Honeywell International Inc. (HON) J.P. Morgan 2024 Industrials Conference (Transcript)

Honeywell International Inc. (NASDAQ:HON) J.P. Morgan 2024 Industrials Conference March 12, 2023 7:45 AM ET

Company Participants

Greg Lewis - CFO

Conference Call Participants

Steve Tusa - JPMorgan

Steve Tusa

Okay. Thanks everyone for joining us for a kickoff of our Industrials Conference this year. Great to have everybody here. Before we start with Honeywell, just want to remind everybody and I feel like an idiot saying this, but, we have a panel at 2 o'clock this afternoon on AI, and it's the basically the Head of AI, JP Morgan. We're doing a lot here and I think it's actually going to be super interesting, better than prior year panels. So, hopefully, you can take some time and sit on that at 2 o'clock.

But before that, we have a bunch of companies lined up here, and we're very pleased to start with Honeywell. We have Greg Lewis, CFO, and Sean Meakim of Investor Relations. Greg, thanks for being here. And I don't know if you want to kick off with just a little bit of an update on what you guys are seeing, so far here through the beginning of March and then I have a few questions.

Greg Lewis

Sure. So, first of all, thanks for having me. It's been a while since I've been here with you. Just super quick, just a couple of quick pages and then we can get into the Q&A. Maybe first and foremost we're two months plus through the quarter, our guidance is in the backup of this document. But certainly here to reaffirm that we're on track to our guidance for the first quarter. I'm excited to see, I'm excited for a new year, I'm excited for the platform that we've built here at Honeywell. And certainly what Vimal is bringing to the table in terms of an enhanced focus on growth. And we're excited about the mega trends that we are decked up against. You've seen this before, but certainly we're getting closer to closing on the acquisition with Carrier.

We've said that that was expected to close sometime in

I think as you've seen before, we've demonstrated our ability to deliver on our algorithm year after year through ups and downs in the environment that we've seen. And we'll continue to do that as we go forward from here. So very excited about the platform that we've built in Honeywell over the last 20 years, but particularly the last five to six. And looking forward to really leverage that with the Vimal's focus and pivot towards a bigger growth agenda.

So maybe with that, I'll turn it over to you for comments or questions.

Question-and-Answer Session

Q - Steve Tusa

So you guys reaffirming the guide and anything moving around within the businesses puts and takes anything that's better or worse in the near-term here short cycle versus long cycle?

Greg Lewis

I think Q1 is probably going to look a lot like Q4 did. So I don't think anything materially different has evolved. Again, we're only a couple months in and as you know a large portion of the quarter happens in the last two to three weeks of the third month. So still a lot to be on unfurled. But as it sits here today, we're leveraging the long cycle backlog that we came into the year with, we're seeing short cycle stable but not pivoting up yet. That's unexpected. We think that's more of a second half versus a first half dynamic. And we're doing all the right things to prepare for that including, again, getting ready for closing and beginning the integration around carrier as well as continuing to work the pipeline.

Steve Tusa

Just geographically, what's your take on, what's going on in China from your dashboard?

Greg Lewis

So we actually have a very healthy growth rate in China that's -- it's supported a lot, of course, by the aero business and just return to travel in aerospace. The China economy is muted. I was there late last year. We continue to have a big presence there and our traveling there fairly often. And I'd say the economy itself is going through a bit of a restructure if you will. But we still have a lot of confidence that we're going to be able to grow our business mid-single digits, not maybe the double-digits that we had expected in the past. But we've got a great business there and we're going to continue to take advantage of our positions in that business.

Steve Tusa

You guys have a pretty strong backlog, a great collection of long cycle businesses. One of the few companies that continue to grow backlog. How do you see backlog playing out this year? Book-to-bill has been pretty solid. Where do you see kind of finishing the year from just a comparable perspective?

Greg Lewis

I mean, I wouldn't be surprised if our backlog grows throughout the course of the year. We continue to have our past due backlog in aerospace grow quarter-over-quarter and even within the months of the quarter at this point, because that's going to be a multi-year story on the unlocking of that supply chain. And that's not going to -- I don't think we're going to see that past due backlog start to burn until perhaps next year. And that's such a big part of our business. So that's going to influence our overall company backlog, pretty meaningfully, in the short cycle where most of the past due backlog challenges are -- have been flushed through. There's a couple of spots where we're still working through some challenges but for the most part that's worked its way through. So book-to-bill,we're going to be in that one-to-one range plus minus as I see it right now.

