Honeywell International Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 13 speakers on the call.

Operator

and welcome to the Honeywell First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Honeywell's Q1 2024 earnings conference call. On the call with me today are Chief Executive Officer, Vimal Kapoor and Senior Vice President and Chief Financial Officer, Greg Lewis. This webcast and the presentation materials, including non GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website.

Speaker 1

Our discussion today includes forward looking statements that are based on our best view of the world and of our business as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the Q1, share our guidance for the Q2 and provide an update on full year 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapoor.

Speaker 2

Thank you, Sean, and good morning, everyone. We delivered a very strong Q1 exceeding the high end of our Q1 adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. The disciplined execution of our world class accelerated operating system and differentiated portfolio of technologies enabled this strong performance amidst a dynamic microeconomic backdrop. As expected, our long cycle aerospace and energy oriented businesses led the way with healthy organic volume growth. We are starting to see recovery in some areas of our short cycle portfolio, including consecutive quarters of orders growth in productivity solution Services, while the other short cycle businesses continue to normalize as the effects of destocking phase consistent with our second half acceleration framework.

Speaker 2

Before we get into a more detailed discussion on the Q1 2024 results and update to our full year 2024 expectation, let me take a minute to revisit my priorities for Honeywell. First, we are keenly focused on accelerating organic sales growth towards upper end of our long term target range of 4% to 7%. We are doing this by enhancing our innovation playbook, accelerating sustainability and software offering, increasing penetration upon installed base and leveraging our leadership position in high growth regions. 2nd, we are evolving Honeywell Accelerator to drive incremental value through deploying global design model across the portfolio to enhance our growth capability. Following the great integration inside of Honeywell over the past several years, we are now an integrated operating company that deploys world class digital supply chain and technology development capabilities at scale along with multiple growth drivers that benefit the entire enterprise.

Speaker 2

This includes leveraging generative AI to maximize the potential benefit of our operating system, both for our customers and internally. Of the strong digitally enabled foundation, Accelerator is providing to be a powerful source of profitable growth across all of our businesses and potential addition to our portfolio. 3rd, we are executing on our portfolio optimizing goals, upgrading the quality of our business and financial profile by executing on strategic bolt on acquisition, while divesting non core lines of business to accelerate value creation. We expect to deliver profitable growth and strong cash generation as we demonstrate progress against these priorities, creating a compelling long term value proposition for our share owners. In the spirit of that progress, let's turn to Slide 3 to discuss the latest action in our portfolio shaping goals.

Speaker 2

Our M and A playbook is yielding positive results. Over the last few years, we have accumulated several quality bolt ons and tuck in assets that strategically add to our technological capabilities, enhancing our alignment to compelling mechatrends and provide accretive growth that supports Honeywell's overall long term financial framework. We remain focused on creating a flywheel of bolt on M and A transaction, roughly in the $1,000,000,000 to $7,000,000,000 purchase price range. We have successfully executed on meaningful deals that add technological adjacencies to our portfolio and are accretive to our growth and margin rate profile with attractive business mix characteristics. The most recent example of this came in the Q4 when we announced our intention to acquire Carrier's Global Access Solutions business for nearly $5,000,000,000 enabling Honeywell to become a leader in security solution for the digital age.

Speaker 2

The transaction further enhances our equipment agnostic, high margin product business mix within building automation. Last year's acquisition of Compressor Control Corporation or CCC, a leading provider of turbomachinery control and optimization solution that will play a critical role in energy transition aligns with this playbook as well. CCC technologies including control hardware, software and services bolster Honeywell's high growth sustainability and digitalization portfolio with new carbon capture control solution. CCC has seamlessly integrated into our Process Solution business and we are already seeing meaningful revenue synergies benefit with Honeywell Forge. Tuck in acquisition is also an important growth lever for us as we continuously evaluate a build by our partner approach to add strategically important offering that solve our customers' toughest challenges.

Speaker 2

Last month, Honeywell announced our intention to acquire Siwi Tanavi system for approximately €200,000,000 Siwi Tanavi technology will reinforce our leading navigation solutions across aerospace, defense and industrial platform. This acquisition is a direct concert with Honeywell's alignment to the megatrend of automation and future of aviation, Further, our ability to create value for our customer from nose to tail, whether they are traditional operators seeking to increase autonomous capability of their existing fleets or new entrants in the advanced air mobility space. Last year, we acquired Sketafense, a business that delivers Internet of Things and operational technology cybersecurity solution for monitoring large scale network. SCADA Fence brought proven technologies in asset recovery, threat detection and security governance into our SC portfolio, all key components for critical infrastructure and industrial cybersecurity. The acquisition has bolstered our strategic foundation in an attractive market for us to continue to build on both organically and inorganically.

Speaker 2

With the recent portfolio announcement including Carrier's Global Access Solutions Business and Siby Tanabe, we are on track to accelerate capital deployment in 2024 and exceed our commitment to deploy at least $25,000,000,000 of capital in 2023 to 2025. Our robust balance sheet capacity enable us to allocate capital to opportunistic share repurchases, high return growth CapEx and accretive M and A. As the deal environment remains relatively favorable in 2024, we will bid on our ready strong pipeline of high value M and A opportunities, supporting the execution of our portfolio shaping strategy. Before I hand it over to Greg, let's turn to Slide 4 to review some of our exciting recent wins. Let me take this opportunity to highlight our recent commercial wins and strategic actions we are taking that demonstrate innovation across our portfolio and support alignment to 3 compelling megatrends, automation, future of aviation and energy transition, all underpinned by robust digitalization capability and solution.

