Honeywell International Inc (HON) September 15, 2026 Conference Transcript

I'm just going to read these disclosures. Good afternoon, everyone. Just quick disclosures. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com slash research disclosures. If you have any questions, please reach out to your Morgan Stanley representative. So this morning, I'm happy to introduce Vimal Kapoor, Chairman and CEO of Honeywell Technologies, and Mike Stepniak, CFO. And Vimal is going to kick it off with some opening remarks.

Thank you very much. and good to be back in Laguna. You know, I would say we are 75 days as a new company. You know, it looks like a 100-year-old company, but we are definitely reinvented ourselves with the changes of completed spin of aerospace and advanced materials. I'm not going to belabor that. I think everybody's aware of the story. I think where we are focused on is, as a new company, how we execute on the commitment we made on Investor Day, On our very simple investment thesis, we are a pure play automation coming out of the gate, playing into three end markets, building, process, and industrial. And building and mining install base is our business model. We live with that every day. We are accelerating growth of our install base by moving towards verticals which are growing at a higher rate and mining install base using much more AI-based tools so that we can get more value out of it. The good news is our strategy execution is facing at a rate better than we had expected. The Q3 start for the first two months have been good or very good, depending on how you want to say it, so we have good momentum. We expect to start the first quarter at the upper end of 4 to 6, which is a great place to start, and have similar momentum for Q4, which will make a good setup for 2027. So where we sit today, we are executing the strategy. The momentum is good, and we think we have a good setup for imminent two quarters ahead. We want to have a good start and then, you know, give a good setup for 2027 ahead for us. So look forward to the discussion and drill into any direction you want to go into.

Yeah, that's great. Thank you. So talk about the portfolio transformation and a little bit what's different about the company now versus a year ago. What do you think the market still doesn't fully appreciate about the new company?

I mean, it's fair to say that, first of all, we are a newer company. You know, portfolio change has been substantial. We separated three businesses apart from the spin, and we acquired six businesses. So I think just appreciating our portfolio, it requires work. I'm not saying it's good or bad. It's just being a newness. But fundamentally, we as a company need to prove we can grow at a high rate, which organic growth rate was not a feature of Honeywell. We did a great job of earning growth through margin expansion, which we haven't forgotten. We still know how to do that. But adding to that feature organic growth and delivering that near term is the best way to prove it. And we feel confident that next few quarters continue to be upper end of four to six, more towards six. we establish credibility that we can grow organically through the strategy we have put in place. So that fundamentally is different for us too, but also market will appreciate that as we have a couple of quarters under our belt in which we prove those numbers.

Historically, as you said, you guys have struggled to kind of hit the higher end of that range. Can you go a little more into detail on what structurally has changed about the business to drive that 4% to 6% growth?

Two things have changed. I would say the first is the portfolio itself. I mean, if you have the right portfolio, that helps you to grow at a higher rate, as we have seen in some of the businesses. So changes in the portfolio we made was intentional to a certain degree. So that certainly is different. And second is making growth as our first priority. That's our goal number one. It means how we think about growth enablers, which to me is fundamentally more and more pivot towards in our mix of our business towards high-growth verticals. and to mine our install base, how we are structurally doing more and more penetration, that becomes our priority, that we are thinking every day that are we mixing up our business towards high-growth verticals? Are we penetrating more towards services and software? And to do both these, we need new products. And that becoming our primary focus area is different from what I did in the past. The portfolio is different. Strategy execution focus is different, which gives us the confidence that we are going to deliver what we committed, you know, $12 earning by 2029. And I should have said it earlier. Where we sit today, Mike said it during Investor Day. That to us is more of a floor. We are here to beat that floor and, you know, perform at a better rate over a period of time.

That's great. On the high-growth verticals, how much of that 4% to 6% growth is coming from the portfolio mix shifting towards those verticals versus improving execution within the other businesses?