Steve Tusa

And when you think about the more commercial businesses, the non-aerospace businesses in that backlog, aside from what you're not able to ship, is the demand running in and around the shipments or is that what are you seeing there and kind of the more commercial businesses long cycle?

Greg Lewis

I mean, long cycle actually the buildings business very strong. And I would say orders are outstripping sales at the moment. So we're building some backlog in the HPS business, which is good. We're going to see a little bit of decline in the equipment business in UOP. And again, that's just because of the cyclicality of some large projects, particularly around LNG that run through it. But the catalyst -- the catalyst backlog, very healthy there. HPS has had a very good two years, frankly and continues to see healthy orders. So -- and the one spot that we all know very well about is the warehouse automation backlog, which has come down significantly, given the warehouse automation, pinch in that market. But other than that I think some pretty healthy dynamics.

Steve Tusa

So on the topic of backlog early short cycle stuff, you definitely have a -- like you said, bit of a step up from one half to second half. I guess when we look at normal seasonality, you definitely have a step up from 1Q to 2Q this year. I believe the comments have been a bit muted, but still up. Can you maybe just refresh us on just the high level of what you've said from the trajectory on EPS and revenue for 1Q to 2Q in a kind of directional sense?

Greg Lewis

The way I would think about the year is you're going to a marginal step up from 1Q to 2Q and then 3Q and 4Q will be a bit more substantial off of the 2Q base. So it's not like there's going to be a huge inflection in the second quarter that we see, but a bit more of a moderate improvement sequentially from quarter to quarter. And EPS and revenue growth are going to on a percentage basis, just each quarter get a little bit better. So it's going to be a little bit of a stair step up as we go throughout the course of the year with, again, the back half. Remember some of that is the absolute growth rate and some of that is just the comps are going to become more favorable in the back half versus the front half, and we should have a pretty healthy exit rate, overall for the business.

Steve Tusa

And you're talking about year-over-year growth, right? Sequentially, do you think you'd be able to grow earnings faster, leverage revenue growth, grow earnings sequentially a little bit faster than revenue growth?

Greg Lewis

And again, in the second half that should pick up/

Steve Tusa

And that should accelerate, but even in one 1Q to 2Q little bit better revenue.

Greg Lewis

A little bit better revenue and leverage on top of that. So a little bit better EPS on sequentially.

Steve Tusa

Sorry, we got to get the sequential stuff out of the way. So, just on the businesses, you guys recently restructured some of the reporting IA is a big segment, so maybe we can just kind of like delve into that one in the different segments. And I guess we'll start with warehouse automation. Where do we stand in that cycle? How do you see the recovery playing out there and anything to point out as far as the future drivers?

Greg Lewis

So I guess what everyone knows where the industry is. So there's nothing differentiated for me to tell you that you don't already know about the squeeze in terms of the growth rates on the overbuild that occurred. What I would tell you, what's important to know about Honeywell and about IGS is a few things. Number one, our business has been repositioned in a very healthy way both from a supply chain footprint and cost perspective as well as an execution focus. I think we've done a lot of work to increase our capabilities around execution. And the third part of that is just the reminder when we bought this business, the whole point was win install base, create a very healthy aftermarket service business that's now approaching a $600 million part of the portfolio.

So, fairly substantial aftermarket at very high rates. So we're poised for leverage as growth does return. We still feel like the overall macro trend of e-commerce and warehouse automation is a positive one. And while, we're not happy with the close rates of deals as we sit here right now, it will happen. And as it does, I think the leverage prospectively is really the important thing to be mindful of. And again, keep in mind too this is 4% of the portfolio from a revenue perspective less than that from an EPS point of view. So while it's interesting, it's not the biggest driver in the Honeywell value creation story but I'm still excited about what we've done and where it goes from here.

Steve Tusa

Is this a strategic asset? I mean, is this something that you guys want to reinvest in? Now that it's got to be -- it's small, is where is this part can this be a platform really for you guys going forward?