Speaker 2

In the automation space, Honeywell was chosen to provide automation, cybersecurity and safety solution to a multi $1,000,000,000 plant expansion project for a major energy company in Middle East. We will deploy our flagship distributed control system and safety manager technologies amongst other solution. We remain excited about the various automation opportunities across our portfolio. In Aerospace, we will invest more than $80,000,000 to expand our Olathe plant in Kansas. This project will enable the production of next generation avionics technology and directly create hundreds of jobs at site and in the local economy.

Speaker 2

This facility upgrade is another example of the resources we are committing to unlock the supply chain and our ongoing investment in the aerospace technology business to drive growth. Finally, Honeywell will be incorporating our hydrocracking technology in the new DG fuel saff refinery to convert hydrocarbon liquids into SAF. This technology is a low capital solution, which facilitates 90% reduction in CO2 intensity versus traditional fossil fuel based jet fuels by using biomass as a feedstock. When completed, both our customers and worst toughest challenges. Now let me turn it over to Greg on Slide 5 to discuss our Q1 results in more detail, as well as provide us our views on Q2 and full year 2024 guidance.

Speaker 3

Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, we're now reporting our results using the new segment structure, which went into effect in the Q1. With that, let's discuss the results. We delivered a very strong Q1 exceeding the high end of our adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges.

Speaker 3

Despite a dynamic macro backdrop, Honeywell disciplined execution and differentiated solutions enabled us to deliver on our commitments. 1st quarter organic sales growth were up 3% year over year, led by 18% organic growth in Aerospace Technologies. This was the 12th consecutive quarter of double digit growth in our commercial aerospace business in addition to double digit growth in defense and space. Segment profit grew 4% year over year and segment margins expanded by 20 basis points to 22.2 percent driven by expansion in Aerospace. Improved business mix, our focus on commercial excellence and benefits from productivity allowed us to expand margins in line with the high end of our guidance range.

Speaker 3

Earnings per share for the Q1 was $2.23 up 8% year over year and adjusted earnings per share was $2.25 up 9% year over year. While tax is a bit lighter relative to our Q1 guide, our full year tax expectations have not changed. A bridge for adjusted EPS from 1Q 'twenty three to 1Q 'twenty four can be found in the appendix of this presentation. Orders were $10,200,000,000 in the quarter, down 1% year on year, which supported our backlog growth of 6% to a new record of $32,000,000,000 This was led by quarter over quarter growth in Aero, Building Automation and Industrial Automation including in key short cycle product businesses namely Productivity Solutions and Services in IA and Fire in BA. This setup gives us confidence in our back half twenty twenty four outlook which I'll discuss in a few minutes.

Speaker 3

Free cash flow was approximately $200,000,000 up $1,200,000,000 versus the Q1 of 2023 due to the absence of last year's one time settlement of legacy legal matters that de risked our balance sheet. Excluding the impact of these settlements, net of tax, free cash flow was up approximately $200,000,000 as higher net income was partially offset by higher working capital due to lower payables. However, we see working capital becoming a tailwind in the coming quarters as we unwind the multi year buildup of excess inventory. We also continue to execute on our capital deployment strategy, putting our robust balance sheet to work through $1,600,000,000 including $700,000,000 in dividends, dollars 700,000,000 in share repurchases and $200,000,000 in high return capital expenditures. As you saw in February, we successfully issued $5,800,000,000 in bonds during the Q1, including our first ever 40 year maturity, taking advantage of strong demand in both the euro and dollar markets locking in attractive long term spreads, while extending our weighted average bond maturity from 7 to 10 years.

Speaker 3

Proceeds will be used primarily to fund our acquisition of the Carrier Global Access Solutions business and to address current debt maturities. This really demonstrates the attractiveness and strength of Honeywell in the capital markets that we have built over time. Now let's spend a few minutes on the Q1 performance by business. In Aerospace Technologies, sales were up 18% organically year on year, matching the Q3 of last year as among our strongest performances in over a decade. Increases in commercial aviation were led by original equipment, which saw over 20% growth in both air transport and business and general aviation as supply unlocks and deliveries continue to increase.

Speaker 3

We also saw significant growth in air transport aftermarket as global flight activity remains strong. In Defense and Space, robust demand and improvements in our supply chain enabled us to grow sales 16% in the quarter. AT had book to bill of approximately 1.1 in the quarter as commercial demand and benefits from the impact of an increased global focus on national security support a strong growth trajectory. Supply chain continues to show sustained modest sequential improvement leading to a 15% increase in output year on year, marking the 7th consecutive quarter of double digit output growth. Segment margin in Aerospace expanded 150 basis points year over year, driven by commercial excellence and volume leverage, partially offset by cost inflation and mix pressures within our original equipment business.

