Honeywell International Inc (HON) May 2026 Conference Transcript

I think before we kick it off, the conference off, I thought I'd make a few over remarks. For those of you who don't know me, my name is Nigel Coe. I lead coverage of the U.S. industrial sector here at Wolf Research. And it's my pleasure to welcome you to the, first of all, on behalf of Scott Group, Miles Walton, the sales team, corporate access teams, and also our founder, Ed Wolf. I want to give you a warm welcome to the 19th annual Wolf Industrials and Transports Conference. I use the word warmly because today is going to be a warm one. Temperature outside today is going to be over 90 degrees. The first day in New York, over 90 degrees this year. So what a great day to be in a small confined room with 400 people. So, so far the air conditioning is working. We've got some cold air coming through, and along with that continues. So as you'd expect for a U.S. Inductor's Conference, we're going to be running the AC really hard. We're going to have AC CEOs on stage, and we're going to have AC coming out of the event. So we'll endeavor to keep you guys as cool and comfortable as possible. We've got another really great lineup of corporates this year. We've got 106 corporates attending for one-on-ones and presentations. We've got 577 investors registered. And we're hosting 526 one-on-one meetings. So that's a really good lineup, new records for the conference. And I'd like to really thank all of you for both corporates and investors for supporting this conference. It's not easy to pull this off. So I do want to say a big thank you to our corporate access teams for really just the dedication and hard work of just making sure all the logistics line up. And finally, I do want to just remind you, we've got a cocktail event this evening, the kicks off at 5 p.m. I would love to see as many of you there as possible, just to mingle and in a sort of very casual environment. 5 p.m., but we'll see if we can get the bar cracked open a little bit earlier than that. So that's it for my prayer remarks. Once again, thank you for being here. And, yeah, okay, we're good. We're good to start. it's 8am so it's time to get into the conference and I've got four or five side chats to kick off the conference and it's my great pleasure to welcome Honeywell, I can't think of a better way to start the conference than with Honeywell and it's my pleasure to welcome Mike Stepniak, CFO and SVP of Honeywell to stage, so Mike thank you for being here.

Thank you, thank you for having us today, really appreciate it good morning everybody Maybe before we get to the Q&A, I'll just give you a quick update on what's going on in Honeywell, where we're at. But as we announced, separation will take place on June 29th. That's the first day of the third quarter. We're in the final stages of separating, I would say, all green lights as far as it goes. Aero Analyst Day, just once again, it will be in Phoenix on June 3rd. There will be a couple of events on June 2nd. There's a prelude to that. And the analyst day for Remainco will be here in New York City on June 11th. So obviously everybody's welcome and we have great, great, great events lined up. Operationally, things are going well. We'll talk about it today, but I would say obviously we're reconfirming our forecast for the year and the guide and a lot of, I would say, positivity in the markets generally.

Thanks, Mike. We're going to spend today talking predominantly about Honeywell Automation, I think. But you mentioned all green lights for the spin. Any remaining hurdles to cross here, or are you pretty much good to go at this point?

We're clear to go. Well, they're obviously all the way to the end. There's some activities and post-spin. You have some transitional services, TSAs, things like that. But operationally, we're ready. Okay. So I don't foresee any issues as far as the 29th.

Great. That's good to know. It hasn't exactly been a huge amount of time since you reported results, but we are two months into the quarter. Anything to comment in terms of moving pieces around the portfolio, particularly interested in this Middle East headwind that you're forecasting?

So maybe I'll address that first. Middle East is resilient, And I would actually say it's better than what we thought it was going to be. Customers are extremely active. We already sent our teams to the region, including all three of our general managers been visiting customers. So works are on the way as far as repairs, et cetera. Underlying demand is still there. So I think we said $100 million to $150 million pressure in the second quarter. That's looking much better. It's going to be ways up $100 million. And customers from order activity, I see customers not only looking for repairs, but also thinking about the future, expanding, et cetera. So really good demand, I would say, coming up in the midterm from the region.

And anything else to highlight across the portfolio?