Greg Lewis

Yes. Listen, I mean, that's why when you think about the industrial automation segment now as it is, there are clearly going to be synergies with our technology across both that and HPS. Obviously there's synergies around the supply chain, which we're going to delve into. So it fits right into software. You mentioned AI a few moments ago. AI is important to us as well. I think there's going to be some interesting solutions that our technology teams are creating that I think can help on the maintenance assist side, so there's some really good use cases for us. So I think it fits nicely into the kinds of things that Honeywell does well with our controls platform and background. And again, prospectively from this point forward, it has a very nice thematic growth path in the future. We've got in the business really well structured to take advantage of that as that happens.

Steve Tusa

So I guess when we think about a combination of project selectivity and the low -- you moved some supply to low cost regions. These are kind of like structural changes. That ultimately as it comes back, it won't be that you guys will be nipping at these tough deals and you can really leverage the business as it comes back like the margins are sustainable.

Greg Lewis

I mean, listen, we learned a little bit of a lesson around over concentration and so I don't think you'll see us do that again in the future. So I'm very excited about the forward leverage for the business as it does return to growth.

Steve Tusa

And sorry one more on just the pipeline. We were down at the show yesterday and everybody's saying that these warehouse pipelines are definitely expanding but the close rates are relatively a challenge. I mean, is that something that you would expect to hit in the second half? Like perhaps a little loosening of that pipeline or we just don't know?

Greg Lewis

I wish if I knew that I'd be in Vegas probably placing bets. Because I would mean I knew more than I do. We'll see how that goes. It really -- everybody's got a different point of view as to what their appetite for investment is. The thing I will tell you though is everyone is struggling for people. And when you think about warehouse automation and the number of people that have to touch packages and when you look at some companies who have had to sign on to pretty substantial labor inflation clauses in their own operations, I don't know that anybody would argue that there's going to be a need to do important things in this space.

So whether that happens in the second quarter, the third quarter, the fourth quarter or early in 2025, I really can't tell for sure, but those are real thematic problems that people have to go solve and we're going to be part of that solution.

Steve Tusa

Moving on to the handheld business, we like to start with the kind of negative comps and we'll finish with aerospace.

Greg Lewis

You promise?

Steve Tusa

Yes. We will get to aerospace. This business has obviously seen some really dramatic destocking, pretty clear destocking. I know one of your peers has been relatively more positive recently. What the orders were, I think pretty good in the fourth quarter. What are you guys seeing there and why can't that business maybe surprise a little bit potentially in the near-term?

Greg Lewis

Well, I would tell you that is one of the businesses that we have a bit more optimism around in the fourth quarter it's book-to-bill was over one, somewhat meaningfully relative to others who are kind of a little bit above but just around. And so we do think that there is going to be an inflection coming, the business is operating reasonably well. And again, this is one of those businesses that has a very high variable contribution margin. So as you see growth, the leverage associated with that is going to be very meaningful. So we are optimistic and yes, this is a business that we're looking for to providing some of the juice that's going to help us here as we progress through the year.

Steve Tusa

Is there anything unusual about the fourth quarter, like timing of a price increase or anything like that that would've driven those orders? Can those maybe sustain into the -- at least the first quarter, if you don't ship it it's some orders that you're building a little backlog or not really?

Greg Lewis

If I think back to the kinds of things you're referring to, are people buying ahead of a price increase that would've been much more meaningful. You know, ‘22 into ‘23 as opposed to ‘23 into ’24, we talked about the fact that we did 10% price in ‘22, 4% in ‘23. And our number this year we think is going to be in the 3% range. So it's not like there's a big heavy thing for any customer to go try to avoid. So I'd be surprised if that were.

Steve Tusa

So the point is that order number is.

Greg Lewis

I think it's a solid order number that should be indicative of the future. We definitely -- this is one of the businesses that we have the clearest visibility into channel inventory. That channel inventory seems to be back to sort of a normalized level. So we would expect like real demand increases would then flow through pretty evenly with our overall profile.

Steve Tusa

And would you have visibility on that by the time you, like, when you report first quarter, would you have visibility more confidence or is it just so short cycle that your visibility there is?

Greg Lewis

I mean, that's a very short cycle business, so I will probably have a little bit better view of Q2. But again, when you get into some of these products businesses, 90 days out is kind of the limit of what you can have a lot of certainty on.

Steve Tusa

And you do have the zebra headwind in 2Q on revenue?

