, they're going to have to be technology differentiated with low cyclicality and aligned to megatrends in our strategies and also have some self help that we think we can provide as a management team.
So that disciplined process is going to be something that you're going to continue to see from us. And really as we look out there, there's no must have deals for us in the market. We're also looking at business development beyond just traditional M and A. And what I mean by that is doing things like joint ventures, minority investments and partnerships. I think particularly in the area of connected, developing strong partnerships is going to be helpful to accelerate not only our capabilities, but the capabilities of others.
And one of the ways in which we're doing that is through our Honeywell Ventures operation. And I'll talk about that in a minute, but that is something that we've been doing since 2017. So what you'll see is, obviously, the prices are elevated. It is a seller's market, as Darius mentioned, but we do feel good about the pipeline that we have and we're taking a very broad based approach to try to drive growth across the company. So let me just step back and talk a little bit about Honeywell Ventures.
You may know we launched this in 2017 with an office that we established in Silicon Valley led by Murray Granger, who's in the room here with us today. And this is really not about making a financial investment just solely for a return. This is about investing in early stage high growth companies who have emerging or disruptive technologies. And these startups are strategically aligned to our portfolio, our software capabilities to our connected enterprise strategy, also to our Honeywell Digital strategy that you heard Torsten and Ken speak about before. And the whole premise here is we think that investing in these companies, we can help them scale faster.
They can use access to our customers, our channels, our intellectual property and even our manufacturing capabilities and our global presence. And we think this is a smart way to go about it. So far, we feel pretty good about where we are. We've been at this for about 18 months. We've already done 11 deals.
We've invested about $30,000,000 So I feel like we're making some nice progress. And what you see on the right hand side of the slide are 6 of the deals that we have announced and made public, a couple of which are actively involved in some of our business pursuits today. So you may remember seeing Foghorn on one of John's slides for SPS, but we're using Foghorn's technology and Iodium's technology in some of our connected offerings and our smart edge device offerings today. Soft robotics, for any of you who were at the ProMat show, you may have seen I was partnering with the Intelligrated team and showing off some products and offerings in the warehouse automation space. So I feel like we're driving real commercial and strategic value.
And this has been a nice success story for us and another one of the levers that we have to drive growth and we've got a nice pipeline here as well to take advantage of. So now just let me pivot over to our long term financial framework, which is very much intact from what we talked about previously and I'll start with segment margins. And as you can see, I showed you in some of the other slides, we've had a very strong track record of margin expansion, as you know, 130 basis points over the last 2 years, and we're looking at 20.7% to 21% in our guide for this year as well. And our our long term target remains at 23%, which is really delivering that 30, 50 basis points per year. And how are we going to do that?
Darius highlighted in the beginning, we've got a lot of levers that we can use in order to deliver that. So whether it's Honeywell Connected Enterprise and CU's discussion around outgrowing the rest of the portfolio at accretive margin rates. You heard Torsten speak about the supply chain transformation, which is going to drive productivity both in direct materials and our network. Honeywell Digital, as Ken mentioned earlier, as we transform and drive better decisions across the portfolio, But it's also more than that. As he highlighted, it's also going to be improving our user experience and capabilities both for customers and for sellers, which I think you're going to see is going to generate growth from that perspective.
And then all of that will wrap into our Power of 1. Darius calls that our commercial Power of 1 and our productivity or fixed cost Power of 1, which is every year we commit ourselves to trying to drive out 1% net fixed cost. So our continued focus on expanding margins is here. We've got a lot of levers to drive to 23% over the longer term horizon. We feel very confident in the 30 to 50 basis points improvement and with the ability to continue to invest back in the business, which is really important for us overall.
So we talked about some of the things that we've changed from a balance sheet and from portfolio perspective. That really hasn't prepared us for any environment. And you may remember in the 'eight and 'nine timeframe, Honeywell weathered that storm fairly well and you can see that from the rise in the share price over time. But you can see the numbers in the bottom left. Sales were down 15%.
We managed to hold margins flat over that time horizon. The TS business was the most impacted by this. Their margins were basically cut in half or more over that 'seven to 'nine timeframe. And our pension took a big hit. We lost 29% in our pension plan.
But we took some big actions, both cost actions and balance sheet actions. From a cost perspective, we took over $1,000,000,000 worth of cost actions, some temporary because we wanted to make sure that we preserved our industrial base and some permanent. And then we also made some balance sheet actions. We contributed over $5,000,000,000 to shore up our pension plan in both cash and stock. And when we think about where we are today and with the changed portfolio that we do have, it's better.
