Honeywell International Inc.

Good day, ladies and gentlemen, and welcome to Honeywell's fourth quarter earnings release and 2022 outlook call. At this time, all participants are in a listening-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please click on the raise hand icon at the bottom of your Zoom screen. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Sean Micken, Vice President of Investor Relations. Sam, please go ahead.

Thank you, Ari. Good morning and welcome to Honeywell's fourth quarter 2021 earnings and 2022 Outlook conference call. On the call with me today are Chairman and CEO Darius Adamczyk and Senior Vice President and Chief Financial Officer Greg Lewis. Also joining us are Senior Vice President and General Counsel Anne Madden and Senior Vice President and Chief Supply Chain Officer Torsten Pils. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com forward slash investor. Honeywell also uses our website as a means of disclosing information which may be of interest or material to our investors and for complying with disclosures under obligations under Regulation FD. Accordingly, investors should monitor our investor relations website in addition to following our press releases, SEC filings, public conference calls, webcasts, and social media. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions, and we ask you that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. This morning, we'll review our financial results for the fourth quarter and full year 21, discuss our 2022 outlook, and share our guidance for the first quarter of 2022 and full year 22. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Sean, and good morning, everyone. Let's begin on slide two. We delivered a strong fourth quarter despite a challenging backdrop that included an accelerated inflationary environment, ongoing supply chain constraints, and persistent COVID-19 variants. I'm pleased for our disciplined execution as we navigate these challenges capitalize on the ongoing recovery in our end markets. We delivered on our fourth quarter commitments for sales, segment margin, and adjusted earnings per share despite these headwinds. The fourth quarter adjusted earnings per share of $2.09, up 1% year-over-year, and just above the midpoint of our guidance. Organic sales were down 2% year-over-year. That was heavily impacted by the COVID mask declines in fewer days in the fiscal quarter, which Greg will touch on later. Our focus on differentiated solutions drove double-digit fourth quarter organic sales growth in the commercial aerospace aftermarket, productivity solutions and services, advanced sensing technologies, and recurring connected software businesses. Segment margin expands 30 basis point year over year. Led by strong pricing actions that we took again this quarter to address the headwinds we faced from inflationary pressures and supply chain disruption. These swift pricing actions allow us to stay ahead of the inflation curve, driving a 5% increase year-over-year on top line and yielding approximately 50 basis points of margin expansions net of inflation. We generated $2.6 billion of free cash flow in the quarter, 4% above the fourth Q2020, achieving 178% adjusted conversion. In terms of capital deployment, we put $2.1 billion of cash to work in the fourth quarter. Looking at the entire year, orders across Honeywell grew double digits organically and backlog increased 7% to $27.7 billion worth driven by strength in many of our segments as we enter 2022. We finished 2021 with 4% organic sales growth, 60 basis points of margin expansion, and $8.06 of adjusted earnings per share, up 14% year over year. We generated $5.7 billion of free cash flow in the year, resulting in adjusted conversion of 102% or 17% of revenue, a very strong result. Our earnings per share and our free cash flow performance was above our initial guidance range shared at the start of 2021, demonstrating our ability to deliver on our commitments despite unforeseen challenges and shifting economic conditions. In the appendix of this presentation is a slide highlighting our guidance progression throughout 2021, as well as our performance against these guides. On our capital deployment strategy, we have maintained a balanced approach over the past several years, consistently deploying more than 100% of operating cash flow to fund share repurchases, dividends, M&A, and capital expenditures. This past year was no exception. In fact, 2021 marks the highest level of capital deployment in the last six years. Despite the challenges we face in 2021, We deployed $8.5 billion of capital, demonstrating our commitment to investing in high return opportunities in any environment. We invested $1.6 billion in M&A, adding strategic assets to our portfolio that enhance our technology offerings, innovation, and ultimately, our long-term growth potential. Specifically, we completed four transactions, including Sparta Systems, Fiplex, PerformX, And the $270 million we contribute to Continuum Combination, which I'll talk about more about in a moment. We spent $900 million on capital expenditures to continue to build technologies that make our world safer, more efficient, and more sustainable. We deployed $3.4 billion to repurchase shares, reducing our weighted average share count by 1.5%. And finally, we maintain a strong dividend policy paying out $2.6 billion and raising our dividend again for the 12th time in 11 years. Looking forward, I continue to be encouraged by the strength we're seeing in many areas of our portfolio as we continue to execute in our rigorous and proven value creation framework, underpinned by our accelerator operating system that drives outstanding shareholder value. Next, let's turn to slide three to discuss some exciting wins in our sustainable technology solutions business. We continue to make substantial gains for our sustainability business. In the fourth quarter, we announced the commercialization of our upcycle process technology, a revolutionary new process that expands the types of plastics that can be recycled. This process can produce feedstocks used to make recycled plastics with a much lower carbon footprint and has the potential to increase the amount of global plastic waste that can be recycled to 90%. In addition, Just last week, we announced our intent to form a joint venture of Avant Garde Innovative, America's largest plastics recycler, to build an advanced recycling plant in Texas. The facility will use our