So today, you know, let's kind of, for the benefit of everybody, we defined in each of our segments higher growth markets. So in buildings, it's data centers, it's hospitals, and it's hospitality. And in case of process, it is LNG and life sciences and so on. So we identified eight markets. They constitute 20% of our mix today. but these markets in 2026 are growing at a rate of net 15%. Some of these markets are well known, like LNG market is growing at a high rate in process. Data center is growing at a high rate. Semiconductor is one of the identified high growth vertical in industrial. So the answer to your question is our rubric is today it's 80-20. 80% of the business come from more mature markets which are growing at a GDP rate. So they should grow at 3% to 4% rate, depending upon the geography and the market. And then the 20% grows at a 15% rate, and that's a math. So if 80% grows at 3% and 20% grow at 15%, we are going to hit that 6% mark. We are conscious of the fact that it's better if that 20% becomes 25% or even higher, and that's one of the commitments we made during Investor Day. We want the high-growth verticals to be 25% of our mix. We expect to finish this year from 20 to 21, so we are heading in the right direction. Hopefully next year we go from 21 to 22. So we are just mixing it up. And more mixing up we do, lesser growth now we need from this higher growth even versus 15%. So I think we are headed in the right direction. And we don't want to forget the fact that the base business also has to grow for us to deliver. It's not and, it's not or, it's and. So base business has to grow well. We have to do good customer service. We have to innovate new products. That's how the base business grows. And a high-growth vertical, you basically build offering in which we can compete and then differentiate against your competition.

And then the new strategy also requires monetizing the install base through services, software, and new products. How under-monetized is that install base today, and where is the largest dollar opportunity you see?

So today, 40% of our revenue comes from services and software. year. We want that to be 45%. Why? First, it's higher margin. And second, it's more durable. You can predictably say that revenue is going to be in your revenue stream next year given the nature of the long-term contracts we have there. So to your question, we obviously have a variety of businesses which are less penetrated or more penetrated. So if it's less penetrated, the answer is obviously get penetrated more. For example, in our process automation and technology business, the process technology side of the house is not penetrated well. They licensed technology to build energy infrastructure and did not sell service contracts. There's no real logic behind it. This was not their focus because the business model was not build and mine install base. Nobody focused on that. Now we are. So there the opportunity is penetrate more. But if you look at building automation business, which has good penetration on their project side of the business, we are doing more upsell, cross-sell, right? It means we have to build more offerings. So you need to find your opportunities, both in terms of penetrate more or upsell more, depending on where you sit. But both strategies are working for us. One big change we made is we built an enterprise-level system for our install base last year. Now, it should look very table stakes to say what's the big deal about it. I mean, you know, don't you know where your install base is? Of course we knew. We always knew about it. But a company of our scale, if we have about 15 businesses, everybody have their install base in their own system. So we may have 10 plus systems or 15 systems where a system of record exists. So we cannot have a common metric on penetration. We cannot have what asset is due for out of warranty. There's no common standard. So the way all companies have an ERP system or a CRM system, we build what's called EAM, Enterprise Asset Management System. Our install base is, data is there. So that basically allows us to ask the question which you're asking, where we have penetrated less, what can we do about it? And if you have penetrated more, that's good news. What can we upsell on top of that and how we build new offerings? So a combination of those will allow us to get towards from 40 to 45. I think we feel highly confident about And this year, our offerings specifically on the software side, they are trending very nicely.

Appreciate that. Pivoting to data center and AI, obviously everyone in industrials is talking about AI and data center. You guys talk about physical AI with Forge. What can Honeywell do with AI that a horizontal software provider cannot, and where do you expect AI to show up first in the P&L?