Greg Lewis

We do. Well known. I mean, yes that’s not news. It was an eight quarter event in the first quarter of this year is the last of those eight quarters and then that will matriculate out of the pivot.

Steve Tusa

And then lastly on the sensing business, always tough to tell what the real -- what the drivers are there. What are you guys seeing there and how do you see that playing out?

Greg Lewis

Well think about there's a number of drivers I mean industrial, healthcare, aerospace are very solid industrial, probably low single-digit type kinds of numbers. Again, this is another business where the stocking levels are coming back into alignment. We're getting better visibility on that. I'll just make a quick plug for accelerator for a second because when we talk about our accelerator operating system, this is one of those areas when we talk about aftermarket services or products based business models, we're getting more on purpose visibility into our channels as a way of operating.

So that wasn't the truth across every single business now we're making that a capability that we're digitizing, so we get better visibility to that on purpose. We're doing that here and we're starting to see those stocking levels also come down to a bit more normalized rate. So that gives us a bit more confidence as we head into the back end of this year as well.

Steve Tusa

And that business I know is a business that you guys like and worth talking about maybe adding to at some point. Is that still a kind of a platform?

Greg Lewis

Yes, 100% platform. I mean the sensing business everything that is going to be automated requires some level of sensing. And so this is an area that we would definitely like to add onto the portfolio.

Steve Tusa

And then lastly, the newcomer there on HPS, what are you guys seeing there? And also it was a very strong margin year for them. Maybe talk about what drove that and ultimately is that temporary? Do you see that continuing on in terms of HPS?

Greg Lewis

Again, HPS not probably is our most mature projects and services operate business model combination in the whole company. And it had a terrific year. In fact, it had two great years in a row in both ‘22 and ‘23. And a big part of that is they're making a lot of hay in the aftermarket, whether it's our software solutions coming through HCE on the industrial side, or whether it's our regular way aftermarket business. It's probably the best aftermarket business outside of aerospace in sort of the traditional Honeywell portfolio. And that's also driving strong margins, right? So that's -- if those things are growing at think about a double-digit growth rate in services that is creating some nice margin leverage.

And we expect 2024 to be very similar. We're we expect positivity in the project side, not massive on the top line from a percentage basis, but also a very good pull through on the aftermarket services. That's why Vimal probably spoke about it. We talked about it a little bit at the earnings release. As we think about 2024, a lot of what we're trying to do is self-help aftermarket services that accelerator engine that we're working on across all the businesses there. Taking something like the success we see in HPS extending it across the others, you know our story around HGRs has always been a strength for us. These are the kinds of self-help levers. HCE continues to have strong double-digit growth in the top line, again, off of a $1.5 billion plus base. So not huge in the context of Honeywell but still nicely accretive to the top line. Again, that's also embedded in HPS as well.

Steve Tusa

But I think the backdrop at HPS is also pretty good. I mean, process CapEx is, okay. Any concerns around the LNG noise that's going on out there and the camps the kind of project delays?

Greg Lewis

I would say the way, I mean with LNG in particular, the way I think about that is it's going to happen somewhere. And if it doesn't happen in the U.S. and it winds up in a different spot of the world, we're going to be there because we're such a global business and our reach is what it is. That demand I think is going to be satisfied in one form or another across the globe and we're going to be a big part of that wherever it happens the way.

Steve Tusa

But the point is that's not like a impact on your near-term growth rate or a cycle killer or anything like that?

Greg Lewis

No.

Steve Tusa

Still a pretty good cycle demand-wise?

Greg Lewis

For sure.

Steve Tusa

Just moving on to the building automation business. That one is always tricky because a lot of us think of non-res spending. It's a global business. There's solutions and products. Maybe on the product side, there's definitely been a destocking for everyone involved in fire and security products. When is that -- any visibility on when that's coming to amend and how do you guys look at the matter this year?

Greg Lewis

I mean we're feeling it, too. Again, I would call our demand profile stable but not growing on a year-over-year basis. And I think, again, that's a little bit of what we're seeing here in Q1 is a bit of a continuation of that.

If I had to call the end of destocking and some of those channels, it's probably Q1 may be a little bit of a bleed over into 2Q, but not really much beyond that. And then I would expect to see, again, sort of demand like real demand recouple with our sales growth is from in sort of the latter part of 2Q into 3Q.

