Honeywell International Inc. (NYSE:HON) Leadership Webcast for Investors Featuring Honeywell Safety and Productivity Solutions September 8, 2020 2:00 PM ET

Company Participants

Mark Bendza – Vice President, Investor Relations

John Waldron – President and Chief Executive Officer

Conference Call Participants

Nigel Coe – Wolfe Research

Mark Bendza

Good afternoon, everyone. This is Mark Bendza speaking. I am Vice President of Investor Relations for Honeywell. And welcome to the third quarter installment of our Honeywell Leadership Webcast Series. As a reminder, this conference is being recorded and your microphones have been placed on mute. The purpose of this webcast is to provide our investors with an opportunity to hear from a wide range of Honeywell leaders on special topics of timely interest. With me here today are Honeywell Safety and Productivity Solutions President and CEO, John Waldron who will highlight his vision and priorities for the SPS business. And Nigel Coe, Managing Director and Senior Analysts at Wolfe Research who will lead the discussion on topics that are top of mind for investors.

But we before begin the discussions; please note that today’s webcast and presentations including any non-GAAP reconciliations are available on our website at www.honeywell.cominvestor. Please also note that elements of our 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 that you interpret them in that light. We have identified the principal risks and uncertainties that may affect our performance and our annual report on Form 10-K and other SEC filings.

John, Nigel, thank you for being here today. Before we dive into Nigel’s questions John, let’s take a few minutes upfront for you to outline your strategic priorities for the Safety and Productivity Solutions business. Over to you, John.

A -JohnWaldron

Thanks a lot, Mark. And thanks Nigel for being with us today and I thought maybe before we get into Q&A I would share couple slides just as reminder of what we do in safety and productivity solutions and what we’ve accomplished and where we are going. But before I do that I want to maybe send a message out to all of the employees out there in safety and productivity solutions who are doing such a terrific job of helping us focus on our customers and helping us deliver. This is really been an incredible last six or eight months at SPS and it’s really put a fine edge on what we do for our customers and brought us really close together with a lot of our major customers and even closer together with new customers. And our customers are having kind of the same basic challenges that many of us are.

They’re thinking a lot about their own safety, their health and they’re also thinking about how to continue to operate. They’re thinking about how to be more productive, but they’re also thinking about the future. And so that’s really what we’ve wrapped our leadership team around; our leadership cadence and our priorities. So as a reminder as you see on this slide, our business has four basic platforms; our warehouse automation business otherwise known as intelligrated, I’m sure we’ll talk a bit about that. Our Safety Solutions portfolio where we have a very broad set of offerings in personal protective equipment as well as gas detection and analysis; our productivity solutions portfolio, which includes mobile and barcode scanning, voice automation technologies and RFID; and our sentencing and Internet of Things business which has been a really critical component business in this particular time. And as you can see in the bottom of this graph, we’ve got a very diverse exposure to end markets and some of those end markets are doing extremely well and growing very quickly while others are a bit more challenged, but all-in-all a very diverse set of markets that we’re exposed to.

So if you go to the next slide, it really shows I think what our priorities have been in the last six to eight months here in 2020. And we spent a lot of time thinking about protecting people and the workplace that they’re a part of. As part of that we have rapidly been expanding our capabilities in PP&E. We’ve added our thermal imaging technology by way of our Rebellion acquisition and have been pivoting both of those into the healthcare space. We’ve been partnering with our partners at home and build — or HPT here at Honeywell around healthier buildings and extending that into healthy stadiums, healthy universities and other settings where our technologies work together. We’re delivering productivity outcomes right now for our customers. Some of our customers have never seen more demand in their businesses. And they’re working to keep their employees safe and productive.

We’re helping them deploy new procedures, helping them keep their workforce in a safe distance and in some cases helping them operate their facilities remotely. And of course, we’re focusing with our customers and partners to talk about the future and in our portfolio the future is all about e-commerce and its effect on many different end markets. We’re investing in robotics and automation technologies and our intelligrated business continues to grow rapidly in delivering these outcomes to our customers. And in some instances, we’re delivering complete turnkey solutions and micro fulfillment. So these are exciting growth vectors that we’ve been focused on over the last several months and we’re very pleased to turn in sales growth and margin expansion in the second quarter.

So with that I just want to pause and maybe bring Nigel in and see where we want to go with questions.

Question-and-Answer Session

Operator

[Operator Instructions]

NigelCoe

Yes. Thanks John. Can you hear me, okay?

JohnWaldron

Absolutely.