We're in a better position than we were back in that time frame. Now we don't have material exposure to cyclical industries like automotive. We have increased our long cycle exposure from 30% to 40%, which gives us more visibility into our demand on a go forward basis. Our balance sheet, as I mentioned earlier, you saw the numbers. We've got very low leverage and we're in very strong position as it relates to our credit rating to access capital should things go south.
And then we talked about our pension health. Having 113% funded pension plan at this stage with a roughly fifty-fifty risk profile means that even if the market were to go down, call it 20%, we'd still be very close to 100% funded and would not really require any meaningful contribution. So you take all of that into effect and we know the playbook that we need to go deliver should we see tough times ahead from a cost perspective, we are very equipped to manage in any macro as we go forward. So let me just wrap that up into what it all means for our long term financial plan. As I mentioned earlier, our long term targets are intact, 3% to 5% organic growth, 30 basis points to 50 basis points of margin expansion per year.
And I showed you the areas in which we're going to focus on making that happen. Roughly 100% free cash flow conversion and again you should think about that as between 95% and 103% say depending on what's required from a capital perspective at any given point in time and our dividend growth aligned with our earnings growth. We're going to continue from a capital deployment perspective to prioritize higher ROI investments. As I mentioned earlier, we're not going to constrain financially compelling internal projects. It's always good to invest in your own business first.
Our top priority is going to remain bolt on M and A, but as necessary or when the opportunity strikes, we will be able to generate strong returns through our share repurchase program. And then from a balance sheet perspective, it's important to us that we do maintain that premium credit rating. It's been conducive for us to weather storms in the past and we want to do that here again. So we're going to target 2.3 to 2.5 of gross leverage for the Moody's calculation as we go through this period. And what all this means is we really have strengthened the foundation for long term value creation.
So let me just wrap up by saying, I hope that our messages today are very clear. We're going to continue to invest in both the short and the long term. Our businesses continue to generate outstanding results. We're better positioned than we've ever been. We have a strong balance sheet with ample capacity for capital deployment and we're very confident in our long term financial playbook and that framework.
And when you think about everything we spoke about today, whether it's Darius' 4 key objectives, all underpinned by the 3 transformations, the continued portfolio optimization and importantly investments in innovation, we feel like this is a compelling investment thesis and we're very well positioned for growth in the future. The future is what we make it and we intend to make it great. Thank you. Now I'd like to invite Darius, Kew and Thorsten up for the final Q and A session.
Okay. Let's start with Josh Pokrzywinski from Morgan Stanley.
I think so question for, I guess, just about everybody up there and some of this will relate to itself. So on the long term margin targets, I think what you outlined on supply chain kind of gets you to the lower end of that range really without a lot of revenue growth.
Can you maybe talk about
how that relates to
some of
the investments you're making, particularly on Forge, which got referenced in pretty much everyone's breakout presentations and presentations upfront. How some of those supply chain investments maybe just get invested and how much of that margin expansion is true operating leverage? Because it seems like there's some natural conservatism there.
Well, perhaps, but obviously not everything that we're going to be where we're going to be getting that margin favorability is going to be dropping to the bottom line. That's so what we kind of showed you is kind of the net impact because any given year we could be performing much better. But I don't want to be into the short termism because all these numbers that you see are net. And yes, Honeywell Connected Enterprise requires a level of investment, although I can tell you it makes money and it's accretive to our overall margins, but it does require investment. Certainly a lot of the things that Torsten talked about are going to require investments.
Some of that we already funded and some of our restructuring funding back in 2018 and Q1 of this year, but we're going to continue to fund it. And yes, and the last thing that we've done in all of this is we have accounted for breakage. Breakage is you set a goal of $1,000,000,000 in, let's say, inventory reduction or so that's the way I always do planning, which is I generally like to build a plan for 2x of what I'm hoping to accomplish. So some of these are sort of your gross numbers, net maybe a little bit worse, but all of that is reflected in our margin commitments and so on. And if we overachieve, well, we'll all be happier.
Then just a question for Kew on Forge. I think anyone who's in this room who's walked a trade show in the past couple of years, every single booth has predictive analytics, the software that and maybe some of those companies don't really have a channel to market or the right technology. But can you talk about how that interacts with 3rd party, some of the 3rd party folks out there and the acceptance or reluctance for those folks to want to partner with you? I know it's very early days, but it seems like that space is becoming a bit democratized. So how does Forge stand out and what is kind of a crowded landscape now?
