Thank you for standing by, and welcome to the Honeywell Fourth Quarter 2022 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. Please, go ahead.

Thank you, Crystal. Good morning and welcome to Honeywell's fourth quarter 2022 earnings and 2023 outlook conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur; and Senior Vice President, General Counsel, Anne Madden. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/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 disclosure 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 the 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 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 will review our financial results for the fourth quarter and full year 2022 and discuss our 2023 outlook, including sharing our guidance for the first quarter of 2023 and full year 2023. 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. The fourth quarter was another challenging one, with supply chain constraints and inflation headwinds still at play. But Honeywell's disciplined execution and differentiated solutions enable us to deliver on organic sales, segment margin, earnings and free cash flow commitments. Organic sales were up 10% year-over-year or up 11%, excluding the impact of the wind-down of operations in Russia, led by double-digit growth in commercial aviation, building products, advanced materials and UOP businesses, a testament to the underlying strength we are seeing across our end markets, particularly in long-cycle businesses. The fourth quarter was another strong one for our backlog, which grew to a new record of $29.6 billion, up 7% year-over-year and 2% sequentially due to strength in Aerospace and Performance Materials and Technologies. Orders were also a positive story in Aero and PMT, leading to a 2% organic orders growth and 6% sequential growth in the fourth quarter. The tailwinds we’ll continue to see in these two businesses gives us confidence in our 2023 outlook, which Greg and Vimal will share more detail about in a few minutes. Our segment margin expanded 150 basis points year-over-year, led by over 900 basis points of expansion in safety and productivity solutions as volumes improve. And we continue to stay ahead with the inflation curve through our strategic pricing actions. Excluding the year-over-year impact of our investment in Quantinuum, the margin expansion was 180 basis points. Free cash flow was $2.1 billion in the fourth quarter, with 125% adjusted conversion, down 18% year-over-year but delivering in line with our original guidance for the year. Capital deployment in the fourth quarter was $2.3 billion, including $1.4 billion of share repurchases, bringing our full year total to $4.2 billion in shares repurchased and exceeding our goal of $4 billion from our March Investor Day. For the full year 2022, we delivered outstanding results above the high end of our initial guidance for segment margin and adjusted earnings per share, despite approximately $2 billion in year-over-year top line headwinds and constantly shifting macroeconomic conditions. We finished the year with 6% organic sales growth, 70 basis points of margin expansion and $8.76 of adjusted earnings per share, up 9% year-over-year and above the top end of our original $8.70 guide. Orders ended the year up 8% on an organic basis. And our backlog reached an all-time high of $29.6 billion. We generated $4.9 billion of cash in the year, 14% of our revenue. The appendix of this presentation contains a slide highlighting our guidance progression through 2022 as well as our performance against these guides. Capital deployment for 2022 was $7.9 billion in total, in addition to the $4.2 billion in share repurchases, which lowered our weighted average share count by 2.5%. We deployed $800 million to high-return capital expenditures and $200 million on closing the acquisition of US Digital Designs. Finally, we maintained our dividend growth policy, paying out $2.7 billion and raising our dividend for the 13th time in 12 years. As always, we continue to execute on our proven value-creation framework, which is underpinned by our Accelerator operating system. I am confident in the strength of our backlog and the tailwinds we're seeing across our end markets, and I'm proud of our ability to execute and drive shareholder value in the current challenging environment. Now let's turn to slide 3 and to discuss an important development from the fourth quarter, which further improved our company's strength for the future. In the fourth quarter, we announced the final court approval of our buyout agreement with the NARCO Trust, providing the elimination of our funding obligations in exchange for our $1.325 billion cash payment to the trust. This liability has been weighing on our balance sheet since 2002, one of the numerous legacy liabilities the company has been carefully managing. We recognized the charge from the buyout in the fourth quarter, and the cash outflow took place in January. Partially offsetting the impact of the buyout is the sale of Harbison-Walker International, the reorganized and renamed entity that emerged from the NARCO bankruptcy, which announced that it will be acquired from the Trust by private equity firm, Platinum Equity. We expect this transaction to be completed later in 2023, reducing the net free cash flow impact by approximately $300 million. This development represents a significant improvement in our financial strength. Specifically, it simplifies our balance sheet by eliminating our evergreen funding obligations, eliminates quarterly asbestos charges related to NARCO and extinguishes any further uncertainty about our company's financial health. Now let me turn over to Vimal to discuss our fourth quarter results in more detail on slide 4.