So AI is already maybe laid a part of the question. Our Forge platform revenue this year will be about a billion dollars. That's the billion-dollar ARR. We expect that to grow at 15%. So it's already in our P&L, and it's about 5% of our revenue. It will grow more. To your question, what is different about us and how we think about it? We think about this being a capability by which we serve our customer through our services and software strategy. Again, as a reminder, our strategy is build and mine install base. Now, when you go to the mine side of it, monetized side of it, you need to have offering which are more contemporary. Customers today want to use a genetic system as part of their operation. They want to have agents. And if we do not offer them agents on top of our system, we are not contemporary. So we have to think about it in context of the market need versus we are trying to catch up on something. Now what's different is you can say why a generic tech company would not be able to do this? Why you need Honeywell to do this are a physical AI. Physical AI has two unique features compared to, say, traditional AI. The first is the data in our domain is not in public domain. Data is in our control system. So you can't go to internet and get the data and train it. There's nothing to train. So if we do not become a capable company, we are ourselves becoming as a kind of a deterrent to scale AI. So that's factor one. The factor two is large language models can do a great job to contextualize data, but they do not have domain knowledge to make sense out of that. So I can have a large language model in which you can put in real-time data. We are sitting in a hotel here. So how is the chiller performing in this hotel? What's the ERP data telling us in terms of the maintenance, or some picture. Yeah, you can give it all to an LLM, but LLM doesn't understand what a chiller does. So that's the domain knowledge which companies like us possess in the segments we operate. So building a physical AI requires that last mile expertise to get that intelligence out of the data. So the combination of the friction of the data, not being in public domain, and domain knowledge, really becomes a value proposition for us. So companies like us now, we partner with cloud providers and AI model providers to take their capability to build an offering which our customers can use so that it's an economic value for them and they can make money out of it versus they are shopping around from other sites. So it's an important part of our proposition. It plays right into the heart of our business model, and therefore we believe that it's something which is critical for us to be successful as part of our business.

And on the data center side, they've become an increasingly important growth vertical. How large is Honeywell's addressable content per data center today, and how much can that expand beyond the traditional building controls fire, et cetera?

Yeah, so I would say our journey in data center has been, you know, interesting. You know, the automation content in a data center in the data hall is not very large. It's about 1.5% to 2% of the capital. So we are a little over 5% of building automation business come from data centers, right, today. And it's growing at a rate of, I would say, north of 20%, even higher at this point of time. But the base is also small. I'll acknowledge that. What's changing, interestingly, for us is that data centers now want to have aspiration to build their own power generation, which has started very recently because of our interconnection problems and everything else. Because the power generation is becoming an integral part of data center, our entitlement has grown because now process automation business also have room to play in the power island, apart from the data hall where building automation business was playing. So if that thesis plays out, our growth rate would further accelerate because now this is a new driver in the market, and we already have active engagement with few data center builders who want both, which improves our value proposition because there are not many companies who do both the core data center and the power generation. There are one or two, but there are very few people. So we see that as an extra enabler. Other growth enabler we see in data center is we being a global company. We absolutely are benefiting from data centers becoming global. So we see a lot of activity in data center built out in Europe. We see early days of a lot of data center built out in Korea, in India. The good news is Honeywell has a deep penetration in each of these locations. So as these will scale, we'll also benefit from that. So there's a geographic footprint expansion momentum in our favor and scope expansion momentum in our favor. So we do expect that, even though it's a smaller portion of our revenue, but certainly it's net helpful to us in the market.

Great. And then pivoting to another high-growth vertical, LNG, that remains one of the more differentiated parts of the Honeywell story. And on the most recent earnings call, you said the proprietary LNG equipment is sold out for the next three years, essentially. What is essentially driving your strength and right to win in that market, and what does that imply for growth in the out years of 28, 29?

So LNG growth is coming on the strength of two acquisitions we made over the last two years. We bought an asset from Air Products for the core technology, which converts gas to liquid. It's a heat exchanger, so think of it as a large refrigerator. You put gas on this side, and liquid comes on the other side, and that's the core technology which we possess. And we also acquired a business called Sundine, which gives us special compressors, which are acquired in LNG plant. So a combination of those is giving us sort of growth. We are expanding our capacity. So when you mentioned that comment, it was in the context that when we acquired a business, it has a certain capacity. So if we took that capacity, we kind of are booked for till 29, 28, 29. We are expanding that capacity substantially so that we can create more opportunity to benefit from the growth which is coming ahead of us, and that's mostly already deployed, so we can now serve a much bigger market because demand is very strong. Interestingly, the demand for LNG was already secular ahead of Iran war. What Iran war did was an incremental demand signal where people want to diversify their sources because there's a risk perception now from certain supply base and people don't want to reply on one supplier. They want to have resiliency, which is creating even more demand for LNG compared to what was forecasted earlier. So we think the cycle will remain strong at least for the next three to four years. What you can see ahead of you, I can't see beyond 2030, so it's hard to say what will happen beyond that time. But fundamentally, as the word energy mix is swimming from coal to the gas, that's a fundamental driver, and we see strong demand in the business, and our acquisitions are playing out to our strength there.

