Honeywell International Inc Q4 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Julian Mitchell - Barclays - Analyst : Congrats on getting the strategic review completed, and thanks, Greg, for all the help and wish you well. Maybe just a first question around the separation news. If you could give us any help around the stranded and stand up costs that might be needed for Aerospace and Automation initially out of the gate. And also if you could give us any help on the free cash flow conversion or margin profile of the pieces. We can see the segment margin club, but wondered if there was anything on the free cash flow differences? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies Sure. So maybe I'll start with the free cash flow. So Aerospace should should be around 100% free cash flow conversion that the business should be operating at that level. And for our Automation businesses, that free cash flow is also expected to be at around 100% free cash flow conversion. So that's what we're aiming for as far as going to this year and then next year.

Question: Julian Mitchell - Barclays - Analyst : And then just a second question would be around the operating segment margin guidance. It's flattish this year. I think it was down slightly, 20 bps underlying in 2024 I wondered if that had made you think about maybe doing a more aggressive repositioning cost out program in 2025? And if not, kind of why? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies Right, Julian. So I would say a couple of things. First of all, I think what we saw in the fourth quarter and the second half, we're quite encouraged by the margin projections and what we expect to see over the next 24 months, if I look at repositioning costs, we're expecting to add about $100 million of repositioning costs this year, year-over-year, which will help fund margin expansion. But the bigger point here is really, if you look at our segments, Three segments with exceptional Aerospace will expand segment margins this year, which is quite encouraging and acquisitions are helping with that, especially in the second half. With respect to Aerospace, we are getting a lot of leverage from volume and that's helping us to expand margins. But in the short term, meaning 2025 the thing that puts Arrow on the back foot as far as margin expansion is really the case acquisition. In the case acquisition from a margin standpoint is dilutive. And this is the first year of acquisition, and we had a lot of integration costs that we have to absorb and move out. So really, it's a story of aero not expanding margins, but really staying flat on core and then case pressuring and that all other 3 segments will expand margins.

Question: Scott Davis - Melius Research LLC - Analyst : There's a lot of puts and takes here. But the first question just to clean up. What are you thinking timing to name the management teams of the pieces? And will there be an external search for Aerospace? Or will you build that internally?

Question: Scott Davis - Melius Research LLC - Analyst : Okay. All right. I'm just looking at Slide 16. So you've got $0.52 of below-the-line items and you've got $0.33 of profit contribution from M&A that is -- and I think your comment was most of that $0.52 is actually higher interest expense. Am I -- a, did I hear that right? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies I can break it down for you. So if you look at $0.33 of it is interest expense, which is predominantly driven by the M&A interest expense. We have $0.10 of incremental repositioning and then we have a couple of other items. One item which is really weighing on us in the first quarter is the reduced pension income, which relates to a curtailment of a pension plan in Europe that we communicated last year. And then we have a couple -- about $0.04 of corporate costs that we're working our way through. So that's the $0.52.

Question: Steve Tusa - JPMorgan - Analyst : Congrats, echoing Julian's congrats to you all. So I'm just doing the math on cash. I mean, this year, I think you have like $8.50 a share in free cash as per your guidance, I believe. And that's 83% conversion. Can you just help me bridge to the 100% you just talked about for Automation and Aerospace? And then I'm just curious, which one of those is going to be the RemainCo?

Question: Steve Tusa - JPMorgan - Analyst : Got it. And then what happens to these like below-the-line items like pension income? Does that kind of stay with whatever the RemainCo is and any of those other like environmental liability costs, et cetera, et cetera? Like what happens particularly to pension income? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies So we were working our way through it. It's really too early to comment through it, but we obviously have advisers and working for those particularities and we'll communicate that as we go through the process and ready to share this news with you.

Question: Sheila Kahyaoglu - Jefferies - Analyst : Congrats, Greg. Vimal, Mike, whoever wants to take this, but 2 questions on Aero. First, I guess, if you could provide some end market color, particularly on the aftermarket mid-teens aftermarket growth in 2024. Some of your peers have called out a deceleration to high single digits to low double digits in '25. How are you thinking about your OE versus aftermarket assumptions for commercial aero in'25? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies Sure. So Sheila, I would say, as you know, the hours have stabilized. And from an aftermarket standpoint, just expect similar profile as last year. I believe that it's going to be decelerating just because the hours stabilizing the supply chain is catching up. As far as OE mix (inaudible) aftermarket mix, we have -- if we look at our backlog and especially if you look at our positive backlog, we have a much higher positive backlog in OE. So we expect -- continue to to essentially expand on our OE and installed base growth. So I would expect on a year basis, the OE to grow aftermarket. So I think not very different in our view.

Question: Nigel Coe - Wolfe Research, LLC - Analyst : Just wanted to have another crack at the margin question. So the 10 basis points at the midpoint expansion, so it looks like 100 basis points of M&A dilution at Aerospace and then maybe, I think, 80, 90 basis points of expansion elsewhere in Automation. I just want to make sure that math is correct. And maybe just provide some just overall kind of quality kind of discussion on which segments do you see above and below that bar? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies So I would say this, your math is directionally correct. And a lot of it will depend on just how our products -- short-cycle products grow this year. Right now, we have a lot of project mix, but we also have the acquisitions coming in and helping expand margins in the second half. So we can follow up on that with you and give you more particularly on that. But I would say your math is directionally correct.

Question: Chris Snyder - Morgan Stanley & Co. LLC - Analyst : Maybe Vimal, just kind of stepping back on the separation. Clearly, this is something that you've spent a lot of time thinking about over the last year. Is the primary driver of the decision to view that a separation will unlock some of the parks value? Or do you believe the businesses will perform better as standalone entities rather than within the Honeywell conglomerate?