Steve Tusa

I know you guys have a lot of solutions and software. I'll get to that in one second. But like the pie chart for us from an end market perspective is always tough to see on this one. Should we think about it as similarly like the non-res data the government puts out there where there's some office, some education like are there any verticals here you're overly exposed to? And would you have some content in these manufacturing plants that are going on -- going up here in the U.S.?

Greg Lewis

Some, yes, but that's the -- I would say, the beauty of building automation. We talked people do to your point, go, commercial building equals BA and that's not it. I think we're something like 20% exposed across our entire portfolio to just commercial buildings and also we play heavily in retrofit. So it's not all about a new construction.

To be honest with you, the best indicator we've had is we look back has generally been GDP and we think about our growth rate should be GDP plus in that business overall. So there's not any one vertical that I would be -- we're into data centers. We’re into hospitals, we're into schools, we're into commercial buildings, a little bit into manufacturing. So I think that's actually a good thing for us the broadness of where we play.

Steve Tusa

And this is one of the more mature software businesses you guys have great controls platform. What are some of the forge KPIs you're looking at? And you guys have been at this for a couple of years now. Anything to point to like the success?

Greg Lewis

Sure. I mean, the two biggest parts of HCE are in Buildings and Industrial. And again, both of those businesses are growing healthy double-digits. And so whether it's energy management-related offerings coming out of forge, whether it's building occupancy related, we're now getting into -- with ESG. There's a lot -- people have to measure greenhouse gas emissions. So we've got some solutions around that as well. So those would be probably the two or three things that I'm really excited about.

I think the other thing you're going to see is we're going to get a little bit more deeply into the small and medium-sized market. I think as we can make applications like forge more attractive to small and medium-sized businesses, you should expect us to be looking for solutions that will fit that end of the market as well because I think there's a lot of demand in that space, which we haven't to this point cracked code on. But that's something that we're working on that could expand our SAP.

Steve Tusa

How do you count is it subscriptions? Is it seats? Is it -- how do you measure success there from a unit kind of volume perspective?

Greg Lewis

I mean, we're trying to get to a place where ARR becomes a more relevant metric for us. And we're learning and that's not necessarily our usual way that we had traditionally thought about it. But again, as we're doing our software accelerator launch of the four business models that's happening right now, we're putting a lot more emphasis and energy around that specifically, but that's ARR, I think is where you're going to see us starting to go to try to put a point on it.

Steve Tusa

That's helpful matrix when it's actually ARR. Companies report ARR, it doesn't really matter, seemingly matter. Just on the margin side, that business has been unbelievable, very strong mid-20s even with the products destock is that a mix dynamic? And can that continue?

Greg Lewis

I would say if you think about all the things that we have tried to do at Honeywell, they've been leading in a number of them. They're the first along in the supply chain rationalization. You could -- I mean, they have more than three factories, but you could think about a large percent of their volume is coming out of a regional factor in each one of the three main regions. So we've created a lot of scale on manufacturing.

One of the things that never let a good crisis go to waste with all of the challenges that we had in semis during the supply chain constraint. Well what do you think we did with our R&D team, we went back to reconfiguring to fewer boards, newer boards on our platform. So we're creating some scale there that we maybe didn't have before. And like I said, they've got one of the two largest parts of HCE, which is growing quite nicely. So there's a number of elements that have helped us drive that business to a much more streamlined lean operational model.

And as -- again, as the products business returns to growth at fairly high margin rates, we expect that continue to have room to run. So we talked about a 27% long-term target. We've already printed something around 25%, and I'm very confident in hitting that number as we go forward from here.

Steve Tusa

On ESS, maybe talk about the -- what's going on in Advanced Materials, forge on prices or moving around a little bit there's this transition. That business had a nice margin in '22 went down in '23. What's happening on the Advanced Materials side? You've also got Electronics coming off the bottom.

Greg Lewis

If you think about sort of the three big pieces of AM, being fluorines, the chemicals business and electronics. I think what you're going to see is almost like it's going to be a little bit of a one, two, three. I think chemicals will start having some growth early, perhaps as early as the first quarter then, I think electronics, second, third quarter and then fluorines, third, fourth quarter. So it's going to be a little bit of a stair step as the orchestra comes back into balance with one another.