Speaker 3

For Industrial Automation, sales decreased 13% organically in the quarter, primarily as a result of lower volumes and warehouse and workflow solutions as investments in warehouse automation remain subdued. Our short cycle sensing and safety technologies and productivity solutions and services sales were stable, but lower year over year with orders in our productivity solutions and services business growing sequentially and year over year for the 2nd consecutive quarter, a positive sign that we're nearing a return to growth in that business. Process Solutions revenue was flat in the Q1 as growth in our aftermarket services business was offset by mega project timing. Segment margin in Industrial Automation contracted 200 basis points to 16.8%, driven by lower volume leverage and cost inflation, partially offset by productivity actions and commercial excellence. Building automation sales were down 3% organically.

Speaker 3

We had another strong quarter of growth in our long cycle building solutions business, while we work through the volume challenges and the short cycle building products area. Solutions grew 7% in the quarter led by double digit growth in building projects, driven by strong execution of our backlog. On a year over year basis, orders in building projects were up double digits with strength in our core business and robust performance in energy and airports. Sequentially orders for building automation improved in the Q1, highlighted by a seasonal lift in building services and modest improvement in fire, resulting in an overall building automation book to bill of 1.1. Segment margins contracted 120 basis points to 24% due to mix headwinds from softer product volumes and cost inflation, partially offset by productivity actions and commercial excellence.

Speaker 3

Energy and Sustainability Solutions sales grew 5% organically in the Q1. Advanced Materials gained 6%, primarily driven by double digit growth in flooring products. In UOP, sales were up 3% year over year as robust demand led to a double digit increase in both petrochemical catalyst shipments and refining equipment more than offset expected challenging year over year comps and gas processing equipment projects. ESS book to bill was 1.2 in the 1st quarter, the 2nd consecutive quarter of a book to bill above 1. Segment margin contracted 70 basis points on a year over year basis to 19.8% as one time factory restart costs were partially offset by favorable business mix and productivity actions.

Speaker 3

Growth across our portfolio was supported by another quarter of double digit sales growth in Honeywell Connected Enterprise, a powerful indicator of our strong software franchise powered by our differentiated forge AI IoT platform. Our offerings in cyber, life sciences and connected industrials all grew by more than 20% year over year in the quarter. HCE continues to generate not only value for our customers, but accretive growth and profitability for Honeywell. The ongoing tailwinds in our long cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current operating environment. We continue to execute in our proven value creation framework underpinned by our accelerator operating system, which will enable us to drive compelling growth in earnings and cash for quarters to come.

Speaker 3

Now let's turn to Slide 6 and talk about our Q2 and full year guidance. We delivered on our 1Q commitments while maneuvering through known risks. And as we look to the rest of 2024, our original guidance framework continues to be solid. We expect the environment to remain dynamic as we were reminded again by recent geopolitical events. However, our accelerator operating system that enables us to move quickly and decisively, our exposure to attractive megatrends and our record backlog will continue to support organic growth for the business.

Speaker 3

This outlook includes continued progress among our long cycle portfolio as well as a modest back half recovery in short cycle as markets continue to normalize. Overall, we have a strong setup that will drive growth within our long term financial framework for sales, margin, earnings and cash in 2024. Now let's discuss how these dynamics come together for our 2024 guidance. Given the backdrop I just laid out, in total for 2020 4, we continue to expect sales to be in the range of $38,100,000,000 to $38,900,000,000 which represents overall organic sales growth of 4% to 6% for the year with a greater balance between volume and price. We expect sequential improvement in the second half of twenty twenty four over the first as aerospace continues to grow its supply capabilities coupled with a modest short cycle recovery that should build momentum in the second half of the year, albeit with different rates of improvement for our various end markets.

Speaker 3

For the Q2, we anticipate sales in the range of $9,200,000,000 $1,000,000,000 to $9,500,000,000 up 1% to 4% organically. We anticipate our overall segment margin to expand 30 to 60 basis points this year, supported by improving business mix, price cost discipline and productivity actions, including our precision focus on reducing raw material costs. Similar to last year, building automation margins will lead the group in margin expansion followed by industrial automation and energy and sustainability solutions. For Aerospace, margin should remain relatively comparable for the last few years as volume leverage covers higher sales from the build out of our original equipment installed base, which is driving robust year over year profit growth. For the Q2, we expect overall segment margin in the range of 22.0 percent to 22.4 percent, roughly flat sequentially, but down 40 basis points to flat year over year, primarily due to volume deleverage in IA and the expiration of the Zebra licensing payments.

Speaker 3

Importantly, our guidance for both the 2nd quarter and full year 2024 does not consider the planned acquisition of Carrier's Global Access Solutions business. We anticipate the closing of the deal by the end of the Q3 and we'll update our guidance accordingly at that time. Now let's spend a few minutes on the outlook by business. Looking ahead for Aerospace Technologies, demand remains very encouraging across our end markets. Sales should grow sequentially in the 2nd quarter, particularly in commercial original equipment, as ships that deliveries continue to increase.

Speaker 3

However, we expect these sales to come at a lower margin, driving a sequential and year over year decrease in margin rate following the Q1 strong result. Increased build rates and ship set deliveries will carry on throughout the year, leading commercial OE to be our strongest growth business in 2024. In commercial aftermarket, volume strength and further improvement in wide body flight hours will support additional growth. We'll continue to work through our healthy order book in defense and space, generating sequential sales improvement throughout the year. Ongoing supply chain improvements will continue to support double digit output growth in AT throughout 2024.

