Honeywell International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 12 speakers on the call.

Operator

Thank you for standing by, and welcome to the Honeywell Second Quarter 2023 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, Liz. Good morning and welcome to Honeywell's Q2 2023 earnings conference call. On the call with me today are Chief Executive Officer, Vimal Kapoor Senior Vice President and Chief Financial Officer, Greg Lewis And Senior Vice President and General Counsel, Anne Matt. This webcast and the presentation materials, including non GAAP reconciliations, Our discussion today includes forward looking statements that are based on our best view of the world and of our businesses 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 Q2, Share our guidance for the Q3 and provide an update to our full year 2023 outlook.

Speaker 1

As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Dhivalkafore.

Speaker 2

Thank you, Sean, and good morning, everyone. Let's begin on Slide 2. The Q2 was another strong one for Honeywell. We met or exceeded our commitments as our rigorous operating principles enable us to navigate a challenging backdrop. We grew our adjusted earnings per share 6% year over year to $2.23 or up 13%, excluding a $0.15 non cash pension headwind.

Speaker 2

2nd quarter organic sales were up 3% year over year led by double digit growth in Commercial Aerospace, Process Solutions and UOP. Our Aerospace business continues to perform at very high level. The 2nd quarter backlog grew to a new record of $30,500,000,000 up 4% year over year and 1% sequentially due to strength in aero, PMT and HPT. Similar to last quarter's orders continue to grow double digit organically in Aero. For other segment unfavorable Comparison to last year's peak supply chain disruption led to a single digit decline in orders for overall Honeywell.

Speaker 2

We remain confident in our 2023 outlook as End markets and operational excellence continue to deliver resilient results despite macroeconomic uncertainty. Our segment margin expanded 150 basis points year over year, exceeding the high end of our guidance range by 20 basis points, Led by expansion in SBS, HPT and Aero, our continued focus on commercial excellence and greater gains from productivity enabled us to remain ahead of our inflation curve. Free cash flow was $1,100,000,000 in 2nd quarter, up 34% Year over year driven by strong net income and improved working capital in line with our expectations. Greg will walk you through the free cash flow drivers in more details in few minutes. We deployed $2,100,000,000 to dividends, M and A, share repurchases and growth CapEx, including opportunistically repurchasing 2,400,000 shares throughout the quarter, reducing our weighted average share count to 670,000,000.

Speaker 2

I'm pleased with the Progress we made this quarter on our portfolio shaping priorities. We invested in multiple new technologies utilizing our robust M and A playbook, Including completing the acquisition of Compressor Control Corporation for approximately $700,000,000 As always, we continue to execute on our proven value creation framework, which is underpinned by Accelerator Operating System. The operating system along with ongoing growth in our key end market A technologically differentiated portfolio of solution is enabling us to navigate a challenging economic backdrop and deliver on our commitment again this quarter. Looking forward, I'm encouraged by the strength we are seeing in our long cycle aero and energy verticals and remain confident in our position to outperform. Next, let's turn to Slide 3 to discuss the important leadership announcement.

Speaker 2

Last month, we announced that Jim Courier will be succeeding Mike Madsen as Honeywell Aerospace CEO. I want to congratulate Mike Madsen on his retirement and extend my sincere gratitude for 37 years he has given to Honeywell. Mike has been extremely effective leader and change engine in our company and the aero industry. He has a rich history of exceeding expectations As Aerospace on an unprecedented $35,000,000,000 in new business in these last 2 years, his leadership And commitment to customers, employees and the community is unparalleled. During his tenure as Arrow's CEO, Mike navigated the business to unprecedented pandemic disruptions, While growing the top line, expanding margins by over 200 basis points.

Speaker 2

Because of Mike's passion and dedication to the business, he helped set up Honeywell Aerospace to be even more successful In the years to come, we're excited about the next phase of growth in Honeywell's Aero business under Jim Courier's leadership. We are fortunate to have someone with his level of Experience and tenure, ready to take the helm, a true testament to Honeywell's bench strength and focus on succession planning. Jim has been with Honeywell's Aero for 17 years and prior to his current position he had held multiple roles of increasing responsibility The medium term setup for Aero is the strongest it has ever been. Flight hours continue to be strong, including wide body upside, which is now underway. We have diverse and optimized platform exposure particularly in Business Aviation.

Speaker 2

In fact, over the last few months alone, we have won $3,000,000,000 in business to provide OEMs and airlines with our engines, V's and brakes, APUs and flight management system along with associated aftermarket services. In addition, supply chains are gradually improving and we have returned to growth in Defense and Space. This momentum points to a robust multiyear directory for the largest businesses in Honeywell portfolio. Let's turn to Slide 4 to discuss our recent corporate development activity. I'm excited about our recent capital deployment announcement closing on our previously announced compressor control corporation acquisition And adding few strategic assets that will drive enhanced innovation and strength, our technology portfolio.