Nothing really new on the quota and the pricing side in fluorines. So I think that dynamic is pretty well understood by most people. So we'll see the quarter come down, but we'll have some other applications that we think we're working on to kick in to try to offset that to some degree. But this business should be heading towards a nice growth path as the year progresses as well and we'll get some nice leverage on those margins as the business grows.

Steve Tusa

The R-410A price, is that still important to you guys? Is that something we need to watch?

Greg Lewis

Well, I mean, it's always important. The volatility, I would say, has lessened over the last few quarters. And so it's something that we'll always pay attention to, but it's not something that we're concerned about at the moment I guess I would say.

Steve Tusa

And then lastly, just on the sustainable technology side. How big is that business now? And where can that go in the next couple of years? You talked about orders.

Greg Lewis

Yes, I was going to say orders is probably in the $400 million range in 2023, sales a little bit behind that. But again, that's growing at a very healthy double-digit type of a rate. So really excited about what Barry Glickman and team are doing in that area. Again, we talked about from a zooming out from a long-term perspective, the energy transition is going to be a long-term theme and the things that we bring into play there for separation technologies for carbon capture, sustainable fuels, I mean all of those things are going to be with us for some time. So we talked about that getting to being a $700 million business over a few years' time. I think that's our growth expectations remain very bullish in that area.

Steve Tusa

And then lastly, just on UOP. I don't have any specific questions there but what are you guys seeing and how do you expect that to play out sequentially as you move through the year? A –

Greg Lewis

Yes. I would say what you're going to see -- you're going to go all the top line is not as strong as I thought. Well, no, that's not really the case. I mean, we're going to have a little bit of the LNG projects that flowed through the back half of last year or I should say, during the course of last year. So we'll probably have a little bit of a lighter equipment growth rate early in particular, with orders and revenue. But that was, again, creating installed base for catalyst and the catalyst business should be very strong.

Steve Tusa

And that's positive for margins, I would assume.

Greg Lewis

You bet. Absolutely.

Steve Tusa

And then getting this to aerospace, all the good stuff from a demand perspective. Where do we stand on supply chain? You said that the past due backlog actually is expanding a bit. Does that mean supply -- because it seems like you guys are on a nice steady trajectory. I mean, supply just kind of like it's stalled again or getting.

Greg Lewis

No. It's -- again, I know everyone would like this to be over fast. And if I'm here a year from now, we'll probably be having the same conversation again and we'll talk about continued sequential modest improvement and that's what we're getting. And so the reason why the past due backlog continues to go up and again, not massively at this point. We're not going up by $0.5 billion in any given quarter, but it's creeping up still every quarter because the demand remains very strong and we are continuing to get that little bit of incremental each and every quarter, which on a year-over-year basis, is delivering strong [Vs] and that's going to happen this year, going into next year.

This -- back to automation, AI et cetera, I mean the supply chain in aerospace is very exposed to labor shortages. That's not solved yet. I don't -- and that's going to have to have some other solutions to it. It's a very disaggregated supply base for the whole industry.

Steve Tusa

So if I'm a customer, should I be ditching as much as I was a couple of months ago, more or less?

Greg Lewis

Well, I would say when you go all the way up the chain, everybody wants everything now. So they're never -- like I don't expect our customers to be having dinners for us and celebrations anytime soon. But what I would tell you is we have a very active dialogue with our customers. Vimal, Jim Currier top to top that those relationships are very active. So there's no mystery about where we are between any of us. We would like it to unlock faster. They would like it to unlock faster for their own growth and we're all kind of arm and arm in this together to try to achieve that. But I don't think the level of stress or is going to be with us for some time.

Steve Tusa

And certainly not your growth rates are still pretty strong?

Greg Lewis

Yes.

Steve Tusa

You guys are printing it in specialty aftermarket. Just on the defense side, that was a little weak or it's been slower than we would have expected. Still a nice trajectory there. How do we think that?

Greg Lewis

Yes, I mean, I think the world is not safer tomorrow than it was yesterday. And so I think the demand for defense is going to continue to be healthy and we're going to play a role on that. So I don't -- again, I don't think that's going to be a one year up big and then flattens out. I think that's going to be a nice growth path for us for a number of years to come. I don't see any reason why that would change any time soon. The conflicts that we're experiencing today are very active, none of us like that but that's true. And so, I would see in the foreseeable future that, that's going to continue to be a very strong driver of demand for us.

