Q4 2020 Honeywell International Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Honeywell as fourth quarter earnings release, and 'twenty 'twenty one outlook at this time all participants are in a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please press star one on your Touchtone phone if any poor.
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Lastly, if you should require operator assistance, please press star zero.
As a reminder, this conference is being recorded.
I'd now like to introduce your host for today's conference Mark Burns, Our Vice President of Investor Relations. Please go ahead Sir.
Thank you Steven.
Morning, and welcome to Honeywell's fourth quarter 2020 earnings in 'twenty 'twenty, one outlook conference call on the call with me today are chairman and CEO, various Saddam check and senior Vice President and Chief Financial Officer, Greg Lewis Lewis.
Call and webcast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell Dot com forward slash investor.
Note that elements of this presentation contain forward looking statements that are based on our best view of the world and of our businesses as we see them today.
Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light.
We identify the principal risks and uncertainties that may affect our performance and our annual report on form 10-K, and other SEC filings.
We will review our financial results for the fourth quarter and full year 2020 discuss our 2021 outlook and share our guidance for the first quarter of 2021 and full year 2021.
As always we'll leave time for your questions after yet.
With that I'll turn the call over to chairman and CEO there is a downturn.
Thank you Mark and good morning, everyone. Let's begin on slide two we finished a challenging yield a very strong quarter driving sequential improvements from the third quarter and sales segment margin adjusted earnings per share and robust free cash flow in the fourth quarter, we delivered adjusted earnings per share.
$2 seven strength.
Flat year over year, and <unk> <unk> above the high end of our guidance range.
Result was up 33% sequentially from adjusted EPS of $1 56.
In the third quarter.
Organic sales were down 7% year over year, four percentage points better than the high end of our guidance range and seven percentage point sequential improvement in the 14% organic sales decline in the third quarter, we drove double digit year over year organic sales growth in defense and space Lauren products and recurring <unk>.
<unk> software sales as well as 27% organic growth in safety and productivity solutions and outstanding results, our cost plans delivering our full year commit a $1 $5 billion in savings and it helped us protect margins Liberty, our decremental margin in the quarter to only 26%.
An improvement from Q3, 29% decremental margin.
Segment margin contracted 30 basis points year over year is significant improvement from the 130 basis points contraction in the third quarter, driven gross margin expansion Aerospace Honeywell building technologies and safety and productivity solutions.
We generated $2 5 billion free.
Free cash flow in the quarter up from $758 million in the third quarter and 9% above Q4, 2019, achieving 170% adjusted conversion.
In terms of capital we deployed approximately $2 8 billion of cash dividends growth Capex investments share repurchases and M&A will talk more about our recent M&A activity on the next page for the full year, we deployed $3 7 billion to reduce shares outstanding by approximately 3%.
With these strong fourth quarter results. We finished 2020 was $7 10 of adjusted earnings per share and then 11% organic sales decline both above the high end of our expectations from October.
For the full year, we generated $5 $3 billion of free cash flow, resulting in adjusted conversion of 105% or 16% of revenue a very strong result.
There is no doubt that the COVID-19 crisis created significant challenges for the business.
And economic are around the world I'm very proud of honeywell's ability to rise to the challenge to deliver strong execution and sequentially improving results throughout the year net let's turn to slide three to discuss our recent M&A activity.
I am pleased with the progress we made in actively shaping our portfolio and our recent M&A announcements directly aligns our ongoing transformation into a premier software industrial company.
In the fourth quarter, we completed three acquisitions announced before all of which meet our rigorous criteria in our M&A framework, which ensures the transactions are aligned with our portfolio strategy and meet our return expectations.
We have previously discussed the acquisitions of Rocky research and Ballard unmanned systems, which provide emerging technologies aligned to strategic initiatives and our aerospace business as well as our strategic investment with a path to full ownership internally mobility, which supports our smart cities breakthrough initiatives and <unk>.
Anyone building technologies.
In mid December we acquired signed group of technology and software as a service or SaaS company that provides a visitor management solutions that are readily accessible through mobile devices.
Science technology will enhance our connected building offerings and will also support our mobile platform for our broader portfolio of Honeywell Forge offerings. We will we will expand on signs features and solutions that make science product available to customers globally.
Most recently, we announced an agreement to acquire Florida systems, a leading provider of enterprise quality management software or Qos with the life Sciences industry for $1 3 billion.
We previously highlighted the importance of the life Sciences market is a breakthrough growth initiatives the acquisition of Spartech further bolsters our software controls.
Analytics capability in this space.
Startups AI enabled SaaS offering will combined Honeywell forge to provide greater relative to our life Sciences and pharma customers. Additionally, <unk>.
<unk> complements our growth strategy for the automation and visualization business within Honeywell process solutions, enabling greater penetration in life Sciences, and pharma market segments.
<unk> will further bolster honeywell's portfolio of accretive non cyclical recurring connected software sales.
I'm excited about the new technologies and Adjacencies, we have unlocked through our recent acquisitions and investments.
<unk> said before that we have an active M&A pipeline and this use of acquisitions is further evidence that we are continuously developing our portfolio and investing in new opportunities.
We also evaluate our portfolio for areas that are no longer core to our long term objectives.
Earlier this week, we signed an agreement to outperformance in the lifestyle footwear business to a leading manufacturer of premium footwear and apparel Rocky brands. The transaction value is approximately $230 million and is scheduled to close by the end of the first quarter.
Rfps business will continue to provide industrial safety footwear for workers Emma.
M&A is just one important part of our broader capital deployment strategy, which also includes share repurchases dividends and capital expenditures.
Let's turn to the next slide to view, our total capital deployment.
In 2020, we continued to demonstrate our commitment to identifying and investing in high return opportunities with help reshape the business where software oriented future.
Over the past three years, we have consistently deployed more than 100% of operating cash flow to fund share repurchases dividends M&A and capital expenditure.