Thank you, Darius, and good morning, everyone. Let's turn to slide 4. As Darius mentioned, we continue to meet our financial commitments despite a challenging operating environment. In the fourth quarter, sales increased 10% organically with double-digit growth in three of our four Strategic Business Groups: HPT, PMT, and Aero. We saw volume improvements from the third quarter in Aero and HPT, although supply chain constraints persisted. We have noticed some signs of demand weakness in certain short-cycle sectors, specifically in SPS and HBT, but demand for our long-cycle portfolio remains strong, except for warehouse automation, as indicated by 2% organic growth in orders and 7% growth in backlog. Though supply chain issues continue to hinder overall growth, we are encouraged by another quarter of sequential volume improvement in Aero, where output increased by double digits in Q4. Along with solid organic growth, we experienced substantial segment margin expansion of 150 basis points year-over-year to nearly 23%, driven by our investment in Honeywell Digital, which equips us to respond swiftly to price and cost changes. While SPS was the only segment to report a revenue decline year-over-year, it achieved its most profitable quarter ever, which we will discuss further shortly. Let’s take a few minutes to review the fourth quarter performance of each business. In Aerospace, fourth quarter sales grew 11% organically year-over-year, primarily driven by a 23% increase in commercial aviation. This marks the second consecutive quarter of double-digit organic sales growth in Aerospace and the seventh for commercial aviation, giving us confidence despite supply chain constraints in the aerospace sector over the past two years. Supply chain issues continue to limit volume growth, but we made progress this quarter with factory output up 15% year-over-year and 14% sequentially. Our past-due backlog grew significantly in the fourth quarter, largely due to strong inbound orders, particularly in commercial OE, where increased deliveries led to 25% sales growth year-over-year. Commercial Aero aftermarket sales rose 20% in the fourth quarter as increased flight hours boosted spare shipments and repair activity. Although defense volumes declined year-over-year in the fourth quarter, our order rates remained strong, with high single-digit growth for the quarter and mid-single-digit growth for the year, positioning us positively for 2023. Aero segment margins decreased by 120 basis points to 27.8% due to higher sales of lower-margin OE products, slightly mitigated by our commercial excellence initiatives. Building Technologies had another excellent quarter with 15% organic sales growth year-over-year. Some improvements in the supply chain allowed us to decrease backlog costs and deliver more fire products and building management systems, resulting in 21% organic growth in building products. However, supply chains have not fully recovered. We ended 2022 with higher past-due backlogs compared to the beginning of the year and significantly above our pre-COVID levels. Sales in building solutions also showed organic growth with double-digit increases in project sales for the third consecutive quarter. We closed the year with a larger project backlog than at the year's start, providing a solid foundation for 2023. Our focus on commercial excellence in this inflationary environment allowed us to expand HBT segment margins 370 basis points to 24.8%, nearing our long-term margin goal of 25%. Performance Materials and Technologies saw a 15% organic sales growth in the fourth quarter despite a 4% headwind from Russia. Advanced materials grew 20% organically during the quarter, demonstrating robust value capture across our portfolio and demand in fluorine products. This marks the fourth consecutive quarter where advanced materials led PMT growth. UOP grew 13% organically, overcoming a 9% headwind from lost Russian sales, with refining catalyst shipments being a key driver, along with a double-digit sales increase in Sustainable Technology Solutions. Process Technology returned to growth in the quarter due to robust gas processing demand, and Process Solutions also recorded double-digit growth, led by thermal solutions, life cycle solutions, services, and projects. Weather-related operational challenges affected one of our plants, reducing output in the quarter. PMT orders again grew organically in the fourth quarter, supported by strong demand for fluorine products. Segment margins contracted 100 basis points to 22% due to cost inflation and higher sales of lower-margin products, partially offset by our commercial excellence initiatives. Safety and Productivity Solutions saw a 5% organic sales decline in the quarter, as anticipated, with growth in the sensing category countered by lower volumes in warehouse automation and productivity services. Although overall Intelligrated volumes decreased, our aftermarket services business saw double-digit growth this quarter. PSS is experiencing some demand moderation due to macroeconomic factors, but we remain confident in our unique solutions. Segment margin for SPS improved significantly, expanding 940 basis points to 20.2%, the highest level ever for this business, thanks to commercial excellence, better sales mix, and productivity improvements that more than offset lower volume leverage and cost inflation challenges. Growth across the portfolio continues to benefit from strong results in Honeywell Connected Enterprise, which recorded double-digit revenue growth, including over 20% growth in our recurring and SaaS business year-over-year. Cyber, Sparta Systems, and Connected Building all achieved more than 35% year-over-year growth in the quarter. For the full year, SC sales and profits both grew by double digits, underscoring the strength of a solid software franchise. Overall, Honeywell delivered strong operational results. Adjusted earnings per share in the fourth quarter increased 21% to $2.52, slightly above our prior guidance range. Segment margin contributed to 29% of the year-over-year improvement in earnings per share, which was the primary driver of our growth. A lower adjusted effective tax rate added 10% of the improvement, and a reduced share count contributed an additional $0.07. A detailed bridge for adjusted EPS from Q4 2021 to Q4 2022 can be found in the appendix of this presentation. Regarding cash, we generated $2.1 billion in free cash flow during the quarter, an 18% year-over-year decrease, but this still aligns with the midpoint of our full-year free cash flow guidance of $4.9 billion. Cash flow was affected by increased receivables and inventory as we navigate a supply-constrained environment, as well as a $200 million headwind from Garrett receipts in the fourth quarter of 2021. Overall, Honeywell's robust operating principles enabled us to navigate yet another challenging quarter as we conclude our 2022 results. Now let’s move to Slide 5 to discuss our expectations for our end markets and the broader macroeconomic landscape in 2023. Looking ahead, we anticipate many of the challenges we faced in 2022 will persist in 2023. However, we are seeing ongoing progress in our initiatives to unlock more volume from our supply chain to meet strong demand in several key market segments. Commercial Aerospace is expected to remain a highlight in terms of demand, both from OEM build rates and aftermarket flight hours, especially as wide-body aircraft contribute significantly to normalization. Along with this strong demand, we expect steady improvement in the Aero supply chain to continue throughout 2023, which should help accelerate Aero's top-line growth compared to 2022, potentially reaching low double digits. We foresee continued momentum in investments directed at sustainable building solutions through institutional channels and in meeting both current and future energy demands, as shown by the strength in orders for sustainable building technologies and solutions, including green fuels. We expect raw material inflation to moderate but remain at high levels, and combined with gradual supply chain improvements, we should achieve a better balance between volume and price to drive top-line growth in 2023. Our order growth of 2% slowed in the fourth quarter compared to the 8% growth for the full year, but it stayed positive, with sequential growth from the previous quarter in Aero, PMT, and SPS. Our backlog, which sits at nearly $30 billion, remains at record levels and grew 7% year-over-year in the fourth quarter. We reduced our backlog in all SBGs except Aero for the second consecutive quarter, reflecting improvements in the supply chain and efforts to mitigate part shortages. Current macroeconomic uncertainties are causing some customers in our short-cycle businesses in SPS and HBT to hesitate, and there is considerable uncertainty about how the reversal of China's Zero COVID policy will affect Q1, particularly concerning the potential implications of Chinese New Year, although this might serve as a tailwind in the second half of the year. As discussed in the third quarter, declining non-cash pension income is a headwind to EPS growth in 2023, but our underlying segment profit growth remains strong. Our expectations are supported by our confidence in ongoing operational execution, facilitated by our operational system called Honeywell Accelerator. We will navigate another challenging operational environment with the rigorous standards you expect from us. Now, I’ll turn it over to Greg to move to Slide 6 and discuss in greater detail how these factors inform our financial guidance for 2023.