So maybe I'll just go through all of our segments. Building automation sees strength across the board. And as you know, they've been printing high single digits last six quarters. We're guiding them at mid-single digit plus. Based on everything I see in the second quarter, they'll have an outstanding quarter. So that portfolio is performing extremely well. Industrial automation for us has been a story of self-help. And with P. Lau coming in and applying some of the knowledge transfer that he brought from FIRE and some of his external pursuits, we're seeing a lot of improvement. And we also see green shoots in terms of underlying market. So I feel like the business stopped losing share and starting to gain share and will be growing into the second half. So a lot of positivity there. And obviously, transformation of the portfolio is helping us a lot as well. And then on process automation technology, That's a business that has been facing pretty hard dynamics. And the second quarter, they're lapping pretty tough comps from last year. But they're sitting on the record backlog, and they'll have another outstanding quarter from order standpoint. There is a significant inflection coming back into the second half that we talked about. And we have a strong visibility to that volume. And orders are extremely, I would say, are picking up both on the catalyst side now, on the short cycle, and from the projects. Our LNG business is sold out now for three and a half years. So really good, I would say, tell when going to the second half. Now, I remind you, the second quarter is a tough quarter for the business. So that's not changing, but we're seeing a lot of inflection in the second half.

And the backlog, does that give you confidence in that inflection? Do you have that visibility? or is that more beyond this year?

It's the second half of next year. So it's a very high-quality backlog. What I mean by it, we see projects going to FID. When they go to FID, we start work. So the teams are starting work because they have financing. And then we're having a lot of discussions now with customers on Catalyst. So that interest is going to lead to orders as well.

And when you talk about projects, obviously LNG is what we have in our minds most recently. But what else beyond LNG are you seeing?

Look, I mean, U.S. doesn't talk about ESG a lot. We were just last week in Europe. ESG in Europe is quite alive. There are lots going on, a lot of interest. Same with Latin America and Asia. I think this disruption that happened here in Iran reminded people how fragile the whole ecosystem is, that people are looking for energy security. and I'm confident these projects are starting to come back. We had a couple of projects go FID in the second quarter, predominantly in Latin America, but we see ESG coming back. So now ESG is not quite dead yet. I think it's going to be resurrected.

Right. I think so.

And then going back to building automation, you mentioned another, I think the word was outstanding quarter from building automation. um maybe just take a step back we're not seeing too many of your competitors growing at this level maybe just just unpack what's driving that outgrowth we we did several strategic shifts over the last couple years in the building automation business uh one we um we moved many of our teams and the focus in region for region um where we can be more intimate with our customers. We revamped very early our NPI machine and R&D. We talked about it last year. We reinvested into our R&D, and R&D was about 50 bips of margin pressure for us last year. That's about $350 million across the company. Just last year alone, our fire business had over 30 NPIs come to the market. And Forge is a big deal for us as far as connected and driving the connected offering. And Bilal and Suresh talked about it early in their year, but this is really taking off for us. So we see growth in our verticals and we'll continue to pivot to high growth verticals for us, which is for us, it's life sciences, it's hospitality, hospitals, data center as well although data center is still fairly small for us but we're seeing growth across the board if you had to if you had to rank order the npi versus forge as a driver that growth enable that growth would you say one's more important than the other so so really npi is all about just installing your creating install base and growing your install base where i see most Forge opportunities for us is moving really to autonomous operations, which for us a lot of it is in the aftermarket. If you think about technicians retiring, not having people to come to service buildings or whatever facility you have, that's where really connected comes in. That's where Forge comes in. That's where cognition comes in, where you can run and operate facilities remotely with fewer people. And that's where we see the benefit of Forge coming in.

Okay. Now, Forge has been around for quite some time, but I think it's now starting to really reflect. And I'm just wondering, is AI starting to enable some tools that customers are now seeing real value?

Yeah. So, AI, I think, is alive, obviously. I can tell you in Honeywell, we're deploying a lot of AI on the cost side. For us, this is really a productivity tool. And you have to be able, in order to be effective in it, you have to deploy it at scale. So you need really processes that are scalable and at scale in order to be applied to those tools and be cost effective for you. And that's what we're doing from Honeywell's standpoint inside the company. If you think about how we are creating MPI, how our engineers work, a lot of the background processes use AI. On the commercial side, for our line of work, it's a little bit different. You can't just come in and take AI from the street and apply it into a process plan that you have very strict, I would say, operating parameters. And you have 40, 50 years of domain expertise in terms of how we design these. So where we're deploying right now, AI, is really just through Forge. And really focusing on our domain expertise, which is around controls and critical operations.

But in terms of Honeywell, the way you operate Honeywell, you're not seeing big displacement of traditional roles by AI at this point?

No, we don't.