<unk> was no exception, even during a global pandemic, we deployed $7 $5 billion of capital essentially equal to the prior two years, demonstrating our commitment to invest in high return opportunities in any environment.
Now, let's turn to slide five where Greg will discuss our execution record in a downturn.
Thank you Darius and good morning, everyone.
We set a slide similar to discipline during our December investor webcast and I wanted to highlight it again here today, because I think a nicely summarizes our ability to manage through tough times, our execution through this year's downturn clearly demonstrates our ability to move quickly and decisively to reduce fixed costs to protect margin to ensure liquidity.
<unk> invest in growth and position ourselves for recovery, while at the same time, we maintain focus on our pre transformation initiatives Honeywell connected enterprise Honeywell digital and the integrated supply chain.
At the beginning of the pandemic, we first acted quickly to address our liquidity and cost structure, our strong balance sheet provides us with stability as well as the opportunity for investments during challenging times and as you saw from here as we took advantage of that through a series of actions to further bolster our financial flexibility, we increased our cash and short term invest.
So approximately $10 billion at the end of 2019 to over $15 billion.
By the end of the second quarter, which we've maintained through the end of the year.
Demonstrating our ability to generate strong cash flow and efficiently access the capital markets during even the most disruptive times, all while protecting our GAAP David.
On the cost side, we responded fast and early to the crisis by identifying and delivering on a two faced cost program, which achieved $1 $5 billion in year over year fixed cost savings as we had committed.
Approximately 70% of these savings are about $1 billion represent a permanent reduction to our fixed cost base to achieve this we curtailed discretionary expenses temporary actions to reduce cost, including reducing executive and board PE and removed significant structural costs through our repositioning programs are.
Our streamline cost base positions us well for 2021 recovery and will drive margin expansion across all four of our segments as well as capacity for investment as sales recover in 2021 and beyond.
As Darius.
Described on the previous page, we strategically deployed capital to drive returns and to position our business for future growth.
Importantly, we also directed resources to address our customers' COVID-19 challenges around the world.
Additional capital into high return growth investments to address urging customer needs, particularly in personal protective equipment and warehouse automation.
We're also helping the World Cup and recover from the effects of COVID-19 through our new portfolio of healthy solutions, we generated approximately $655 million in sales for a healthy solutions in 2020, and we have a pipeline of approximately $2 1 billion.
Which will drive growth again in 'twenty one.
As a result of our Swift actions during the downturn <unk> decremental margins were limited to 26% improving from 33% in <unk> and 29% and <unk> are demonstrating our ability to protect our margins in a very difficult environment.
We are clearly well positioned for a variety of outcomes as the recovery progresses into 2021 and beyond and our shareholders are benefiting from that with a total shareholder return of 23% in 2020, which was over two times greater than the <unk>.
Now, let's turn to slide six to discuss our fourth quarter results in a bit more detail and our 2021 outlook.
As Darius highlighted we delivered a strong fourth quarter to end 2020 with sequential improvement from third quarter on all our key financial metrics.
Sales declined by 7% organically due to the effects of the COVID-19, pandemic, which is four percentage points better than the high end of our guidance and represents a seven percentage point sequential improvement from the 14% organic sales decline in the third quarter driven by sequential sales growth from the third quarter in all four segments.
Starting with aerospace fourth quarter sales were down 19% organically.
<unk> six percentage point sequential improvement from the down 25, we had in the third quarter.
Lower commercial aftermarket demand due to the ongoing impact of reduced flight hours and lower volumes in commercial OE equipment was partially offset by double digit growth in defense and space.
There is still down significantly year over year, our commercial aftermarket business did improve sequentially from the third quarter.
Our air Transport aftermarket business was down 48% organically in the quarter compared to 55% in Q3, and our business aviation aftermarket was down 6% organically compared to 28% in the third quarter.
Moving on to building technology sales declined 4% organically, a four percentage point sequential improvement from the 8% down in <unk>.
The other solutions projects were impacted by timing due to customer order push outs, we saw earlier in the year, which was partially offset by growth in services.
They are now placing orders for projects that they had previously delayed as a result orders and building solutions grew 32% year over year in the services backlog was up double digits year over year to finish the fourth quarter positioned the business well for 'twenty one.
On the building products side, the portfolio sales and orders improved sequentially from the third quarter and the commercial fire business returned to year over year growth.
In PMT sales were down 12% organically, a four percentage point sequential improvement from the 16% organic decline in <unk> <unk>.
<unk> solution was impacted by continued delays in projects and services as well as volume declines in thermal solutions and smart energy due to end market softness. However process solutions orders were up 30% sequentially from Q3, <unk> continued to be impacted by weakness in the energy end markets gross sales improved sequentially from the third quarter.
<unk> across the <unk> portfolio and orders were up 21% versus the third quarter as well.
Finally advanced materials sales increased 8% year over year organically driven by growth across the flooring product portfolio, including strong auto and phone demand.
In Sps organic sales were up 27% year over year, a very strong result, and a year in which the SCS team stepped up to meet unprecedented demand for critical safety products and.
And calibrated and personal protective equipment led the way with another quarter of double digit organic growth followed by high single digit growth and productivity solutions and services. We are encouraged by the turnaround that team has orchestrated in 2020.
Sps exited 2020 with a backlog of approximately $4 billion, which was nearly double our backlog at the end of 2019.
Based on the business in a very strong position to start 2021, where we expect to see a robust first half in particular.
Overall, we expanded margins year over year and three of the four segments Aerospace HCC in Sps limiting Honeywell overall segment margin contraction to 30 basis points and ending the quarter with a segment margin of 21, 1%.
This was a sequential improvement of 120 basis points in <unk> segment margins of $19 nine.
An improvement of 260 basis points from the <unk> trial, demonstrating the effectiveness of the effectiveness of our response to the pandemic in particular, our cost actions and operational rigor we delivered cost actions in the fourth quarter net brought us to $1 $5 billion of savings for the year.