NigelCoe

Good. Well, I managed to negotiate the mute button well, so that’s a good start. So, John thanks for that. That was a great way to frame the discussion. So we’ve got about 25 minutes to sort of run through what I think is a business that maybe doesn’t quite get the attention deserves; it’s been built without a lot of acquisitions of the past decade, but we do think there’s going to be a disproportionate amount of sales growth and earnings growth over the next two, three years. So obviously the last drop-off point we had for SPS was Q3 earnings, we saw extremely strong order growth at both intelligrated and within your safety, PPE business. Maybe just bring us up to speed in terms of state of the union and terms what you’re seeing out there right now. And then maybe transition to what you see as your top priorities over the next 6 to 12 months.

JohnWaldron

Sure. So great way to frame it by the way, so we did experience tremendous orders growth and record backlog at the end of second quarter overall and in both of those businesses. Largely that has continued; we’re continuing to see strong growth in both of those platforms and portfolios and where some of our customers were kind of locked down in the second quarter. We’ve also seen some of them come back in other parts of the portfolio like productivity products and our gas analysis business. So we really been focused on expanding our capacity, expanding our output in those areas where as we’ve talked about we’ve had records demand has been put on the business, while we have been pivoting some of our new product investment, new product innovation ideas toward the pandemic that’s among us. New PPE offerings, new technology in our mobile product to help them sense when they’re too close together for example really helping our customers get more out of the technology that they have already purchased from us.

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So that’s really what the current state of the union has been which is rapidly expanding output meeting that demand while we take stock of the markets that are still really challenged in some of our sensing portfolio and our gas business. And so leadership is really focused on remaining disciplined about investments and making sure that those are high return investments whether they be new product innovations or whether they be high return CapEx investments. And making sure that we get those out into the market on time or up and running on time.

NigelCoe

Great. Thank you and obviously, Intelligrated, we’ve seen a lot of announcements on new warehouse capacity expansions from some of the REITs and obviously Amazon et cetera. Is this purely an e-commerce story or there are some other drivers out there that you see? And I’m thinking here but maybe existing warehouse capacity being automated for example. And how do we think about this extreme growth right now. Is this a pull forward or is it somewhat more sustainable?

JohnWaldron

Yes. Great question. So the way we think about this is that it’s a structural change in business commerce whether that business is flowing ultimately through a consumer or ultimately to a business. It’s not a temporary change; it’s a structural change and the global pandemic we think has accelerated the — really the transition to this direct fulfillment mode and it’s largely to home right now because most people in the United States at least are still working from home and not working from the office, but we think there’s going to be a hybrid work environment for quite some time. And the effects that that’s having on this overall network of production, distribution and fulfillment are having an impact on all levels of that value chain. So people in the manufacturing end are changing the way that they package product, they’re changing the way and the options with which they create selection.

In some cases, they’re creating their own drop-ship capabilities. If it’s in the distribution channel of these various markets, companies are engineering for throughput; they’re engineering for more packages, smaller packages. In many cases but they’re certainly engineering for a lot more items. And then on the direct, on the end of the marketplace when you could think about fulfillment; it’s a lot about the marrying of those higher volumes of items and the delivery of them. And in all of those — in all of that dynamic, everybody’s competing for labor and everybody’s competing for volume; so productivity becomes the key and so we’re being asked to deliver more automation with less touches, solutions that require less human intervention and to meet those needs we’re investing in technologies like robotics and machine vision, RFID, leveraging some of our productivity technologies, voice enablement and bringing those all together with our customers and each customer has a slightly unique set of requirement so it ends up becoming a very consultative discussion to ultimately help them re-engineer their supply chain and their business footprint for the future.

NigelCoe

That’s a great point. So I guess if I kind of asked the questions slightly different way, the orders you’ve seen today are they from customers, traditional customers but they’re ordering more or are you seeing some new customers that weren’t necessarily investing a lot in their warehouse capacity automation that are now in the market because less touches and looking for automation.

JohnWaldron

It’s both really and especially early on in the second quarter; we had a lot of conversations with the existing customers not knowing exactly what was going to be happening, and how long the current environment would persist as that has gone on, we’ve all seen and I think come to realize that this environment of the changed commerce economy isn’t going to away; it’s probably here for a very long time and maybe forever. So that has really brought in a lot of new conversations; brought new players to our company and we really had conversations with people who we didn’t know before. We had conversations with the people in the healthcare industry for example that are really thinking differently about their supply chain. We’re having conversations with companies who have previously kind of been against or had not yet invested in a direct fulfillment e-commerce engine for their business. And they’re realizing that’s really a need now and so we’re having conversations about that topic. But certainly it’s also the long-held relationships that we’ve had over many years of helping our customers meet the needs of the growth in their business. And so those conversations are a lot about new technologies, they are lot about the future of labor in the industry and how we can work together to innovate around some of those challenges.