No. Okay. Aerospace, I do want to just touch on, maybe just going back to 1Q, the supply chain issues that you saw obviously growth was was well below what you expected it's just maybe just brings up the speed well maybe first of all just just maybe just run through where you're seeing the barriers on the supply chain you know what you're doing to overcome those and and how are we tracking through the second quarter i would say um maybe first we'll talk about the second quarter so jim guided mid single digit to high single digit for the quarter and i I think I'll leave it at that.

They'll have their analyst day in a couple of weeks. They can talk more about it. As you know, the quarters in that industry are very back-end loaded. So it's really the last month, the quarter, where you get the majority of your output. And I think that's what the team is instrumenting. Everything I understand, April was encouraging. So it definitely will print better results than in the first quarter. But they still have some work to do. As far as the supply chain issues in aerospace, specifically related to Honeywell, it's on the mechanical side. On the mechanical side, I remind you, the business produced 14 quarters in a row, double-digit output growth from factories. First quarter, I think, was unusual, and the team got surprised with a few late-stage decommits from the suppliers. They're working through that. But the supply issues, I would say, continue. We've done a lot in terms of investing in our own supply chain. We've done a lot in terms of investing in our suppliers as far as tooling, testing, et cetera. But right now, the capacity of the supply for us, it's about 10 to 12 percent year over year growth. And we really need something like 15.

Okay.

It seems like it's a lot of the smaller links in the supply chain that that's where the the pressure points are that's right our and that's really comes to the to the nature of the mechanical supply chain it's it's more fragmented it's smaller players uh some of them are not well capitalized etc so um so you either have to assist them or you have to insource it etc so team is kind of working through that okay i mean say mechanical is it mainly on apus and engines or is it um it's more it's more engines um more more engine pronounced it's um it's forgings, castings, blades, things like that.

Okay, okay. Nuts and bolts basically. Yeah, exactly. Yeah. Okay, and maybe just before we move on to the separation some of the separation items to consider industrial automation maybe just bring us speed in terms of the timing for the PSS and warehouse exits and then maybe just remind us what's left in IA at this point.

We know there's sensing there's smart meters anything else to think about there sure so the business will be post uh post tlw exit it will be about three and a half billion dollars um and it's pure play now measurement and instrumentation business um quite excited about it we have a lot of domain expertise we have good positions uh much more focused and um and that's why i'm so confident in the inflection of the business both from a top line standpoint but also very important from margin expansion standpoint the business right now is quite dilutive to Honeywell over the next two years it's going to lead the margin expansion for the company and you'll see that at the investor day and you'll see essentially impact immediately as we go through the second half so I'm quite excited about the inflection of the business.

And any help you can give us in terms of once we you know extract those two businesses how the margins look for that business?

I would say the businesses are dilutive to overall Honeywell, obviously, but also to IA. I would just ask you to be a little bit more patient with us and we'll have that information on the 11th.

Do you think that these can, again, this is probably a question for back in June, but do you think these are low to mid 20% type margin businesses? Because that's obviously where Honeywell is. The business we're exiting? No, no, the remaining IA businesses.

Yeah, the business, look, I mean, it's for the business to earn its keep in Honeywell portfolio will have to be north of 20%. So that's what we're working for.

Okay. And obviously, $3.5 billion makes it a little less scale than the other two segments. Is the intention to build, to really focus acquisition activity within IA?

So maybe I'll talk about it and we'll have a discussion at the investor event about how our acquisitions are doing. But when you talk to Pete, what you'll see is that within industrial automation, we have a lot of white space and the industry itself is quite fragmented. So there is a lot of opportunity there as far as the M&A, but we obviously will be careful to make sure the assets that we add and when we add them, they continue to be accretive for us, and we see a strong technology fit. I would just leave it at this. And if you look at our portfolio, process automation technologies are pretty well provisioned with acquisitions. They have a lot to work with as far as organic growth and margin expansion. So is building automation. The access solution business is doing extremely well. We'll be looking at maybe some bolt-ons down the road there. And then the focus is really on industrial automation at this stage.

Okay. We do still get questions about the possibility of a big bang transformational acquisition within IA. It seems you've been indicating something a bit more maybe creative and maybe, I don't know, tangential is the word, but where do we stand on that?

That's probably a better question for Vimal when we talk to him. But generally, I think where our head is, is we don't want to bet an enterprise on something big and transformative. We've seen companies that get in trouble with big acquisitions like that. What we find works for us the best is Bolton, which for us, it's $2 to $4 billion to get assets. We tend to know how to absorb them quickly and realize commercial synergies in the best way.