That's great. So at the most recent Invest today, you highlighted a new framework of 4% to 6% organic growth and also a margin expansion of 60 basis points annually. While 2026 is going to benefit from portfolio actions and stranded cost reductions and a little bit of that in 2027, once those are out of the way, what are they going to be the durable drivers of that organic margin expansion?

Sure. So there are a few, and we talked about it in Investor Day, but obviously price is a big one. Then productivity. Everything that Vim will talk about as far as mixing the portfolio to higher growth verticals, more focus on services and software, ARR, that also, I would say, will allow us to drive margin expansion. And finally, it's just good old productivity. And if you think about the accelerator, what Honeywell deploys as far as productivity, that's really the big driver of our cost-out and margin expansion as we grow at the higher levels.

Great. Shifting to more near-term dynamics, you saw double-digit order growth in Q2. especially across the short cycle segments and backlog up almost double digits as well. How much of that strength reflects improving underlying markets versus Honeywell-specific execution and share gains?

I would say it's both. I think markets remain very resilient across the board. As I mentioned, we had a strong booking quarter and quarter two, but first two months of quarter three has also gone very well. so the momentum continues both in short cycle but also in the long cycle demand and our backlog continues to grow so we are benefiting from strengths in the markets we play but also continue to keep our position or gain share in some pockets which is net helping us so we have been gaining share in building automation for multiple quarters that momentum continues which is helpful so a little self-help here We are also seeing trend lines now of industrial automation business normalizing and stabilizing. We had share loss problem in that in 2025, an earlier period, but that's reversing. So that's definitely helping net because we are no more losing share but stabilizing ourselves. And the process market, as we talked, is extremely in upcycle at this point. Our backlog in process automation technology is up 25%. That's historic high, which positions us well for second half of 26, but also for 2027. So markets being strong is net positive and self-help to a certain degree where we can differentiate ourselves and at least keep share or gain share in some pockets is also providing us tailwinds.

And Q2, you also highlighted software, ARR being up mid-teens. What is driving acceleration there and how large can software become relative to the overall company over the next few years?

So as I mentioned, our software ARR by the end of 2016 will be about $1 billion. It's pure play software ARR because I think earlier we mentioned big numbers, but they are part of our other revenue stream, so I think it's better to keep it simple on AI-driven offering, which is about $1 billion. I think driver for that is new offering as we launch and adoption rate of those offerings. The market adoption rate on AI is variable. Few customers want to do faster, few not. It's not in our control. What's in our control is are we innovating at a pace and speed at which we are differentiated in the market so that when market wants to adopt it, we are number one in the priority because we are the most advanced. So I do see that the primary driver is continue to build new applications which customers are willing to pay for. and our aspiration is to keep growing that at 15%. It will remain a smaller portion of Honeywell Technologies revenue. However, this revenue pulls through the rest of our offering because this is a differentiating feature which allows us to grow our core at a higher rate. And we don't want to forget that. This cannot be looked in isolation of the rest of the portfolio. We have to look at it all together, and therefore this innovation is critical for our overall growth algorithm.

Can you detail a little bit how it does end up pulling through the rest of the portfolio?

I mean, look at, take an example, we have seen a lot of success of, you know, building automation business growing at high single for almost eight quarters. I mean, software is, you know, in less than 5% even in building automation. But when you create an offering which helps customers save time because they are able to save time and get productivity, they want to buy your product because they are getting net saving and productivity in their business. So we have launched offering, for example, we are a leader in fire detection system. Our fire detection system can be configured remotely from an office location. They can be tested. So why should anybody care about it? Because our channel partners don't have to go on a road and run a truck to do a basic work, So they get a lot of productivity, but they get that productivity on top of Honeywell's system. So they have to buy a Honeywell product to use this capability. So it's intertwined. So even though this may be a smaller portion of the revenue, but it's pulling through less stress of the revenue. And that's really the whole intertwined model. We are not looking at this software strategy in isolation to our business. Software strategy is part of our business. It is to compound the growth of our business and not try to have an independent strategy with an independent set of customers, we are looking at it as a part of how it drives to accelerate growth of our core. And that's why we see this as not only driving the growth on the base and, you know, we do believe we should, in the period we have said, can we hit a 50% growth rate? I think so. I must mention I'm not aware of many industrial companies, which is a billion-dollar ARR. and we'll continue to grow it and keep it, make it higher every year.