A couple of ways to address that. One is we're really focusing our investments in areas that we believe Honeywell has a competitive advantage. And so one of the constant pieces of feedback that customers give us on their hesitancy or apprehension to adopting the new technologies, because they can see the impact is just the cost of deployment, the effort on the organization, the change management needed. So we focus our a lot of our investments on let's make things easy to install, make it easy to use, so that becomes a differentiator. And we partner in areas that frankly, partners have a better investment profile and roadmap in that area.
So Microsoft is an example. We partnered with them on the Azure platform. We're not going to try and rebuild infrastructure as a service. We're building on top of that as an example. So the other thing is in our strategy, we're fundamentally starting with the customer problem and our installed base.
We know that really well. That's a competitive advantage. And we see a significant opportunity taking our customers from point solutions today to a much more comprehensive offering. So we have an alarm management application in the connected plant, for example. We don't use that data anywhere else.
And so we're actually stitching that the digital thread through the operations and delivering greater, more comprehensive value to the customer. And customers are willing to pay us more for that because they're getting a bit greater benefit than they do today.
We'll go to Sheila Kahyaoglu from Jefferies.
Thank you. Darius, one for you. In terms of capital allocation, I know multiples are elevated at the moment. John mentioned M and A about 3 times in his slides and Tim didn't mention it at all. Do you think about aerospace?
That competitive landscape has changed. Do you get bigger to win more the next cycle? How do you think about the competitive landscape, I guess?
Do you mean in aerospace specifically?
Aerospace in particular. Yes. I've always said, I
don't think we necessarily need to get bigger in aerospace to continue to have a successful franchise. To me, it's never been about scale. It's been about technology and being able to differentiate versus some of our peers. Now having said that, Tim, you have to mention M and A more, okay? So now that your presentations aren't boring, now we're going to no, but jokes aside, as Greg pointed out, we're interested in expanding each of those platforms.
I mean, that's I can tell you that I think Greg mentioned our pipelines are up to 80, 90 companies that we're looking at. There's certainly a fair portion of those are in aerospace. So that's and we're interested in investing any of those 4 platforms. But I don't and I would say this is true of any of our businesses. I don't feel like I need to make an acquisition in any one of our businesses because we're somehow behind or we're getting way behind our technology or we can't catch up on market share.
And that's actually not too many CEOs will admit that they have to make an acquisition, but in many cases, they do. We're not in any of those spots where we actually have to do it.
Maybe one for Q as a follow-up. Q, in terms of how do you think about Forged given its official launch today? What are the sales? How do we think about that growing over time?
Look, we've got a long term target of 20% compounded growth. We're starting with our customers. And the good news is as we built this product, we involve customers very early on. We have customer advisory boards on every single one of these verticals. So we already have beta testers.
We're getting constant feedback. So and what we're trying to do is have a smart fast start program on taking those beta customers into a full scale deployment. So that's how we're getting going. And so far, I think the signs are building will go out, I think officially end of this month with the general availability product. So we're very excited about the traction we're seeing so far in the pipeline.
Let's go to Chris Glynn from Oppenheimer. Thanks, Mark.
Kew, you talked about in your explanation of Honeywell Forge and HCE in particular aero defense and building solutions and process markets. The aero defense and process strikes me as very rarefied domain expertise. With Building Solutions, you did have
a list of single domain players,
maybe a little bit more
of an egalitarian domain expertise across that spectrum. So wondering if that introduces a build and buy dynamic because some of those smaller players have built some nice installed base and they might even serve as an incremental channel for you.
I mean, I think Greg said it right, which is that, we have a general partnership approach to the market. In some cases, it makes sense to have a commercial relationship. Sometimes that's with our customers, particularly since some of these migrations take a lot of effort on their part. We're partnering with customers. We're partnering with technology companies.
We're obviously also open to acquisitions and we're looking at areas. I think the key thing is we are very confident in our organic plan. We can develop software fairly quickly and unless there's something on the target landscape that has a software application that can be applied to across our industries, it's a lot more effort to actually integrate them than it is to build on our own.
Okay. Let's go to Julian Mitchell, Barclays.
Thanks. Maybe a first one for Darius. You'd mentioned it's a seller's market. You'd also said at the beginning that you want to run the best company, not the biggest. So when you're looking at the portfolio today, I guess how tempting is it to potentially exit some further businesses given the spins went pretty well late last year?
I would tell you that some
of the more obvious things that I wanted to do in alignment with our Board, we did. So I would say kind of that Phase 1 is complete. But as I said, it's an ongoing process. My strategic plan is due to the Board in July. So we're kind of in the middle of doing another reassessment.
