Honeywell International Inc.

Thank you for standing by, and welcome to the Honeywell fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's 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 Mecham, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Honeywell's Fourth Quarter 2024 Earnings and 2025 Outlook Conference Call. On the call with me today are Chairman and Chief Executive Officer of Dermot Kapoor, Senior Vice President and Chief Financial Officer Greg Lewis, and incoming CFO Mike Stepniak. 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. 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 fourth quarter and full year 2024, discuss our outlook for the year, share our guidance for the first quarter and full year 2025, and provide an update on the comprehensive portfolio evaluation. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Then we'll go forward.

Thank you, Sean, and good morning to everyone joining us today. We finished 2024 on a positive note, exceeding or meeting the high end of our guidance for organic sales growth and adjusted earning growth in the fourth quarter while navigating an uneven operating environment. During 2024, we deployed over $14 billion of capital, including four closed acquisitions for approximately $9 billion in remaining on track to surpass our commitment to deploy at least $25 billion of capital through 2025. We also delivered on our promise to exit non-core lines of business with a planned spin of advanced material and the sale of our personal protective equipment business in the quarter. Turning to 2025, we're excited by our progress from our future shaping innovations to growing our global install base. That said, we are aware that evolving geopolitical situation Challenging global macroeconomic conditions and tempered demand expectation in some end markets may pressure our near-term momentum. As a result, we are offering a realistic baseline for 2025 performance based on current end market conditions and without assuming a recovery in short cycle demand. While the current operating environment presents some near-term challenges, we continue to believe in the strong through-cycle growth potential of our best-in-class businesses. Now let's zoom out from the near-term dynamics to discuss an important step in our journey to transform Honeywell. Following our year-long comprehensive business portfolio evaluation, we have decided to pursue a full separation of automation and aerospace technologies. We believe the results of our strategic assessment provide clear direction for the future of Honeywell. Let's turn to slide three to discuss today's portfolio announcement in more detail. As many of you know, Honeywell has performed portfolio evaluation systematically for many years, evaluating various ways to potentially unlock value as conditions evolve. About a year ago, I initiated a process to look even deeper at different structures, including full separation of our largest businesses. Following the completion of this in-depth internal portfolio review, I'm prepared to share with you today that the Honeywell Board of Directors has concluded that the separation of automation and aerospace is the best interest of Honeywell shareholders. This step, coupled with the previously announced plan to spin advanced materials, will result in three industry-leading public companies with tailored strategies and growth drivers. The formation of these three distinct companies will enable greater strategic focus, operational independence, and financial flexibility to pursue growth opportunities unlocking significant value for our stakeholders, including shareholders, customers, and employees. From a timeline perspective, we expect to complete the separation in the second half of 2026 and in a manner that is tax-free to Honeywell shareholders. In between, we remain very focused on delivering on our commitment and will continue to identify ways to further shape our portfolio and create shareholder value. Now let's turn to the next slide to discuss why we think this is the right time to separate into three publicly traded companies. The decisions built on the operational and digital foundation we have created over the past two decades and the series of strategic actions we have taken over the past year to dramatically simplify Honeywell. Our accelerator operating system is mature and will be a source of strength for each company. Looking ahead, we see increasing divergence strategic pathway for automation and aerospace. This is a logical next step to bring the portfolio to the next phase of transformation and unlock incremental value. With that, let's turn to slide five to talk about strategic rationale behind today's announcement. We believe the planned separation of automation, aerospace, and advanced materials will benefit all stakeholders and position all three standalone companies for long-term profitable growth. The path will enable three pure-play companies to pursue simplified go-forward strategies that are clearly aligned to the unique purpose of each business and to address the specific needs of their end markets. With this clarity of strategy and incentives and the enhanced financial flexibility that comes with being an independent public company, Honeywell Automation, Honeywell Aerospace, and advanced materials will be able to meaningfully drive innovation throughout investment cycles. The distinct investment profile of each company and an improved ability to customize capital allocation strategy will unleash the full potential of each company's strong balance sheet, creating the best path forward for enhanced commercial success, faster-paced technological innovation, and increased customer intimacy. Each business will be able to build on their existing powerful foundation and with a guidance of focused board of directors and management team that have deep domain expertise and clear vision for their future. We are committed to strong investment grade credit rating for both automation and aerospace, and a strong non-investment grade credit rating for advanced materials, positioning all three to successfully compete for capital among their respective PSX. Now let's turn to basics to talk about what it means for each of these three standalone companies. We