Thanks, Vimal, and good morning, everyone. Given the backdrop Vimal just shared, in total for 2023, we expect sales of $36 billion to $37 billion, which represents an overall organic growth sales range of 2% to 5% for the year. While we'll continue to drive pricing actions where needed to offset the impact of cost inflation, we expect more balance between the contributions of volume and price in 2022. Similar to last year, we believe the first half of the year will be slower as supply chains improve sequentially throughout the year and potential headwinds from the reversal of zero COVID policies in China are strongest in the first quarter. In Aerospace, the demand backdrop remains very encouraging in both commercial aviation and defense and space. In the commercial aftermarket, we expect continued flight hour growth, particularly in wide-body as international borders open and travel further normalizes to drive growth in air transport aftermarket sales. The policy change in China should provide added fuel to this dynamic. On the commercial OE side, build rate schedules among the OEMs are trending upwards year-over-year, leading to more ship set deliveries for Honeywell, driving revenue growth but also translating into a corresponding increase in selection credits, a headwind to margins. In Defense and Space, we plan to convert our strong order book into sales and expect defense to return to growth in 2023 as the supply chain improves. Supply chain constraints, not demand, remain the gating factor to both commercial and defense volume growth in 2023, but we're encouraged by the improvements our team has executed in recent months, resulting in 7% output growth in 2022. The sourcing environment for electronic components in Aero improves over the past quarter, but the supply chain for mechanical components remains constrained due to skilled labor shortages among Tier 3 and 4 suppliers. We entered 2023 with Aerospace backlog levels that are more than 20% higher year-over-year, giving us confidence in our growth projections. For overall Aero, we expect organic growth for the year to be in the high single-digit to low double-digit range. While Aerospace will likely be our strongest top line grower in 2023, we expect only modest margin expansion year-over-year as increased volume leverage is largely offset by unfavorable mix due to increased selection credits in the commercial OE business. In Building Technologies, we're cognizant of the broader economic environment and expect private investment in non-res construction to continue to be impacted by increased financing costs. However, throughout 2022, we built a strong slate of orders, partially as a result of the supply chain environment that provides solid sales visibility and buffer for 2023. In addition, we believe that institutional investment will remain robust buoyed by government stimulus funds that have not yet been deployed, supporting key verticals such as education, airports and healthcare. We see the most significant sales growth this year coming from building projects and building management systems as we capitalize on a robust 2022 book-to-bill in these businesses. We also expect increased spot orders for our building services throughout the year as the supply chain normalizes, layering incremental demand in. For overall HPT, we remain cautious in the current environment, expecting our strong backlog to support us early in the year and anticipate low single-digit organic sales growth for 2023 overall. However, we remain very confident in our long-term framework for Building Technologies as much of our portfolio is aligned with secular trends of sustainability and energy efficiency. On the segment margins, we expect to carry the momentum from 2022 strong exit rate, resulting in year-over-year expansion for the full year. In PMT, we are set up to build upon an impressive 2022 and convert favorable macro conditions into another solid year with sales growth sequentially throughout the year. Backlog built through 2022 will enable another year of growth in Process Solutions led by Lifecycle Solutions and Services and thermal solutions. In UOP, improved comps as we lap the lost Russian sales headwinds will provide support to a business that already has potential for upside. Our Process Technologies business returned to growth in the fourth quarter and is poised to continue to grow at 2023, while catalyst shipments should remain robust throughout the year. Demand for new energy capacity to offset lost Russian supply will also be a tailwind, particularly for our LNG business. In Advanced Materials, growth will continue despite difficult comps, thanks to strong demand for our Solstice products and supply chain improvements. In addition to Solstice, our other sustainable offerings will benefit from legislation, such as the Inflation Reduction Act and increased customer focus on environmental responsibility. Orders in our Sustainable Technology Solutions business have accelerated dramatically over the past two years, and we're expecting more of the same in 2023 as we continue towards our $700 million sales target by the end of 2024. In total, we expect PMT sales to be up mid-single digits for 2023. PMT margins should expand modestly as a result of improved volume leverage and continued pricing and productivity actions. Turning to Safety and Productivity Solutions. That will be the business most impacted by the macroeconomic environment in 2023. And Intelligrated, decreased investment in new warehouse capacity will continue to limit near-term opportunities in our long-cycle projects business with the trough in demand likely coming this year before returning to growth in 2024. However, our aftermarket services business has been growing at double-digit rates, and we expect that to continue in 2023. And productivity solutions and services, short-cycle demand softness and the distributor destocking will impact sales in the first half of '23, but we expect this dynamic to taper off and should see sequential improvement later in the year. In sensing and safety technologies, sales growth will continue in '23 after a strong finish to 2022. In total, we expect SPS sales to be down mid to high single digits for the year. From a margin standpoint, '23 should be another solid year for SPS, as we continue to benefit from improved business mix and drive our operational improvements. While Q4 '22 was a high watermark for the business and will not necessarily be the new standard moving forward, we believe high-teen margin rates are achievable in 2023. So we expect our overall segment margin to expand 50 to 90 basis points next year, supported by higher sales volumes, our continued commercial excellence efforts and productivity actions. Similar to last year, we expect SPS margins to expand the most, as we build on our operational improvements in '22 and continue to benefit from improved mix and cost structure in that business. For the year, we expect earnings per share of $8.80 to $9.20, flat to up 5% adjusted, despite an approximately $0.55 headwind from lower pension income. Excluding this impact, our adjusted EPS range would have been $9.35 to $9.75, up 7% to 11% adjusted. On the free cash flow front, we expect a range of $3.9 billion to $4.3 billion in 2023 or $5.1 billion to $5.5 billion, excluding the one-time $1.2 billion net impact of NARCO, HWI and UOP matters. I'll walk through the puts and takes for our '23 cash flow in greater detail in a couple of minutes. But first, let's turn to slide seven and walk through our EPS bridge for 2023. As you can see, segment profit will be the key driver of our earnings growth in '23, contributing $0.59 at the midpoint of our guidance range. 