Speaker 2

This mix really exemplifies the type of deals that we look to generate on a consistent basis. Last month, we closed our acquisition of CCC, a leading provider of turbomachinery control and optimization solution, Deploying approximately $700,000,000 of dollars in all cash transactions, CCC Technologies including control hardware, software and services Foster Honeywell's high growth sustainability and digitization portfolio with new carbon capture control solution. CCC integrates seamlessly to our Our Process Solutions business and provides meaningful revenue synergy potential with Honeywell Forge. We are excited to extend Honeywell's leadership in automation and help customer accelerate the energy transition with this with the completion of this acquisition. We also acquired SCADA Fence, An Israel based company that delivers operational technology or OT and Internet of Things or IoT cybersecurity solutions For monitoring large scale network, SCADA Fence brings proven technologies in asset discovery, threat detection and Security Governance, which are key to industrial and critical infrastructure cybersecurity program into our SCE portfolio.

Speaker 2

The OT cybersecurity industry is expected to grow to greater than $10,000,000,000 in next several years and the Sketafense portfolio pairs seamlessly With Honeywell's cybersecurity business, providing an end to end enterprise solution that helps customers enhance enterprise resilience. In addition, we signed an agreement with Saab to acquire its Heads Up Display or HUD asset, bolstering Honeywell's comprehensive end to end avionics and Safety offering. We'll partner with SARB to develop and strengthen the heart product line, which enables pilots increased situational awareness, Specifically at night or in difficult weather conditions, importantly, the huts will be integrated into Honeywell Anthem, our revolutionary integrated slide deck with an intuitive user interface and highly scalable design, in addition to Honeywell's Primus Epic, slide deck and retrofit solutions. I'm excited about our new technologies and the adjacency we have unlocked through our recent M and A activity. We said before and we have an active and robust pipeline and this Further evidence that we are continuously enhancing our portfolio by investing in new opportunities.

Speaker 2

We look forward to continuing to deploy our capital in Coming quarters to create more value for Honeywell shareholders. Now let me turn it over to Greg on Slide 5 to discuss our 2nd quarter results in more detail as well as provide our views on guidance.

Speaker 3

Thank you, Vimal, and good morning, everyone. We delivered another strong quarter in a very challenging operating environment. 2nd quarter sales grew 3% organically, led by double digit organic sales growth in Commercial Aerospace, Process Solutions and UOP, where demand strength continues to support Honeywell's short term and long term outlook. PMC grew at a robust 7% pace After 4 consecutive quarters of double digit growth, our long cycle warehouse automation business is around trough levels as expected, which led to overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 5% across the remainder of the portfolio.

Speaker 3

Our backlog remains at a record level ending the 2nd quarter at $30,500,000,000 up 4% year over year sequential improvements in aero output as expected and are reducing our past due backlog across our short cycle businesses. Our investments in Honeywell Digital have continued to yield commercial and operating benefits through surgical pricing actions, Enabling us to expand segment margin by 150 basis points year over year to 22.4% And exceed the high end of our guidance by 20 basis points. 3 out of 4 segments expanded margins in the quarter, each by more than 100 basis points with SPS leading the way as expected. On cash, we generated $1,100,000,000 of free cash flow, up 34% year over year. This increase was driven by stronger net income as well as improved working capital performance with higher collections And good progress on inventory, where we have improved our demand planning and optimized our production and materials management Using our improved end to end process and digitalization capabilities.

Speaker 3

Now let's spend a few minutes on the 2nd quarter performance by business. Aerospace sales for the 2nd quarter were up 16% organically, led by over 20% growth in Commercial Aviation. This marks the 4th consecutive quarter of double digit aerospace organic sales growth and over 2 years of double digit growth for commercial aviation, supported by strong recovery In both flight hours and higher ships at deliveries. Growth remained strongest in commercial aviation aftermarket, up over 25%, Led by over 30% growth in air transport as increased flight hours resulted in higher spare shipments and repair and overhaul activity. Commercial original equipment sales also increased double digits, driven by increased build rates.

Speaker 3

Defense and Space grew for the 2nd consecutive quarter We were able to execute on our strong backlog and increase our sales volumes. The aero supply chain continued to make progressive improvements As better material availability enabled 20% year over year growth in original equipment and spare shipments again in Q2. Historically high past due backlog increased again in the quarter as orders growth outpaced our backlog burn down. Segment margin in Aerospace expanded 120 basis points year over year to 27.7% due to commercial excellence and higher volume leverage, partially offset by cost inflation. Performance Materials and Technology sales grew 7% organically in the 2nd quarter With double digit growth for the 3rd consecutive quarter in both HBS and UOP, process solutions sales grew 11% organically driven by strength in our projects business And in Lifecycle Solutions and Services.

Speaker 3

In UOP, sales also grew 11% organically led by gas processing and refining catalyst shipments. Sustainable Technology Solutions within UOP had another standout quarter in Q2 with strong triple digit orders growth and over 30% sales growth. In Advanced Materials, continued demand for Fluorine Products portfolio was offset by expected macro driven softness in 60 basis points to 21.7 percent as favorable price cost was more than offset by challenges in Advanced Materials, including lower volumes and the previously communicated disruption in one of our plants. Safety and Productivity Solutions sales decreased 21% organically in the quarter. Sales declines were primarily driven by warehouse and workflow solutions and productivity solutions and services.