And it's not annual, it's actually more frequent than that. So I don't think that there's anything that I feel like I've made a decision or our Board has made a decision that it has to go. But I can tell you everything is under review and nothing is ever safe because we have to continuously look at whether the businesses that currently have are aligned against those Honeywell criteria. And as you know, that can change. That can change based on what's happening in the markets, can change on where what the growth trends are, megatrends, how they're performing, competitive intensity, all those things.
And it's always tougher to subtract and add, right? I mean, there's something mentally that says, gosh, it's tougher to subtract than to add. Adding feels good, subtracting feels bad. I don't know if that's mental, but I can commit to you that we're going to have the discipline to do both, because I think doing both is a healthy thing. That's the way we do.
Thanks. And then just a
quick one for Thorsten. You've been at Honeywell the best part of a year, a lot of experience at other companies before that. Maybe explain what surprised you most in these sort of 9 or 10 months that you've been live and active at Honeywell? And which segments in terms of the 4 reporting segments do you think offers the most scope for the improvements that you're aiming for?
I don't think there were some real major surprises. There was a reason why I joined the company, and it's been a real, really nice journey here. So I don't think there was anything that really kind of surprised me negatively. Probably to the positive side is that it's really a high performance culture and there are a lot of smart people working in this company, which I really love. And there's also not one single segment that I could kind of take out and say these are really very, very good in this and these are very, very bad in this.
I think what we do what you've seen today is we do a lot of foundational things to kind of prepare the entire enterprise for the future. And that's true for all segments. So there's different focus areas here and there, but in the end, that's true for all of them.
Let's go across here. Joe Ritchie, Goldman Sachs.
Thanks. Good afternoon. So the working capital improvements have been really encouraging. And you've called out inventories as still a pretty big opportunity for you. So maybe just kind of talk about that opportunity a little bit further.
I think you call that even vendor managed inventory as a possibility as well. So just a little bit more color around where the working capital improvements can go?
To Thorsten. Whoever wants to answer that.
I'll start and I'll let maybe Thorsten fill in. Yes, I mean, sort of the metrics speak for themselves. We made progress on payables, made progress on receivables. In terms of DOS, we're kind of treading water. That's one issue.
Part of it, you could say, well, you're growing, so obviously, your inventory should grow. I don't buy that argument at all. So I think we have to be much more efficient with our inventory. I think VMI is a tool. It's one of the tools that we're going to be using.
I happen to like it, because it makes actually life easier for suppliers and makes life easier for us. It takes a lot of pressure off of planning. But there are many other tools, planning being at the forefront and consistency, discipline, improved demand profiles and so on. So
Yes, for us, it's actually a way to even simplify further for us. Darice mentioned VMI is a relatively simple strategy, but we really want to go into more exception based supply chain management. And so that means the majority of the network needs to be somewhat on an autopilot. And inventory is actually a representation of waste in that system. So the lower we are able to have this inventory level, the more agile we are, the shorter our cycle times.
So it has a lot of operational advantages to control inventory very well, but it requires a certain level of sophistication how we manage the supply chain.
Just my one quick follow-up. It's interesting in this, what's become a little bit more of a volatile macro backdrop that your high growth regions are set to accelerate this year, expecting to grow 10%. I'm just curious, 75% of your business, I think, is PMT and aero. Is it predominantly your longer cycle businesses where you feel good about the backlog to get to that type of growth or are we going to need to see some help in the back half of the year from a short cycle perspective?
Yes. I mean, listen, I think what you heard today, not only PMT having strength there, but also Vimal with what he talked about from a buildings perspective with all of the new construction that goes on. And just our strong positions in China, in the Middle East and India, I think all three of those places in particular as well as some of the other high growth regions that may be having a little bit of a rebound, I feel like we've got a lot of opportunities and it's not really concentrated just in one business. Great. Let's go
to Nigel Coe. Thanks, Mark.
Greg, you mentioned the balance sheet is in great shape. Your pensions are very clean. Your liabilities have more or less gone. So how do we think about the management of the balance sheet from here? So the leverage is obviously very low.
Are we now at a floor on leverage and therefore maybe buybacks would keep the leverage here and then you lever the balance sheet through acquisitions. I mean, how do we think about the way you think about that balance sheet? Yes.
