Q2 2020 Honeywell International Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to Honeywell's second quarter earnings Conference call.
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Introduce your host for today's conference Mark Benchmark, Vice President and the other Investor Relations.
Thank you Lauren good morning, and welcome to Honeywell second quarter 2020, <unk> earnings conference call on the call with me today, our chairman and CEO dairy Saddam truck and senior Vice President and Chief Financial Officer, Greg Lewis.
Colin web cast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell Dot com forward Slash investor.
No doubt elements of this presentation contains forward looking statements that are based on our best view of the world and up our businesses as we see them today, there's elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light.
Otherwise noted the cost action plans described herein are not final and may be modified or even abandoned at any time.
No final decision will be taken with respect to such plans with a player satisfaction of any apple applicable requirements with respect to informing consulting or negotiating with employees or the representatives.
Identify the principal risks and uncertainties that may affect our performance at our annual report on form 10-K, and other actually see filings.
This morning, we will review our financial results for the second quarter of 2020.
And your views on the third quarter of 20 Twond.
As always we'll leave time for your questions out beyond.
With that I'll turn the call over to chairman and CEO dairy Saddam truck.
Thank you Mark and good morning, everyone. Let's begin on slide to the second quarter was one of the most challenging quarters Honeywell has ever price.
The widespread repercussions covert 19 pandemic and all price probably tell probably tell the impacted many of our businesses and end markets.
Our number of factors beyond our control. The current environment you are laser focused on the drivers of value that we can't control.
In the second quarter made numerous investments in newly emerging growth opportunities, we agree aggressively manage cost affect margins.
We generated very strong cash flow.
We delivered adjusted EPS of $1.26 cents in the quarter on sales that were down 18% organically consistent the greater than 15% organic sales decline we signaled in may.
Our phase one cost plants deliberate approximately $500 million so you're on a year benefits in the second quarter, we completed planning for phase two player.
These actions helped us protect margins.
Limiting our decremental margins in the quarter to only 33%.
In fact, we're actually able to expand segment margin in two or four segments.
Despite the challenging macro economic conditions, we generated $1.3 billion or pre cash flow driven by cost actions customer collections, resulting in adjusted free cash flow conversion of 140%.
We prudently deployed approximately $900 million with cash.
Nearly two dividends Capex investments you committed approximately $250 million incremental gross capital expenditures compared to our previous allocated budget for new projects to accelerate our investments and safety products integrated and other growth opportunities.
These are high return investments expected to generate triple digit all your ours.
Let's turn to slide three to discuss the work we've gone to visit our business given the current environment, what emerging customer needs.
I'm proud that quick mobilization by employees throughout the company to rapidly innovate and provide solutions for both urgent and long term customer needs to address the urgent need for Pete to eat your significantly growing our personal protective equipment business expanded face masks productions instead.
Typically art and 95 and equals a mass production, Arizona, Rhode Island, the United Kingdom, India, They usually been China in the UK, we create a new manufacturing line cables produce producing a significant amount of masks entering new house like Scott.
Which will assist the UK governments response to cope with Nike pandemic as well as servers the European served <unk> region.
In addition to our expansion.
States, India, and China capacity, we have added capacity you, we were part or strata manufacturing ups, a subsidiary of Abu Dhabi State funds, the buyback investment company to produce and 95 masks.
Yeah, and masks and other P. acne, there innovating to provide creative solutions for you areas of customer demand.
We recently announced or partnership with Sep to create a joke cloud based solution to improve building performance based on Honeywell forge the F.C.P. cloud platform.
Building owners often need to pull data from this spread sources that are not normalized making it extremely difficult to determine to treat efficiency and utilization of their portfolios.
Anyone porch and Sep cloud for real estate solution will streamline and combined operational and business data, enabling customers to bend much benefit from building performance optimization, including reduced carbon footprint and lower energy cost as well as improved tenet experience.
This would be especially useful as building.
Come back online in the midst of the coldest 19 pandemic economic crisis. It's building owners are expected to focus on key performance indicators tied to enhanced occupant safety and a reduced operating costs.
Also launch in integrated instead of healthy building solutions to help building owners improved to help them they're building environments.
Great more cleanly and safely comply social distancing policies and help reassure occupancy that it's safe to return to the workplace.
We are partnering up with pharmaceutical and biotech customers not at Clark healthcare packaging business to develop innovative packaging solutions for future covert 19 therapies and vaccines.
We have launched new bottles, and viles called backlog edge that enable ultra high moisture barrier bought the limitations of glass.
Also launched Honeywell thermal rebellion temperature monitoring solution, which can be rapidly deployed at the entry. Okay Factory Airport distribution Center stadium or other commercial buildings to quickly and efficiently identify weather personnel exhibit and celebrated temperature using advanced infrared imaging took.
Allergy artificial intelligence algorithms.
In aerospace, we are helping to provide a safer and healthier travel it spreads the ultra violent Cabot cleaning system. Honeywell you cabins system can treat an aircraft cabin less than 10 minutes were just a few dollars per flight for mid size to large airline fleets significantly reducing.
We certainly viruses in bacteria on cabin surfaces.
I'm very proud of the part we're playing to keep people safe and healthy by providing new solutions for urgent customer needs.
Remain committed to come to any honeywell's long legacy of innovation, you were continuing to invest in our future in good times and bat.
We also recently for new business units dedicated to advancing our position in growing industries for sustainable energy and unmanned aerial systems are you sustainable technology solutions business in PMT will develop and commercialize new technologies that will help need to growing demand for salute.
And did accelerate the path to a low carbon accounting.
This includes growth opportunities into plastic circular economy energy storage.
Yes de carbonization and renewable fuels in aerospace our new unmanned aerial systems business has continued to introduce new innovative products for this exciting market and recently conducted in flight testing of sensors that will guide Bourbon air mobility vehicles delaying.