NigelCoe

I see. Great. Then we think others view this — Intelligrated as a largely a North American centric business and that certainly was the case when Honeywell acquired this. Just bring us up to speed in terms of where that’s now gone in terms of globalization and to what extent does the strength you’re seeing today more global in nature.

JohnWaldron

That’s a great question as we talked about for quite some time. We have been investing to globalize this business. It really starts with the product set because we have to have global product set that’s capable of meeting the needs in those markets. And then it’s next to the supply chain; you really have to be able to locally source and manufacture and create a service chain to support customers that put these solutions in and use them for many, many years and so that has been underway and is in a pretty advanced state now. We’re really primarily focused on three markets for that international expansion right now Europe, China and India and those three markets are big market opportunities for us.

I’d say fairly advanced as it pertains to automation and commerce. India perhaps maybe behind the other two in terms of automation as a component of the overall supply chain setup, but that we think that’s going to change. We think that’s a big opportunity. So it’s growing; we’re winning business in those marketplaces. We’re deploying projects now in all three of those regions but as an overall kind of dollar value percentage of the total, it’s still quite small. So we think there’s still a lot of runway out there for us to grow internationally.

NigelCoe

Obviously Europe, China and India in terms of — a decent part of the globe. Do you have any near-term targets for — in terms of international mix sales over the next call it three years.

JohnWaldron

We haven’t really set any targets for that at the moment, Nigel. We’d like the international business to be substantial. We think it could be 25% to 30% of the total in the next three to four years, but largely that depends on continued execution and making sure that we deliver to customers needs; it also depends on the denominator how fast the North American business continues to grow.

NigelCoe

Yes. That would be a good problem to have though. Wouldn’t it? What does this mean? So and again, there’s more to your business than Intelligrated, so I do want to move on a second but what does this big surge in orders imply for resourcing and capacity requirements. So we’re going to see a ramp up in CapEx for Intelligrated.

JohnWaldron

Well, we are investing now and expanding our manufacturing and assembly capability. We’ve nearly tripled the business since we bought it. So we’ve gone through this cycle once and we know what it takes to expand both the manufacturing output as well as the project management and installation output in the business. And so we’re at that again and underway; we don’t expect it to be a huge drain on CapEx. It’s not a particularly CapEx intensive part of the business at the moment. So we think we’ve got that well under control and we’ve got to continue to put in the extra capacity that we need.

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NigelCoe

Great and then switching onto safety, PPE. This is another area where you’ve been investing CapEx to ramp up capacity on the N95 mask. You I think booked $650 million orders in 2Q. Number one; just give us an update on these — on status of capacity ramps that you highlighted in your prepared remarks. And then what is the — what are the bookings tell us about how this business is going to ramp or like it ramp the next 12-months.

JohnWaldron

Sure. So we have continued to expand capacity and we haven’t given out specific numbers publicly, but we are going to be well in excess of 25x output by the end of the year that when we started the year, and we’ve opened a number of new facilities around the world in partnerships with the local markets. And I think as we’ve also described before we’re trying to do this in a smart way where we’re partnering with customers and some of the distribution companies in these markets to make sure we have long-standing commitments for that demand as we put in the supply. And so far that’s going quite well; Q3 continues to trend well in that regard and we think there’s still more opportunity out there. Our capacity ramp ups are going well. In all cases like this where you’re opening multiple factories in record time and putting in complex processes with automated machines. Our teams are managing through the challenges and frankly doing a terrific job managing a very complex and difficult set of inputs and dynamics.

In terms of the long-term kind of nature of this market; we’ve done some modeling on this. We’ve done a lot of research; we think that the market for N95 in particular but health and hygiene and more generally has changed pretty fundamentally. And that we think that there is a long-term durable demand here for what we’re doing. We’re working with the end users and the end organizations in these markets directly and we think that this is going to be a good business for us.

NigelCoe

So it sounds like you’re reasonably confident that the demand is going to persist once we have god willing to get a vaccine and move into a post COVID world. It sounds like you’re confident that this doesn’t become stranded capacity.

JohnWaldron

Yes. That’s certainly our expectation. I mean we think no one has a crystal ball here, Nigel, obviously; but I mean there are many — there’s a lot of really good work been done in the vaccine space and I’m sure you’ve done research on this as well, but even if the stage three trials go well and the environment, the vaccines are distributed as planned later this year and early next; it’s not going to be a magic bullet that immediately eradicates the COVID-19 virus from the globe and things like this are now a heightened risk in everyone’s mind. And I think that reality is going to live with us for quite some time.