I think as I tried to articulate, I think we want to keep our leverage ratio in the neighborhood of where it is today. But if there was a reason for us to lever up for a particular opportunity, I'm sure we would go ahead and do that. Now with $8,000,000,000 of surplus cash on the balance sheet. I'm not sure that that's going to be happening anytime soon because we've talked about the fact that we're not interested in bet the company deals at the moment. So I would just say it's an opportunity for us, but it would only be if there was something really compelling to cause us to want to go do that.
And then Darius, breakthrough initiatives are an increasingly important part of your future growth plans. So how do you incentivize your business leaders to drive more growth from breakthroughs going forward?
I think it's twofold. The first one is, maybe it's threefold. Number 1 is the way we align our incentives for executives in terms of a much greater level of growth and orientation. 2 is by inspecting. It's what you expect, it's what you inspect.
And part of our operating systems, including my own, really dig into the breakthroughs. And frankly, sometimes we throw some out. We keep some, we throw some out. By the way, that's expected. About half of them are what we're finding about, it's a little bit worse than I had hoped, but that's okay.
60% of them fail so far. 40% of them are quite good and survive. But I view that as very, very healthy. I think it's again having that discipline. Back to Julian's question, sometimes you got to just say that's not working and have the courage to say that business isn't a Honeywell business or that breakthrough isn't working.
So it's very much reinforced through our operating system. And we have I have my strap reviews with all the GBEs coming up in July. They're also expected to present what they're going to do with their GBE strategy. So we reinforced it both with incentive as well as how we operate the business.
Let's go to John Walsh, Credit Suisse.
Hello. You provided a lot of metrics around the internal digital roadmap. I just was curious about the impact it's having on potentially fixed CapEx avoidance. I mean, the ability to kind of drive productivity and prevent having to build 4 new walls or expand out a plant, any impact there you're seeing? Yes.
I mean, that sounds like more of a manufacturing angle to it. But I mean, I would tell you that what we're trying to drive from a digital perspective certainly has got a specific and intentional productivity aspect to it. To the degree that that's going to allow us to to constrain the required for space, maybe I'll have you Sure. I mean, there are
actually two levels of waste in the system. 1 is inventory and 1 is underutilized capacity. And with the digital transformation, we attack actually both. So yes, it is it will be a positive driver.
Got you.
And then I guess a follow-up on tariffs. I mean, you noted how you were watching the short cycle businesses. Obviously, you had contingency plans in place for the escalation. There's a lot of questions around the duration, and if we'll how the resolution could look to the current tariff situation. Are you changing or throttling back any of your purchasing at all because of that?
Or is it you're running the plan in this kind of new normal? Well, we've been working on the tariff mitigation strategies and the potential impacts for that for some time now, probably, I don't know, 6, 9 months maybe. And as we entered into 2019, we had already dimensionalized what each of the individual lists may be. So we'd already had plans in place on the shelf ready to go. And as List 3 has now gone from 10% to 25%, we've certainly enacted anything that we had that was waiting in the wings.
List 4 is in a, I think, a bit of a quiet period, could take 30 to 60 days, I think, from what I've been reading before, perhaps that may come into effect. We have the plans and strategies aligned to how we're going to combat that. And in fact, many of those things we put in place in anticipation of that happening. So as we highlighted in one of our earlier discussions, we don't see that as a material negative impact to our guidance. But how long does that persist?
That's a very different question and we'll have to see how that plays out.
Yes. I think
my concern is a little bit broader than that because individual tariffs, whether it be List 3 or potential enactment of List 4, we have a path to deal with that and we've been preparing for that path. I mean, granted if List 4 gets enacted, we've got a little bit more work to do, but I'm confident we're going to be able to mitigate those. I'm a little bit more worried about the global economic environment and is that vector going to change. So far, it hasn't. It hasn't.
We're not seeing any dramatic changes in economic conditions throughout the world. But being able but being dealing with the tariffs that we actually are either visible or potential, we have a path. But I think a little bit more about what's going to happen to global economy. Is that going to continue going or are there going to be some potential cold or even worse of flu? And that's if I have a concern, it would be.
Yes. And that's why we highlighted it's the U. S, China, U. S, Europe, Brexit, I mean, all of these things, it's just more than we've seen in quite some time to consider.
Go ahead, Cliff Ransom.
Thank you.
First, I can't wait to have a conversation with you about BMI, as you can probably imagine. Darius, all of this, everything you've talked about today relies and you talked about talent, you didn't give us very much detail on how you think about that. What kind of metrics do you use for employee engagement? How do you feel about them? How do you think you can amp that?
You're in a process, I've said to you before, this is a revolution at Honeywell over the last 15 years, going from basically either discrete or process to what's much more like flow and continuous. And that requires a very different mindset from everybody that works there. How are you dealing with that issue and how do you measure it?