Speaker 3

While the projects portion Our Intelligrated business is around trough levels and the current low investment warehouse automation environment, the aftermarket services portion of the business continues to deliver Solid double digit growth. Sensing and Safety Technologies was flattish in the quarter with ongoing strength in our industrial sensing product portfolio offset by modestly lower volumes and safety. Segment margin performance for SPS once again led Honeywell expanding 4 10 basis points to 16.7% as a result of productivity actions and commercial excellence, partially offset by lower volume leverage and cost inflation. Honeywell Building Technologies sales were flat year over year on an organic basis in the Q2. Building Solutions sales grew 2% organically Despite expected year over year order softness as we continue to execute on our robust backlog with organic growth in our services business And no change year over year in projects.

Speaker 3

Turning to our products portfolio, we continue to see sequential improvements in the supply chain environment And we're burning down our past due backlog as expected. Building product sales decreased 1% organically As continued growth in our world class fire products business was offset by declines in security and building management systems, our continued commercial excellence Productivity actions have allowed us to once again mitigate the effects of elevated inflation, expanding HPT segment margin by 200 basis points 25.5 percent. Honeywell Connected Enterprises' strong software franchise continues to be accretive to overall Honeywell and a powerful differentiator. Overall double digit organic growth was supported by strength in cyber, industrial, aircraft and buildings. Double digit orders growth in the quarter is supportive of continued strong performance for HCE.

Speaker 3

Overall, this was a great result for Honeywell. Our operational efforts enabled us to grow 2nd quarter GAAP earnings per share 21% year over year to $2.22 And adjusted earnings per share 6% year over year to $2.23 despite a $0.15 headwind from lower Non cash income from our overfunded pension. From a year over year perspective, segment profit drove $0.21 of the improvement in earnings, the main driver of our EPS growth. A lower adjusted effective tax rate contributed $0.06 of improvement and reduced share count added an additional $0.05 Excluding the pension headwind, below the line and other created a $0.04 year over year headwind due to higher net interest expense For a total EPS, excluding the pension impact, of $2.38 up 13% year over year. A bridge for adjusted EPS from 2Q22 to 2Q23 can be found in the appendix of this presentation.

Speaker 3

Finally, as Vimal mentioned earlier, we continue to leverage our strong balance sheet, deploying $2,100,000,000 in the quarter, bringing the year to date total to $3,700,000,000 As we execute on our capital deployment strategy with meaningful portfolio updates. So overall, disciplined adherence to our best in class Honeywell value creation framework Provided us with the operational agility to meet or exceed our guided financial metrics. Now let's turn to Slide 6 to discuss our Q3 and full year outlook. While a number of challenges persist in the current environment, our rigorous operating principles Enable us to increase our guided metrics for the full year. Our demand profile remains robust with record backlog levels, particularly in Aerospace and PMT And stabilized sequential short cycle order rates across much of the portfolio.

Speaker 3

For our Q3 sales guidance, we expect

Speaker 4

to be in the range of $9,100,000,000 to

Speaker 3

$9,300,000,000 up 1% to 4% on an organic basis. We now expect full year sales of $36,700,000,000 to $37,300,000,000 which represents an increase of $200,000,000 on the low end, Incorporating our strong second quarter results. We're raising the low end of our organic growth range now 4% to 6%, And we continue to expect a greater balance of price and volume versus last year. We've upgraded our full year expectations in PMP, while softening our outlook for SPS to reflect our latest views on the end market speech. Moving to our segment margin guidance, We expect the Q3 to be in the range of 22.3% to 22.6%, resulting in year over year margin expansion of 50 to 80 basis points due to commercial excellence and productivity actions.

Speaker 3

For full year 2023, we are upgrading our segment margin expectations by 10 basis points on the low end to a new range of 22.4% to 22.6% or 70 basis points to 90 basis points of year over year expansion, driven by improvement in HBT, SPS and PMP. Now let's take a moment to walk through the Q3 and full year expectations by business. Looking ahead for aerospace, we continue to be excited about demand across our end markets and expect sequential sales growth throughout the second half, supported by ongoing sequential factory output increases and strong orders. Commercial aftermarket, particularly in air transport should lead growth in the aero portfolio As flight hours continue to recover and we see further recovery in the wide body market from increased international travel. On the commercial original equipment side, we expect build rate strength to drive volume progression in the second half.

Speaker 3

In Defense and Space, we expect sequential and year over year growth in the second half and continue to work through our robust backlog. As a result, we expect Defense and Space to grow at a mid single digit rate for the full year 2023. We continue to expect modest sequential improvement in the aerospace supply chain as growing commitments from our suppliers year to date, Coupled with the 2nd consecutive quarter of 20 percent output increases give us continued confidence in our outlook. Given these factors, we still expect aero organic sales growth In the low double digit range, for segment margin, we still expect Air to be flattish for the year as we see modest mix pressure within our OE business, offsetting overall volume leverage. In Performance Materials and Technologies, encouraging fundamentals persist across our end markets, Driving favorable growth.

Speaker 3

For the Q3, we expect sales to increase year over year and sequentially, Coupled with a seasonally strong 4th quarter, growth will be led by Smart Energy, Projects and Lifecycle Solutions and Services Within Process Solutions as the strength these businesses saw in the first half continues into the second half. In UOP, Our growth outlook for the year is supported by robust demand for petrochemical and refining catalysts. The Sustainability Technology Solutions business within UOP We'll also provide growth as we capitalize on legislation backed demand. For Advanced Materials, we see ongoing demand for flooring products, Combined with improvements in Electronic Materials, supportive of sequential growth in the first half. Despite more challenging comps in the second half, these favorable market And our strong execution give us confidence to upgrade our full year sales growth expectations for PMT to high single digits compared to mid single digits Last quarter.