<unk> pilot intervention.
These are challenging times for all your rapidly dressing or end market and customer needs through innovation and mobilization of resources across the organization.
Finally, I'd like to make a few comments about our commitment diversity and inclusion any quality.
Let me be clear will never tolerate right research at Honeywell fully embracing the principles of diversity inclusion any quality in treating all employees or the utmost respect.
Our requirements for working here. In addition, we're committed to the falling actions will continue to evolve our community relations programs and partnerships with key external organizations to promote diversity quality an opportunity for all.
Well and we will intensified our focus on the recruiting retention and development women veterans and minority groups and we will continue to rigorously enforce our cold <unk> business conduct which makes it explicit it there's zero tolerance specifically for ratios the script.
The nation.
You recognize the de steps are starting point not in and we're committed to continuing to make progress now let me turn it over to Greg on slide four to discuss our second quarter results in more detail as well as to provide our views on the third quarter.
Thank you Derisked and good morning, everyone.
We highlighted here may call. The second quarter presented significant challenges. However, we effectively managed with a strong operational execution that our stakeholders have come to expect of us.
For the second quarter sales declined by 18% organically as the effects of the pandemic spread across the globe.
Substantially lower sales volumes that are most challenged markets in aerospace and PMT drove 280 basis points, a second margin contraction, while we delivered strong sales and orders growth in both our warehouse automation and can be businesses.
Our phase one cost actions delivered approximately $500 million of year on year benefit in the quarter, which brought us to approximately $700 million of savings in the first half.
Skus that later on in <unk> and a presentation.
We delivered adjusted earnings per share of $1.26 down 40% year over here as we funded over $250 million of repositioning in the quarter to drive cost savings in 2020 and into 2021.
As we previewed in May repositioning was significantly higher than the second quarter of last year, driving a 19 cents headwind below the line.
Higher adjusted effective tax rate resulted in a six cents EPS headwind compared to last year, partially offset by four cents EPS benefit due to lower share count.
This quarter EPS as adjusted to exclude the favorable resolution of a foreign tax matter related to our spin off transaction in 2018, so on a GAAP basis, our second quarter earnings per share as the dollar 53.
Find a bridge of our E. Yes in the appendix of this presentation.
We generated $1.3 billion, a free cash flow driven by strong customer collections, despite a difficult operating environment and our adjusted free cash flow conversion was 140% up 40 points year over year.
In terms of capital deployment, we paid up $650 million and dividends, we also invested over $225 million and capital expenditures in the quarter up $56 million from the prior year.
Our capex in the second quarter included the first tranche as investments that we're making to produce and 95 mass to support the carota virus relief efforts.
Overall this was a very challenging quarter, but we continue to execute managing costs and our cash flow with a discipline and rigor you can expect everybody well.
Now, let's turn to slide five and we can discuss our segment results.
Starting with aerospace sales were down 27% kind of organic basis as the steep reduction in flight hours lowered commercial aftermarket demand had a slow down in original equipment build rates. In addition to the 737, Max impact and air transport impacted commercial OE more broadly.
Our air transport aftermarket business without 56% organically and our business aviation aftermarket business was down 50% organically in the quarter.
The declines in commercial aerospace were partially offset by continued demand for U.S. government programs, including the F 35, Efifteen, Neil Lyons space program, driving 7% organic growth in the defense and space business.
For the quarter, the defense and space backlog finished up double digits, giving us confidence, we'll continue to deliver growth in that business throughout the second half of the year.
Aerospace segment margins contracted 510 basis points, driven by lower commercial sales volumes and business mix, partially offset by cost actions to improve productivity.
And Honeywell building technology sales were down 17% organically, primarily driven by deferrals of product purchases and security Dolby management systems, and fire and softness in building solutions due to delays in the project energy businesses, some of which as a result of site access constraints due to shutdown, particularly in India.
In the Middle East.
Organic sales improve sequentially as the quarter progress for the short cycle products businesses.
H.P.T. segment margin expanded 50 basis points in the second quarter, driven by commercial excellence and cost actions to improve productivity, which offset the impact of lower sales volumes.
In performance materials, and technology sales were down 17% on an organic basis process solutions sales were down 13% organically driven by volume declines in products, including thermal solutions smart energy and feel there's for them.
And you will p. sales were down 25% organically driven by declines in gas processing, lower licensing and lower catalyst shipments due to weakness in the oil and gas end market.
As expected we saw new orders declined significantly in the second half I sit in the second quarter as cold in 19 in the oil price volatility led to lower bookings that hps and you'll Peter However, we had not seen a significant project cancellations to date.
Organic sales in advanced materials were down 18% driven by lower automotive refrigerant volumes due to automotive plant closures offsetting double digit growth in packaging composites and electronic materials.
Flooring product sales into the automotive end market improved sequentially by month throughout the quarter as automotive plant began to reopen.
PMT segment margins contracted 460 basis points in the second quarter, driven by the impact of lower sales volumes, partially offset by cost actions to improve productivity.
Finally, and safety and productivity solutions sales were up 1% organically driven by more than 20% growth and intelligrated and over 100% growth in the respiratory personal protective equipment space, particularly I, partially offset by weakness in sensing in I O T portable gas sensing and productivity products.
Orders in Sps were up approximately 90% in the second quarter led by record high bookings of $1.2 billion in Intelligrated.
300% year over year.
And over $650 million of bookings as personal protective.
Positioning Sps well for the second half of the year and into 2021.
SPS segment margin expanded 150 basis points in the quarter, driven by productivity, including cost actions net inflation and commercial excellence.
So overall, we finished the challenging quarter with significant top line impact from the told at 19 pandemic. However, we grew in several businesses, including defense Intelligrated and PPD and due to prudent cost management and commercial excellence, we were able to limit decremental margins at 33% overall and expand margins.