are creating three scale pure play public companies that have leading position in their specific categories with a distinct competitive advantage and compelling long-term and market growth drivers. Each has a strong set of competitive advantages built and sustained over decades coupled with cohesive strategic direction and compelling secular growth drivers to support attractive top and bottom line growth. Honeywell Automation will be a pure-play automation leader driving digital transformation, energy security, and increased industrial autonomy globally. Honeywell Aerospace will be a diversified, premier aerospace technology and system provider to all forms of aircrafts with some of the most compelling financial metrics in all of the aerospace. Advanced Materials will be sustainability-focused specialty chemicals and materials pure-play with a strong IP portfolio and set of unique growth investment opportunities. Let's turn to the next page to talk through the value proposition of Honeywell Automation. Cutting-edge controls and automation technology have been the foundation for Honeywell for a century. We have been leading market position across process, industrial, energy, and building and markets that go back decades, creating a vast install base globally. Honeywell technology is used in over 10 million buildings, 17,000 process plants, providing a powerful platform to enable growth through our services and software. Honeywell automation brands are highly valued and well-recognized across the globe, and we have numerous long-lasting customer relationships. As a standalone $18 billion business, Honeywell automation global scale deep domain expertise and long-lasting technology leadership positions can tackle the world's most complex problem and power digital transformation on a global level. Honeywell Automation's current segment margin of 23% is supported by a track record of driving continuous improvement in operating efficiency to our accelerated operating system. We anticipate that the secular growth, such as chronic labor scarcity, increased funding for capital projects, both public and private, energy security, and supply chain resiliency will all stimulate further growth. The rapid advancement in automation technologies is enabling the manufacturing sector to unlock valuable new sources of efficiency through cloud, connectivity, and advanced analytics. These trends are compounding as we speak with the progression of industrial AI evolving from theory into reality, transforming automated facilities into autonomous facilities. In an automated facility, machines with pre-programmed instructions and deterministic outcomes govern the industrial process. But in an autonomous facility, systems or machines can analyze years of historical data and make recommendations and decisions that adapt to new conditions, changing environments, or unanticipated problems. We believe this momentum will only accelerate in coming years and continue to drive increased demand for high-quality sensors, controls, process and software technology, all of which are right in Honeywell's warehouse. In fact, our leading software-based Honeywell Forge IoT platform is already improving asset performance, enhancing labor productivity, and increasing cybersecurity for our customers, as well as driving valuable recurring revenue streams for Honeywell. Increasing energy demand, requirement to reduce emissions, and heightened energy security concerns are driving the need for significant investment in emerging energy verticals, infrastructure, as well as for fortifying traditional energy sources. Annual automation is uniquely positioned to help meet world's need on both fronts, with leading innovation from renewable fuels technology to LNG, building on largest installed base of process technology for the energy sector. As an independent automation pure play, Honeywell Automation will be able to anchor the direction of the company to build on a powerful foundation and focus capital allocation strategies on deepening presence in high growth verticals. We believe this will drive differentiated performance for both customers and shareholders. On the next page, we'll talk about Honeywell Aerospace in more detail. Moving to aerospace, Honeywell has a 100-plus year heritage as a crucial innovator in aerospace and defense. With a diverse portfolio of technology and systems, that spans nearly every major commercial, defense, and space platform worldwide. As a standalone business, Honeywell Aerospace will be one of the largest publicly traded pure-play aerospace supplier with a global scale and the highest value and most critical areas across the value chain. For example, Aerospace has delivered over 100,000 auxiliary power units, a technology we invented, and 72,000 engines since 1969, and is triggering 90% of global aircraft to use Honeywell Avionics. On its own, Aero will pursue tailored capital deployment priorities to position the business to continue driving growth, delivering reliability to customers, and positioning the business for the future of aviation through increasing electrification and autonomy of flight. With an annual sale of $15 billion and a streamlined cost structure yielding best-in-class segment margin of 26%, Honeywell Aerospace is a solid financial profile which can support continued growth and investment in new innovations while maintaining industry-leading profitability. Aerospace also has significant expanding high margin revenue stream from retrofits, modifications, and upgrades, or RMUs. These new value propositions are purpose-driven to serve customer needs within our install base and offer a source of growth that is decoupled from OEM build rates or flight hours, another key source of differentiated financial performance. Aerospace technology has deep end market penetration and global scale in aircraft propulsion, cockpit and navigation system, and auxiliary power units. With a robust Honeywell-funded R&D investment profile of approximately 4% of sales and a customer-funded R&D of approximately 7% of the sales, our business is well positioned to benefit from multiple years ahead of unprecedented demand within traditional aerospace and defense. Aging fleets with a lengthy backlog for replacement, increasing