Speaker 3

For segment margin, we expect sequential improvement throughout the year, including robust expansion in the 4th quarter, resulting in modest year over year improvement for overall 2023. Looking ahead for Safety and Productivity Solutions, Our outlook continues to be impacted by the decline in CapEx for new warehouse capacity. However, our short cycle businesses Appear to be stabilizing as we awaited demand acceleration in the coming quarters. For the Q3, we expect this to lead to organic sales declines Similar to Q2. However, we anticipate another quarter of strong growth in the aftermarket services portion of our Intelligrated business And Sensing and Safety Technologies should return to growth.

Speaker 3

With the SPS portfolio bouncing on the bottom of the cycle, we now expect full year sales to be down low double digits in 2023. However, segment margin continues to be a bright spot for SPS as we implement productivity actions and drive operational improvements, And we still expect strong margin expansion for the full year. In Building Technologies, the macroeconomic environment remains challenging. Our team continues to execute well and burn down our past due backlog. For the Q3, We expect sales to be relatively flat year over year as we continue to see more challenging comps and the timing of short cycle recovery remains uncertain.

Speaker 3

For the year, we still expect sales in our long cycle building solutions business to outgrow the more short cycle building products. Our institutional verticals such as airports and education will remain strong as we continue to see similar spend come through. The business is well aligned to energy efficiency and sustainability megatrends. Given these dynamics, we still expect HPT sales for the year To grow low single digits organically and we see potential for growth acceleration as we exit 2023. For segment margins, we now expect HBT to lead Honeywell margin expansion as a result of strong inflation management and productivity actions.

Speaker 3

Turning to our other core guided metrics. Net below the line impact, which is the difference between segment profit and income before tax, is expected to be in the range of negative $120,000,000 to negative $170,000,000 in the 3rd quarter and negative $500,000,000 to negative $625,000,000 for the full year. This guidance includes a range of repositioning between $40,000,000 $85,000,000 in the quarter and $225,000,000 to $325,000,000 for the year We expect the adjusted effective tax rate to be roughly 23% in the 3rd quarter, 2 points higher than our full year guide of 21% At 2 points higher than 2Q, which is unchanged from our previous guidance. That implies a lower 4Q rate due to the timing of discrete items. Importantly, this higher tax rate in Q3 reflects an approximately $0.06 headwind to EPS, but will be offset by a commensurate tailwind in 4Q, Leaving the full year unchanged, we expect average share count to be around 669,000,000 shares In Q3, 670,000,000 shares for the full year.

Speaker 3

As a result of these inputs, Our adjusted EPS guidance range is now between $2.15 to $2.25 for the 3rd quarter, which would be down 4% to flat year over year. Excluding the pension headwinds, 3rd quarter EPS growth would be up 2% to up 6%. For full year EPS, we are increasing the midpoint of our guide, upgrading the low end of the range by $0.05 For a new range of $9.05 to $9.25 up 3% to 6%, reflecting our continued confidence that 2023 will be a solid growth year for Honeywell despite the year over year pension headwinds. Excluding these headwinds, EPS growth would be 10% to 12% this year. After a strong first half and continued progress On inventory and receivables management, we expect to meet our original free cash flow guidance of $3,900,000,000 to $4,300,000,000 in 2023 $5,100,000,000 to $5,500,000,000 excluding the net impact of settlements.

Speaker 3

So to wrap up, Our original thesis for 2023 remains intact. Robust backlog of $30,000,000,000 underpins our growth, Though the timing of the short cycle recovery remains uncertain, we're encouraged by the strength of our portfolio and continue to execute on our rigorous Operating playbook through a challenging backdrop to deliver outstanding results. Now let's turn to Slide 7 and I'll hand the call back to Dimal for some long term comments.

Speaker 2

Thank you, Greg. I'd like to take a minute to zoom out from the quarterly results to emphasize the long term journey Honeywell is on. As you can see from the chart on slide, Honeywell has made tremendous progress, Whether it's accelerating organic growth, expanding gross margins and segment margin or growing free cash flow, we have come a long way. But we are not close to done We have identified the critical levers that will enable us to reach even higher level of financial performance. We remain committed to our long term growth as Gurudev That we discussed during our May Investor Day and during 2023 guidance, closely aligned with this framework.

Speaker 2

We carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth, achieve 25% segment margin And expand gross margin to above 40% and free cash flow margins to mid teens and beyond. As I said in May, my priorities as CEO include accelerating organic growth and enhancing our innovation playbook, Growing our sustainability and digitization capability and maintaining our leadership position in high growth regions. I also plan to evolve the accelerating operating to drive incremental value through business model optimization. Additionally, Honeywell has undergone substantial internal transformation, The results of which you can see in our top line and bottom line improvements over the last decade. Our plan to further optimize the portfolio through strategic capital deployment and reduce 3Ds announced this quarter demonstrate the strength of our M and A pipeline and our commitment to deploy capital.