Question: Chris Snyder - Morgan Stanley & Co. LLC - Analyst : And then maybe just kind of following up on that better growth. We saw a pretty nice positive rate of change on some of the short cycle end markets. that have weighed on the company the last couple of years, specifically industrial automation and building automation turning nicely positive in Q4. I guess is there anything specific to kind of call out on that pickup in growth that you guys are seeing? I don't know if there's any maybe tariff prebuy in those numbers because the guy does call for both of the (inaudible) both building automation and industrial automation to have worse growth in 25 than what we just saw in the Q4 exit rate. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, HON.OQ - Q4 2024 Honeywell International Inc Earnings Call Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies That's right. So we are quite encouraged by the fourth quarter, both on the order side and on revenue. The team delivered really outstanding results. Now going into the guide for this year. As I come in, I really want to give the guide that that is, I would say, aligned with what we see and not really betting on end markets in the industrial products improving. And I think that's prudent to do given with everything that's going on just like you said yourself, we don't know exactly whether it's prebuy or is the trend, et cetera. So that's the one point of the guide and deceleration in the first quarter specifically. Also in the first quarter, we are dealing with fewer days versus the fourth quarter, which it has impact for us in our short cycle product sales. And then there's a little bit of lumpiness in Aerospace, especially in defense and space as we exit fourth quarter and go into the first quarter. So I think the guide is prudent, and we obviously are encouraged by what we're seeing. But I think for the first quarter, we need to be careful.

Question: Joe Ritchie - Goldman Sachs & Company, Inc. - Analyst : Greg, thanks for all the help. I try not to miss us too much. The first question, and look, I know you guys have a lot going on. So, when you thought about breaking up the company into these 3 entities, how much thought did you give to potentially maybe even breaking things down further because you can make an argument that the Automation business could be separate businesses as well? I'm just curious like the thought process behind that.

Question: Joe Ritchie - Goldman Sachs & Company, Inc. - Analyst : Got it. Well, that's helpful. Yes, I look forward to the longer version as well. But my quick question on the fundamentals Look, I know that you guys had a tough comp in ESS from a margin standpoint this past quarter. But I'm trying to just maybe get a little bit more understanding on what drove the margins down this quarter? And fully recognize that there is the refrigerant transition. And so I'm guessing it had something to do with that. But just any color on what happened this quarter on ESS margins. Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies

Question: Joe Ritchie - Goldman Sachs & Company, Inc. - Analyst : Yes, just year-over-year was down and it was a little bit below the performance was a little bit below what we were expecting for the quarter. So I'm just trying to understand like what the delta was? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies Yes. So the first one is really the (inaudible) in our ESS business. That's a big driver. And that will actually reverse itself in the second half. Just this project, as you know, tend to be lumpy and when they happen, they're quite, I would say, material. So that's the biggest driver. And then other than that, like we talked about, there's a little bit of deceleration going on. And we just still don't have the confidence in our Industrial Products recovery business, which is short cycle, and we'll continue to monitor it. And when it happens, it's going to be will be just massively accretive, I would say, to the performance. And then from the below the line standpoint, there are a couple of things happening. Tax rate, even though for the year is 20% in the first quarter is is a pressure of us about $0.13. And then like I talked about, we have a little bit of pressure from pension and curtailment, that's about $0.09. And those are the big drivers for for the reason why you see the EPS the way you do in the first quarter?

Question: Andy Kaplowitz - Citi - Analyst : Greg, thanks for all your help. So just focusing on price versus cost. You mentioned prices normalizing in '25. And it seems like you mentioned cost inflation a lot really at all of your segments when describing the margin impact in Q4, maybe except for building automation. So could you give us a little more color to what exactly happened is I don't I don't think material costs spike in Q4. How are you thinking about price versus cost in '25, especially considering tariffs may impact the business? Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies Sure. So I would say from a -- we had a good year on price last year. Let's just start with that. And what I see for this year and what we're guiding on the enterprise level will be above 2% on price. Now the price strategy for us will differ depending on what's going on in each of the businesses. What I see this year and what we've been working for the last 12 months is really on having more optionality and more levers on our cost side. and that's we'll be in bulking in additional price. So I think price cost will be positive overall. But unlike maybe last few years, this year, we just have much more opportunity to work on on material productivity, direct material productivity and the cost side as well. So we'll be balanced on price, but it will be will be above 2% for the year.

Question: Andy Kaplowitz - Citi - Analyst : Helpful guys. And then Vimal, maybe just a little more color how you're thinking about revenue growth by geography in '25. I know you mentioned some headwinds in Europe and China. Should China still be a growth market for you in '25? And you've talked in the past about during growth tailwinds in regions such as Middle East, India. So what are you seeing overall?

Question: Deane Dray - RBC Capital Markets Wealth Management - Analyst : Mike, congratulations. I wanted to just revisit the credit ratings and leverage targets for Automation you're saying look for strong investment-grade rate and just kind of tack on a leverage range you'd expect? And then just clarify on the below investment grade for Advanced Materials. That's not surprising, but just kind of frame for us what you're expecting there. Mike Stepniak - Honeywell International Inc - Vice President and Chief Financial Officer, Honeywell Aerospace Technologies Sure. So let me first answer investment area. It will be very high below the investment grade level. So that's kind of towards where we're going towards. And honest, I cannot comment more right now as far as the remaining 2 entities, we're going through it. But given where the business is today, they will be investment grade and we'll have a competitive and compelling equity story. So I can leave it at this, at this stage.