That's a good question. I think first of all, one of the things that we want to make sure that people understand is our 8 behaviors are in 3 principles. We didn't talk a lot about that today. I talked about the 3 principles, which are, I think are the ticket to entry to work at Honeywell. I mean, if you don't believe in those three principles, you simply can't work here.
But the eight behaviors are important too, because although I don't expect everybody to excel on the eight behaviors, these are the things the kinds of things that we value at Honeywell and I'm not expecting everybody to be perfect and proceeding that direction, but I want everybody to make some progress every year. And frankly, I don't pretend and say that Honeywell is for everybody. It isn't. It's for the people that can identify those late behaviors. I can assure you, Thorsten, who came in and joined us last year, he looked at all that and he said, that's me.
I like that kind of culture. There are others that may say, that's not me. And both of those are okay. We're totally comfortable with that. People have to make their own decisions.
In terms of talent and skill set engagement, we measure that. We do want to give more back to employees when things allow. We want to provide careers for employees. We're passing that aligned with benefits that I think fit that desire. For example, last year we extended our maternity and paternity leave.
Why? Because we want to make sure that during the ages where parents, both mothers and fathers have kids, they have some time to spend with their young ones. So we're trying to align with this mindset that I want people who reflect Honeywell values and behaviors and are excited about winning and doing great things for the world, to be here for their whole career. And that's the real objective. And yes, we measure things like employee engagement and attrition and so on.
All those things are the basics. But and then also in terms of recruitment, I can tell you, I'll give you Torsten as an example. He knows this. I looked at 32 people before we actually made an offer for an IOC leader and that's not an exaggeration. We're extraordinarily selective when we recruit senior executives and you have to have the right skill sets, the right intellectual curiosity, wanting to make a difference and fit with our behavior.
So all those things combined is kind of how we're trying to manage our most important asset, which is our employees.
Thank you. Just one quick follow-up, if I may. Have you ever talked, even if just intellectually at the Board level, what you would have to do differently to grow at 5% to 7% organically as opposed to 3% to 5%?
I'll go back to the human capital, which is part of it is what we a lot of what we talked about today in terms of the actual what and the how. But I think your question refers back to the human capital, right? Because those skill sets are a little bit different. Honeywell has always been a company that promotes from within and it's going to continue to be that way because I always want to promote from within and make sure that our people have a career path for the future. But having said that, I also felt back in 2016 when I took over as COO that we needed to bring in some external talent into the organization, into leadership roles.
And you look at the stage, you have kind of 2 and 2. You have 2 people that are a little longer term Honeywell, 2 that are relatively new. And I think that creates the right mix. And I can tell you and Mark's been Mark's in the audience. So he's been pretty busy in terms of augmenting the great people that we have at Honeywell with some new skill sets, whether it be digital skill sets, which whether it would be ISC excellence.
I think that's a very healthy part of our processes to not have the arrogance to say, well, we do everything the best. I think we want to grow from others, we want to learn from others. I personally spend a lot of time reading things about how other CEOs do things, the successful CEOs. And one of the things we want to continue to be is a learning organization.
Mr. Martin Sankey, Neuberger.
Thank you.
My question is, today's presentation is permeated with Honeywell Forge and Honeywell Connected Enterprise and the benefits it drives to the customers. But Honeywell builds makes chemicals, Honeywell operates buildings. How have you all adopted these tools internally? And what benefits are you seeing and maybe have the business leaders speak to that? In other words, are you eating your own cooking?
We are eating. We have a term for it. We call it eating our own dog food. And just as an example, Vimal can maybe add a bit more color to this. With 200 buildings within our portfolio and we've deployed on 16 large campuses the Connected Building Solution, this one being one of them.
And that's helped us drive up to 20% energy savings within the energy within our portfolio. And we work directly with our corporate real estate team. We go through their procurement process. It's a legitimate we've got to have the best solution at the best value for our real estate team to actually adopt the solution. So that's one example.
We've also deployed connected plant solutions in our own chemical facility in Texas and Rajiv can talk to that and the impact that that's had on our own operations. And then Thorsten, of course, is deploying he talked a bit about data analytics. We're deploying our connected plant solution within part of these IAC transformation. So we absolutely believe in our own cooking. And if we couldn't talk to our customer legitimately about the benefits that we think our solution is going to bring, we weren't deploying it ourselves.