Speaker 3

For the year, we still expect Aerospace Technologies to lead organic growth for total Honeywell with sales in the low double digit range. 2024 segment margin should be relatively comparable to 20222023 as volume leverage is mostly offset by higher sales of lower margin products, a dynamic that likely leaves the Q1 as the high point for aero margins this year. In Industrial Automation, the timing of short cycle recovery will remain an important factor in our 2024 results, leading a back half weighted year. In the 2nd quarter, IA should be roughly flat sequentially. We expect growth in process solutions to be offset by warehouse automation demand that remains near trough levels and the end of the $45,000,000 quarterly license and settlement payments we have received for the past 2 years in our Productivity Solutions and Services business.

Speaker 3

For the full year, Process Solutions will grow sequentially each quarter to build on last year's strong performance, driven by the aftermarket services business. Warehouse and workflow solutions will improve as we move through the trough of warehouse automation spending, while also benefiting from easing comps throughout the year. Our sensing and safety technologies business will benefit as the effects of distributor destocking fade throughout the year. Lifecycle solutions and services orders grew sequentially and year over year in the Q1 and we expect that strength to continue throughout the rest of the year. 2 consecutive quarters of orders growth in our Productivity Solutions and Services business provide confidence in a back half ramp, excluding the impact from the absence of additional Zidra payments.

Speaker 3

As a result of these dynamics, we continue to see flattish sales growth in 2024 for IA. We still expect segment margin to expand particularly in the second half as short cycle recovery leads to positive volume leverage. Moving to building automation, we remain confident in the overall outlook and execution of business. For the Q2, sales should improve sequentially as the channel further normalizes and our long cycle businesses continue to benefit from strong backlog and aftermarket services tailwind. The timing of the short cycle recovery remains one of the key drivers of business performance throughout the year and our expectation for a more back half weighted recovery in BA has not changed.

Speaker 3

As such, we will anticipate our long cycle businesses to outpace our short cycle portfolio as both project and services benefit from strong demand and backlog. Additionally, high growth regions remain a core part of the growth strategy for this business and encouraging signals from regions like India and the Middle East support our full year sales forecast, which remains low single digit growth for the year. We anticipate VA will be the segment with the largest margin expansion, primarily driven by productivity actions and commercial excellence net of inflation. Finally, in Energy and Sustainability Solutions, the geopolitical environment will remain a key focus as we move through the year. In the Q2, we expect sales to remain roughly flat year over year and sequentially as sustained demand in fluorine products and catalysts will offset remaining volume headwinds from challenging comps in gas processing equipment.

Speaker 3

For the full year, strong performance in those businesses is expected to offset volume declines in our legacy stationary products due to well telegraphed quota reductions within the U. S. In sustainable technology solutions, robust demand will lead to another strong year of growth. We continue to monitor the ongoing short cycle recovery, particularly from semiconductor fabs, a key component to achieving our unchanged top line expectation of flat to up low single digits for the year. Margins should improve throughout the year from a 1Q bottom, driven by a combination of commercial excellence and productivity actions.

Speaker 3

Moving on to other key guidance metrics, pension income in 2024 will be roughly flat to 2023 at approximately $550,000,000 We anticipate net below the line impact to be between negative $550,000,000 and negative $700,000,000 for the full year and between negative $120,000,000 negative $180,000,000 in the 2nd quarter. This guidance includes repositioning spend between $200,000,000 $300,000,000 for the full year and between $25,000,000 $75,000,000 in the second quarter as we continue to invest in high return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 21% for both the full year and the second quarter. We anticipate average share count to be around 656,000,000 shares for the full year as we execute our commitment to reduce share count by at least 1% per year through opportunistic buybacks. As a result of all these inputs, we are maintaining our previously provided full year adjusted earnings per share range of $9.80 to $10.10 up 7% to 10% year over year.

Speaker 3

We anticipate 2nd quarter earnings per share between $2.25 $2.35 up 1% to 5% year over year. We also expect free cash flow to grow in line with earnings, excluding the after tax impact of last year's one time settlement from derisking our balance sheet. We are progressing on the multi year unwind of working capital where our efforts to improve demand planning and optimize production and materials management are yielding some early operational benefits, another indicator of the power of our digitalization capability through Accelerator. In addition, we will continue to fund high return projects focused on creating uniquely innovative, differentiated technologies. As a result, our free cash flow expectations remain $5,600,000,000 to $6,000,000,000 for the year, up 6% to 13%, excluding the impact of prior year settlements.

Speaker 3

Our robust balance sheet and strong cash generation will support accretive capital deployment. And while we're happy with our recently announced transactions, we will further build on our active M and A pipeline as we continue to optimize the portfolio. So in summary, we executed a strong first quarter anticipate delivering a strong Q2 and 2024 benefiting from our alignment to the compelling aerospace, automation and energy transition megatrends. Our record backlog and rigorous operating principles give us confidence in our track record of execution. So let me turn it now back to Vimal on Slide 7.

Speaker 2

Thank you, Greg. Let's take a minute to zoom out from the near term dynamics and talk about the tremendous progress Honeywell has demonstrated across our key metrics since 2016. We remain keenly focused on delivering our long term growth algorithm and remain confident on our ability to accelerate growth, achieve 25% plus segment margins, expand gross margins to above 40% and generate free cash flow margins to mid teen plus. This framework will enable us to deliver what matters consistent compelling EPS growth. Our annual 4% to 7% organic sales growth rate and 40 to 60 basis point of margin expansion coupled with 1% to 2% of EPS accretion from both share buyback M and A execution is a powerful combination that will allow us to generate double digit adjusted EPS growth on through a cycle basis.