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 $475 million to $625 million, which includes capacity for $200 million to $325 million of repositioning, which is lower than the approximately $400 million we used in '22. For tax, we expect an effective tax rate of approximately 21% for the year. With these inputs below the line and other items, excluding pension, are expected to be up $0.05 per share year-over-year at the midpoint of guidance, primarily driven by lower repositioning and asbestos charges, partially offset by higher net interest expense. For share count, our base case for 2023 is that our minimum 1% share count reduction program will result in a benefit of approximately $0.15 per share, reducing our weighted average share count to approximately 672 million from the 683 million in 2022. As we previously communicated, we expect a large decline in pension and OPEB income this year, as a result of the increased interest rate environment. For the full year, we expect approximately $550 million of pension and OPEB income, down about $500 million from 2022, driving about a $0.55 headwind to EPS. However, this is a non-cash accounting item as our overfunded pension status will ensure that no incremental contributions are needed. We ended '22 with a pension-funded status of over 125% as a result of diligent management and strong returns, a great position to be in for our employees and shareholders. In total, we expect '23 earnings per share to be in the range of $8.80 to $9.20, flat to up 5% year-on-year on an adjusted basis. However, excluding the impact of non-cash pension headwinds, our guidance would be a range of $9.35 to $9.75, up 9% at the midpoint. Now let's turn to slide 8 and talk about the drivers of our free cash guidance for 2023. As we've outlined in the bridge, our 2023 free cash flow story can be characterized as strong operational performance offset by a few discrete non-operational items. Income growth is the largest driver of free cash flow, and we expect to make further progress this year on working capital as the supply chain normalizes. We expect 2023 free cash flow, excluding the settlement of the legacy legal matters we discussed earlier, to range between $5.1 billion to $5.5 billion, up 8% year-over-year at the midpoint as we had previously spoken about. Accounting for the settlements, we are expecting free cash flow for 2023 in the range of $3.9 billion to $4.3 billion. Now let's turn to slide 9, and we can discuss our guidance for Q1. As we highlighted earlier, we entered 2023 with record backlog, providing a solid foundation for the first quarter. Supply chains remain constrained, however, we anticipate modest sequential improvement in volumes. We're closely monitoring the impacts of Zero COVID policy changes in China as the country reopens and eases its COVID restrictions and are wary of potential Q1 impacts. However, we anticipate that these policy changes will be a net positive for demand as we progress throughout the year and will result in a robust second half in China. Looking at the segments. We expect sales growth in Aerospace in the first quarter as the demand environment remains robust, and we execute on our strong backlog. However, the rate of growth will be more subdued than our full year expectations as we anticipate Q1 will be the most supply constrained for the quarter. In Building Technologies, we anticipate modest organic sales growth in the first quarter as we work through our backlog and the supply chain continues to heal. We see the strongest sales growth in building projects, followed by increased sales of fire. In PMT, we expect another quarter of year-over-year growth in Q1. We expect that growth to be once again led by advanced materials with Process Solutions, the laggard, though still with strong year-over-year growth. We're expecting, sorry, we experienced a disruption in one of our PMT plants that will cause some unplanned downtime, though that is embedded in our guidance. In Safety and Productivity Solutions, short-cycle and warehouse automation demand softness will offset growth in Intelligrated aftermarket services and the sensing part of our sensing and safety technologies business, leading to a decline in year-over-year sales. However, we expect another strong margin performance in the high teens. So for overall Honeywell, we anticipate sales in the range of $8.3 billion to $8.6 billion in the first quarter, up 1% to 5% organically. We expect margins in the range of 21.4% to 21.8%, up 30 to 70 basis points year-over-year as we remain diligent in our price/cost management and benefit from favorable business mix. The net below the line impact is expected to be between $165 million to $210 million of an expense with a range of repositioning between $80 million and $120 million as we continue to provide capacity to fund our transformational efforts. We expect the effective tax rate to be in the range of 21% to 22% for the quarter and average share count to be approximately 675 million shares. As a result, we expect first quarter EPS between $1.86 and $1.96, down 3% to up 3% year-over-year or up 5% to 10%, excluding the year-over-year impact of lower non-cash pension income. And lastly, while the first quarter is already historically our lowest from a free cash flow perspective, the settlement payments related to the aforementioned legal liabilities were paid out in January, and we expect cash from operations to be a net use in Q1. Overall, while we maintain a prudent level of caution, we're confident in our operational abilities and our portfolio of differentiated technologies. Our portfolio is well positioned for this stage of the cycle, and we'll continue to innovate and invest in the businesses to support long-term growth. Now with that, I'll turn the call back over to Darius on slide 10.