Yes. And I totally agree, Ki Bin, just to reinforce it is, I think we would lack credibility in SECO. We have all these Honeywell Ford solutions, whether it's before aircraft or for industrial facilities, say, well, any given customer should ask, well, where are you deploying them? We've been Honeywell and the answer is nowhere. We kind of lose all credibility.
So we're very much our own kind of test cases and it's the right place for us to learn because I would rather learn of our own installations than necessarily doing a lot of that learning of our customers. So that's part of the requirement.
Darius, maybe I can add a couple of examples.
We've had both point solutions
and entire factory IoT applications. So if you were to go to our Greer facility from the front door to the back door, We took existing sensors that were in the system and capitalized on that from an automation standpoint and actually had less than a 1 year payback. And then as far as the connected aircraft, you can only imagine that Darius I hear occasionally from Darius when the high speed Internet is not working on the aircraft on its CG650. So there's lots of applications that we've used from an aerospace perspective.
Okay. Jonathan, in Iowa. Tostan, just the as you kind of try to consolidate facilities distribution centers, how do you balance that against the risk of tariffs? Because you want to build to avoid the tariffs or you want to build everything locally. So how do you kind of balance those 2?
I think the strategy is more to really have a simple supply chain as much as we can. It's not so much built around tariffs. And but still, we will have a pretty diverse footprint. So we will never put all of our eggs into one basket. That's not going to happen.
But there is opportunity in many areas of the world where we have 4, 5 warehouses in the same place and maybe 2 would do. So I think that's the level of simplification we are thinking about right now.
And the other question was on pricing. You guys mentioned margin expansion would come more from the gross margin side. And so where do you see the most opportunity in pricing? Or is the margin expansion mostly more software mix and things like that?
Well, I think it's certainly software mix is going to help in terms of margin expansion, but pricing opportunities come from innovation. This is all about innovation. The more it's a very simple formula, which is the more value you can create for customers, the more value you can capture for yourself. And that's why for me innovation is the lifeblood of Honeywell. Once we stop innovating, we're going to have a problem and that's going to be at the forefront of everything we do because it drives organic growth, it drives margin expansion, it drives our R and D team.
So I would say that that's critical and
that gives us the license to capture more value. Yes. And we don't want to
over function on just one license to capture more value.
Yes. And we don't want to over function on just one area either. We want to do pricing. We want to do direct material productivity. We want labor productivity.
We want to tackle this on all those fronts. So I don't think we're really going to angle into 1 and forget the others.
Okay. Let's go back to Scott Davis.
Darius, I think it's Slide 9, you have these 3 breakthrough things that you mentioned. Quantum computing was 1 and I recall you ever talking about quantum computing, but I noted that's just $50,000,000,000 opportunity next to it or something which is a little eye popping. What does quantum computing mean for Honeywell? And why are you even positioned to participate in that world? Yes.
So we're actually been incubating this one for a while. I mean, this actually precedes me. Dave has been doing been funding this and it's been under it's been sort of incubated and sponsored by Anne and her team and it's sort of become mine. And it comes from the fact that we've had a lot of great innovation, which is differentiated. We had an R and D lab that was part of ACS that came up with some really interesting technologies that we believed were differentiated.
And frankly, I believe that we can monetize this. The reason we haven't spent a great deal talking about it is because we're pretty far away from revenue. The only reason I brought it up today is that I actually see a path to revenue within 12 months. Once we get to see a path to revenue within 12 months, I think it's time to kind of bring it to the surface. Now is this going to be a financially curve bending thing for Honeywell in the next 12 to 24 to probably 36 months?
No, probably not.
But do
I think it has the potential to access a very large and growing marketplace and solve some unique solutions that no other computing platforms can solve, I do. And that's why we're investing in this thing. It's we're investing at a race that's modest. But this is another example that if we just stopped investing in this and brought that money back to the bottom line, our margin rates will look even better. But you've got to see it for the future and you've got to invest in your future.
And the level of investment is such that it would hurt if it doesn't work out, but it's not going to kill us. And that's sort of the mentality around breakthroughs in general.
So at the risk of showing how little I know about this topic, I mean, can you just give us an example of a type of a product you envision within the Honeywell product, a product line that relates to the client?
So for example, for a lot of the molecule research for a lot of catalyst work that's done in PMT and especially UOP, that's a classic application where we have a lot more computing horsepower to do in hours or days, what takes months or years and the kind of computing power needed. From an external perspective, probably some of the more interesting potential customers are going to be pharmaceutical companies, which really need that computing horsepower and needed things to be done again in days or weeks, not years. And that's why I'm optimistic we're going to see revenue because we're getting that kind of interest proactively. And as you know, we've been relatively shy about this offering. We just slowly started bringing it out.
