Honeywell International Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Thank you for standing by, and welcome to the Honeywell First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded.
Thank you. Good morning, and welcome to Honeywell's First Quarter 2024 Earnings Conference Call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. .
Thank you, Sean, and good morning, everyone. We delivered a very strong first quarter, exceeding the high end of our first quarter adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges.
automation, future of aviation and energy transition, all underpinned by robust digitalization capability and solutions.
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 first quarter. With that, let's discuss the results.
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 in our ability to accelerate growth, achieve 25%-plus segment margins, expand gross margins to above 40% and generate free cash flow margins to mid-teens 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 points of margin expansion, coupled with 1% to 2% of EPS accretion from both share buyback and consistent M&A execution, is a powerful combination that will allow us to generate double-digit adjusted EPS growth on through a cycle basis. '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.
Thank you, Vimal. Vimal and Greg are now available to answer your questions. [Operator Instructions] Operator, please open the line for Q&A.
[Operator Instructions] Our first question comes from the line of Scott Davis of Melius Research.
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, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period?
Yes. So Scott, if I get your question, just that I've missed the front word. Is it -- did you mention industrial automation or warehouse automation?
Warehouse automation.
Warehouse automation. Okay. Thank you.
Warehouse. Sorry, Vimal, warehouse.
No, I got it. 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.
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. 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?
Scott, I would say it in two parts. I have 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.
Yes. And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Civitanavi announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10 billion this year with just what we know about, and we're not done.
Our next question comes from the line of Stephen Tusa at JPMorgan.
Can you just talk about maybe just sequentially how you see the earnings trajectory in 3 and 4Q?
Yes. So I would say the earnings, as we guided here, we gave 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 on expected lines, our book-to-bill is 1.1, our backlog is up 6%. Long cycle remains strong across the board in Aerospace and building solutions, and we expect the same trend in European Process Solutions. And short cycle is recovering on expected lines.
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 Vimal's 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.
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?
Yes. So we're going to have a ramp from 2Q to 3Q as opposed to flat, and then the ramp from 3Q to 4Q will be greater than 2Q to 3Q.
Our next question comes from the line of Julian Mitchell with Barclays.
I think a lot of that 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 billion. And it sounds like you're doing $2.5 billion 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 billion to $5.8 billion. Maybe help us understand which of the pieces inside IA will lead or lag that delta, and if it's similar to the firm-wide where there's some pickup in Q3 and then a steeper one in Q4 sequentially.
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 fourth quarter in ESS as well. So it really does come back to all the products businesses inside of each of those portfolios.
Only thing I'll add, Julian there, is that in IA, the HPS continues to perform very well. It's going to mirror the performance it had in 2023. So similar growth rates. The bookings remain very strong. Aftermarket is performing extremely strong. And that's the biggest constituents of the newly framed IA business.
That's helpful. And then just my quick follow-up on the buildings division margins. So I think they're guided to be up maybe 100 bps or so for the year, above the firm-wide margin expansion. First 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? How quickly we start to see that flip to margin expansion in the rest of the year, please?
Sure. So again, you're going to see that tie a lot to the product volumes because of the 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.
Our next question comes from the line of Andrew Obin with Bank of America.
Good to hear that short cycle is finally starting to move.
Absolutely, Andrew.
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 a very, very impressive performance there.
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.
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, it's 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?
So very bullish on UOP. I would say this business is headed for a 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 SAF with the biomass now, which is a new technology we have launched.
Our next question comes from the line of Sheila Kahyaoglu with Jefferies.
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 I just want to clarify the comment about margins for Aerospace. You said it would dampen just given OE mix, but I would think aftermarket would accelerate as we progress through the year.
Okay. So I think there are 3 questions there, Sheila, I'll try to pick up.
Sorry about that.
No, no problem. So the overall, we do expect commercial OE to grow double digits, both on the -- the commercial OE to grow double digits and aftermarket. So we'll maintain the strong growth trend as is indicated in our guide for the rest of the year.
Our next question comes from the line of Joe Ritchie with Goldman Sachs.
I just want to really focus my questions 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 that you're expecting in both BA and IA is really dependent on short cycle accelerating?
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 shipsets 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.
Our next question comes from the line of Nigel Coe with Wolfe Research.
Sorry to bore you in another -- obviously, aero margins were great. What's the timing of Boeing shipments to customers affected there? Just curious if there's a timing issue there. But mainly my question is around 2Q margin dynamics. And thinking about that drop-off in the Zebra royalty income in the second quarter, are we looking at maybe margins, I don't know, down like 300 basis points year-over-year in the second quarter for IA? And therefore, the balance of the segment margin performance is actually probably more like on trend? So just any more color on the 2Q margins by segment would be helpful.
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 million a quarter on the revenue side. There is some costs associated with that as we talked about over the last 2 years, as we've had that impact into our P&L. 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 in IA, but nothing to the degree that we described in terms of 300 basis point drop.
Okay. And then any color on aero margins in second quarter?
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.
Our next question comes from the line of Andy Kaplowitz with Citi.
Vimal, 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?
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 digits on the strength of our aero and energy business. So net-net, we do see strong -- continued strong trend in emerging markets.
Great. And I just want to follow up on the process business. I think you mentioned delays. Is it you're seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business. Maybe talk about it a little bit more.
So Process Solutions business, absolutely. Our booking -- we carried a strong backlog, and our booking trends remains strong there. Aftermarket is double-digit growth for several quarters in a row. So that business will, as I mentioned before, will repeat 2023 pattern of high growth.
Our next question comes from the line of Jeff Sprague with Vertical Research Partners.
Vimal, just back to kind of the ongoing portfolio review, and you said it could be many things, 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?
Look, whenever we complete any action of addition and substraction, 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 billion 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.
And one thing you have been clear on is ultimately, there's a monetization play on Quantinuum. Where are we there? Where's the spending tracking? And can you kind of give us an idea of maybe the time line of a monetization event?
So Quantinuum is in, I would say, exciting times. We completed a major event of pre-money. We got valuation in excess of $5 billion, got more people invested there. We talked about that in the last earnings call.
Our next question comes from the line of Brett Linzey with Mizuho.
Again, I wanted to come back to ESS. You noted the margin contraction on some of this onetime factory restart cost. Maybe could you quantify that? And then any detail on the nature of just the timing of some of these pressures?
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 back out the impact of that, we would have been roughly flat, maybe slightly up on a margin rate basis year-on-year in the first quarter.
All right. Got it. And then just one more on M&A. Just thinking about the velocity there. I know last May, you talked about the pipeline prioritization. I think you had 90 deals looking at within your markets, and that's still at the top 10. I guess how is that 90 compared today? I mean it sounds like the enthusiasm, it sounds a little bit more optimistic about some actionability. But maybe just talk about some of the pipeline and the movement there.
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 strategic 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.
This concludes today's teleconference. Thank you for participating. You may now disconnect.