Right at the stated range that we had highlighted earlier limiting our full year margin contraction to 70 basis points, despite the challenging operating environment.
We delivered adjusted earnings per share of $2 seven sales.
Flat year over year, and up 33% sequentially from adjusted EPS of $1, 56% in the third quarter.
This result was five above the high end of our guidance driven by higher segment profit due to better than expected sales volume with aerospace HCP and Sps.
Given the strength, we saw in the fourth quarter, we were able to make discrete investments in the business and our employees, including an ICU marketing spend before and brand expansion in the middle East and China as well as a special $500 recognition award for.
For our ISP frontline production and production support employees, who perform so greatly as well through this crisis.
Repositioning was lower than <unk>, <unk>, a year ago as expected driving a 15% year over year tailwind below the line.
Interest income and foreign currency were lower than 2019, driving a 7% headwind below the line, which was offset by higher pension income.
Our effective tax rate and share count were also lower than in the fourth quarter of 19, driving <unk> and <unk> <unk> of EPS benefit respectively.
A bridge from <unk> 19, adjusted earnings per share to <unk> 20 can be found in the appendix of this presentation.
I am also proud to report that our fourth quarter cash flow generation was very strong we generated $2 $5 billion of free cash flow up 9% year over year, resulting in adjusted free cash flow conversion of 170%.
Free cash flow and conversion both improved year over year due to working capital improvements, including GAAP.
And Sean collections, our teams put in extra focus on cash in the fourth quarter and really deliver and we expect to continue this progress in 'twenty, one, particularly on inventories.
In terms of capital deployment.
Paid approximately $607 million in dividends repurchased $1 $6 billion of Honeywell shares over delivering on our commitment of 1% share count reduction in 2020, we invested approximately $300 million in capex and deployed over $250 million to complete free acquisition.
All in all a very strong fourth quarter to close out 2020.
Now, let's turn to slide seven to talk about our 2021 planning assumptions.
We hope and expect that the worst is behind us as we move on from 2020.
We're seeing promising signs of the recovery unfolding, but there continue to be a few key uncertainties to be mindful of.
Over the past couple of months, we've seen governments around the world approve multiple effect of COVID-19 vaccine and begin rolling them out or.
Our current view of 'twenty, one assumes the vaccines are widely distributed leading to lower manageable infection rate over time, and allowing the global economy to largely be opened and stabilized.
However, many regions had recently been coping with a new wave of infections, and Lockdowns, new COVID-19 strained and vaccine distribution challenges. So it remains unclear when exactly infection rates will slow down materially in the in the economic recovery will really accelerate.
As the macro planning assumption, we're expecting the recovery to be weighted to the second half of the year and are expected to experience a little bit of a slower start in <unk>.
We're assuming a fiscal stimulus remain supportive of the economy in 'twenty. One we do expect passengers will begin flying where free Lee again as the vaccine rollout again, leading to a modest improvement in global flight hours in the first half an acceleration in the second half. So this is one area, where we are seeing some renewed softness, particularly in China and <unk>.
<unk> as the year begins.
We also expect stability in the defense budget spending and finally, we have seen improved macro conditions broadly will drive moderate increase in oil consumption in the second half of the year.
Given that let's turn to slide eight and discuss our markets and segment outlook.
Starting in aerospace the previously mentioned increase in flight hours as the pandemic subsides will gradually lead to improvements in our commercial aerospace business is aftermarket demand accelerates, particularly in the second half.
However, we expect recovery in the commercial OE business to lag the commercial aftermarket recovery due to the gradual ramp in commercial OEM build rates.
Dave will defense spending should support continued growth in our defense and space business, though at a reduced pace versus the double digit growth we experienced in 2020.
In total we expect the aerospace business to be flat to up low single digits in 'twenty one.
In <unk>, we expect the nonresidential market to remain relatively stable in 'twenty one.
We anticipate solid demand for building products and management system in key verticals, including data center warehousing in health care.
However, in other verticals, including hospitality and commercial offices, we expect them to remain challenged as the world recovers from the effects of the pandemic. These.
These challenges were partially offset by the traction we have been gaining over the past couple of quarters with our healthy building solutions with key wins in education commercial offices healthcare and some government verticals.
Our solutions address key customer concerns, including air quality, social distancing and controlling costs with assets and we expect continued demand through the year.
Building solutions ended 2020 with a quarter of strong year over year orders growth.
Which positions the business well for 'twenty, one and we expect customers to continue placing orders that they deferred in 'twenty as the macro economy recovers.
We also have a robust services backlog that is up strong double digits year over year and will support 2021 growth we.
We don't expect building access to be a significant issue in 'twenty. One. So we don't anticipate any material challenges getting on site to complete projects in total we expect HCP to grow low single digits for the year.
In PMT, we expect the oil and gas and petrochemical markets to remain relatively flat with oil consumption picking up slightly in the second half.
We expect the EPS recovery to be led by our large backlog of global Mega projects and the products services and.
In <unk>, we expect the energy markets to remain challenged through the year, particularly in the first half. However, we expect business conditions will recover sooner for petrochemicals and oil and gas.
We anticipate increasing investments in renewable fuels, which will drive demand for our new sustainable technology solutions business, and partially offset challenges in the oil and gas market.
In addition, the specialty chemicals market is expected to grow modestly in 'twenty, one with strength in global healthcare automotive and residential construction end markets driving demand for advanced materials.
Overall, we expect TNT to be down slightly to up low single digits for the year.
Lastly in Sps, we expect continued strength in warehouse automation and personal protective equipment as we execute the delivery of our robust backlog.
We also expect productivity solutions and services to grow as the strategic turnaround of the business drives market share gains and we expect GAAP sensing to recover in line with the market.
In total we expect Sps to growth double digits in 'twenty, one with comps getting tougher in the back half as we lap strong growth in the back half of total volume.
So overall, we see improvement across most of our key end markets in 'twenty, one and we have confidence in our continued operational execution.