And is that kind of growth flywheel from the software expected, is that something that's baked into the 4% to 6% organic or is that more like a long-term cycle that needs to happen?

To me, the adoption rate growth will become a tailwind for us. I mean, if you see our growth algorithm, we have said we have 2% of bridge or contingency and there's a lot of dialogue that why we need it and nobody else earlier shown because we're instrumenting our business for a higher growth rate. Things like these have potential to grow at a higher rate. But there's also going to be a risk in a business of our scale. We're a business with multiple end markets and global scale. So we only felt it's prudent to have sufficient contingency so that we don't have to come and explain why can't we meet a year to our earlier discussion. we want to be a highly reliable organic growth delivery. And if we instrument our business at a higher rate, the probability to achieve is much greater because now we are not living with the short-term issues in the businesses or in the geographies.

You mentioned building automation and the improvement that we've seen there. It's now persisted, as you mentioned, for roughly eight quarters now. What specifically changed in the operating model there that took the business from low single digits just a few years ago to now 8% organic last year, starting this year roughly the same level here to date?

Fundamentally, the building automation has been following the Honeywell strategy for three years, mixing up to the high-growth verticals. They have a very good position in the three high-growth verticals I mentioned, data center, hospitality, and health care, so that's certainly helping them. Mining the install base, certainly doing a great job on aftermarket services and through software. And they're also keeping the share in the base through new products. So that's our strategy. They're executing it every day. We are executing on other parts of Honeywell, and that's what we talked in Investor Day that we may be lagging. But one benefit of being a pure play is we only have one strategy for the entire company. We don't have segment A strategy and segment B strategy. It's universal. The variation is end market drivers a little bit and things of that nature. And building automation is the longest in the journey and more consistent, and they are delivering results. And you will see the same thing in other parts of Honeywell. We're already seeing, as I mentioned, results in industrial automation, reversing its share loss, becoming more stable. So similar performance, you know, we're going to repeat across the board.

Great. Shifting to industrial automation, you saw orders grow 11% in Q2, excluding businesses that were divested. strength kind of broad internationally. Does this suggest that the short-cycle industrial environment has turned more positive than you expected entering the year? And it sounds like it's continuing through the quarter.

Yeah, I mean, I'll ask Mike to also add in. I mean, we do see strength in short-cycle, both in industrial and building automation. You know, Q2 was strong. First two months of Q3 has trended very, very positively. So we haven't seen any change. What has helped us is incrementally in industrial automation is that the share loss we had in pockets, that is slowly stopping and it's becoming more stabilized. So that's turning a business which was not growing to shrinking to modest growth. And we think we are going to keep this trend for the rest of the year and continue to get better in 2027. Mike, anything to add?

I'll just add that I think the team is executing extremely well, industrial automation. Like Ben will say, just generally across the board, Our short-cycle businesses' orders are high single-digit for the first two-and-a-half months of the quarter. Long cycle has been booked to bill, 1.1, 1.2 for a while, so that's helping. Specifically on Pete's business, they've been delivering quite well, which means they're gaining share. They're taking the stranded cost out ahead of time, so they should have a really strong second half.

Great. And then on PA&T, you had sales down. Low single digits, Q1, but orders grew, Book DeVille above 1, 1.2. You're expecting a sharp growth inflection in the second half. What gives you confidence in the order strength converting to revenue on that timetable?

I believe we talked about it during Investor Day also in our earnings call. It's just a backlog conversion. These are long-cycle businesses. Our backlog is up 25%. We have consistently said in Investor Day and then during our earnings call in July, and I'll repeat it again, we will grow high single-digit in process automation technology. We've said it repeatedly. We are a couple of days away. We are saying again we are going to do it, and numbers will speak itself. We're going to do second half now, quarter to quarter. There may be small differences, but if you say next six months, we are highly confident that we'll deliver high single-digit growth in P&T.