I'll take one or two more questions, and then I'll throw the Q&A open to the audience. Maybe just think about the aero separation. You mentioned on track maybe some TSA agreements to dot I's and cross T's. Maybe just bring us up to speed on the stranded costs. You said $350 million to $400 million stranded costs. That's right. To the low end of that range, I think, is what you said. But maybe just where do you expect to be on day one?

Sure. So we thought stranded costs was going to be around $400 million when we looked at it in January. We obviously went after stranded costs for a while now. before solstice. And by the way, I remind you, solstice is up 70%. Yes. I just want to shout out to that team. They're doing extremely well. We will show up in June with probably less than $300 million stranded cost. And majority of the stranded cost is already being addressed. So meaning it's related to repositioning, et cetera. and we've already provisioned for it as far as executing this stranded cost. So by year end, I'm assuming right now about $100 million of stranded cost. It's a really good story. Team really rallied around this and given we're going through separation, but we're also trying to grow the business, et cetera, I think it's really strong focus from the team on getting the stranded cost in the box quickly.

Okay, so just make sure I understand that. So less than $3 million of stranded costs on day one of the separation?

On June 29th, that's correct. Okay, that's really impressive.

And then the restructuring actions to accomplish that would be part of the acquisition one-timers, I assume?

Most of it is one-time cost, correct?

Yeah, okay. And then pension. Can we talk about pension? Any decisions on pension income?

So for people that don't follow our pension discussion, I just remind you, our pension is 40 plus percent overfunded, more like 46 percent overfunded. We did and we're doing natural split on the pension between aerospace and Honeywell. What I mean by that is we're essentially dividing the pension base when employees wear and overfunding goes proportionally with that. So Aerospace, where we get about 55% of the pension assets, Romenko will be left with the rest. With that said, we're still having discussions with our board on what's the best treatment for the pension. There are two schools of thought. One is obviously you get implicit value for the pension because it is an asset. The second school of thought is it's quite volatile. It affects your free cash flow metrics. it excuse your quality of earnings etc. So we're finalizing that discussion obviously we'll have more to say on the 11th. Do you have a thought on it?

Just my free advice and it's free because it's all it's worth is I do think that free cash flow is the key. That's correct. And I think that the pension just adds noise personally and I'd be at Advocate just going clean on the earnings. Not to say it's not clean, but maybe just going back to the pension surplus. You've sort of referenced the possibility of monetizing the surplus. Any thoughts on that?

There are two different ways you can do it. And I don't want to take a lot of time today on that and people can read it. But if you look at what IBM did or what Kodak did or what Nokia is doing, I mean, those are several different options. You can structure it in a way where you open in your defined benefit plans. You can straight up exit it or sell it, but it's very tax inefficient.

And there was actually in one big, beautiful bill, there was some legislation proposed where you could fund some of your employee benefits from the, I would say, from the overfunding that didn't pass, but nonetheless is being discussed. okay so um so maybe we'll see more more about it in the future okay great thanks mike uh enough pension otherwise we'll send everyone to sleep um any questions from the audience um any questions put your hand up otherwise i'll keep going no everyone likes to just listen to me talk and ask questions so thinking about continuum i know there's an s1 continuum i know that you're

in terms of what you can say but maybe you tell us what can you say about this about the IPO I can't say a lot okay I would I would leave at that but what I would say is that there'll be few announcements coming up soon as a team is working through flurry steps of of its strategic journey as well as commercial journey I'm extremely excited about the commercial progress the team has made on maturation of their technology, and they have a very strong pipeline as far as orders that's going over to revenue, which we're excited about. And I think right now is the right time for them as they're maturing, growing, et cetera. It's a good time to stand up the company.

And you said publicly the $250 million of investment spend or losses that's right now in corporate expenses, that deconsolidates? Is that still the case?

So right now we're fully consolidated. At some point, we will not fully consolidate. And we will only, I would say from EPS standpoint, it won't change anything. But from a segment margin standpoint, it will be tile-wind for us because we will only put above the line the portion of the company that we own. It will be sub-50%. And today it's 100%. So simple math, today it's $250 million that goes above the line. Tomorrow it's $125.

Okay, got it. Thank you. So it seems to me that when we think about the $250 from continuum going below the line, you've got the $150 of royalty income from Aero. You've got the $300 million coming in. It seems that net net corporate expenses come down on day one. Is that that's right?

I mean, structurally, we have a lot of margin expansion and look at the Aero trademark license is helping us with some of the inefficiencies we'll have as far as simplifying residual taxes, et cetera. And that's temporary, too, because that's I think that cash flow continues for about five years. But generally, I think the corporate expenses will be much better and more importantly, will be cleaner. We're trying to have a cleaner income statement. And hopefully you noticed we also removed our asbestos liabilities last year, which is a big drug for us in the tailwind going forward.