The recovery may vary due to the items, we discussed on the prior slide. So we are taking a cautious approach as we begin the year.
Now, let's move to slide nine to discuss how these dynamics come together for our 2021 financial guidance.
For 2021, we expect sales of 33, 4% to $34 4 billion, which represents overall organic growth.
<unk> growth in the range of 1% to 4%, reflecting double digit recurring connected software growth and the impact of our announced M&A and divestitures.
Segment margins are expected to expand 30 to 70 basis points supported by higher sales volume and our streamlined fixed cost base. Following 2020 cost option with investments for growth.
While we expect margin expansion across all the businesses Sps will lead the pack as we scale up capacity to become more efficient followed by arrow driven by high margin aftermarket recovery.
These organic growth in segment margin expectations are consistent with our long term commitments for low to mid single digit organic growth and 30 to 50 basis points of margin expansion and give us flexibility to deliver earnings growth and invest for the future.
2020, with a challenging year, but we'll be back on track to deliver our standard commitment to shareholders in 2021 and beyond.
The net below the line impact, which is the difference between segment profit and income before tax is expected to be in the range of negative $130 million to positive $20 million, which includes capacity for $400 million with $525 million of repositioning.
We expect an effective tax rate of approximately 21% to 22% and a weighted average share count of approximately $705 million for the year, representing our minimum 1% reduction in shares.
As a result, we are guiding earnings per share of $7 60.
To $8 up 7% to 13% adjusted.
We see free cash flow in the range of $5 1 billion to $5 5 billion in 2021 day.
That represents cash margins of 15% to 16% of sales commensurate with the 2019 and 2020 rates that we have demonstrated and a cash conversion in the 95% range.
Keeping in mind that our conversion excluding non cash pension income would actually be approaching 115%, so very healthy numbers overall.
This range does include $375 million that we expect to receive an upfront payment from Garrett, resulting from their proposed plan of reorganization.
We will continue to include cash receipts from Garik going forward within free cash flow in order to be comparable to prior periods, where the cash proceeds from the indemnification and reimbursement agreement were recognized at.
Adjusted spend a minute on that topic. We're pleased the gear has agreed to the plan of reorganization under which they will be recapitalized and well positioned to meet their obligations, including those to Honeywell and will avoid costly litigation.
We believe this is the right path forward that maximizes value for all stakeholders.
Now, let's turn to slide 10, and walk through our 2021 EPS bridge.
Segment profit is expected to be the key driver of our earnings growth higher sales volume commercial excellence continued productivity improvements and ongoing benefits from previously funded repositioning will contribute <unk> 54 per share at the midpoint of our guidance.
The impact of our acquisitions of Sparta sign and Rocky research and the divestiture of the retail footwear business will drive a 7% headwind at the midpoint.
Below the line and other items are expected to be a <unk> <unk> benefit per share at the midpoint of our guidance, primarily driven by higher pension income and <unk> 41 compared to 2020.
I'd like to take a moment to discuss those pension dynamics, a little bit more detail.
We expect approximately $1 1 billion of pension and <unk> income in 'twenty, one up approximately $260 million from 2020 with the majority of this increase related to our U S pension plan.
We have derisked, our U S pension plan.
Two approximately 60% of plan assets being in more conservative fixed income like assets and the remainder in return seeking assets.
As a result of another strong portfolio performance in 2020, our fund returned approximately 14% increase.
The increase in our pension asset base compared to the prior year.
This higher asset base combined with lower discount rate is driving higher income in 2021.
Our diligent management and strong return have been an important value driver for the company.
Putting us in a position where our pension funded status continues to be robust ending the year at 113%.
For taxes, we expect an effective tax rate of 21% to 22%, which would result in a six net headwind per share at the midpoint and.
And finally, our base case is that our share repurchase program will result in a benefit of <unk> <unk> per share as we reduce our weighted average share count from 711 to at least 705 million shares.
So in total we expect 2021 earnings per share to be in the range of $7 60.
The $8 up 7% to 13% year over year adjusted nearly back to 2019 levels.
Now, let's turn to slide 11 for a preview of the first quarter.
As I noted earlier, we are entering <unk> with a cautious stance as the environment continues to evolve real time, which is driving a wider than usual range per quarter.
We expect organic growth in the first quarter in the range of downturn to down 5% organically, which brackets, our fourth quarter sales growth performance recognizing market conditions could vary.
The year over year sales decline will be driven by continued headwinds in commercial aerospace and <unk>, partially offset by ongoing strength in warehouse automation, PPE and advanced materials as well as gradual recovery in other areas of the portfolio.
Keep in mind, when he will be our toughest comp for the year across all four segments. Since the first quarter of last year was only partially disrupted by the Covid pandemic.
We expect segment margins in the range of 24% to 29% in the first quarter slightly below the fourth quarter based on lower sales leverage given our usual sequential step down in sales from <unk>, partially offset by ongoing productivity.
That represents year over year segment margin contraction of 140 to 90 basis points.
We have positioned ourselves with a streamlined fixed cost base for 'twenty, one and expect sequential segment margin improvement from the second quarter on.
The net below the line impact is expected to be between $40 million expense and a $5 million benefit with a range of repositioning between 101 hundred $40 million as we continue to fund ongoing restructuring programs.
We expect the effective tax rate to be in the range of 23% to 24% and the average share count to be approximately 705 million shares.
As a result, we expect first quarter earnings per share between $1 68, and $1 83.
Down 24% to 17% year on year.
Now, let's take a moment to walk through our expectations by segment.
In aerospace, we expect first quarter global flight hours remain relatively flat in the fourth quarter, we could see a step back and when he had certain regions given the flare up in infection rates over the holidays. As a result, we expect current softness in flight hours to continue impacting our air transport and in the aviation market sales in the first quarter.
In addition, lower air transport OEM build rates and lower business jet demand will continue to impact our commercial original equipment business, we expect defense and space to partially offset the challenges in commercial aerospace supported by stable U S defense spending.