In HPC and Sps.
Now, let's turn to slide six to discuss our cost management actions in more detail.
We previously announced our phase one cost reduction efforts, which we rapidly started implementing in the first quarter.
This included curtailment of discretionary expenses cancellation of 2020 merit increases across the enterprise reduced executive and board pay reduced work schedules at a first phase of targeted permanent census reduction.
During the quarter, we completed preparation of the second phase of cost actions to expand permits as reductions.
We also began executing in June.
The result is that we reduced fixed cost by approximately $700 million year over year in the first half, which is pushing us toward the high end of our original phase one target range of $1.1 billion to $1.3 billion.
The phase two actions to deliver approximately $200 million of 2020 benefit. So the combination of phase one of phase two is expected to reduce costs by $1.4 billion to $1.6 billion in 24 [noise].
Our aggressive deployment of repositioning funds $250 million in the quarter and $325 million in the first half is serving us well [noise].
I do expect our fixed cost to be pressured sequentially in the third quarter as the permanent reductions begins to replace the benefits of the more temporary actions.
Now, let's turn to slide seven and discuss our balance sheet and liquidity.
We exited the first quarter in an incredibly strong position on the balance sheet and we took additional actions during the quarter to further bolster our financial flexibility.
The second quarter, we issued $3 billion and long term debt instruments with maturities in 2025, 2030, and 2050, replacing a portion of the term loan financing, which we reduced commensurately from $6 billion to $3 billion. So as to access we fully drew down.
On the remaining terminals so as to access the liquidity of 6 billion that we had highlighted previously.
As a result, we ended the quarter was $15.1 billion, a cash and short term investments on the balance sheet and a net debt to EBITDA ratio below one.
The $15 billion of cash and short term investments compared to only three and a half billion dollars, a commercial paper and $800 million of long term debt coming due within the next year.
As you recall, we substantially completed our 2020 share repurchase commitment in the first quarter and we were focused on liquidity preservation in the second fall.
We deployed $650 million dividends at approximately $225 million to capex in the quarter.
Well being prudent on Capex overall, we will continue to fund growth investments in the second half and we expect full year capex to be approximately $900 million, including the addition of growth capital Dairies mentioned earlier.
We are committed to holding share count approximately flat the second quarter for the remainder of the year at a minimum.
We are open to deploying capital to share repurchases and M&A investments in the second half of the year, it's attractive opportunities become available.
On the topic of M&A, we're pleased to welcome ethylene Nielsen Honeywell this quarter as our new senior Vice President corporate development and global head of M&A will be responsible for maintaining and building our robust pipeline of acquisition opportunities that are strategically well positioned to accelerate honeywell's growth we're very excited.
Okay.
Now, let's turn to slide eight to discuss our segment outlook for the quarter.
[noise]. The next few quarters, we'll continue to be unpredictable at our visibility has limits under the current circumstances. Accordingly, we are continuing the suspension of full year guidance until the economic environment stabilizes and we can once again give reliable and comprehensive forecasts.
We believe it's important that we provide a level of precision that is commensurate with our ability to forecast in the current environment and therefore, we will provide the same set of inputs that we provided today.
We are closely watching several key drivers of uncertainty in the third quarter.
First and foremost the severity of increasing coded infections and the potential for additional lockdowns, it's still very fluid and could have significant impacts on the macroeconomic environment.
The support provided by the fiscal stimulus programs deployed in the second quarter by governments globally will diminish in the third quarter and additional stimulus is uncertain, particularly in the U.S., which complicates the visibility to true economic stability.
The geopolitical environment and trade stability also continues to be a wildcard.
From an end market perspective, the dynamics in the air travel industry, including flight hours retirements and used serviceable materials as well as oil price volatility and capex and opex budgets, which affect our PMP business are not stable yet at this point.
With that said the impact on customer solvency and aging receivables remains a question mark as well and a potential future risks that we're monitoring.
Together these drivers are difficult to predict and set the stage for challenging quarters ahead.
So as best we see it starting with aerospace we expect global flight hours to remain far below three coated 19 levels, which will significantly impact our commercial aftermarket business.
We do expect air transport flight hours to begin recovering from second quarter lows the sequential improvements in commercial aftermarket sales due to flight hour improvement, maybe offset by the impact of used serviceable material and rotation of fleets.
Our commercial original equipment business will continue to be impacted by lower air transport OEM build rates and lower business jet demand due to the economic slowdown.
We are anticipating that government defense budgets will remain intact and we expect continued growth in defense and space in combination, we expect aerospace sales once again to be down more than 25% compared to the third quarter of 2019.
Well, we got the PMT a combination of volatility in oil prices, coupled with the uncertainty stemming from the global pandemic has continued to put pressure on our business is linked to oil and gas.
We've seen a continued reduction in customer capex and opex budgets as well as project delays and site access constraints, which are impacting the engineering and licensing business in your p. and orders and projects and automation solutions and Hps.
We also expect ongoing headwinds for our products businesses and process solutions, causing decline in field services and feel devices and thermal solutions.
As we've previously discussed we enter 2020 with a healthy backlog of global Mega projects, an H.P.S., which was still up over 8% year over year for the second quarter and we expect these projects to continue to convert over the next few quarters.
Access the customer sites will likely remain Inc.
[noise], especially as high growth regions, including India and Middle East.
And your P., we expect continued weakness in gas processing and lower catalyst shipments due to lower production and refining volumes.
Additionally, we anticipate new products will continue to push to the right and progress on current contracts may be delayed resulting in continued pressure on multi licensing and engineering [noise].
Within advanced materials, we expect that automotive refrigerant volumes will continue to recover as auto OEM plants increased production and capacity levels.