upcycle process technology and is expected to have the capacity to transform 30,000 metric tons of mixed waste plastics into annual recycled polymer feedstocks per year. We also recently announced that we've entered into an agreement with Friar Battery, the intent to provide smart energy storage solutions to address the needs of wide range of commercial and industrial customers alike. Friar will leverage Honeywell's leading technology offerings, including integrated automation, field instrumentation, and security integration solutions or manufacturing processes. In turn, Honeywell will purchase 38 gigawatt hours of battery cells produced by Fryer from multiple energy storage system applications. Battery energy storage systems technology development is vital to the continued decarbonization of global power system as it will enable the transition to renewable energy sources. In the fourth quarter, we announced an agreement with the University of Texas at Austin that will enable the lower cost capture of carbon dioxide emissions from power plants and heavy industry. We have committed to achieve carbon neutrality in our own operations and facilities by 2035. We're committed to helping our customers use their carbon footprint as well. We'll leverage UT Austin's proprietary advanced solvent technology to help power, steel, cement, and other industrial plants lower their emissions and meet their sustainability goals. Finally, we saw tremendous traction in our green fuels business, which uses UOP's eco-finding technology to produce high-quality drop-in fuels from sustainable sources. Over the last few months, we recorded six important wins, including two large multinational companies. In addition, Diamond Green Diesel is using eco-finding technology to produce renewable diesel. They plan on having the capacity to produce over 1 billion gallons per year by the second half of 2022. These are just four select examples from our vast portfolio of sustainable offerings. We will continue to innovate, demonstrating that Honeywell will be a key player in the oncoming energy transition. Now let's turn to the next slide, take a look at some of the big commercial developments and how we are aggressively investing in growth. If you've been following our press releases over the past quarters, including the examples highlighted on the previous slide, you're well aware of the successes we're having with new innovations and partnerships. We have many growth opportunities across the portfolio, be it new products, businesses, or entirely new markets. These areas present high return opportunities to deploy our CapEx and OpEx spend to create value for the future. To highlight a few examples, in 2022, we are increasing CapEx investment to expand our Solstice production capacity commercialize our advanced plastics recycling technology, and build additional generations of both commercial and development quantum computers. To fund key investment priorities in 2022, we plan to spend $1.1 to $1.2 billion in CapEx, up $200 million versus 2021, up 25% versus the prior three years. Our 2022 research and development priorities will be continued innovation in sustainable technologies, developing our next generation flight deck and investment in new engine development to name a few. R&D for 22 will be up approximately 200 million or 15% year over year and up 10% versus the prior three years. Our internal spending on capital projects and R&D has consistently been the highest return deployment of our capital. We'll continue to make these investments to drive our future growth. Also, Honeywell Digital, one of the three main transformation initiatives, has fundamentally changed the way we work and resulted in $1 billion of cumulative sales, productivity, and working capital benefits since 2018. We'll continue to invest in our digitization efforts to drive efficiencies and produce valuable data-driven insights. While this may be a modest drag on our cash generation in 2022, these investments are crucial to accelerating our growth and drive transformation across our portfolio. Let's turn to slide five, take a closer look at Quantinium, between the major breakthrough initiatives for Honeywell. In the fourth quarter, we completed our previously announced business combination of Honeywell Quantum Solutions and Cambridge Quantum to form a new company, Quantinium. As mentioned in our investor communications throughout 2021, this combination marries the leading quantum computing hardware, the leading quantum computing software to form the largest and most advanced integrated standalone quantum computing company in the world. Quantinium technology will help solve some of the world's most pressing challenges, including breakthroughs in drug discovery and delivery, material science, and industrial optimization, to just name a few. Continuum's cybersecurity offering launched in December, Quantum Origin, is the world's first commercial product built upon quantum computers that delivers outcomes that classical computers could not achieve. This revolutionary new product will be crucial to companies and governments who need to ensure protection of sensitive information against adversaries and criminals. With the introduction of Quantum Origin, which is already serving Fortune 500 customers today, we expect Quantinium to reach approximately $2 billion of sales by 2026, one year earlier than the estimate we provided in our leadership webcast back in November. Upon the completion of the combination, Honeywell invested $270 million into Quantinium, and Honeywell currently owns a majority stake. We expect a slight margin headwind of 30 basis points, to Honeywell in 2022 due to increased R&D spend associated with Quantini, as shown on the previous slide. Overall, we expect Quantini to be a $150 million headwind to EBITDA. However, this R&D investment will yield great returns as we accelerate the commercialization of this revolutionary technology. The appendix of this presentation contains a slide explaining the 2022 financial impact to Honeywell in more detail. We believe this unique opportunity for investors to gain exposure to an early stage growth technology company at an industrial multiple. Continuum is the best positioned company to lead quantum computing and has all the building blocks to be the front runner in what is projected to be a trillion dollar industry. Now I will turn the call over to Greg to discuss our fourth quarter results and 2022 outlook in more detail.