NigelCoe

Great, fantastic. And then maybe one more here before we move on to productivity products. Darius and Greg talked about the $250 million CapEx investment this year with 100% IRR or triple digits IRR. To what degree is that being driven by the CapEx you are investing in SPS?

JohnWaldron

Well, what I’d say is that we are getting our fair share of that CapEx for sure and we are spending elevated level of CapEx for our business and for the PPP and e-business in particular. And we expect to be largely finished with that investment stream around the end of the year through the first quarter for sure. So we’re satisfied with the opportunities that we’ve had to invest, and we will continue to be flexible obviously if there are more high return opportunities that we see ahead of us then we’ll capitalize on those and invest again. But we’re definitely getting our share there and putting it to good work.

NigelCoe

Great, okay. Then moving on to productivity products what I call scan mobility which is I think a business that you ran back in the day, John, this business has just kind of waxed and waned. There have been some struggles over the past three years for a variety of reasons. Maybe just brings up the speed in terms of where we are now. Are we beyond the inventory headwinds in the channel and where are we on the product vitality kind of curve here?

JohnWaldron

Yes. So this business has made great strides. I’m quite pleased actually with what the team has been doing to put the business in a good place by launching a lot of new products. We’ve got revolutionary new scanning technology that now has been outfitted in all of the mobile computing products; a whole host of scanning solutions and we’ve got — there’s more than just scanning and mobility in that portfolio. We have world-class printing technologies and products; the voice product that is in that portfolio as well as RFID which we think has a lot of potential as well. But kind of back to your question, the business has gone through cycles for sure and in 2019 which was pretty challenging for the business. We think we’ve gone through that cycle; we’ve got channel inventory right where we want it. The team has made a lot of progress, re-engaging our partners, our resellers in industry winning it at the end user at the core base of the customer and we’re expecting growth in the second half.

NigelCoe

That’s great news. That’s actually my next question. So thanks for preempting that question and then I think we always viewed the productivity products, scan and mobility portion of SPS as quite distinct to Intelligrated. It feels like there might be opportunities to bind these businesses more closely together. To what degree are we right in that view? And are you doing that right now?

JohnWaldron

Yes. We think so too. I mean that’s kind of how we got into the warehouse automation business is by having a significant presence in mobile computing and voice automation in the warehouse to begin with. And so we absolutely are putting those two things together with those teams and with customers. There’s somewhat different selling motions; somewhat different opportunities but increasingly as the Intelligrated business becomes a software business through our investment spending momentum, warehouse execution, software platform; the opportunities to integrate what we do in the scan and mobile business, the RFID and voice business are increasingly great. So we’re coming up with new selling schemes and partnerships in our channels with our customers and building the technology set as well to make that a much more natural buying opportunity for our company.

NigelCoe

Then apologize if it sounds like a question from a tech dinosaur, but does 5G open up opportunities within this portfolio?

JohnWaldron

Absolutely. We’re very close to the technology players in 5G and you should expect to hear more from us about 5G in the months and quarters to come, but absolutely we think that 5G will be a very transformational technology both outside the warehouse as well as inside the warehouse.

NigelCoe

Great, okay. Switching gears now to margins and margins, type of margins are been trending low to mid teens, obviously, there’s been a lot of acquisitions in here which has been somewhat depressing the margins but that’s obviously an opportunity as well as a challenge I guess. And let me just talk about how easy the margin progression over the next a couple years as you invest for growth. Is that going restrain or put a brake on the degree of operating leverage or do you think that we’ve got a reasonably quick returns maybe the mid to high teens margins here.

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JohnWaldron

Well, we certainly think there’s an opportunity to return to better margin performance and we, in our view are that our long-term margin targets are intact. And we’re investing in high return capital projects and organic development projects with the expectation that those are going to turn into margin growth as well. So we feel like we’ve got a good portfolio of products and technologies that deliver high value for customers and we expect that value to return in the form of both sales and margin growth. So we’ve got also productivity opportunities in the portfolio. We’ve shown and talked before about the fragmentation in our supply chain and the opportunity to simplify that. We continue on that journey as a part of the overall supply chain transformation that Torsten Pilz, our Chief Supply Chain officer has been leading and has talked about. So we’re trying to do both and I think we’ve got a good game plan to deliver a better margin performance this year next, year and beyond.

NigelCoe

And do you think the major driver of that improved margin is going to be volume leverage maybe some mix benefits or do you think that there’s going to be a material contribution from cost reduction as well?