2022 was another year of both challenges and progress for Honeywell. Despite another host of macroeconomic and geopolitical difficulties, we attacked the challenges we faced head-on, we over-delivered on our financial commitments. While 2023 brings new challenges, including potential recession scenarios, leading to uncertain demand in the short cycle with a record $30 billion backlog, a robust balance sheet and one that has been further derisked due to the NARCO settlement and the ability to deploy capital organically and inorganically, I remain optimistic about the future of Honeywell and believe the company is well positioned to drive innovation to solve some of the world's most challenging problems. One last item before we move to Q&A. I'm pleased to announce that our 2023 Investor Day will be held on May 11 in New York City. At this Investor Day, I, along with our other members of the senior management team, will provide an update on Honeywell's business strategy, exciting new growth opportunities and our long-term growth algorithm. We look forward to sharing more about Honeywell's future data. With that, Sean, let's move to Q&A.

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

Thank you. We will now begin the question-and-answer session. Our first question will come from Julian Mitchell from Barclays. Your line is open.

Hi. Good morning.

Good morning.

Good morning. I would like to ask about the first quarter outlook. Specifically, my question has two parts. First, regarding the segment margin assumption, are we anticipating a year-on-year increase of 200 to 300 points in SPS, while possibly seeing a decrease in margins in Aerospace and PMT? I would like to confirm that. Secondly, in Q1, should we expect a decline in orders after they experienced low single-digit growth in the second half of last year? Thank you.

Thanks, Julian. First off, we don't guide orders, so we're not really going to comment on that specifically. As it relates to the margin outlook you highlighted, I think you're in the right neighborhood. Again, we don't guide our individual margin rates for each of the segments. But to expect that Aero might be down in Q1 is probably a reasonable expectation. And as I highlighted, SPS is going to be on the top end of our margin expansion all year long, frankly, given all the work that that team has done, adjusting their cost structure for the realities of the sales environment that they've been in as well as, as we talked about before, the reductions in Intelligrated sales are actually not painful from a margin standpoint. They actually help given the margin profile of that business. So, I think your instincts are right, but we're not going to be specific on that guide.

Yes. And maybe just to add to that, I mean, I think SPS results, particularly in Q4, really exemplifies the strength of our operating systems and how quickly we adjust to market conditions. As you saw, they posted record margins. And that's not by accident. That's by very pronounced actions that they were facing some challenges on the revenue side. They adjusted their cost structure. They maximized our aftermarket services business, which resulted in a really nice margin profile. That's an example of how Honeywell operates, which is when we see challenges, we act upon them early and make sure that we still print very good results despite some market headwinds.

Thank you. And our next question will come from Steve Tusa from JPMorgan. Your line is open.

Hi, good morning.

Good morning.

Can you provide more details on the OEM incentives and the impact they're having? Are you on track to meet your long-term targets? What can you share about the progress and timeline? I believe you mentioned last year it was around 29%. Are you still aiming for that?

Yes, we are definitely committed to that number. As we evaluate the outlook for this year, we are operating within the framework we outlined during our last Investor Day. If we look at the midpoint, we are at the lower end of revenue forecasts, but we are exceeding our margin expectations. Regarding our long-term objectives, we are on track. The OEM credits present a notable challenge. And Greg?

Yes. This is related to Boeing's delivery of airplanes and the incentives we have for the airlines that are receiving those airplanes, which will lead to a multiyear adjustment. Currently, they have committed to delivering more than their production rate. This will affect our sales, and when we report our original equipment sales growth rates, you will see this as a counterbalance, which is also a margin challenge. It's estimated to be in the hundreds of millions of dollars, although we won't specify an exact amount. Additionally, there will be fluctuations based on the actual delivery performance of the original equipment manufacturers to the airlines.

Yes. And maybe just some closing two points, we do expect modest margin expansion in Aero. And we're very committed to the goal we gave you at the last Investor Day.

Thank you. Our next question comes from Scott Davis from Melius Research. Your line is open.

Good morning, guys and Anne.

Good morning.