Steve Tusa

And then on the margin front, there's a decent amount going on here. The aftermarket is obviously very accretive to you guys but the OE stuff. How much is this margin burdened by these how active you're being in trying to remedy the supply chain issues. Obviously, that's not going away. So we're not -- that doesn't flip, but like is there -- I'm assure you as an accounting guy have a number in your head on how much cost extra costs?

Greg Lewis

Listen, we are spending extra money in the form of people. The -- if you think about we have a supplier recovery program with humans that are aligned to different outlines that we're producing and the supply base that goes along with that, they're partnering very closely with suppliers, trying to help in case where maybe we have to leverage to bring to bear either the access to talent or adding capital where perhaps we're going to buy capital, own tooling that might sit in some of those suppliers.

So there's a variety of things that we're doing to create this unlock or support the creation of this unlock and the supply base. It's not just happening by the passage of time. And yes, that's -- there is -- that is measured in tens of millions on a run rate basis. And it's gone up from '22 to '23, '23 to '24, we continue to invest and expand that program. And so it is definitely burdening margins, but we're also gaining leverage. So if you think about it, we're investing in R&D. We're investing in the supply chain recovery. We're battling the mix challenges that come along with OE and aftermarket, but we're also getting some really nice leverage with mid-teens top line growth.

Steve Tusa

I think that's pretty. Anybody have any questions on the actual businesses before we go to a portfolio? Yes. I think that was a pretty comprehensive discussion of the business. I appreciate it.

Just on the portfolio. You guys have talked about selling some stuff maybe less than 10% of the portfolio. I mean, we just walked through all the businesses, it sounded like you were pretty committed to each of them. Maybe there's a couple of things here and there. But is that still a plan that you guys? And when we have any kind of -- is that in the next couple of years and the next timing-wise, how should think about any announcement there?

Greg Lewis

I would say, again, we just walked through the whole portfolio. It's a $37 portfolio. We probably hit on $27 of it, I don't know. So it's not like we touched on every single thing in the portfolio. There are certainly things that as time passes and change happens in markets, perhaps don't fit quite as well as they once did. We know what those are. We go through a refresh of that portfolio assessment each and every year. It's evergreen type of a thing. We always talk about we're our own activist to make sure we understand what's happening and how we see both -- how thing fits in the portfolio but also what the receptivity to separating something might be, right? So you don't want to be -- even something may not fit but it may be a bad time to separate that thing from you in order to gain value. We're not really just willing to give thing way.

So I would just have that in mind that we're always working on the things that we think are just like we have a pipeline of incoming things we hope to execute on. We also have a pipeline of outgoing things. And when the two things meet in terms of business performance readiness and market readiness to get appreciable value, then you would expect us to start talking about any individual property at that point.

Steve Tusa

And then can you just remind us in the financial impact of Quantinuum. You guys recently had some news there, but what’s running through the P&L and the cash flow statement today from that asset that's should be a positive but treated as negative?

Greg Lewis

If you think about it just on the face of the financials, what you see when you look at the K or the Q, it's about $150 million burn rate in corporate. So if you just think about that as -- just think about it as cash flow for simplicity's sake, both earnings and cash flow.

But from an EPS perspective then knock that in half, right? So relative to our EPS, it's probably a drag of I don't know, $0.06, $0.07 on an EPS of $9.16 last year. So I would call that de minimis, which is one of the reasons why it gets a little frustrating sometimes when people are like, why are you doing that thing. And we're saying we're doing that thing because we think it's got a pretty big option value, and it's not a huge investment in our financials to create that option. And we're pretty bullish on what that could turn into.

Again, I'll go back to -- you mentioned AI. AI eats data, there's going to be more and more high-powered analytics that are going to need to be done, quantum computing is going to play a role in that kind of thing. So -- and we feel very bullish again on our technology and it’s capability.

Steve Tusa

So how does that dovetail with like these data centers with all these GPUs? I mean, is that -- I guess I could ask drew this afternoon, but like is that -- is the competitive technologies?

Greg Lewis

I wouldn't think so. I mean I think data centers power these things, right? So I think those -- it's part of the portfolio of things that are going to be needed to take advantage and we're going to play in that value chain.

Steve Tusa

As far as the impact of the election is concerned, I mean, are you guys at all talking about, there's obviously a pretty stark contrast between the two potential administrations. Are you guys talking at all in the boardroom about any changes in approach on anything if there's a change in the administration?