Specialty products, we expect strong demand for healthcare packaging and electronic materials.
Altogether, we expect PMT sales to be down more than 10% compared to the third quarter 2019, driven principally by the volatility in the oil and gas moments.
In HBT, while we do expect access to customer sites to improve in some regions in the third quarter. The current environment nonresidential product projects in multiple verticals have pause and customers are deferring nonessential spending impacting the timing of long cycle building solutions project and delaying purchases of security building.
Management firewalls.
We expect these dynamics to continue that third quarter, but to improve sequentially.
In addition, dairies mentioned, our new healthy building solution and our partnership with Sep for buildings, which we see as emerging growth opportunity.
We expect HBT sales to be down more than 10% compared to the third quarter 2018.
And finally in Sps the surgeon E commerce as governments in that social distancing requirements has strengthened demand.
Warehouse automation business and supports continued conversion of our robust intelligrated backlog.
Intelligrated orders were up over 300% in the quarter to $1.2 billion driven by major systems bookings and Intelligrated backlog remains very strong up 140% year over year to $2.1 billion. So we expect this this business performed well the remainder of the year.
We're also continuing to see record level demand for respiratory masks and other personal protective equipment.
PPD orders were up triple digits for the second consecutive quarter will strengthen the respiratory head five face clubs, including categories.
Our personal protective equipment backlog is now also a triple digits and our total Sps backlog is that an all time highs.
The macro conditions continue to put pressure on other Sps businesses, including sensing in I O T gas sensing and productivity products, where we expect to see declines in the third quarter.
Overall, we expect sales it Sps to grow single digits compared to the third quarter of 2019 less than 7% overall, a very good result.
So while there are signs of stabilization in the macro economy key end markets remain challenged and economic conditions fluid.
We have both opportunities and challenges in the portfolio, but on balance we expect sales for the company to be down again more than 15% versus the prior year.
We expect between 125, and a $175 million of additional repositioning charges in the third quarter to fund our cost programs.
This increase in repositioning and the second and third quarters will drive higher repositioning cash outflows in the second half of the year, putting pressure on our free cash flow.
Additional details for our tax rate share count and below the line expenses are included in the appendix.
With that I'd like to turn the call back to Derisked [noise].
Thank you, Greg, let's wrap up on slide nine.
As we expect that this quarter proved to be very difficult, but we actively manage through the challenges are strong operational execution.
Cash generation.
We remain cautious heading into the second half the year as there are still many unknowns. However.
Diversified portfolio and significant balance sheet strength will continue to provide the resilience in these uncertain times, we acted quickly and responsibly to big structural changes to our cost base during the quarter.
And that over $250 million and repositioning.
And we identified significant additional axis throwing our cost base the current environment in 2020 and 2021.
Despite the challenging times, we're delivering growth in several parts of the portfolio, particularly in defense Intelligrated and personal protective equipment.
We're also investing in growth opportunities that are working hard to provide innovative solutions for emerging customer needs.
I am proud of everyone at Honeywell is working hard to adapt and deliver is challenging environment I'm confident we will emerge from this crisis, even stronger than ever.
That mark let's move to QNX.
Thank you various dairy thing Greg are now available to answer your questions. Lauren. Please open the line for QNX.
Thank you the floor is now open for question at this time, if you have a question.
Please press star one on your Touchtone phone.
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Yes.
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First question is coming from Jefferies.
Vertical research.
Thank you good morning, everyone point adjustment.
Good morning to for me if I could.
Very clear on the cost so what you expect to deliver in 2020.
Guardius or Greg given that some of the stuff is kind of slight over the course of the year here just wonder if you could give us a little bit of seal looks kind of what the carryover positives success of this phase one in stage two would be as we look into next year.
Yeah, well I think you know we sort of provide some guidance on that into you know 60% to 70%.
Because I think you have really three buckets of cost that we think about right which is.
Jordan temporarily and think about those as you know furloughs, which obviously, they're going to come back.
The second bucket is what I call semi permanent you know those are some of the indirect cost base, which obviously are impacted which does not permanent in nature, but we think some of those are going to carry over into 2020 wall and then obviously permanent reductions you know so the 60 to 70 is a pretty good guide.
Oh and that includes primarily to permanent reductions and then some portion of the semi permanent because obviously an indirect costs, we're not gonna be as long as we were in 2020, but we're also not going to get back to 2019 level. So we try to have.
Think about a 50 50 or something in that kind of a split we approximately that's sort of the rough decide how to think about that I don't know Greg. If you are now that's right and again at the midpoint of our one four to one X you can kind of use the one five number you extrapolate that 60% to 70% from it. So I mean, I think the only Jeff the only I've known as you know.
So the timing because the permanent wants to timing isn't perfectly predictable and.
Some of it make move soon soon or somebody moves maybe move later, so I think timing element as well I would say somewhat unpredictable, but if not slightly more than you know it looks like quarter and that'll be that'll become much much clear you know 90 days from no as as we got through the third quarter.
And second question, so again trying to get a sense of.
What seems to hold them.
So you don't want to kinda give a really explicit guidance yet.
And work through it certainly helps.
Yes orders could you give us a orders for the.
In the quarter, so we haven't done or though.
For what you're working with here, we look forward.
Yeah, I mean, you know if you think about he have H.B. key in PMT they were down into teens.
It's the way to think about it.
Obviously, an arrow they were down a you know mid double digits is maybe there were significantly down but I think there's so that's sort of a hopefully that gives you some color, but I think there's a couple <unk> really important things to remember our total Honeywell backlog actually is up 3%.
Even did PMC backlog is up 2%. So obviously you know order is actually kind of came in more or less where we expected them to do but overall the backlog position improved.
Which I think once it was a pretty good sign so all in all.