I would like to know more about your assumptions regarding cost inflation and the current price/cost dynamics. Specifically, are we nearing the end of the inflation cycle? Are your suppliers continuing to increase prices, and are you also raising prices? It would be helpful to have some details by segment. Thank you, and I will pass it on after this.

Inflation is moderating, but it's not disappearing. Our focus remains on maintaining a positive price/cost model. While there is some deflation in certain commodities, labor costs remain high and energy costs have stabilized. We believe the trend is reducing, but not completely moving away. Our pricing targets have been revised because we still aim for a positive price/cost model in our financials, a strategy we will continue from 2022. However, we recognize the market is tighter than last year and want to protect our volumes, so we are carefully adjusting our price/cost strategy. This approach may vary slightly across different business segments, but overall, these are our guiding principles. Greg, would you like to add anything?

Yeah. I mean all I would say is that means rather than double-digit price increases, we're planning on mid single-digits, maybe low single-digits this year with inflation in that same neighborhood.

We don't increase pricing randomly. We monitor demand, pricing, and inflation carefully to ensure we make thoughtful adjustments rather than just raising prices. We also consider market share and demand, supported by a set of analytics. This is the strength of Honeywell Digital, which we have been implementing over the past three to four years. Our visibility and accuracy have improved significantly, thanks to new capabilities we've developed in the last 1.5 years as we navigate this inflationary environment.

Thank you. One moment for our next question. And our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

Hi. Good morning, everyone and thank you.

Good morning.

Maybe if I could ask about supply chain improvement. You have a little bit of improvement in working capital year-over-year on supply chain. Can you frame the total impact in 2022 of supply chain? And how do you expect it panning out in 2023? You called it out in Aerospace with the Tier 3, Tier 4 suppliers having labor issues. Where else are you seeing it? And how do you kind of expect it to improve across the segments?

Certainly. There isn't just one way to explain this, but I'll provide a few metrics that highlight the direction we're headed. The main takeaway is that things are getting better, and we observed that improvement. Specifically, we saw a decrease in past dues for two out of the three of the four segments. The only segment that saw an increase in past dues in Q4 was Aerospace, but we also experienced strong demand in that area, which should be taken into consideration. Is it a concern or a chance for improvement? I would point out that our Aerospace output increased by approximately 15% year-over-year, indicating we are on the right track. Given that the past dues have declined in the other segment, I’ll break down the discussion further. For semiconductors, the situation is definitely improving and trending towards a more normal state by year-end. We noted some clearing of past dues, although some still remain. In Aerospace, we're also seeing progress, although it may be at a slower pace compared to semiconductors. Our decommitment rate in Q4 was under 20%, which is the lowest for the year. The previous quarters had rates above 20%, which is encouraging. Overall, we anticipate a gradual and steady improvement as we progress through the year. That’s our outlook for the supply chain.

Thank you. One moment for our next question. And our next question comes from Nigel Coe from Wolfe Research. Your line is open.

Thanks. Good morning, everyone. I just wanted to share that our level of decommits in Q4 was below 20%, marking a low point for the year. In every quarter leading up to Q4, the decommit levels from our supply base exceeded 20%, which is also a positive sign. We anticipate a gradual and consistent improvement as the year progresses.

Good morning.

Hi, good morning. I’d like to discuss SPS a bit more. First, could we explore what occurred with the PPS? I understand there have been some challenges with the channel, but the change from last quarter is significant. Regarding the 2023 outlook, it seems like Intelligrated is down 15% to 20%. Is that reflective of the overall market, or are you being more selective about the projects you are taking on? Additionally, I know I'm asking more than one question, but it appears that margins this year are in the high teens or possibly around 20%. When we consider the mix going forward, can we expect margins to exceed 20%? Any insights on that would be appreciated.

Can you repeat the last one, because I didn't quite get the last question there, Nigel?

Yes. The last part of the one question is, when we normalize the mix to Intelligrated PPS in 2024, 2025, are we at 20 and above margins?

Yes, it's probably too early to say for sure, but I can tell you that we've already shown we can achieve 20% margins in SPS in the fourth quarter. The target remains the same. In terms of the overall business, Intelligrated is feeling the effects of the market downturn, especially in the warehouse and distribution sector, which has been impacted by an overbuild in 2020 and 2021. The market is currently working through that excess capacity. We anticipate an increase in orders and a return to growth in 2024, and we are optimistic about the pipeline forming. At the same time, we are being more selective regarding margin profiles and other factors, utilizing an algorithm to guide the types of orders we pursue. PSS has been somewhat weaker than previously, but we must remember we are coming off a record order period, particularly in the first half of the year. Overall, we expect a strong business performance in the second half of this year, and we still have a backlog to work from. There were no surprises in SPS during the fourth quarter; it was quite consistent. I was genuinely pleased with the margin rate, and the team has done well managing the revenue challenges they faced.

So, IGS, I think I just want to add a comment on IGS. I think top line challenge will be there in 2023. But we are focused on margin in this business. Our aftermarket service business is growing double digits for the last several years. That trend will continue in 2023. In fact, we want to do everything possible to continue to drive that at a higher rate and other margin improvement opportunity. But better operating efficiency, executing projects better and faster is going to be another focus area. So while the volumes are down, we are constantly looking at margin expansion strategy in the Intelligrated business.

Thank you. One moment for our next question please. Our next question comes from Andrew Obin from Bank of America. Your line is open.