Others have been much more aggressive with what they have, but I'm pretty confident that what we have is differentiated and interesting.
Okay. We'll time for one more. Let's end with Steve Tusa.
So a lot of the commentary in the slides was about downside protection, whether it's the balance sheet. Have you thought about, whether it's sales growth or profit or whatever you want to define it, what you could do in kind of a downturn? So if you kind of go into a downturn that's half as bad as 'eight, 'nine like what are the levers that you can flex at to potentially hold things flat? It's hard to you'd obviously have to have various assumptions around how bad the economy gets, but I'm just curious as to maybe put a finer point on that messaging. Clearly, the macro has gotten a little bit weaker here and who knows in 6 to 9 months where we'll be.
But it seems to me like you guys are in pretty good position to kind of sale through.
Yes. No, I think that's right, Steve, because my view is the time to prepare for down cycles isn't an up cycle, right? Because once you get to a down cycle, then you will start operating in a panic mode. If you recall, I had the pleasure of going through the oil and gas cycle in 2015 2016 when I ran PMT and that was a lot of fun. I know Rajeev was there with me.
He enjoyed it daily. So I think we know the playbook and we have people in Honeywell that know the playbook. But I think that this it made me appreciate the issue of cyclical versus less cyclical businesses. And then really being prepared from a balance sheet, from a pension funding perspective, so that when tougher times do hit, we don't necessarily have a problem because then you don't have the option where you direct your cash. You have to direct your cash to either some of these liabilities.
You have to direct it to your pension. I want to be prepared. And also, I don't want to take such a huge dip in our revenue that now we're going to create a problem. And some of the productivity things we know how to do, we've done them before, we've done them in 2008, 2009, 2009, but I would tell you that the recession we saw in PMT in 2015, 2016 was dramatically worse than the 2008, 2009. And as you can saw, and I think it was in Rajeev's presentation, we actually grew our margins despite actually revenue base, which disappeared, which was negative.
So we know how to do this and hope we don't have to go there, but
Would you need to take a like last cycle right before the downturn you guys took a lot of restructuring? Would you need to take you think if you saw a recession on the horizon a significantly bigger bite of the apple when it comes to restructuring? Or you think you're kind of your businesses combined with the balance sheet combined with what you've already done gives you enough to kind of defend?
I would tell you
that restructuring is part of the playbook. We funded it. We've been fortunate. We've got some income coming through below the line, which frankly, if we have good restructuring projects, we fund it. We can fund it even at a greater level.
So we're always looking for great projects. And I think we probably would have to accelerate a little bit, but not dramatically.
Yes. I would agree and I would just say that we've in our financial framework, we've retained capacity for repositioning. And should we have to pivot it more towards short term cost reductions versus some of the longer term cost reductions, we could do that. And so I think we're ready should that happen with capacity in our financial plan to do so.
Good. All right. We made it. I'll allow Dario to make closing remarks.
Well, this will be relatively short, but maybe one commercial before my closing remarks, which is I wish we could have timed this better, but due to some time challenges, we're actually doing a brand relaunch tomorrow. I hope all of you keep an eye out for that. I think it also positions Honeywell into what I call kind of the Phase 2 of the transformation and you're going to see a lot more press about that coming out tomorrow and then for really the next 6 months or so. We were still going to be called Honeywell. Just not to spell the surprise, but we're positioning the brand a little bit better.
But just in terms of a summary, as I outlined, we've made good progress on the 4 key strategic initiatives, whether it's organic growth, enhance that continue to drive margin expansion, cash conversion, transformation to a software industrial as well as more aggressive deployment capital deployment. Those four things are now going to be underpinned by Phase 2 of the transformation. And Phase 2 of the transformations are Honeywell Connected Enterprise, Honeywell Digital, ISC Transformation, continued work on the portfolio and certainly the most important element, which is continued focus on innovation. We're very confident in our future. All of that is also supported by an extremely strong balance sheet, which we have a lot of firepower left, but it's also what I call a safe and recession proof balance sheet such that we're not going to have to worry about it during a downturn.
And then last but certainly not least, although we're a performance company, we're also a company that's very much focused on ESG and we bring a lot of great things to humanity, bring a lot of great things to the planet. Want to have people stay in Honeywell for their whole career and we'll have a very diverse workforce. On that note, I'll wrap things up and I'm very confident saying although we've done some good things in the past, the best days are still ahead of us. Thank you.