In building technologies, we expect business conditions to remain similar to conditions in the fourth quarter we.
We don't expect significant issues accessing our customer sites as I mentioned earlier, which will enable us to deliver projects as normal.
Our strong building solution services backlog to drive growth in the quarter and we expect demand for building products to continue improving in.
In addition, we expect continued customer momentum with our portfolio of healthy building solutions, Inc.
PMT, we expect continued customer capex and Opex budget reduction and project delays to impact the engineering and licensing businesses and projects and services in Npls and.
In <unk>, we expect continued weakness in gas processing and lower catalyst shipments due to the lower production refining volume. However, we do expect to see some demand return in process solutions products.
And we expect another strong quarter in advanced materials, driven by continued demand and flooring products.
Finally, we expect continued strength in Sps with another quarter of double digit growth in integrated and personal protective equipment.
Our personal protective equipment backlog remains up triple digits year over year, and our intelligence backlog is over $2 5 billion, giving us confidence.
<unk> for the first quarter and the full year free.
According to the solutions and services, we expect continued growth driven by market share gains and low inventory levels in the channel due to favorable sales out of distributors.
While macro conditions continue to put pressure on our sensing and Iot and gas sensing businesses, we expect strong overall Sps sales growth for the first quarter.
Now before I turn it back to Darius, let's look at slide 12, and talk through the ultimate measure of our performance to this crisis total shareholder return.
We're creating shareholder value and outperforming the industry in the broader market in all environments. If you look at this chart you will see that Honeywell has shown remarkable consistency outperforming bulk versus the soi and the Dow Jones industrial average indicative of the outstanding resiliency of the company.
Investors can depend on Honeywell could generate superior returns compared to the benchmark regardless of market timing due to our rigorous and proven value creation framework as well as the Honeywell operating system with.
This crisis reinforce the fact that our value creation framework, which we discussed at length in our December investor webcast is highly effective in delivering consistent outperformance in all marketing conditions. In fact, this framework drove Honeywell shareholder return above both the <unk> and Dow Jones industrial average again in 2002.
Volume.
So with that I'd like to turn the call back over to areas.
Thank you Greg before we wrap up I'd like to take a minute on slide 13 to discuss one of the key elements of our overall ESG story.
Last quarter, we discussed Honeywell commitment to shape, a safer and more sustainable future. This time I would like to focus on another important topic corporate social responsibility.
Honeywell has committed to corporate social responsibility and community involvement.
Straight to the unique global programs to work to improve lives and inspire a change in the communities around the world.
Beyond these programs we acted quickly throughout the course of the pandemic to address the needs of our employees communities and customers a.
A few of our more recent actions are shown on the slow most recently, we announced our participation of unique public private partnership backed by North Carolina Governor Roy Cooper to help support the goal of the 1 million COVID-19 vaccinations by July for 2021, who are partnering with atrium health.
Upper sports and Entertainment is Charlotte Motor Speedway, and the state of North Carolina to administer day vaccine manage complex logistics and to provide operational support for mass spec summation events.
Very proud to be part of this effort to bring further spread of the virus by helping our frontline workers and other members of our communities get vaccinated.
Another recent example of Honeywell contribution to our communities will be important math delivery milestone. We achieved in December we began with more than 225 million face mask growth.
<unk> workers and their response to COVID-19.
We delivered 95, respirators and surgical face masks to multiple locations in the U S where health care systems with Federal Emergency Management agency in the U S Department of Health and Human services. In addition, we shipped millions of masks to both state and local governments, we're proud of.
These contributions and our role in providing much needed PPE to workers around the country are responding to the pandemic.
Finally, we're also committed to recognizing and respond to the needs of our employees, usually recognize the dedication and strength of our own frontline integrated supply chain production teams, who have been instrumental in keeping our manufacturing sites running safely, enabling us to meet critical customer needs. During these unprecedented times.
To show our appreciation, we announced a special $500 recognition award or each of our frontline production and production support employees. We continue to be inspired by the members of our integrated supply chain team.
Truly gone above and beyond to support our customers throughout this pandemic.
Now lets rep graph on slide 14.
Sure.
There's no doubt that 2020 was a challenging year, our re effectively manage through the downturn repercussion of the global pandemic by focusing on liquidity cost management strong operational execution and investment for the future.
We drove sequential improvement from the third quarter in sales.
<unk> margin adjusted earnings per share and free cash flow, creating good momentum into 2021.
The past year was another proof point that the Honeywell value creation framework.
Lewis outperformance, even in the most challenging economic and market conditions.
We continue to invest in organic and inorganic growth opportunities in the downturn with high return Capex and M&A positioning ourselves for the future and day recovery to come.
These growth investments will help us solve challenging problems for our customers address critical global sustainability issues.
Our superior shareholder returns.
I am proud of Honeywell.
Rapid and effective response to the challenges of 2020.
Our employees around the world worked hard to quickly adapt and deliver through the crisis Inc.
Moving to ramping up production of critical PPE, developing a portfolio of healthy solutions and delivering growth in multiple areas of the portfolio.
Well positioned for a recovery.
<unk> half of 2021 and beyond which.
As demonstrated by our expectation to return to our key long term growth commitments in 2021 day.
Net mark let's move to Q&A.
Thank you Darius Steven give us a moment, while we gather here for Q&A.
Absolutely Sir.
Okay.
Yes.
Yes.
Okay, Darius and Greg are now available to answer your questions. We ask that you. Please be mindful of others in the queue by asking only one question.
Steven Please open the line for Q&A. Thank you.
The floor is now opened for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing star two.
We ask that when you pose your questions do please pickup your handset and we will now take our first question from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, everyone and thanks, I will detail on the guidance.
So <unk> sales guide so just wanted to.
Against that you prefer despite some good general detail on what you're expecting.
The mid points have not sit down very similar to what we saw in <unk>, but a much easier comp. So I'm just wondering was there any.