JohnWaldron

I expect to kind of equal participation from three sources. One is volume leverage; two is mix and then the third is productivity, and mix comes in the form of both kind of better managing the portfolio we have and it also comes from some of the investments we’re making in some of our new growth opportunities; software, some of our breakthrough initiatives, robotics initiative we’ve talked about. And we expect those investments to pay off and be higher accretive to the overall portfolio.

NigelCoe

Great. Thanks John. And then just to be clear I think there is a bit of a misperception out there that the PPE ramp is going to be diluted to margins over the next into 2021. Is that correct?

JohnWaldron

We don’t expect it to be dilutive to margins.

NigelCoe

Okay, great. M&A, I mean as I mentioned in my preamble this business has been really driven put together with largely through acquisitions over the past decades or so. Where are the white spaces right now? Where do you feel that there are acquisitions to be done in this portfolio and maybe geographic expansion might be one aspect, but in terms of technologies and white spaces on technology, where do you see those white spaces?

JohnWaldron

Yes. Good question. So we, I guess maybe just as a starter we remain quite interested, very active. We’re continuing to do our good work there in M&A. It’s as pretty challenging environment to do deals right now but nonetheless we are interested and engaged. The key areas of interest are primarily the near adjacencies to the businesses we have. So areas that I’ve talked a little bit about already like robotics and vision technology, material science, supply chain automation, material handling technologies, industrial sensors and workflow automation software. There’s a very long list when you think about the things that we do across our portfolio and how broad both the technology set is that we deploy as well as the markets we serve. We have a very long list of interest areas that energize our M&A agenda.

NigelCoe

Does those areas feel like they might be somewhat high multiple areas certainly things like think about supply chain software, robotic technologies. So what degree are your ambitions constrained by return on capital math at this point?

JohnWaldron

Well, I think that there’s always a balance and we’re going to be disciplined buyers and we have certain requirements to that end, but we’re also practical buyers so we understand that there’s a price that’s set and there are expectations of sellers. And so at the end of the day it’s just a matter of making those two things meet and deciding whether our expectations for ownership meet the price point that the seller has. But I’d say that we’re certainly leaning in, but we’re not going to overpay. I mean that’s the discipline that we’ve had for a long time and I would expect this to maintain.

NigelCoe

Great and then I know we’re getting close to the half hour mark here, but so maybe a couple of more questions. Again sticking with M&A, 3M; one of your big competitors in the personal protection space has closed the last two or three major deals in this space. So a lot of your deals were really I guess more than 10 years ago at this point. Are you now happy with the portfolio you have in this protection or is there still scope for you to add some more products or geographies here.

JohnWaldron

Yes. That’s a good question. Actually, we feel like we’ve got a very complete safety solutions portfolio both in PP&E and gas analysis and in fact when we added Rebellion last December; we feel like that is a key emerging technology and we happen to pick up the very best technology crew in the marketplace. And we’ve pivoted that technology interestingly enough into thermal body sensing. And have put a product into the market that’s the most precise body temperature scanner in the world. So we think we’ve really got something with our portfolio. And we don’t feel like there’s huge gaps in the portfolio. Does that mean we won’t continue to look at the players that are out there and maybe consider either some additional technology add-ons or maybe even some additional scale acquisitions? No, of course, we’ll consider it; but we don’t feel like we’re at a disadvantage. We feel like we’ve got a very complete setup and a great team.

NigelCoe

Great and I’ve blew my budget I’ve gone over the half hour mark here. But it’s one more if I can on cash conversion just clearly because cash conversion has been a topic for investors over the past few months and understanding the CapEx you go through a mini CapEx cycle here, but how do we think about SPS cash flow into 2021 and beyond?

JohnWaldron

Well as you know, cash is a top priority, the various drivers for the entire leadership team and the entire company. I’m not expecting that to change. So we’re going through as you mentioned a short cycle here of investment in CapEx, but we maintain the same kind of expectation and target about 100% conversions. So we’re continuing to manage our working capital playbook and manage it progressively for cash flow production. So I wouldn’t expect anything unusual from SPS and so we’re trying to do those two seemingly different things at the same time, which is manage the business for cash performance but remain flexible for high return investment opportunities.

NigelCoe

Awesome, okay. Well, I think we’ll draw line there, John. Thank you so much for your time and your great answers to my questions. So with that let me hand it back to Mark.

Mark Bendza

Great. Thank you, John and Nigel for the discussion and thank you to everyone on the line for joining our leadership webcast with John Waldron. We’re excited about the opportunities ahead for our Safety and Productivity Solutions business under John’s leadership. We hope you will tune in for our next webcast which we will announce at a later date. We will now conclude the webcast. Thank you.



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