That's great. Thanks, Mike. So my remaining questions are really, you're probably going to tell me to come back in June for the investor day.

But, you know, you've got standing targets for 4% to 7% for Honeywell today. the Romainco automation business is that still a decent framework for organic growth going forward that's right I would say it's mid single digit yeah I think that's that's how I would position it I think you'll see us growing more consistently on the go forward basis we we've cleaned up the portfolio we have diversified we like I said we restarted our NPI wheel machine reinvesting to R&D, moving purposely to high growth verticals, software and services revenue is growing faster than the rest of the business. It gives us stability in the top line as well. I think what I'm most excited about is the margin expansion story for Honeywell over the next two years, and we'll talk about it a lot during the investor day.

That's exciting, actually, margin expansion. So that would be the process, marginalization, IA.

IA is going to lead. Process is going to get better mechanically, just where they are in their cycle. And then building automation continues to innovate and introduce really compelling NPI, which allows it to have better mix, better leverage on volume, and obviously stronger pricing.

So you're going to be a genius to figure out that you're going to be pitching double-digit EPS growth for the next two or three years. You'll see on the 11th. Yeah. But I've got questions here. I need to ask these questions.

What I will say with this is that our growth will be front-loaded. I think that's kind of where the setup for us is. So I know people discount the year three usually, but what I'm excited about is we're instrumenting the company to perform this year and next year.

I think a really important part of the story is the way that, you know, you and Vimal have retooled the incentive structure to incentivize investment spending. Maybe just touch on that quickly, because I think that's really important.

Yes, and Vimal is passionate in terms of linking pages to performance. And we're actually looking at our plans right now for 2027. He really wants to focus the team on customer obsession and NPI. And NPI obviously is also a function of customer obsession. So we're working on KPIs, which we will put into our performance plans for the for the management team um that are focused on metrics that our customers care about and obviously the street cares about from a growth standpoint so there's more to come to it but generally in the past last few years we we pivoted as far as incentivizing more on revenue growth and we incentivized certain teams within our engineering offering etc around cross-sell around NPI, CEDU, around offering. And we're taking a step further to put more of the organization under those plans.

And that wasn't the case before?

That wasn't the case, no. Yeah, okay.

I think one of the key changes under Vimal has been much more M&A, much more, I don't know if aggressive is the word, but certainly deploying more capital into M&A. The balance sheet for automation is in good shape with the dividend. Is that still the case going forward to be more acquisitive and maybe less buybacks?

I would say this. We'll continue to have a prudent capital allocation framework. And what I mean by it is that what we see investing in growth CapEx, but generally business is CapEx lighter, I would say, versus it used to be. second is we'll maintain our dividend ratio if you will in line with our peers we've talked about that and then we'll maintain our I would say share count and offset dilution at a minimum if if our free cash flow generation allows and and we need to I would like to get the outstanding shares lower maybe one percent um that said all that said is in the short term we're focusing on debt repayment and um and you will see us this year paying paying down a lot of debt and getting our leverage ratios down to about three percent three x on the gross leverage for uh before on at the year end um as far as mna we'll continue to to do mna like i said i think for us better is bolton and tuck in and if you look at our cash profile we should be able to comfortably do one maybe two mnas a year okay okay of course we've got the catalyst acquisition still pending that's right so um that should uh hopefully hopefully close in the third quarter we're quite excited about that business um has great positive market positioning with everything going on in the world. I think this technology has a lot of future and we're quite excited about it. You managed to negotiate down the price as well, which is... We did. I mean, the business just wasn't worth what we thought last year, given where the market is. So we're able to renegotiate and we're just waiting to close it.

It's always the case. Sometimes you buy a company and you realize it's not quite worth what you thought it was worth. You don't get the little price, so that's actually well done. I think that covers it. I'm not going to touch on tariffs. I'm going to spend a little time talking about tariffs as possible. So, Mike, I think we'll draw a line there unless there's any last questions from the audience.

We're around today, so I'm sure there'll be questions. I'm sure there'll be any closing remarks, Mike. No, thank you once again. Thank you for coming today. We're really excited about Honeywell, both businesses, and we have some exciting news at the respective investor days coming up and both companies have a really good setup and I think are entering the second half from position of strength.

Thanks, Mike, and good luck with the separation. I appreciate it.