Speaker 2

24 is no different as we continue to make steady consistent improvement to the quality of Honeywell's financial profile. The organization is aligned to my key priorities of accelerating organic growth, deploying the operational power of Accelerator 3.0 and executing on a robust portfolio optimization strategy, all of which will enable us to achieve our long term targets. I'm incredibly optimistic about the high opportunities we are already surfacing during the next phase of our transformation. We'll continue to track our progression closely as our efforts to drive incremental sales growth, expand margins and generate more cash transferred into our enhanced financial profile. Let's turn to Slide 8 for closing thoughts before we move into question and answers.

Speaker 2

Our value creation framework is working. While the economic backdrop remains fluid, we are deploying our rigorous operating playbook to effectively manage near term challenges to meet our performance targets. Record backlog levels, ongoing strength in our biggest end market, Aerospace and Energy, as well as an impeding recovery in our short cycle businesses will allow us to achieve our strong results as we progress through 2024. This includes our margin expansion guidance, which will benefit from improving business mix in addition to our continued focus on commercial excellence and productivity. It's no secret I'm excited about the future of Honeywell and believe our company is on track to drive the innovation needed to solve some of the world's most challenging problem and enhance the lives of people around the world.

Speaker 2

As we move to Q and A, I want to take a moment to thank our 95,000 future shapers whose dedication and capabilities enable us to deliver the best of our customers, partners and communities every day. With that, Sean, let's take questions.

Speaker 1

Thank you, Vimal. Vimal and Greg are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question and one related follow-up. Operator, please open the line for Q and A.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Scott Davis at Melius Research. Your line is now open.

Speaker 4

Hey, good morning, Vimal, Greg and Sean.

Speaker 2

Good morning, Scott.

Speaker 4

You guys in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business? Are we going to see a big bounce back? Have you structurally changed your cost structure?

Speaker 4

What's kind of on the other side of this tough period?

Speaker 2

Yes. So, Scott, if I get your question, just that I missed the front word, did you mention industrial automation or? Warehouse. Warehouse automation. Okay.

Speaker 2

Thank you.

Speaker 4

Warehouse, sorry, panel.

Speaker 2

No, I got it. Look, the need for warehouse automation is strong. There is no doubt that it drives labor productivity. So there is no debate on the basics of it. The interesting part is our pipeline remains strong, but order conversion is weak, specifically in the project side.

Speaker 2

The another fact which encourages me about the business is the aftermarket continues to grow, which means once the systems are deployed, people use it well our aftermarket business is in excess of $500,000,000 We also have rationalized our cost base. All in, I would say, the business is in trough right now, and we are waiting for its recovery. But net net, we remain very optimistic and, confident about the business prospects.

Speaker 4

Okay. I appreciate that Vimal. And you've been in the seat kind of long enough to have a good sense to well at least review the portfolio. Do you anticipate further portfolio actions Vimal? It's still a relatively complex portfolio.

Speaker 4

We certainly get that feedback frequently. I'm sure you do as well. But has your view on the portfolio evolved at all since you've taken the role? Thanks. And I'll pass it on.

Speaker 2

Scott, I will say in 2 parts. I've committed that we will take action on about 10% of our portfolio, which doesn't fit with the 3 megatrends and we are absolutely taking action on that. We will make progress one step at a time because that constitutes a few businesses and no one big thing. On a broader basis, I will review with both as I did last year on a broader Honeywell portfolio and we will continue to be our own activist. And wherever there's a case to look at things differently, we absolutely will do that.

Speaker 3

And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Sinitsanabe announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10,000,000,000 this year with just what we know about, and we're not done.

Operator

Our next question comes from the line of Steven Tusa at JPMorgan. Your line is now open.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Steve.

Speaker 5

Could you just talk about maybe just sequentially how you see the

Speaker 2

the earnings as we guided here, we gave you the guide for Q2. The earnings as we guided here, we gave you the guide for Q2 and rest of the year. So I think the headline is that H2 will be stronger than H1, and that's built upon our order spacing. If you see our orders performance in Q1 was unexpected line, our book to bill is 1.1, our backlog is up 6 percent, long cycle remains strong across the board in Aerospace and Building Solutions and we expect the same trends in European Process Solution. And short cycle is recovering on expected lines.

Speaker 2

You saw the results of ESS, the Chemical business did perform well on the strength of short cycle. We saw recovery in scanning and mobility business. We saw some early green shoots and fire business. So things are progressing as we expected and that's the basis of our guide for rest of the year. So the punch line is we're going to have stronger second half versus first half and that's reflected on earnings guide for the year.

Speaker 3

Yes. And we know that that's outside of the normal historical comps that you've seen, but that's not really different than the way we've modeled the year so far. And to the most point, we are starting to see some of those short cycle order patterns. And we said that those were going to be different by end market as the year progresses. So no real change, Steve, to what we outlined in the original guidance.