Speaker 2

I'm excited to lead the change for this next phase of transformation for Honeywell and I'm confident in our ability to deliver superior returns for our shareholders. As we deploy our global design model across our portfolio, we are uncovering substantial opportunities to capture value whether it is expanding margins, Driving incremental sales growth are generating more cash and we will continue to update you as these efforts translate increasingly into enhanced financial performance. Now let's turn into Slide 8 into closing thought before we move into Q and A. Honeywell executed very well In what remains a very dynamic operating environment, we'll continue to effectively manage through ongoing external factors by relying on our value creation framework. The macro economy remains challenging and the timing of a short cycle acceleration is uncertain, With ongoing strength in our 2 biggest end markets, Aerospace and Energy, combined with operating rigor you have come to expect from Honeywell, We are confident in our ability to weather near term challenges and meet our performance targets.

Speaker 2

Thank you all to our Honeywell colleagues who continue to enable us With that, Sean, let's move to Q and A.

Speaker 1

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

Operator

Our first question comes from the line of Andrew Obin with Bank of America. Andrew, your line is now open. Hi, can you hear

Speaker 1

Yes. Can you hear me?

Speaker 3

Yes. Good morning, Andrew.

Speaker 4

Yes. Good morning. Just a question on Advanced Materials. It's a good return business. When should we expect this business to return to growth?

Speaker 4

And Do you guys need to add capacity to grow this business? How strong the structural demand is? Thank you. Yes.

Speaker 2

Thanks, Andrew. So I think the key is the comps of Advanced Materials to 2022, we grew more than 20% last year. So combine that with some of the Weaknesses we see in Electronic Materials side, we are having a moderate year for the Advanced Materials this year. We do expect markets to turn better during second half and more importantly in 2024. To Your question on capacity expansion, we remain very excited.

Speaker 2

In fact, in the next track cycle, we expect More capital investment increased our capacity for Advanced Materials for some of the existing offering and potentially some new offering. So overall, we remain very bullish on Advanced Materials portfolio.

Speaker 4

Thank you.

Operator

Our next question comes from the line of Steve Tusa with JPMorgan.

Speaker 5

Hey, good morning guys.

Speaker 2

Good morning, Steve.

Speaker 5

The underlying I guess on the positive side, the Very strong margin in Aerospace. Tough to kind of like cut through the OE incentives. Was there anything Unusual there like where the OE incentives, we just under the quarterly timing of those. I mean, I'm kind of getting to an underlying incremental of around like 40% For that business, if we adjust for some of these OE incentives, can you just maybe talk about some of the moving parts there and whether I'm Roughly right on the math?

Speaker 3

Yes. So the OE incentives, we haven't disclosed the exact amount of them, but the first half is going to be a little lighter In the second half, in terms of those OE incentives. So that's why when we talk about the full year margins still being flattish, Even though we had a pretty strong Q2, I think that's really what's going on in that regard.

Speaker 5

Okay. And then just one last one on HBT. That business just perhaps should be growing better in this environment. Yes. Even Building Solutions was kind of like weak.

Speaker 5

So there's really not a function of these that's really can't be a function of destocking. So maybe What are the moving parts there? And why are you guys not keeping up with the other non res players out there? Thanks.

Speaker 2

Yes. So Steve, we are conscious of our margin rates in HPT and make careful selection of our projects, which have Ediquate margins and strong service day. So we I think given that choice we make, you can see impact of that in margin Building Technologies and that comes to a certain degree at the organic growth rate. So it's a choice to be made And we want to deliver both in ideal world, but we remain biased more towards growth in margin expansion versus the top line growth.

Speaker 5

Great. Thanks a lot.

Operator

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Speaker 6

Good morning, guys, and thank you. I want to ask an aerospace specific one, if that's okay. Last quarter, you raised Your aerospace guide to up low double digits. And I think the bulk of the raise had come from the OE side, which you guys are doing well in. But there's been a bunch of moving pieces this quarter with the MAX officially going to 38 per month yesterday.

Speaker 6

And then of course engine issues Could force like a build new build versus spares issue at Airbus on the A320. So kind of how are you thinking about the puts and takes for aerospace OE as we get into the second half following 15% growth in the first half.

Speaker 2

So, Sheila, our deliveries So the year are pretty well aligned with all OEs, both on air transport as well as on the business jet side. We have our commits to all key OEMs on for Q3, Q4 and our projections are based upon those commit rates. So I can't comment on their commitments to their customers, but we are pretty well aligned our commits to them. And our revenue growth And our volume growth is linked to that. And it's going to be pretty strong.

Speaker 2

I mean, we expect the momentum in Aerospace not to change In 2023 or for that matter even in 2024, our backlog is extremely strong and our supply chain continues to improve every quarter.

Speaker 3

And the recent events have not changed their expectations of us to this stage.

Speaker 6

Got it. Thank you very much.

Operator

Our next question comes from the line of Julian Mitchell with Barclays.

Speaker 7

Hi, good morning. Maybe just my question would be on SPS. Just wanted to try and understand how the sort of orders and backlog there is moving. I can imagine it's not Moving well and that's why the revenue guide has come down, but any finer points on the orders and backlogs? And I suppose in the conviction level around warehouse accelerating next year, if that's starting to get sort of Tested now because of the ongoing backlog pressure.

Speaker 7

And if we think about the shorter cycle businesses, How severe do you think the inventory depletion needs are in that business? And what does that mean for exit rates in SPS from this year on the top line.