And then you deliver <unk> any budget flushes.
Some.
Speculation from prepayment activity from other companies et cetera. So just wondering if you've seen.
Classify chain, causing some printing quarter demand with maybe causes the sales guidance to be.
Essentially flat <unk> with what you saw bookings.
Yes.
Know that there was anything unusual in Q4, I mean, I think obviously, we kind of see our continued ramp up of our.
Sps business that will continue but it does start to flatten at some point PMT basically came out about as we expected Europe, because we know that <unk> business, particularly is lumpy.
So to accomplish it can vary dramatically.
I think if you look at overall Covid is a big play in this and I would say.
Should you compare to the Covid situation early in Q4 versus where we are now we are in a much worst price I mean, that's obviously guidance.
Tom.
And frankly, we really thought about whether or not we should guide Q1 at all.
We're in a place that.
The level of infection throughout the world is the highest its ever been right now and Theres a lot of uncertainty.
But we thought it would give us sort of our best effort in providing a wider range of normal.
Jim our investors from some of our best really educated view of where we think we'll grind up but theres a lot of theres more uncertainty this quarter Greg.
I mean, even for all of US I mean traveling is a question Mark if you read the journal this morning, and they talked about the airlines and concerns even in the U S about whether theres going to be testing requirements put in place for domestic travel we know that that's been put in place already on international travel. So Darius has pointed I. Just think there are some things out there that are really kind of hard to predict.
<unk>.
But as I said in my remarks means.
The downtime to down five kind of brackets, we're down seven we had in the fourth quarter.
The downturn is in case something gets gets worse that.
We don't really.
Can see at this moment.
It could be it could be better than that if things.
<unk> progressed, so so no nothing theres nothing strange I mean, we always have a fourth quarter to <unk>.
Decremental sequential sales boost sales for he is always our strongest quarter. So.
Nothing unusual in there and just just to add to that I think you don't actually predicting that sort of been liners.
However is not that unusual.
And then aerospace, which obviously is our biggest business of things to consider there is no.
If you look at infection rates and the fact that at least in the restaurant.
Holidays.
Air miles flown could be actually down.
And we see that we actually given some of the outbreaks that we saw earlier this quarter in China and Asia Pac specifically is where we're seeing some pressure so.
That's sort of that's sort of the puts and takes over the quarter.
Thank you very much.
Okay.
And we will take our next question from Steve Tusa with Jpmorgan. Please go ahead, hey, guys.
Good morning.
Good morning, Steve Good morning.
Tom to read the journal. This morning, Thats impressive you can read the journal on on earnings Day, you must have it all wrapped up there.
Hi.
Just on the margin side.
Pretty decent margin expansion.
For this year.
Assuming you guys do better on sales, where there would be any reason.
As to why those margins would be.
Would be weaker than youre guiding to or do you think that.
If you do a little better on sales you can still kind of converted.
This high level.
Yes, so Steve I think what we tried to do is position ourselves this year.
For anything so.
Tom.
We guided something we feel like is very much deliverable in that 30 to 70 range and it if sales actually turned out to be better I think two things can happen one we could convert a bit of a higher rate, but two we may invest more back in the business. We have some important things to get done in aerospace from an R&D perspective, we are funding some of that already.
If things get better then we think that we could let the line out a little bit further so if you look at our conversion.
In the last three quarters of this guide is really converting at like 37% just the math the math says a 37% conversion rate in Q2 through four with this guidance. So we think it's a pretty strong rate of conversion as it stands right now and we're trying to give ourselves optionality to both deliver earnings as well as make sure.
Sure we've got some room for investments.
Did that high <unk> sustainable is that high 30 is kind of a sustainable rate going forward.
I think that remains to be seen.
We're very again, we're very confident that now that we're this 30 to 70. This year gets us right back in the 30 to 50 long term framework that we've been consistently able to deliver so that's what I get very stable growth.
Couple of points first of all if you take a look at our conversion rate for 2021 versus net.
Good day conversion under review average ratio.
Alright.
And we project that in Q2 to Q4, the wildcard and a lot of it is aero aftermarket right.
That is probably the single hardest number for us to call because it is directly correlated to vaccinations in growth speed of those vaccinations and robots and that comes in better than we're projecting.
Obviously, there is no there is upside to the margin rates in 2000, and well then you're probably going to be someplace momentum elaborate but I think it's really important to note something else sandwiches.
You look at the upper income or margin rate for 2020 launch I mean, we get back to 2019.
Basically we're kind of taking a one year break in English initially there were discussions about what it would take us three years or two years to get back to that and we're kind of getting mark on the EPS range and so on pretty much through 2019 and of course also serve a one year Brian but.
As usual, we're trying to be prudent in our planning.
Early on in the year.
Many unknowns with the vaccine at levels that growth has never seen.
So we're trying to embed that into our guidance and obviously when you kind of provide you more clarity as the year progresses. One more quick one what are you guys pretty much track flight hours and commercially.
Our aerospace aftermarket or will there be kind of a lag like some have talked about.
And there is a little bit of a lag, but there'll be a correlation eventually so as you know those those numbers are correlated.
Correlated so as we track.
Flight hours travel and other my view made of a lead lag, but the correlation is there.
Thanks.
Okay.
We will take our next question from Scott Davis with <unk> Research. Please go ahead.
Hey, good morning, guys.
Hey, good morning.
Okay.
I'll keep to one question, but hopefully you guys can answer it's a little bit more broadly than perhaps what im asking correctly, but can we talk about and calibrated in gist.
Kind of how scalable it is I mean are your margins rising as you.
As you grow I know Dave.
Stahl isn't necessarily all that profitable, but are you actually seeing in it.
Improvement in margin structure, perhaps because of the supply and demand imbalance, maybe better pricing thats, leading to better margins I'll just leave it at that.
And give some color there would be great.
Yeah, Let me just start off very much.