Speaker 5

So I guess just normally, you guys are up, I think, a little bit 2Q to 3Q. You're up like I think I don't know low to mid singles from 1Q to 2Q. Should we think about like just to kind of frame this the ramp because it is from a timing perspective, is it 2Q to 3Q? What do you think?

Speaker 3

Yes. So we're going to have a ramp from 2Q to 3Q as opposed to flat. And then the ramp from 2Q to 4Q will be greater than 2Q to 3Q.

Speaker 5

Okay, great. Thanks for the color.

Speaker 2

Yes. Thank you.

Operator

Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Speaker 6

Hi, good morning. I think a lot of the second half pickup rests on the IA segment. So maybe just wanted to home in on that for a second. I think you'd guided full year sales there flattish, so about 10.8 $1,000,000,000 And it sounds like you're doing $2,500,000,000 a quarter in the first half. So you've got a sort of high teens half on half step up in the second half in IA revenue from sort of €5,000,000,000 to €5,800,000,000 Maybe help us understand which of the pieces inside IA will lead or lag that delta?

Speaker 6

And if it's similar to the firm wide where there's some pickup in Q3 and then a steeper one in Q4 sequentially?

Speaker 3

Yes. So thanks, Julian. I mean, the ramp for the company actually is in IA and in BA. And then we'll get sort of a nice ramp in the Q4 in ESS as well. So it really does come back to all the products businesses inside of each of those portfolios.

Speaker 3

So think about NIA, PSS, the Sensing business. In BA, think about fire and the BMS business. And then as Zimmel mentioned earlier, in ESS, you're going to get a continued step up in electronics and chemicals, as well as our normal sort of 4th quarter move in our Catalyst business. So it's really not all predicated on any one segment overall And it's going to be you've got your numbers approximately right in terms of the IA first half, second half overall. But you're going to see it across the portfolio.

Speaker 3

It's not

Speaker 1

going to be

Speaker 3

concentrated in any one specific business around the portfolio.

Speaker 2

Only thing I'll add, Julian, there is that NIA's HPS continues to perform very well. It's going to mirror the performance 2023, so similar growth rates. The bookings remain very strong, aftermarket is performing extremely strong. That's the biggest constituents of the newly framed IA business. And the short cycle is recovering.

Speaker 2

I remain very confident on short cycle recovery. We have seen that in PSS business. It has 2 successive quarters of orders growth. We see that in early cycle in other businesses. So net net, we are going to see strong exit rates in IA Business at the end of the year.

Speaker 6

That's helpful. And then just my quick follow-up on the buildings division margins. So I think they guided to be up maybe 100 bps or so for the year, above the firm wide margin expansion. 1st quarter clearly starting down tricky down over 100 bps. So the slope of that, maybe help us understand kind of how do we think about the buildings margins in the second quarter?

Speaker 6

How quickly we start to see that flip to margin expansion in the rest of the year, please?

Speaker 3

Sure. So again, you're going to see that tied a lot to the product volumes because volume leverage that comes with that and the margin rates associated with it are going to be very helpful in that margin ramp as well as the work that we've done on productivity, particularly around direct materials this year. So that's our last two quarters were in the same neighborhood, right around 24 points with the lower products mix. And as the year progresses, you're going to see that move up sequentially throughout the remaining three quarters of the year.

Speaker 6

That's great. Thank you.

Speaker 2

Thanks, Gideon.

Operator

Our next question comes from the line of Andrew Obin with Bank of America. Your line is now open.

Speaker 7

Hey, good morning guys. Good to hear that short cycle is finally starting to move.

Speaker 8

Absolutely. Good morning.

Speaker 7

Yes, just a question on defense and space, that picked up very nicely, nice lever. Can you just talk specifically and I know there are a lot of programs there, but what is driving that and what's the outlook specifically for defense and space into the second half, because this is very, very impressive performance there?

Speaker 2

Yes. Thanks, Andrew. Look, the Q1 performance of Defense and Space was more linked to the supply chain unlock. That remains the biggest variable in aerospace even in 2024. We are very pleased with strong growth in Q1.

Speaker 2

We expect high single digit growth in Defense and Space in the revenue, but order booking will be much stronger. And that's driven by the fact of not only the demand in U. S, but the international demand, which is coming up in this business. And those trends are extremely favorable. So net net, we do expect to finish the year strong, not only the revenue side, but equally strong on the order side on the defense.

Speaker 7

Got you. And maybe to shifting to ESS, can you just talk about visibility of UOP? I know you guys were optimistic about some of the green projects coming in and I think due to regulatory issues is just taking time. What does the pipeline look like and what does the ramp look in this business into the year end? And how do you balance this visibility on these projects and just the time it takes to get them approved?

Speaker 2

So very bullish on UOP, I would say. This business is headed for great time ahead. The traditional projects continues to remain active, while the new energy project on sustainability, a strong pipeline and we see decisions now maturing. You saw in one of our exciting wins we mentioned here new way to make staff with the biomass now, which is a new technology we have launched. So net net with the strength in traditional energy, strength in renewable technologies and catalyst, we are going to have a strong year for UOP both in orders and revenue.

Speaker 2

And that's not only 2024, look ahead for the business remains extremely positive in the times ahead.

Speaker 7

Thank you very much.

Speaker 2

Thanks, Andrew.

Operator

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Good morning, Vimal, Greg and Sean.