I'm not not not as bad as we anticipated.
Great. Thanks, I'll pass it.
Thanks, Jeff.
Our next question comes from Steve Tusa with JP Morgan.
Hey, guys good morning.
Morning, Steve or.
Just on aerospace a it when you look out to the kind of third quarter. This profile wise.
What do you expect between you know OE and aftermarket you know well were one be picking up a little bit together decelerating I mean, what what is the just on a year over year basis, how do we think about kind of moving parts for those two guys on the commercial yeah.
Yeah, maybe I'll start I mean, just to give you little bit of a personal it's kinda divided up into the three segments that starts with defense and space. You know, we expect that to grow again so.
That's you know that's been the strength for our business and aerospace in Q2, we expect that to comes in Q3.
You know what do you think about.
Oh, he oh, we actually expect that to be flat to down versus Q2 <unk> for a couple of reasons number. One you know obviously, we had some carryover impact from Q1 in terms of shipments number two is in some segments and some of our always that we don't see the robust production what rates are exhibiting.
Q3, so we don't we don't see that improving.
No in terms of business aviation aftermarket or we expect that to be.
Slightly better than it was in Q2.
And then finally and HCR exact one is that the toughest recall.
And I'll tell you why because you can't just look at flight hours. So all the flight hours would be better.
And you know if you think about a low to mid Seventys reduction year over year. In Q2, you know, we kind of estimated Q3 to be something in the call. It 50 fees or something of that nature, which actually maybe a little bit aggressive.
But the thing to think about here is that because it's not there is a leader in the lag impact and the second component, which is somewhat unknown. Although we haven't seen as you know they're gonna be cannibalization of some of the per aircraft. So so that one for us is really tough to call and and.
So we're gonna have to just kind of see other quarter evolves. So that's why you know it's hard for us to give precise guidance. Because these things are unknown as you know we had airlines, adding more flights in July and August.
Now we.
Pulled back their schedules a bit in August so theres a lot of moving pieces here and I think the HCR aftermarket component is stuck up as one of the call.
And sorry wouldn't when you talk about kind of that that U.S. and I'd be used parts dynamic.
You know your businesses is electronics, there's some software obviously you have some mechanical components, but I mean outside of putting business jet decide just looking at the large commercial stuff I mean, how much of your.
This is even kind of exposed to that it wouldn't seem to need to be.
A material mover.
You know made by 200 basis points, but not not something that you know can really swing things around in a in a major way correct. No. It's not no I don't think it's gonna be dramatic, but I think I think it wouldn't be wrong to just say well you know.
To tie the aftermarket performance purely to the quarter over quarter.
Right hours, because we think obviously flight hours are gonna be better right Q3, Q2, but I don't think its next necessarily just a pure correlation right. We think it's going to be modest.
Very modest impact and keep in mind that we also had some orders back all the way from Q1, but we still.
Filled in Q2, so we've got a little bit about lead lag impact. So right. You know I don't I don't like something dramatic because no. The natural assumption would be okay, what's going to be a lot better in Q3. The fact is we're really not sure because we need to kind of see how things evolve and some of the factors I talked about yeah, I don't think marijuana and behaviors are necessarily solidified yet.
Yeah, one last one I'm just getting at the cost side discussion and I did have a different way.
You know probably in the worst quarter, hopefully that you ever see as CEO you guys are putting up a headline decremental of 33%.
With the goal beat to kind of on the way up leverage that you know, but when things normalize kind of leverage yet.
The come through a number that you know comfortably above that.
That kind of beat a high level.
Yeah, I mean, I think you look I mean, 33% given the sudden kinda stop in our business I have you actually view is pretty good given or whatever we have you know.
Aerospace exposure and oil and gas exposure, so I think that that's gonna be.
A respectable performance, which by the way it was substantially different than a way to no not at the aftermarket drop here.
You know is multiples of what it was and we don't know this session, which really puts a lot of pressure on those.
But you know our plan here, though is you know to.
To show improvement from this number going forward I don't think it's going to be dramatically better in Q3.
But we do expect modest improvement assembled in the 30 group. So that's the sort of how we're thinking about.
Right, Okay. Thanks, a lot.
Thank you.
Our next question comes from Scott Davis with millions research.
Hi, good morning, guys.
Hey, Scott Corning Scott.
[noise] gosh, there was a lot of fanfare around this S&P cloud forge thing and.
If you can.
A couple of little bit I mean can you can you help a size it a little bit or thinking about what.
How do you get paid or what's the opportunity is is.
And maybe some early signs around take rate just some color about.
Really what isn't that did not yeah <unk>.
Yeah, I think it's really really exciting because you know I think Honeywell nested piece of what I called complementary pro strategies.
So this alliance you know we started out in buildings, but I think it's I think we'll give a much broader opportunities.
And just to give you a perspective you know clearly the connected buildings part was really a highlight over Q2 in terms of our connected enterprise and just to give you the level of growth we saw 26% growth in that segment in Q2. So you know in this environment and and given.
Oh, I think thats tremendous obviously were onto something in terms of some of the growth drivers I mean, obviously its.
Energy savings its security, it's a coherent interface, so that building owners or maintain nurse can understand what's going on it's building occupancy optimization.
Now with the launch of healthy business buildings. It's also.
You know social distancing, it's where if you need temperature monitoring clean air quality. All these elements are part of that connected buildings offering, which we're now augmenting even more with a broader focused some kinda behalf of creating a healthy environment or.
For.
The office work or any other maybe once the last thing I'd want to add on to Scott is that we're also in our H.B. tea business. We're also reorganizing.
You know to be much more end market vertical oriented. So for example, we're going to go to the market is set of solutions for health care or hospitals for stadiums for airports for office buildings for data center. So that's that's an evolution in our H.P.T. strategy now.