Speaker 3

Sure. So I would say if we take IGS first, Our order rates are down meaningfully as we've talked about as but when we look at the overall pipeline, we're starting to see the pipeline I'll build back to a little bit better levels. That may not occur immediately, but we see there is a That we may be growing again in 2024. That will really be dictated by how the back half orders really come in. But We are starting to see a little bit more strength in the pipeline, which I think is a positive.

Speaker 3

As it relates to the short cycle businesses, what we talked about, It's down year on year because the first half of the year was particularly high, but we're seeing stabilization. The last 2 to 3 quarters Have been either going up sequentially or staying roughly flat. So I think we've reached this stabilization point On a short cycle and as and when some of those markets begin to recover, Then we'll see some growth. So as we think about SPS overall, I would expect it's going to grow in 2024. It's probably not going to be at the high end of our Growth rate for our SPGs, but that's how we see it with the data that's coming through right now.

Speaker 7

Thanks very much.

Operator

Our next question comes from Scott Davis with Melius Research.

Speaker 8

Hey, good morning everybody and welcome Vimal.

Speaker 9

Good afternoon.

Speaker 8

A couple of small things here. 1, I mean, you guys are spending a couple of 100,000,000 a year on Quantum. Vimal, do you have a kind of an evolved vision Of where this business goes and how you can monetize it, when you can monetize it, if is it Can the cash flow bleed go down a little bit over time or some kind of positive endgame that you see here?

Speaker 2

Scott, we have publicly stated that we will like to monetize value of the Quantum investment we have made in Continuum. And as the markets are more ready for IPO, which probably are here for a while, we are getting prepared for that. We're doing everything towards that end game and the strategy hasn't changed to create more value for our shareholders At appropriate time through an IPO for that business.

Speaker 8

Okay. Fair enough. And just quickly, Just following up on Steve's question. I mean, I would have thought forge for buildings would have given you a little bit of a lift given the Timing of when you rolled that out, I understand project selectivity, but I would have thought Would have given you a little bit more of a tailwind into the quarter? Is there timing issues there and that those orders haven't really kicked in yet?

Speaker 8

And we'll see that later in the year or Is there other competitive dynamics?

Speaker 2

Look, I mean, we are definitely seeing better bookings for Force for Buildings. But One fact I would like to state is that business runs on a SaaS model. So even a large booking, The revenue recognition process is different from traditional perpetual license based model. So the revenue accretion is going to spread over multiple years for that. And we are consciously make that decision because rather than showing a short term win, we are more biasing Ourselves were more recurring revenue model there as I've chatted before.

Speaker 2

So that's why you see lesser impact, but we are scoring wins in force for buildings. And I continue to remain very bullish on that segment.

Speaker 8

Okay. Fair enough. Best of luck, Vimal.

Speaker 2

Thank you, Scott.

Operator

Our next question comes from Nigel Coe with Wolfe Research.

Speaker 10

Thanks. Good morning. Thanks for the question. Just wanted to maybe just For the final point on Julian's point question on SPS. So obviously encouraging signs of the bottling process here, but it does feel like the guidance embeds Flat to maybe flattish plus or minus growth in 4th quarter.

Speaker 10

Just want to make sure that's the case and You've got good lines on that. And maybe on HBT, just break down geographically what you're seeing versus North America, Europe and China and whether There's any channel dynamics here that we should think about as well?

Speaker 2

So I'll start with HPT, turn to Greg for Respond to SBS question. I think HPT from a geographic perspective, We Europe continues to be where we want to have better outcome. I think that's a bit of a drag at this point. The strength is in high growth regions. We see strength in Middle East, India and China in buildings and North America is more of, I would say sequentially no change within the business.

Speaker 2

So that's kind of our overall dynamic. On the channel side, I mean, the channel demand will be determined by the end market demand. So we it's a very short cycle business. So we don't see any dynamics of channels having less or more inventory in the HPT business. Maybe Greg, you want to respond to SPS?

Speaker 3

Yes. So, SPS, it's likely to be down in the 4th quarter. So I would say it's not going to be flattish. It's going to be probably more like down. I think 3Q and 2Q are going to look pretty similar to one another and then we'll get a little bit of a normal seasonal bump in the 4th quarter.

Speaker 3

So that's the way I would think about the progression for SPS top line overall.

Speaker 10

Great. Thanks.

Speaker 2

Yes. Thank

Speaker 4

you.

Operator

Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners.

Speaker 4

Hey, thank you. Good morning, everyone. I was going to ask a near term question, but given your response about margins in HPT, I wonder if we could maybe just zoom out and Just kind of think philosophically about kind of the trade off between growth and margins, right? We have seen situations in the past where Companies with high margins get like a, for lack of a better term, a little bit trapped in wanting to maintain and grow the margins, right, and growth Ends up suffering as a result. So could you and you addressed this to some degree obviously when we were together in New York, but Could you maybe elaborate a little bit more on your philosophy relative to managing those two metrics And how you make sure you don't hinder growth by overly focusing on margins?

Speaker 2

Jeff, our business model in HPT is combination of serving the market both through direct and channel. So we have to make choice What business we want to serve direct and what business we want to serve through channels. And in direct, we want to pick Projects which have a strong first party content and aftermarket services. So given that algorithm, We make choices with that rule and we are sensitive to drive top line growth, But we are not going to compromise to book projects which are lower margins and show shining top line growth without any margin expansion. That has been our principles.