Greg Lewis

So we're always mindful of it as I'm sure you could guess, I mean, Anne Madden and her team do a great job in government relations of making sure that we as a company and our executives stay plugged in and tuned in and also providing input wherever we can to be helpful as things evolve. I mean, who knows what's going to happen this is again, this is -- it's going to be an interesting time between now and November to see what shakes out.

When I think about certain things as it relates to geopolitical tensions or changes, tariffs that type of thing, I mean, the good news is our local-for-local strategy has always been very helpful to us, and this is another place where that's going to be true because we're not super exposed to any one region serving another. When you think about trade agreements and tariffs and that kind of thing, it's not that it doesn't matter, but it's not so material that we don't know how to deal with it. When the tariff regime was going through, we had very clear visibility as to what that was. Again, we were able to pass that through to the marketplace. I would expect we would do that again if that were to be the evolution of it.

As I mentioned earlier, I think when you think about things like the energy transition specifically, those things are going to need to get addressed, whether it's a Republican or Democrat in the White House over the period of time we're talking about, which is again a medium- to long-term threshold that is going to need to be addressed and we're going to be a player in addressing some of those big challenges.

What happens in the very short run? I think we'll all have to wait and see how this year plays out. I mean something like 50% of the world's democracies are going to the polls this year. So it's the U.S., but it's actually quite a few different places are going to be having elections this year. So this will be a pretty consequential year overall on that topic.

Steve Tusa

Yes, every year seems consequential, every day actually these days. And then just lastly on AI, what are you guys doing internally? Are you doing anything -- is that -- are there any initiatives there? And are they accelerating? What pace are they at? I kind of have to ask that question of everybody.

Greg Lewis

Listen, I think we're trying to do from both angles, both trying to bring it into some of our solutions as well as that we're offering as well as using it internally. A big part of what you hear about is engineering and coding efficiency. We're definitely seeing that and doing it. So that's adding capacity and/or allowing us to perhaps bring some costs down. So that's a positive.

And we have as I'm sure you would probably expect in our plan, we have a cost down target associated with creating some efficiencies in a number of areas, finance is another one where that's going to be relevant as well. But anywhere that you have data transactionally needing to be addressed. There's opportunities there. So we're doing it both on the cost side, and we're also doing it in our solution sets.

Again, I think about AI and generative AI, in particular, as a learning device. And so whether it's I'm, again, I mentioned technicians. I'm a technician. I need to learn what my next best action is or how I might go about do something, and I want to learn it fast. AI can be part of that solution, and our software solutions can bring that to bear. So that would be the thing I was trying to leave you with is, again, AI eats data and what we have created Honeywell both for ourselves internally as well as in our IoT platform that we bring to the market through Honeywell forge is a data backbone for these things to sit on and work on.

If you do not have that data backbone, you're probably going to be talking about hype cycle and it'll be interesting, but you're a company's ability to execute on that, I think we'll be challenged without that data backbone. And that's what we've spent the last seven years building both for ourselves as well as for our customers with the forge platform.

Steve Tusa

And internally, the initiatives and the business models you're pursuing to make yourself more productive, is that getting reflected in higher spend within IT budgets or more CapEx and on-prem data center like how is it influencing your spending on the ultimate infrastructure that's supporting you guys? Or it's so efficient, you don't even see it?

Greg Lewis

I would think about it, there is a marginal cost of some of that, but it's not -- again, we've already spent I talked about this for the last number of years, over $1 billion in creating our own digital infrastructure for Honeywell. We've spent a substantial amount of money creating our IoT platform. Those investments are done, like we're still adding -- we're at the add to it and refinement stage now.

So things like AI for us, yes, there is a marginal cost of perhaps a certain AI license for a thing or a partnership with someone perhaps in certain use cases to help make a particular thing go. But those are like small marginal costs relative to the benefits that we think will come from them. So we don't feel constrained by that.

We want them to pay for themselves real time. But you're not going to see -- again, you're not going to see like a big blip in our P&L, and I'm not going to come to you on quarter and go, our expenses were up by $100 million this quarter because of AI. That conversation is not coming.

Steve Tusa

We got our GPUs this quarter. All right, I think that's it. Thanks, everyone. Thanks, Greg. Appreciate it.