We're going to its going to be that much more product there because we're gonna be that much closer and much more intimate with those customers and their needs.
Next on from.
A follow up with you on the sizing and I pets doesn't sound like you want to answer that part of the question, Yeah, well I think Oh, yeah not ducking. Your question you know because frankly, we're we're creating the market whenever you create a market.
You know, it's hard to guests at the sizing, but you know just our our own.
Our own installed base is fast you know, we think we think that overtime. This could be a billion dollar business just stick that's sort of our.
That's part of our our scope and we don't think that that's like exactly the way. So you know we have big hopes and double digit growth rates aren't expectations and the good news about that is like even in environment. Like we had in Q2, which was an all time worst for Honeywell I mean literally was.
Probably the worst quarter, hopefully I'll ever see.
26% growth gives you the kind of traction we're gaining in this segment.
Oh you answered the question. So I'm just a quick follow up that they order growth in Intelligrated is pretty dramatic.
No surprise, but the big numbers can you actually satisfy that demand without incurring some extraordinarily kind of costs around.
Hi, Mark well I mean, that's you know you I mean, you heard you know Greg discussed if somebody were aggressively investing in our Capex I mean people and people. So we're we're cutting in some areas because we have to do but we're actually adding a lot of people that others. So you know $250 million of incremental capex that we never had on our budget.
Yes.
And Scott I think this is an important data point I just want to give you and I think it's one of the remember you know when we bought Intelligrated roughly eight to 900 million dollar business per year.
We booked 1.2 billion this past quarter.
To get some shoot it kinda growth profile that we're seeing that business.
<unk> Terawatt acquisition.
[laughter] area and good luck guys.
The best press here.
Our next question comes from Julian Mitchell with Barclays.
Hi, good morning.
Hey, maybe just the first question around the free cash flow. So you had good conversion in Q2, but even the first cost was running.
He is a percent lies on conversion.
You talked about some restructuring Glenn perhaps in the second half Greg. So maybe just help US understand you know where are you seeing free cash flow conversion, perhaps for the year as a whole.
And any other major swing factors in the second half that we should think about.
Yeah, So I'm not going to give you a.
Conversion rate 'cause. It again, that's also is dependent on where things come out on the bottom line, which as we discussed we're not going to guide here today, but as it relates to some of the pressure points I mean, obviously, we we harvested the receivables with you know with our Ah.
In in Q2, which was good and we also were able to bring down some of our past due receivables. We worked very closely with a lot of hospitals.
Particularly in the <unk> airline space to make sure that.
We are managing risk around that so pleased about the results there, but going forward again as I mentioned to solving see our risks I think our in front of us lot behind us and so you know that made that may create some challenges in the back half of the year. If we start seeing you know additional bankruptcy that again a lot of it depends on we did.
Our behavior travel.
You know any stimulus that may come out in the back half the year and so for the other thing is I did I did mention repositioning we booked over $300 million repositioning a lot of those are very fast payback of less than anything about less than a year kind of payback and a lot. It was a very heavy heavy for the severance for cycle. So you know we yeah. We spent.
At $170 million, a cash repositioning in the first half of the year I expect that to be unit, probably double that number.
In the back half of the year round about so so that's going to be that's going to be a pressure 0.4, as well and then again, where we are investing in capital. So.
This year, if you think it back back to when we originally did our outlook call early in the year for 2000 and in 20, we had about a 900 million dollar capital budget and even with this decline we're still at about a 900 million dollar capital budget for the year. That's because we did I do some smart things to took to reduce capex and.
Places, where things are slowing but with all the growth programs that we're adding and as Dennis mentioned these things have triple digit are so we're gonna do them yeah. So our total capex for the year is gonna be 900 million.
Even this year in you know and you know we only spent a.
370 million in the first half so that's going to ramp up in half two and then if you remember we also did talk about at the very or you know here of course guidance Paul only the year that we were going to have an extra payroll cycle and not 2020, and that's kind of happening for Q. So that is like 157. So you know I think this would be our best cash.
Quarter of the year.
And again, we're you know we're happy with the work that we've done, particularly around receivables management, we have looked to be an inventory flow.
And and so those would be the main things that I would highlight capex.
Our repositioning cash that that pay cycle.
You know what dynamic at play out for Q and then you've Gotta go good work are indicating yeah, and I think you know from an investment perspective, I would just ask that you know were nearly doubling our growth capex from our original plans because I I to be honest I haven't seen IR ours Oliver.
That were triple digit and its by far the best way, we could put our capital to work.
Yes, Hi, return Capex projects, and a and they're terrific in it and we're not afraid to I mean, if need be we may even be targeting more investments for growth well into second half.
Thanks, Terry So yes, I think point just now on the schools that you're thinking clearly about the recovery in and how to position Honeywell for that in terms of organic investment I guess following up on that.
How should we think about capital deployment from here, you're making that push on the organic site.
Are you looking out at the M&A landscape and knew about them. She is thinking this is the right time to go ahead and stop so upscale the portfolio through acquisitions, what you're trying to position themselves for the next often or is it we probably should expect a balance of M&A and buybacks for the next six or 12 months.
Yeah, I mean, I think you know, we're always going to see some level you know we hope to see some balance right. I mean, I think that's kind of up and going to be to formula going forward. I certainly will tell you that you know the M&A function is open for business I mean, I think we it was prudent for us to take a little bit of a pause in Q2 just to see how world involves how things are going to.
Change and so on but hey, you kind of saw the.
Kind of working capital performance, we had.
Further secure the balance sheet and protective even more and I think you would agree that the balance sheet is very strong and well protected well funded.
So in short you know, we're very much open for business both from an M&A perspective.
As well as potential buyback perspective, and if you've already made a commitment that you know we're going to at least keep share count flat from here, which is which is new news.