Hi. Yes. Good morning.

Good morning.

Just a couple of questions on PMT. So first, on decarbonization, I mean, clearly a big revenue driver. But are you seeing any delays in process and fund disbursement at the federal level because we sort of heard about just shortage of staffing there? So that's question one. And second, if you could just talk about visibility on advanced material strength because that seems to be just getting better and better every quarter? Thank you.

In response to your question about decarbonization, I see a much stronger trend in orders within our Sustainable Technology Solutions business as we had anticipated, with IRS playing a supportive role. Our sustainable aviation fuel segment performed well, and we expect this strength to continue into 2023. Additionally, we are noticing increased activity in carbon capture and hydrogen projects, indicating that customers are moving forward with decisions. Thus, we remain optimistic about the STS business performance in 2023. Regarding advanced materials, the momentum for Solstice is ongoing, with more applications being adopted in new areas. For instance, heat pumps are emerging as an exciting opportunity for new applications. This business focuses on expanding both applications and geographic reach, and we are observing that trend. However, there are some economic challenges in the residential sector, which is a smaller part of our business, as well as some headwinds in electronic materials related to server demand in PCs. Despite these challenges, the overall outlook for advanced materials remains strong, and as you pointed out, we expect this momentum to continue into 2023.

Yes. To add a couple of details and specific figures, our orders in the fourth quarter, especially in our flooring business, were very robust, showing double-digit growth. Our LST business is performing well, and UOP is well-positioned for the year ahead. The Sparta business performed exceptionally well following the acquisition we made in 2021. Overall, it was a strong quarter for orders. However, as we noted previously, the unusual cold weather we experienced around Christmas posed some challenges for our processes, as they are not designed to operate in such low temperatures, which are atypical for Louisiana in December. Nevertheless, our AM and PMT business is well positioned, and we should expect good growth in orders and strong performance moving forward.

Thank you. One moment for our next question please. And our next question comes from Jeffrey Sprague from Vertical Research. Your line is open.

Hi, good morning, everyone. I have a follow-up question regarding Aero margins. Thank you for the insights on the OEM incentives. I'm looking for some guidance on the next couple of years. It's reasonable to expect that these incentives may increase in the coming years as Boeing ramps up deliveries, but there might be some offset from business jets or other segments of Aero. Can you provide clarity on whether 2023 will be the peak challenge for incentives?

Yes.

How it might play out in 2024 and 2025?

Yeah. Great question, Jeff, and your – again, your instincts are on – this is the bubble, right, because they – Boeing, in particular, was not able to deliver jets when they were grounded. And so that acceleration is going to go up and then come back down again. As we see it right now, it looks like 2023 is going to be the top and then it starts coming back down. But again, that's going to depend entirely on the pace of those deliveries. But it ought to be, let's say, reoriented back with deliveries in our view by 2025, for sure, and maybe into 2024. So this is going to be a temporary headwind, and then things will realign back where deliveries and shipments come back into line. And so therefore, our P&L will become more aligned.

Yeah. I think that's exactly right. I think that this is probably an unusual 2023 headwind. But even the headwind, we expect to modestly expand margins. But I think the most important thing that's missing here is, we're very excited about the future of Aerospace. I mean, the orders are up, backlog is way up. I mean, we think the next three years will be very exciting for Aero.

Supply chain is...

Supply chain is getting better. Our ISC teams have really demonstrated unlock of a lot of capacity. And I think there's nothing other than to be excited for the next three years in Aerospace. It's – I'm very confident in the backlog position, and it's going to be a really nice period for that business.

Thank you. One moment for our next question. And our next question comes from Andrew Kaplowitz from Citigroup. Your line is open.

Good morning, everyone.

Good morning.

You mentioned capital deployment in line with the three-year $25 billion plan for 2023, which suggests another year somewhat akin to 2022. You deployed nearly $8 billion in cash. As you know, National Instruments is currently undergoing a strategic review. If Honeywell were to consider a larger acquisition than in the past, we recognize that you have the financial capacity for it, but you have been disciplined with M&A and typically focused on smaller bolt-on acquisitions. Can you remind us about your return hurdles for a larger acquisition and what strategic requirements you have for such a move?

Thank you for the question. We have a strong balance sheet and approximately $15 billion available for deployment over the next two years, in line with our 2025 goals. However, I want to emphasize a few key points. First, we maintain a disciplined approach. Second, we focus on controls, automation, sustainability, and our digital initiatives. Third, we generally avoid hospital acquisitions. While we are looking to pursue smart mergers and acquisitions in 2023, any potential acquisitions will be strategic, conducted at a price that ensures we have a high level of confidence in delivering shareholder value.

Thank you. One moment for our next question, please. And our next question comes from Josh Pokrzywinski from Morgan Stanley. Your line is open.

Hi. Good morning.

Good morning.

Good morning. Thanks Darius for taking the question. I understand you guys have above-average backlog right now, obviously, some longer-cycle businesses as well as supply chain. Any way we should think about backlog conversion this year, or where do you guys think maybe backlog should end or hopefully end if you're able to start getting more product out the door? I think teasing out the demand environment versus the supply chain environment has been a bit of a trick here for a while?