Speaker 9

Hey, Jason. I wanted to ask about aerospace commercial OE was really strong, up 24% in the quarter. How are you thinking about that for the full year just given slower MAX production we're seeing and the new news of the 787 also slowing down production there. Any top line margin or cash impact that you foresee? And then just want to clarify the comment about margins for Aerospace.

Speaker 9

You said it would dampen, just given OE mix, but I would think aftermarket would accelerate as we progress through the year?

Speaker 2

Okay. So I think there were 3 questions there, Sheila. I'll try to pick up.

Speaker 9

Sorry about that.

Speaker 2

No problem. So the overall, we do strong growth trend as is indicated in our guide for rest of the year. To your comments specifically on 787 Max, I'm not going to give you a specific input on one particular platform. But I would say that our demand for Boeing hasn't changed. We know that we all heard their earnings call yesterday and there are different drivers for that.

Speaker 2

But for Honeywell, we are present in multiple platforms and the demand for them remains unwavered. I personally talked to Boeing leadership and I'm very confident that's going to trend that way. On margins, Q1 was strong. It's a mix driver. As the year progresses, we have different product mix and mix between OEM aftermarket.

Speaker 2

So net net, we are still guiding flattish margin for the year. And that's what we have given in our guide.

Operator

Great. Thank you. The next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Speaker 10

Hey, guys. Good morning.

Speaker 2

Hey, Joe. Good morning.

Speaker 10

Yes, just want to really focus my question on margins. So just making sure that I understood some of the comments already. As you think about the rest of the year, I guess how much of the margin expansion you're expecting in both BA and IA is really dependent on short cycle accelerating? And then Vimal, just a quick clarification on the answer you just gave on the aero side of the business. The OE business was up, I think it was over 24 percent or something like that in aero.

Speaker 10

I'm just curious, like what were some of the kind of mix tailwinds you saw this quarter in aero? And again, why doesn't that continue going forward?

Speaker 3

Yes. Joe, I mean, as it relates to the mix, I'm not going to bore you with the details, but it's actually quite deep between the different OEs, the ship sets within each of them and so forth. So that is going to migrate up and down during the course of the year as it goes. So there's not one particular thing happening there. As Vimal mentioned, though, we're going to continue to see very strong OE margins or excuse me, OE volumes during the year.

Speaker 3

In fact, I wouldn't be surprised if the growth in OE actually accelerates in the next couple of quarters, not dramatically so, but in terms of its relative mix inside of the overall portfolio. So that's what I would say about Aero. And then in terms of the margin rates in IE and BA, both of those businesses are seeing mix down with product softer. And so absolutely mix up with products growth is going to be a driver of those margins. But that also comes with a lot of the work we've been doing on the productivity side, both in direct materials as well as in our continued repositioning of the cost base that we have been doing.

Speaker 3

So our margin story is going to be a combination of the volume leverage, the product mix and our productivity actions that we continue to take, as you know, is always a strength for Honeywell.

Operator

Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Speaker 8

Great. Thanks for the question guys. Sorry to bore you and another obviously, aero margins were great. Was the timing of Boeing shipments to customers affected there? Just curious if there's a timing issue there.

Speaker 8

But mainly my question is around 2Q margin dynamics. And thinking about that drop off in the Zebra royalty income in Q2, are we looking at maybe margins, I don't know, down like 3 basis points year over year in Q2 for IA? And therefore, the balance of the segment margin performance is actually probably more like on trend. So just any more color on this 2Q margins by segment would be helpful.

Speaker 3

Yes. No, we don't expect IA margins to be down 300 basis points in 2Q on a year over year basis. We talked about the Zebra impact. Again, it's $45,000,000 a quarter on the revenue side. There's some costs associated with that as we talked about over the last 2 years as we've had that impact into our P and L.

Speaker 3

So you guys can do the math on the direct impact of just that item all by itself. But we have other actions in place to continue to offset that. I don't expect margins to necessarily be up year on year NIA, but nothing to the degree that you described in terms of 300 basis point drop.

Speaker 8

Okay. And then any color on aero margins in Q2, Doug?

Speaker 3

Yes. Just that I would expect them to be down sequentially from Q1, that Q1 is going to be the high point. And as we go through the year, again, our overall expectation is flattish on a year on year basis, but Q1 will be the high point.

Speaker 8

Okay. That's helpful.

Operator

Our next question comes from the line of Andy Kaplowitz with Citi. Your line is now open.

Speaker 10

Hey, good morning, everyone.

Speaker 3

Hey, Andy.

Speaker 2

Good morning, Andy.

Speaker 10

Maybe can you talk a little bit more about what you're seeing by region? I think you mentioned strength in India. How important is that region becoming? And what are you seeing in China and Europe?

Speaker 2

Yes, so I would say if I go around the corner, we continue to see strength in our high growth regions, specifically in India and Middle East, those remain strong. China also did well for us. We grew high single digit on the strength of our aero and energy business. So net net, we do see strong continued strong trend in emerging markets. Europe has stabilized.

Speaker 2

I would say the worst is definitely behind us. We see more recovery and positive trends, specifically in short cycle, we talked about it earlier in Europe and U. S. Of course is the balance here. So net net high growth region remains a tailwind in overall revenue mix for Honeywell.