And we're going to come pick a look at what opportunities are out there in the second half I mean, you M&A environment, It's just a little bit slower just because everybody's focused on battling the crisis, but do we think that that may open up a little bit more here in the second happened and we hope to be active.
Great. Thank you.
Thank you.
Your next question comes from Andrew Obin with Bank of America.
Hi, good morning.
Good morning, Andrew on it.
Just a question on defense and space, which was a highlight a you have allo.
How much visibility do you have on G.O.G. being able to accelerate payments on programs basically what happens on 2021 is just having some say I'm not asking about day I'm like it outlook, but it shows there is a very sort of basic Oh gosh I play dynamics by the Department of Defense do you guys on existing programs.
So does that band that 2021 has to be down or is there a child's the 20 twond anymore.
It can be a flat.
Specifically at this stage will work yeah at this stage, we're not expecting a decline in 21 at this point, we feel like the you know the defense budget is as you highlighted is still fairly robust.
So you know not expecting a material downshifts off from 20 to 21.
And just a follow up question you highlighted masks I'm, just I guess two prong questions I think.
Right I know it was great strategic move on your part on respiratory protections.
So anyway.
Do you have plans to continue to increase capacity.
On masks and part two of the question does it open sort of strategic opportunities for you a dog alive and safety to build on this new strike.
Yeah.
Andrew I, I'd say, well first of all its more than masks right. So so this isn't just math marks is massive part of it but its other PDP any it's it's also we're expanding capacity in our sensing business for pressure sensors, which go into a lot at the medical equipment that are.
Hospitals desperately need so so let's say the capacity expansion is much more broad based and it's not just you know mask oriented you know, but certainly as we look longer term this sort of opens up new opportunities for us.
So maybe last it's less about masks, what a little bit more about steering good business towards servings and medical segment, that's kinda I would think about it.
And any plan strata additional capacity specifically on that 95, and the second half on top of rack.
No we yeah, we've been doing that gradually and as we see the demand.
We're certainly not gonna be afraid to add even more capacity. So as we you know the the demand is still very robust and Ah I think it's very possible that we could be adding even more capacity here in the second half the year.
Thank you very much.
Thank you.
Our next question comes from Joe Ritchie with Goldman Sachs.
Hi, Thanks, good morning, everyone.
For the job.
Hey, Gary maybe I'm.
Sorry.
And.
He and H.B. at I know and kind of talked intra quarter.
Seems like Youre, a little bit more sanguine about you up he kind of recovering quicker just given given miles driven should be fairly fairly more resilient.
Well versus versus prior cycle I'm, just curious whether that's changed at all.
And what you're seeing a along those lines.
Yeah, I mean, I think you know the segment for you a pea that was the most challenges our gas processing segment, which obviously is closely tied to the.
<unk> unconventional gas production and you know prime mailing the U.S. is and as you know that's that's very challenged so we saw some pretty big drop off you know, but even before this this crisis hit I mean, they didn't make any you'll p. can vary substantially from quarter to quarter or even a year to year and we always knew.
We had a very heavy equipment mix into business into Q2 in Q3 of this year and even if this recession hadn't had.
We always had a challenging <unk> now you mix going into it now you combine that with you know kind of a push out of a lot of the catalyst refills push out of projects.
You know, obviously, they're refining capacity wasn't as a or demand wasn't as robust as many of US would hope here in Q2, you combine all these factors and you will see obviously was a bit more challenged in some of our other businesses <unk> HPV test performed I think my are building in the quarter I mean, some of the products businesses.
We are little bit more challenge then to systems businesses.
So over all pretty much aligned with our expectations and in terms of advanced materials. You know that one was heavily impacted by the shutdowns in auto manufacturing and our supply axles to switch.
Look to see some level of recovery here in the second up here.
Okay Fair enough and then maybe just my one follow on question just going back to be that that cost that commentary and Greg maybe that just a question for you.
You made a comment about that it's going to fix cost pressure in threeq versus Twoq Q.
Hi into hockey be thinking about like how much of the benefits are actually coming through in Threeq, you versus walking through into Q, and and potentially maybe talk a little bit about how the temporary reversals. Yeah. There are temporary reversal that occurred threeq was impacting that number.
Yeah, Yeah. So that's it that's that's exactly why they chose the words I did because you know some of those temporary actions furloughs you know some some of the other reductions in discretionary spend that may start ticking up during the course of Threeq you and then as as I mentioned were backfilling that with.
Some of our our fixed or sorry, more permanent action, but those are going to.
Play out over the course of June July August September so.
You know the steepness of that backfill you know is probably going to be more weighted towards the fourth quarter than the third so you know where we're doing our level best to try to hold our fixed costs flat. They may not be in Q3, but you know I would expect the the one we talk about one for.
The one six as a as a range with a 700 already achieved in the first half of the year I would think the balance of that is gonna be a little bit more weighted towards the fourth quarter than the whole.
Got it then maybe like kind of got like like sequentially like kind of called 50 million in pressure in threeq versus I'm not going to quote specific numbers a joke.
It's just it's because we simply can't call the timing of that perfectly I mean, it's not obviously when you know.
Temporary reactions are pretty easy to called because you can sort of unilaterally implement that when you go when you ship basically what we're doing in Q3 in Q4's, we're shifting and substituting some of the temporary actions were taken in Q2 for permanent.
The timing of that can't be exactly perfectly called <unk> and as Greg pointed out I think it's going to be a little bit more weight towards Q4 of them too.
Okay fair enough thank God.
Yes. Thank you.
Your next question from Nigel Coe with Wolfe Research.
Thanks, Good morning, and and we appreciate you, making this no drama Friday.
So [noise].
Putting on the effect.
Comments around.
Rentals and I appreciate the.