defense budget given geopolitical uncertainty, and higher flight activity in high-growth regions provide support for healthy commercial and defense OE investment upcycle alongside aftermarket strength. At the same time, the industry is in a dire need for new electrification and sustainability offering to meet steep global carbon reduction initiatives. Already now integrated electric propulsion systems combine motor, controller, power, and cooling system with Honeywell's unrivaled expertise in fly-by-wire avionics, including the next-generation Anthem flight deck, making the future of aviation safe, quiet, and efficient. Honeywell aerospace electrification and autonomous-driven technology is also leading innovation that will transform travel and delivery services, as well as how countries defend themselves. This is creating a significant new source of revenue for Aero in the decades ahead, as evidenced by over $10 billion in advanced air mobility wins. An independent aerospace company of this scale and global presence will benefit from a focused strategy, a well-capitalized public company structure, a dedicated board with a deep domain expertise, and targeted high-return investment, both organic and inorganic, to deliver the future of aviation. Let's turn to slide nine to talk about advanced materials. And finally, for advanced materials, as we discussed last October, we announced the SPIN We are very excited about the opportunity to create a leading sustainability-focused specialty chemicals and materials pure play. We believe that as a standalone specialty chemicals and materials business, the company will benefit from greater financial flexibility to pursue its own growth agenda and associated investment choices. This includes distinct opportunities in next-gen sustainable refrigerant, specialty electronic materials, and highly engineered solution for healthcare applications. The business generated approximately $4 billion of sales in 2024 with sector-leading EBITDA margins of about 25% on an estimated standalone cost basis. With over $1 billion invested over the past eight years, AM has built a robust economic mode with an efficient supply chain and a global customer base in a highly regulated vertical. AM's solid competitive positioning stems from a differentiated IP portfolio made up of over 5,000 active patents and applications created by a deep bench of more than 400 highly specialized technologists and engineers. A standalone AM will be able to continue to focus on developing new, more sustainable solutions through next-gen chemistry, and this pure-play business with a compelling investment profile is uniquely positioned to benefit from strong macro trends. Now let's turn to slide 10 to talk about progress on transforming our portfolio. In a little over a year, we have made tremendous progress on optimizing and simplifying the portfolio. In the fall of 2023, we announced plan to reorganize our business around three megatrends. During 2024, we announced a total of four strategic port and acquisition plus a handful of smaller but strategically important technology tuck-ins committing $10 billion of capital, and adding about $2 billion of run rate revenue growing at accretive rates. In addition to these ads, we also are executing on simplification of portfolio with the pending sale of PPE business. Today's announcement to separate automation and aerospace coupled with the planned spin of AM marks the beginning of the next phase of our transformation. We remain committed to and excited about the prospect of Continuum. Last week, SoftBank announced a partnership with Continuum to explore ways to unlock innovative quantum computing solutions that will overcome the limitation of classical AI and explore quantum data center business models, just the latest validation of our technical progress. Continuum continues to make great strides in both technical and commercial progression, and we look forward to an eventual IPO for this business. We will continue to make M&A a consistent part of our operational rhythm. seeking to acquire a creative bolt-on that further shapes the portfolio and enhance the value proposition of each business during the pendency of the separation process. We are confident that our dynamic capital deployment strategy, including acquisition, further share repurchases, and optimizing our operations will lead to an enhanced financial profile for Honeywell that is more attractive to investors. And finally, we are committed to reducing our share count by at least 1% this year, net of dilution, which equates to more than $3 billion of capital deployed over the next 12 months. This reflects our conviction in the future value creation of our strategic plan, near the momentum in the business performance, and what we believe to be a stock trading at an attractive valuation. Let's turn to slide 11 to talk about the next steps. In terms of path forward, we remain on track to complete the spin of advanced materials by end of 2025 and or in early 2026. The planned separation of automation and aerospace we announced today is expected to be achieved in a manner that is tax-free to Honeywell shareholders and targeted for completion in the second half of 2026. We will leverage the rigorous operating principles underpinning our accelerating operating system to prevent business disruption. and manage the one-time cost of $1.5 to $2 billion associated with the separation of both automation and aerospace, as well as advanced materials spins. This operating playbook is a deeply ingrained part of Honeywell culture and will carry on inside each of these powerful franchises. We will provide you with updates on process towards completing these separations. Importantly, we'll maintain a steadfast approach to executing on our commitment to our customers, shareholders, and employees as we enter this next phase of portfolio transformation. Now, before I turn it over to Greg on slide eight to discuss our fourth quarter and full year 2024 results in more detail, I want to thank him personally for his leadership and partnership in my first two years as CEO. Greg's tireless effort as CFO over the past seven years have been instrumental in transforming Honeywell. Greg, I wish you all the best in your next chapter.