No I don't I don't think were expecting dramatic margin improvement and calibrated in 2021, and let me explain why the reason is that our sales booking an incredible amount of Greenfield project Cunard.
You saw that it was another incredibly robust year in terms of bookings, we expect double digit growth again.
Im, particularly what's really important is to look at the ratio of our aftermarket business to our projects business and as you can imagine thats not changing or if anything probably their projects are growing at a much faster than aftermarket. So obviously down it's going to keep pressure on the margin but.
We should view David is a good is a good news because as I explained this before eventually when the growth slows down.
The growth rate will be slower on the margin rate will be higher, but we're still going to be very much in this greenfield expansion.
Mode for the next few years, which means higher growth rates.
Lower margins, which over time is going to moderate to lower topline growth rates and higher margins that sort of how that business kind of growth was really encouraging areas Yamato share that one gaining in the marketplace unquestionably this business is winning and winning big in the market.
Yeah, and I would just add to your question about scale, that's we talked about some of our growth investments.
Some of them are here to scale. This business. So we are making investments in capacity and scaling up as we go both here and in Europe.
Two because again that was also part of the plan as well broadening.
Our reach beyond just the U S. So that's a big focus for this team the scale question.
As one of the biggest things that they have on their plate and.
We're making nice progress.
Okay. Good luck guys. Thank you.
Thanks.
We will take our next question from Andrew <unk> with Bank of America. Please go ahead.
Hi, guys, good morning, sort of continuing where sort of Scott tango and other business.
You announced the deal with <unk>.
On the building solutions and you didn't provide a lot of details, but since then I think latch has published an expensive debt.
Talking about.
Very very aggressive market growth targets I was just wondering if given that there is a competitor there was aggressive targets for market growth. If you could just talk about maybe a deliberate more detail about the opportunities that you are seeing in sort of software on the buildings side as this business is evolving.
Yes.
A couple of things number one so we're seeing very strong double digit growth in our connected buildings offering. The S&P partnership is working we're actually still innovating together, we're launching progressed or even more aggressively into the marketplace. This quarter next quarter as we complete some blood joint innovation just to give you a perspective across all.
All of our business units. This won't give you a hint as to how other businesses are Honeywell connected buildings business, one business unit over the year across all of our clients. So that will tell you a lot about its financial performance. So that business is growing as fast as any business. We currently have getting traction in the S&P partners.
But we're also getting traction in the marketplace because frankly, its a GAAP that's on the field and we don't think that there is anything out there that this comprehensive in terms of our connected building solutions, we have which really covers the full scope of energy management.
Occupancy.
<unk> safety.
Tom.
Overall maintenance footprint.
So it's really comprehensive just about anything and everything related to building and net debt businesses think about high double digit growth GAAP numbers.
Thank you.
Okay.
We will take our next question from John inch with Gordon Haskett. Please go ahead.
Thank you good morning, everybody.
Alright, Darius and Greg.
Good morning, under what scenario would PMT sales be negative in terms of your range to the low end of your guide and I'm just thinking out loud you do have other build exposures in flooring, which is going to be really good I would think theres GOP catalyst to reload.
Likely next year based on pent up demand and then we've got commodity prices higher I'm, just wondering how that actually plays into your thinking for the segment. Both in terms of sales and margins and I think PMT decrementals were about 50% or over that in the fourth quarter. So how are you thinking about it.
Claiming a bunch of stuff into my one question. So there you go.
No.
Good day that patients.
So yes.
<unk> deposits. This is all about yield let's start with advanced materials, we're pretty comfortable with our growth profile HP as we kind of know what we're going to do.
Which is growth you will keep the whole net of an unknown right.
We've seen can happen is that a lot of catalysts loads or reloads get free.
Charter projects get pushed out.
It can be some.
Net.
Our bookings in the backlog are higher entering 2021.
Versus what they were in 2020.
So I am cautiously optimistic that we're going to see growth.
We've also seen some push outs of particularly catalysts roads and delay in projects if that happens.
Honestly, we're going to have some pressure from the ERP side.
Frankly, the price of oil is that a reasonable number right now it's not.
<unk> is now it's under $50, which is quite receptive to.
<unk> investment.
Is that a lot of the big oil and gas majors, who are our customers set their budgets just like we do in Q4 of 2020, so and they've announced some pretty big product flow.
We don't know fully as our nose are there going to be adjustments made based on the economic conditions based on the adjustments to gross margins. There is a point there is definitely pent up demand because you can't under fund this marketplace for too long so whether that happens in the second half of this year or 2022.
<unk>.
Net stores yet to be told but we don't know is we still have a lot of sort of.
Bookings that we expect for the second half and we have visibility to but they need to land and that's why we provided the guidance David because we don't know whether or not they will land.
Our non you pushed out to 'twenty, two I have zero doubt and I mean zero doubt because I was in this business 15 and 16.
Will it be a big reinvestment cycle, because you can't starve this market for so long and Thats why its sort of hero, we can debate when it will come but theres node undoubtedly will happen.
And if I can just because you mentioned margins as well I think this day you have to keep in mind. There is that is to number one as Darius described the catalysts obviously.
Pretty high margin and so that impacts our mix and then the other thing is we are executing on a lot of the gas processing.
Business that we had won back in 2019 and in 2020 and a lot of that is in high growth regions and so you can imagine there is.
Our lower margin aspect of some of that business as well that we're actually executing here through 2020.
So that's been that's been an impact to the PMT margins when you take away the the catalyst.
Business and that becomes a bigger share of the overall PMT.
Sorry, yes.
P mix and European particularly.
Okay, just to make sure I understand it's a reload it does happen, that's possibly very significant upside to the guide but for now you are not assuming that so im assuming PMT is probably kind of on the ERP side.
Sort of flat.
Is that a fair statement.
That's right because right now those jobs are not booked in the second half we have visibility during the pipeline, but until they book.
It's a little bit of an uncertainty, we expect them to but could they get pushed out to 'twenty two.