Speaker 10

Great. And I just want to follow-up on the Process business. I think you mentioned delays. Is it seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business.

Speaker 10

So maybe talk about it a little bit

Speaker 2

more. Yes. So Process Solutions business absolutely. We are booking we carried a strong backlog and our booking trend remains strong there. Aftermarket is double digit growth for several quarters in a row.

Speaker 2

So that business will as I mentioned before will repeat 2023 pattern of high growth. And we to do continue to do well in that segment monetizing installed base, aftermarket software, all our strategies are really working. And also diversification into new verticals as the new energy segments are emerging like factory storage, gigafactories, all are becoming attractive growth optionality for us in that

Speaker 10

business. Appreciate it, Mehul.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Your line is now open.

Speaker 11

Hey, thank you. Good morning, everyone.

Speaker 2

Hey, Vimal.

Speaker 11

Good morning. Hey, Vimal, just back to kind of the ongoing portfolio review and you said it could be many things and not one big thing. Can we take that or should we take that to mean as we look at kind of your revenue disaggregation, right, there's kind of 11 buckets we track and model to that none of those entire sleeves would be gone at some point in time in your thought process?

Speaker 2

Look, whenever we complete any action of addition and subtraction, we'll give you an early guide for that. As I mentioned, this is no one step change. So it's not that we're going to take action of a $4,000,000,000 type of thing in a single move. But whenever we are ready to communicate, we'll give you a heads up on what's likely coming in. For example, carrier business will likely come in, Sobeys and Navi will likely come in and what are the implications on the guide.

Speaker 2

And then what goes out if and when this happens we'll provide you the guide. But what I can share you with you is there is no going to be 1 mega event on divestiture. It's going to be combination of multiple small events.

Speaker 11

And one thing you have been clear on is ultimately there's a monetization play on Quantinium. Where are we there? Where's the spending tracking? And can you kind of give us an idea of maybe the timeline of a monetization event?

Speaker 2

So Quantium is in, I would say, exciting times. We completed a major event of free money. We got valuation excess of $5,000,000,000 got more plus people invested there. We talked about that in the last earning calls. We also met another major milestone.

Speaker 2

I don't know if you read that Honeywell and Microsoft announced a major milestone of testing different scenarios to deliver reliable results. So Microsoft gave ran 14,000 experiments on H2 Quantum Computer and they were able to prove that every time all 14,000 times we are able to deliver results with accuracy. Why it matters is in Quantum the repeatability or accuracy matters more than the speed at this point. Once we are able to solve the problem solving with accuracy, we can work on the speed part. So that's a major milestone, and that's what matters in Quantum Business.

Speaker 2

We continue to hit these milestones one after another and we score some wins on the commercial side and that will set us for the next event of demonetization somewhere in 2025. It's contingent upon hitting this, but I remain confident that we are on the right track on that. And by the way, the last comment I'll make there is AI is definitely giving us a lot more momentum. There's a deeper understanding and appreciation why quantum is necessary. And that's going to certainly help us when we are ready for an IPO or something similar in 2025.

Operator

Our next question comes from the line of Brett Linzey with Mizuho. Your line is now open.

Speaker 12

Hey, good morning all.

Speaker 2

Good afternoon. Just wanted to again, I wanted

Speaker 12

to come back to ESS. You noted the margin contraction on some of this one time factory restart costs. Maybe could you quantify that and then any detail on the nature of just the timing of some of these pressures?

Speaker 3

Sure. So in our Clean Energy business, we had been operating as in a trading manner, and we had shut down the major facility some number of years ago in that business and we restarted it. And so as you can imagine, that restart has some fits in it as we go through the course of the year to get to stabilization. And that's really the if you look at ESS margins, I'm not going to give you precise numbers, but if you backed out the impact of that, we would have been roughly flat, maybe slightly up on a margin rate basis year on year in the Q1. And so that's going to take some time to get to stability.

Speaker 3

But the good news is this is a great business. The long term dynamics for it from a pricing standpoint, a supply standpoint are very favorable. As we exit the year, we're going to have more stable operations internally. And so we're going to have a very nice exit rate going into 2025 with a very strong business. And again, that business is think about it being roundabout $400,000,000 on an annual basis.

Speaker 12

All right. Got it. Thanks. And then just one more on M and A, just thinking about the velocity there. I know last May, you talked about the pipeline prioritization.

Speaker 12

I think you had 90 deals looking at within your markets and distill at the top 10. I guess, how does that 90 compare today? I mean, it sounds like the enthusiasm, I mean, it sounds a little bit more optimistic about some actionability, but maybe just to talk about some of the pipeline and the movement there?

Speaker 2

Absolutely. I would say the pipeline is very strong as we sit today. Of course, we compete for every target and we remain very sensitive to both strategy fit and valuation fit. So net net, we do expect to continue to take some actions on adding new business to our portfolio. And overall, my tone is very positive on that.

Speaker 12

All right, great. Best of luck.

Speaker 2

Thank you. Okay. Just to wrap up here, I want to continue to express my appreciation to our shareholders for your ongoing support and again to our Honeywell future shapers who continue to drive differentiated performance. Our future is bright and look forward to sharing progress with you as we continue to execute on our commitments. Thank you for listening and please stay safe and healthy.

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Earnings Conference Call
Honeywell International Q1 2024
00:00 / 00:00