Just we have so much of a backlog.

There's nothing secret behind it. It's just those projects are going to get delivered. Our short cycle within process automation is also shaping up quite well. There are some short cycle businesses. Overall performance will be very robust for the business.

And then within that segment, you also closed the Johnson-Matthew Catalyst acquisition. What does that business add strategically that Honeywell couldn't replicate organically?

So it's a business which brings in capabilities to our core process technology business, which we did not possess. Essentially, we are a believer that the world is going to go through change in energy mix over a period of time. The demand of energy is increasing, which we all know, for different drivers. But energy mix is also changing. Right now, the world is going through change of energy mix from coal to gas. That's why the growth of LNG is a big driver. But we are also a believer the world will move from traditional fuel like diesel, gasoline, jet fuel to sustainable fuel or biofuels. That cycle hasn't started yet, but that cycle will eventually take over at the right time. The projections are that will be 5% of the energy mix net. Right now it's less than 1%. Johnson-Methy business adds our capability in incremental to what we had. We had a very good position on sustainable aviation fuel, but this adds capability to inner spaces like hydrogen and methanol. So we have a variety of renewable fuel options for our customers. So think about an energy company and as they think about their future strategy, nobody puts a bet on one product to say, I'm going to make only product A. They want to have options to say, I want to consider a mix of A and B or A and C. We provide capability to build all potential options, and that's why this acquisition just adds that capability into our mix. It's a long-term play. We have to think about in-process automation technology cycle, five-year or ten-year cycle, and these cycles play out on that term. So we believe we are extremely well positioned when the cycle pivots towards renewable fuels in the future.

Got it. And then shifting to margins, inflation has remained persistent in electronics, memory, other commodities that we all can see. How would you characterize the price-cost environment for you all today and your ability to keep that neutral to positive going forward?

I would say it's consistent to what we said before. We're being neutral to slightly positive on price costs. We're managing it actively. We're being mindful of not destroying the demand. And in the second half, price for us should be around 4%, which just helps us offset the inflation. And we've been saying that for a while. We're highly convicted that that's kind of what's required right now as far as pricing, and that's been playing out, I would say, true to us in our end markets and with our customers. We're obviously working actively with the customers to make sure we manage the overall equation, but pricing is about 4% right now.

I mean, we talked about it during several of our calls that we do see industrial inflation staying at a high level. Even in Investor Day, in our walk, we talked about 3% price, and I think it was a bit of a surprise for a few people. And that trend persists because electronics cost is high, commodities cost is high, labor cost is high, and there's no real fundamental driver which changes it. I also don't want to create an impression that it's so easy to get price just because inflation gives people a call to say, oh, I'm going to raise price. It means you need to have a high rate of innovation. People want to buy your products, and your customer service levels have to be high. You deliver on time, your lead times are attractive, your customer service levels are at high standards. When you do those two well, you innovate well and your customer service levels are high, you are likely to get price to offset the cost in that scenario. If you don't do those two well, guess what? There's going to be a lot of resistance. And we have learned it hard way that we just need to run our business well, anticipating a high inflationary environment. We see this is occurring now. I have no signal, which makes me believe things will change in 27 if it will let you guys know. But things continue to look at this 3%-ish inflation, even 4% in some segments, and we just need to deal with it.

Since we're coming up on time, I just want to give you a kind of long-term question. Finally, if we sit here a year from now and say the first year of standalone Honeywell was successful, what will the company have accomplished? Wow, that's a good question.

I would say that we are meeting or beating our financial commitment is our high priority. We have set up a $12 earnings goal in 2029. So sitting in one year from now, everybody feels confident that that's a floor and we're going to beat it. I think that will be a great outcome. And supplementing that with the leading indicator of our strategy execution are progressing in the right direction. Our higher growth vertical mix is trending higher than what we committed. our software services mix is committing higher than we committed so our strategy execution is ramping up while our financial performance is at or above our target so I think that will be a great outcome and we get invited again on this slot, that will be a great outcome Great, well appreciate it Vimil appreciate it Mike, it was great talking to you all Thank you very much Thank you