We are optimistic about our backlog, which stands at about $3 billion to $4 billion more than what I would consider normal. Historically, it's been around $3 billion to $5 billion above normal levels. Our backlog is solid, particularly in the long-cycle areas like Aero, especially PMT. In the short-cycle sectors, primarily HBT and SPS, we also have a strong backlog for at least the first half of this year. We anticipate an increase in the second half due to some unusual order activity in the first half. As we move into the second half, while we can't be certain yet, we are cautiously optimistic that we may witness a unique situation where both short and long cycles are progressing effectively. Our confidence in the first half is bolstered by the strength of the long cycle, and we also expect an improvement in the short cycles during the second half. Vimal?

We are considering in-person engagements, and as mentioned earlier, we anticipate improvements in supply chain performance for both the Aero supply chain and semiconductor constraints. This should enable us to address our past dues and backlog more effectively than we did in 2022. Additionally, we expect our project businesses to manage their backlog more decisively, having faced significant supply chain challenges last year. While we cannot provide specific guidance on order forecasts, we are optimistic about capturing our share of market demand. As long as the market performs well, we will align our performance accordingly.

Thank you. One moment for our next question please. And our next question comes from Joe Ritchie from Goldman Sachs. Your line is open.

Thanks. Good morning, everyone. I want to ask that last question, maybe slightly differently, because guidance is a little bit wider than normal. And so perhaps maybe under what scenario would you guys see yourselves coming in below the midpoint of the guidance, the EPS guidance for the year?

I think it's important to address a couple of questions here, starting with why our guidance is wider than usual. This year, the economic scenarios appear to be more unpredictable, ranging from a soft landing to a severe recession, with various opinions falling within this spectrum. Our goal is to provide a broader range that reflects the current economic uncertainties, which is especially true this year. When I compare this year's guidance to 2022 or 2021, it's clear that the uncertainty has increased, not necessarily our projections. In terms of the guidance range, the lower end indicates tougher economic conditions, suggesting that if the economic situation worsens in the latter half of the year, the short cycle may underperform. Conversely, the upper end reflects optimistic expectations, with hopes that order activity improves, the short cycle strengthens, and China experiences growth. We anticipate that the first quarter in China may be challenging due to the lifting of COVID restrictions and the Chinese New Year, which we've considered in our guidance. However, we're hopeful that the second half in China could be quite strong. If that happens, it would support the upper end of our guidance. Historically, we have provided a range like this, which is not excessively wider than previous years, though 2022 was narrower. Ultimately, this wider range illustrates the economic uncertainty we are all facing and the variety of educated guesses about where things might land.

Yes. I think we'll know a lot more come June, right? I mean as we talked about, I think we feel pretty good about where we are from a backlog position. And no one really knows what the level of activity in the economy will be. I mean we've had some good things. The European winter has been more mild than people thought, and Europe has held up relatively well versus what some have figured it could be. But I think, as you said, we feel really good about where we are right now. And we'll continue to take that temperature as we go through the first four to five months of the year.

Thank you. One moment for our next question, please. And our next question comes from Deane Dray from RBC Capital Markets. Your line is open.

Thank you. Good morning, everyone. And start with congrats on getting to the finish line on the NARCO Trust. That was a really long road. And I know you had to get all the approvals. So nice to see.

Thank you, Deane.

Yes, I understand it has been a long journey. Honeywell was among the first to seek that trust, and all approvals with the plaintiffs are now in place. It's encouraging to see it derisked. Regarding the last question about geography, were there any significant surprises for you this quarter in terms of geographic performance? It appears that Europe may have had some weather-related factors contributing to the energy situation. What were the unexpected factors in the different regions? Additionally, what are your projections for the major geographies in 2023? I realize you have some details on China, but it would be beneficial to get a more comprehensive view. Thank you.

I will begin, and Vimal can provide additional insights. Overall, there weren't any significant surprises in our results. Europe, particularly the UK, experienced softness in Q4, which stood out to us. However, looking at December, the exit rates improved compared to October and November, which were weaker. In terms of our overall business performance, it aligned well with our guidance. We ended up roughly in the middle of our projected range, with slightly better operating margins. We provide guidance for a reason, and that's where we landed. Additionally, I appreciate the acknowledgment regarding the NARCO. As discussed in various articles about other companies, it's crucial to eliminate liabilities from the balance sheet. Successfully doing this permanently and with confidence significantly reduces the company's risks going forward. I feel this achievement didn't receive as much attention as it deserved, given its significance and the resources it required, but I am pleased to see this liability removed from the balance sheet. Vimal, over to you.

So I think the only thing I'll add is that I think everybody is aware of commentary on US and Europe, so I won't repeat it. But high growth regions represent a very large part of Honeywell revenue. We do expect China to have a strong growth in 2023. We are cautious in Q1, but very optimistic for the year. But other high-growth region markets, we are confident on good growth. Middle East, we have good backlog and a very strong pipeline for orders. India, we remain very optimistic. Turkey, Central Asia, we remain very optimistic, ASEAN. So overall, that part of the world should offset some of the headwinds we see in Europe, and that's what we are kind of dialing in into our planning process.

Thank you. That does conclude our question-and-answer session. I would now like to turn the conference back over to Darius Adamczyk for any closing remarks.

I want to thank our shareholders for your ongoing support. We delivered strong fourth quarter results and continue to navigate effectively multiple uncertainties with the typical level of operational rigor you've come to expect from Honeywell. Our future is bright, and we look forward to discussing this further at our upcoming Investor Day in May. Thank you all for listening, and please stay safe and healthy. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.