Speaker 2

And the reason we are quite determined on the principle is it takes one bad project to deteriorate the entire business and the portfolio. So We remain committed to that model. And I'm not suggesting that we will not see growth in Building Technologies. I do believe that as energy efficiency becomes more prominent across the board, our energy business there will do well And we will deliver more growth in the project side of the house too. But that remains our overarching.

Speaker 4

Yes. Thank you. I sort of meant the question on a total Honeywell basis also though.

Speaker 2

Okay. On total Honeywell basis, I mean, organic growth On the top end of our range is my biggest priority. I stated that in Investor Day, if something I want to make my contribution and my tenure is how we grow at a higher rate. Now we are having favorable macros in 2 of our biggest SPGs, both in aero and PMT. So on the strength of that and if we couple that with the right new products, I see no reason that we should be delivering our growth in upper end of our 4% to 7% algorithm.

Speaker 2

And that's what I work on every day and continue to drive our New product execution and then M and A accelerating our overall growth algorithm. That remains my top commitment.

Speaker 4

Thank you for the perspective.

Operator

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Speaker 8

Hi, good morning.

Speaker 3

Hey, Josh.

Speaker 9

Hey, so just want to maybe flip around the HBT question from the other Perspective on PMT. I mean, you're seeing some of the bulk chemical guys go through destocking. I think Traditional oil spending has been okay, but maybe not as strong as what you guys are seeing in some of the other process guys are seeing. I guess just how much are we getting away from kind of traditional oil versus either some of these mega projects So our energy transition, like is this business really transcending its roots of even kind of 5, 6, 7 years ago?

Speaker 2

Sure. So Josh, if I look at each of the 3 segments, our Automation Business Process Solution has Increasingly reduced its dependence on oil and gas. It has diversified very well in other end markets, Energy storage, the Gigafactory, metals and mining etcetera. So we can see that in the growth rate of revenue generation for Process Solutions and we remain very bullish on that business for 2023 2024. The UOP segment, our strategy has been to grow our business into sustainable technologies, Renewable fuels, clean hydrogen, carbon capture and we see pretty strong bookings in our sustainable technologies business.

Speaker 2

Just as a data point, now we have licensed 40 renewable fuel projects till Q3 and on a path To be 50 by, I would say, Q1 of 2024, which we I mentioned in a couple of earlier investor meetings. So UOP business is becoming also less linked to traditional refining petrochemicals, but fast moving towards renewable technology. And in Advanced Materials, our business is very specialty chemicals, solstice product line continues to grow. We see Some pressure in Electronic Materials, which is reflected in our overall growth rates, but we do expect that to turn back Into normalcy in 2024. So overall, the extremely positive outcome and bullish view on PMT for second half of twenty twenty three and twenty twenty four.

Speaker 2

The booking rates remain strong, backlog is very strong, new innovation pipeline is very, very strong. So All good news there.

Speaker 3

Understood. Thanks.

Operator

Our next question comes from Joe Ritchie with Goldman Sachs.

Speaker 11

Thanks. Good morning, guys.

Speaker 8

Hey, Johnny.

Speaker 11

And so just real two quick ones. I guess just on SPS, we've talked a little bit about the growth dynamics For the year, I'm just curious how the reduction in the short cycle businesses is perhaps impacting margins for the second half of the year. And then the other question is really around the defense business. It's nice to see the inflection there. I'm just curious at what point do you really start to See an acceleration in defense growth just given what you know about your production schedules.

Speaker 2

So the way we have guided it, we are short cycle orders have Stabilized and we're expecting similar trend over the next few months and our guide is based upon that. We are expecting stronger performance In warehouse automation orders because our pipeline has become better, but that will really strengthen our 2024 position given the long cycle nature of the business. And that's our forecast right now. And we'll continue to update you if things change.

Speaker 3

Yes. And I would just say, Joe, we have the Teams have resized their costs envelope to the current reality. And as and when the short cycle businesses reaccelerate, You can imagine those are very high margin at the VCM level and that will create a lot of acceleration from a margin rate standpoint. So the margin rates that we're going to be printing now are going to be within a higher band until we see that Acceleration come, but their business is poised for it. And we'll see.

Speaker 3

Is that going to be Q4? Is it going to be Q1? Remains to be seen, but We've sized the business properly and there's going to be a fairly substantial leverage opportunity when that acceleration happens.

Speaker 1

Then here a question on defense, when we could see acceleration in demand there.

Speaker 2

Yes. So on defense, we our bookings remain very, very strong. So we are working our supply chain constraints there and we do expect our delivery performance to be better in second half versus first half. So we had low single digits in the first half of the year. We expect the year to finish more in the mid single digits for the Defense

Speaker 3

And from here though, we've passed probably the comps where small increments are going to create meaningful growth From a percentage basis, so it should be all accretive from this point on.

Speaker 2

And also I should also mention we see Longer term for the defense business, pretty strong demand outside United States. As we can all imagine, the recent war in Ukraine Has created more higher budgets by different governments and we clearly see those signals coming to us in terms of demand from Neto countries, other friendly countries and that will play out even more stronger for the defense business in the times to come.

Speaker 11

Great. Thank you.

Operator

Our next question comes from the line of Deane Dray with RBC Capital Markets.