Yeah.
The thing you can.
At a decremental margins into the back office and.
And I'm wondering if that confidence extends to the aerospace margins.
I think than say nine cents points.
And in Twoq and recognizing mix is an important factor that but do you think that she can maintain everything from fund that's a performance.
Well.
I think that night the comment was more in total you know I think arrow is the toughest to call because of the.
Uncertainty around the mix that I've talked about particularly in air transport aftermarket, which as you can imagine a very.
Interesting and a higher margin revenue stream and you could very easily see it being sequentially down yeah. So it's like <unk> or so I'm not you know I can't tell you that.
Arrows necessarily going to have better decrementals.
You know.
At least in Q3, but we are I'm cautiously optimistic.
That Honeywell in total.
We'll continue to drive better decremental margins as we move from Q3, and even more sort of the Q4. You know provided of course all of this provided we don't have sort of a much broader and much more aggressive <unk>.
I used to have closed at 19, which I guess is depending on who you listen to that I guess, it's always possible in the fall. So that's that's kind of how we're thinking about our math would allow us to your.
Okay.
And then again just eating into 2021 within aerospace and thinking about business jets at very high level.
<unk>.
So categories, you play in which is always India and the markets.
How does that look.
Can you approach and.
Seems to me like that could be some benefits, but I'm curious how you think about that.
Yeah, I mean like I mean, a couple of questions number one is I think that you saw the bottom in Q2.
[noise] see a gradual slow improvement.
Could you know as we move into Q3 Q4, and then into 2021, you know we're gonna continuous improvement I think were they real discontinuities here, where we could see a much more dramatic improvement, which is which is really going to be tied to a medical solution, which is.
Probably a vaccine when it gets distributed because that's the level of the leisure travelers actually little bit better than expected people are traveling.
Well, what we need really pets that that second like that come in which is the business traveler and that's part of it.
We think is going to happen after we get a much broader distribution of a vaccine, which all right now I you know, it's anybody's guess when will happen, but but I think the news overall is actually pretty good and I don't think it's crazy to think that we may even have.
A certified vaccine before the end of year. This year. Now then does and we also to think about the distribution timing and so and so.
No we're optimistic that certainly there's going be a medical solution. The first half for next year, which obviously will stimulate.
As a greater level of air travel.
Like very much.
More on let's take one more question. Please.
Thank you we'll take our next question from John inch with Gordon Haskett.
Thank you good morning, everyone. Thanks for squeezing me in here Hey.
Gerritsen, Greg So if you look at your restructuring programs in the 60 to 70 of structural how would you anticipate say your pro forma head count ending 2020, I just want to the K. It looks like you started the year with 113000 employees, where would we expect that kinda to end up based on.
I don't mean on furlough basis, I'm trying to sort of think about the significance in terms of headcount based on your structural actions that you're taking and much of what you called out.
Yeah, Yeah, I think it's it's tough to call a discipline and I'll tell you why because although.
You know, we obviously know roughly.
What we're having our restructuring plan. So you know we know what we're going to do there. What we don't know is the capacity additions because all the work you know some of the reductions are taking place in places like aerospace to a lesser extent PMT and so on but now we're adding hundreds if not thousands of people in S.T.S.
And we don't think were dawn I think that we're gonna be making further investments in people for the investments in capacity.
So I think it's a little bit too early to call exactly what you know that our staffing may look like at yearend and I'd hate to give you a number which may prove to be an inaccurate.
No that's fine I think the magnitude of the action serious seemed pretty substantial so I'm just trying to sort of triangulate that could that mean no capacity here you know you're taking out 5% of your head count or how.
What else would you say about it I suppose it's kind of question. Yeah. I mean, you know I think it's you know in Aero. It's it's you know huh.
Span shows it's closer to double digit yeah in some of the other businesses were adding headcount. So you know a little bit all over the place I mean, I think we've we've tried to be protected as many jobs is we can because.
Frankly.
Don't want to be doing a lot of job reductions, but I also have to be realistic and we have to be realistic that you know we don't think that this is a quarter or two phenomenon aerospace and.
Fortunately the business is going to shrink for a little while we do think I'm not by the way I'm not so pessimistic that I think arrows gonna be down till 2024 as I've heard some estimate I actually think it's going to.
Come back.
A big faster than that and so long to a medical solution.
But realistically, it's probably not going to get back to the 2019 levels until at least 2022 or.
Even a bit later, so you know we're sizing the business for that kind of a reduction.
Yeah that makes sense he said the follow up.
Got it you know this ultra violet airplane cabin clean technology is then applicable to what could you even sort of developed product for commercial building application or even residential going that would seem to employee.
Pretty big deal if you could actually extrapolate that yeah. What we are we're working hard to exactly that type of a solution, which treats the air ultraviolet light and you know obviously results in a much higher air quality.
Than anything out there so that is very much part of our thinking in part of our solution. So we're doing some studies are on you know timing required exposure to you view like required and that's very much part of our thinking.
Yeah, I know you get back on the New York City subway the economy might actually come back great. Thanks, very much appreciate it.
Thank you.
[noise] and that concludes today's question and answer session.
Time, I'd like to turn the conference back to Mr., Dario Saddam check for any additional closing remarks.
I want to thank our show owners for their continued support of Honeywell, we're focused on continuing to perform for our share owners are customers and our employees in any environment.
We're well positioned to manage through challenging times about balanced portfolio track record of execution and the strong balance sheet I'm excited about the future of Honeywell. Despite the current challenging challenges facing the global economy, we're capturing new growth opportunities by providing innovative solutions for new customer needs.
And our operational rigor will continue to serve us well. Thank you for listening if we stay safe and healthy.
That does conclude today's conference. We thank you for your participation you may now disconnect.
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Yeah.
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Hmm.
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