Speaker 8

Thank you. Good morning, everyone.

Speaker 2

Hey, Dean.

Speaker 8

Hey, just want to circle back on SBS, if we could. On warehouse automation, what are you seeing in the pipeline that suggests a bottoming? And then a related question is, can you give us any sense When you'll hit this targeted critical mass of installations that will drive that flywheel of attractive aftermarket? How close are you to that?

Speaker 11

What kind of timeframe?

Speaker 2

So the pipeline is growing very nicely And that gives us a little bit more optimism on better orders performance for the business in the second half of the year. And the part of where the pipeline growth is driven by much more diversified end markets we serve now. So we are not limited to e commerce. We are diversified into retail, into fashion, into logistics. So that's So that's wider coverage is giving us better pipeline and we are anticipating Good progress in the orders in the second half of the year.

Speaker 2

On the aftermarket flywheel, I would say it's been working now. We are Growing double digits in aftermarket in 2023 and will cross our aftermarket business more than $500,000,000 In bookings and pretty much nearly the same revenue for the year and we don't expect the momentum to stop. That's our strength. Honeywell has strong playbook on how to drive aftermarket services and that's the value we'll continue to add into the business. And our strength in that business in 2024, therefore, we anticipate Low to moderate growth, but very strong margin expansion because we continue to build more business with more first party content And very strong aftermarket.

Speaker 2

And we've coupled the 2 together, we do expect pretty healthy margin growth in Warehouse Automation Business in 2024.

Speaker 3

Yes. I mean that business was around $200,000,000 of the total in 2018. By 2022, it doubled to roughly $400,000,000 As Vimal said, this year it's going to be over $500,000,000

Speaker 2

Aftermarket business.

Speaker 3

So that aftermarket is happening.

Speaker 8

Great. Thank you.

Speaker 11

Welcome.

Operator

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Yes. Thanks, guys. Good morning.

Speaker 3

Good morning.

Operator

Just maybe on PMT, if you guys could talk a little bit more about the order activity you saw within UOP and HPS in the quarter? And then On the margins, you talked about the challenges in Advanced Materials. I guess, how does that kind of phase through the second half of the year? Thank you.

Speaker 2

The orders remain pretty strong in first half for UOP and HPS and we expect to finish year strong in both the businesses, I would say, high single digit Orders growth in both UOP and HPS and I explained the rationale of it. In HPS, it's more diversified end markets And our strength of our aftermarket business there and in UOP it is diversifying to renewable technologies. And as they become more and more important part of our portfolio. It continues to grow the business. And UOP, the catalyst business continues to have a lot of strength in Both refining and petrochemical catalysts.

Speaker 2

Advanced Materials, as I mentioned, 2022 was an outstanding year, 20% plus growth, so our comps year on year are tough. The margin rates are driven by some of the Plant shutdown, which we had announced earlier, so that certainly put pressure on our cost positions. And then some contraction in Electronic Materials business, which is depressing our margins. But overall, it's still highest margin business in the PMT portfolio. And as mentioned before, with the Potential capacity expansion coming in years to come, this business is poised to perform very well in our portfolio.

Speaker 3

Yes, Nicole, if you think about this year, we're literally going to progress each and every quarter sequentially a little bit better. We picked up about 110 basis points sequentially from 1Q to 2Q. We expect some additional sequential improvement In Q3 and then again in Q4. So I think as we get to the end of the year, it'll look like modest year over year for the full year, but it's going to be a nice Sequential step up quarter to quarter to quarter.

Speaker 5

Thanks guys.

Speaker 10

You're welcome.

Speaker 2

Thank you.

Speaker 1

Liz, I think we have time for one more question.

Operator

This question comes from the line of Andrew Kaplowitz with Citigroup.

Speaker 8

Good morning, everyone.

Speaker 5

Hey, Andrew.

Speaker 11

Vimal, could you talk about the stepped up level of acquisitions you did in the quarter? Would you expect that kind of activity to continue Over the next few quarters, have you changed any of your methods for assessing potential acquisitions? I think given the Investor Day, you probably didn't, but Could you talk about the pipeline of opportunities going forward?

Speaker 2

Look, Andrew, the pipeline remains extremely strong. We are actively working more outbound activities in M and A and remain very optimistic if we can get the deals done at the Because one thing we're not going to compromise is our deal metrics. We want to stay disciplined to create shareholder value. But at the same time, our number of opportunities in the play Are at the much higher elevated level compared to this time in the past. So Anne, if you want to add any comment from your perspective.

Operator

Yes, I would just add, the pipeline is growing. It's rich. We feel good as a strategic acquirer. We maintain the view that it's environment for strategic acquirers, while the private equity community still is having a harder time financing. So it's a good time for us Thank you.

Operator

I'd now like to turn the call back over to Vimal Kapoor for closing remarks.

Speaker 2

Thank you. Our value creation framework is working. We are deploying our rigorous operating playbook to navigate near term uncertainty. Honeywell remains well positioned to outperform in any environment as we capitalize on recovering end markets combined with solid operational execution. Thank you all our Honeywell colleagues who continue to drive differentiated performance for all our customers and shareholders.

Speaker 2

Thank you for listening and please stay safe and healthy.

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Earnings Conference Call
Honeywell International Q2 2023
00:00 / 00:00