Absolutely.
Got it thanks for the color appreciate it.
Correct.
We will take our next question from Josh <unk>. Please go ahead.
Hi, good morning, guys.
Hi, Jeff Mark.
The broader Honeywell software offering.
Connected and otherwise.
I understand that probably varies by business, obviously, a lot of different end markets. There, but can you talk a little bit about how adoption has fared in customer conversations are going I would imagine with folks starting to pivot back to growth for our investment.
As they expect COVID-19 to get resolved that both should be accelerating by.
As you mentioned a few times Darius there's awful lot of complexity in cases are actually worse, but.
How is that adoption going and if that trend line moving higher as people are thinking about kind of post COVID-19 digital transformation.
Yes.
But I wasn't I think we actually had a very reasonable year end 2020. Despite some of the challenged markets. We're in but just to give you.
Rough numbers, if you think about our overall software growth is mid single digits, even in 2020 environment.
And then for our recurring growth.
Because frankly brewer sacrificing Tom.
Top line growth, because we're really converting our entire forage business towards software business is already sold as a SaaS offering net actually grew in the teens last year. So.
That was a very good year, and we actually we expect an acceleration on both of those figures for 2021.
2020 for me was a really good proof point.
This business is.
Cyclical and as we continue particularly to build that recurring revenue base, which is growing.
More than two X are sort of traditional software base is going to be a great tailwind for the future of Honeywell and a future event software business and with offerings like we just talked about in connected buildings.
Our cyber offerings or I'm quite confident that its.
It's Greg continue to growth that kind of pace with the short story is we're seeing more traction in.
And we're winning more accounts.
Great. Thanks.
Sure.
We will take our next question from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning, Mark.
Maybe my question would be around the free cash flow.
So.
The operating cash flow.
Added to drop I think around $400 million at the midpoint.
Even though net earnings should be up probably high.
High single digits.
So I just wanted to try and understand.
What's happening within that around sort of working capital is it. The fact that you had that exceptional receivables tailwind in 'twenty that has to with US just trying to gauge.
How conservative or what assumptions, you've got on that working cap side, because I think that the capex is up but only up maybe 10% or so.
Sure sure. So as we discussed the five 1% to 55 just to round out the numbers.
Thats.
It's 15% to 16% of sales so pretty similar to what we just did a 16% to 95% 98% conversion.
So approaching 100 into 113% to 115% conversion extension. So just keep in mind relative to the basic metrics are pretty pretty healthy numbers as it relates to working cap and what's happening there I mean, obviously sales came down substantially this year and both with some.
Transformation and effectiveness in our process as well as harvesting receivables.
We had a we had a very big we had a very big cash flow for may or this year, we started to see some of the inventory come down in <unk> for the year was still a build and so when you think about next year. That's the area that I expect us to make more progress is on is on inventory and start seeing some inventory reduction again, even in the face of.
Sales growth and so I think youre going to see we're world class.
Payables will continue to make some steady progress as we do each year.
We'll make some progress on our programs around transforming on our credit and collections aspects and so I would expect we will make some more progress on past dues in DSO, but the big effort.
He is really going to be focused around inventory in 2021.
And I would sort of I think.
I would classify our cash conversion in 2020 are exceptional army, 105% conversion in $120. If you would exclude something very positive which is the fact that we're one of the few companies that have substantial pension income so we might be going from exceptional to very good frankly in our receivables.
Performance was outstanding we're not sure of that can be replicated, we're certainly going to try but we're going to focus on some other ophthalmic I would also say we've done a nice job on advances on the Unbilled to.
In terms of 2020 sign front that this performance on cash was exceptional.
It should really take a look at.
Especially if you adjust for cash.
Pension or take a look at our cash generation as a percentage of our revenue you'll find that we're in the top quartile performance in that.
Used to live down 11% to 12% of sales and now we've been posting 17 16 16 so.
Feel pretty good about what we've done here hopefully by now it's sort of clear that this is not locked in it's not a one time phenomenon. This is actually a repeatable event.
Great. Thank you.
We will take our next question from Jeff Sprague with vertical research. Please go ahead.
Thank you good morning, everyone.
Hey, good morning, maybe a quick one on pension agreed the conversion numbers look great, especially if you adjust for that but.
The fact that you are now so over funded.
Is there a way.
<unk> exit through an insurance company or something to actually kind of extract monetary value from the pension.
When you speak of it as kind of a value driver.
Are you really kind of talking about hey, it's great day, that's overfunded and B.
You can use pension income to basically offset restructuring or other kind of cost related actions you might be taking.
Yes, I mean, I guess I would say a few things I mean, we're always looking at options around the future of the pension plan. So that's something that we look at constantly.
As far as value creation.
Is it in two ways number one it's a risk mitigated I mean other companies are having to pile cash and to their pension plan because they are unfunded we don't.
I can't remember the last time, we put anything substantive into our pension fund.
Which obviously would take away from our ability to deploy capital into things that are going to drive growth. So that's when I say, it's a value driver, particularly vis vis others.
A huge value driver in that case.
In particular, so and yes, it's a 113% funded I feel great about where that is even if we were to have a bit of a <unk>.
Market Downdraft, we would still be very very.
Very good position in terms of that funding level. So to me. It's the team has done a terrific job of managing the pension and the annual returns around it for a very long time and it has absolutely Ben.
Very good for us and for our balance sheet and our liquidity.
Jeff maybe couple of other things, there's really only two ways you can sort of monetize for one way is obviously are prepared no more people in the pension plan anymore, which frankly is a couple of Ceos from now.
The other ways you could sell it to potentially an insurance company and so on but.
There was a big premium on that some financially.
It doesn't make a lot of sense to do that right now, but I think what our investors should really remembers.
When they think about pension, particularly given the derisking that we have a new amount of fixed instruments that we have known this should be completely worry free flow to them because even a huge adjustment in the stock market is not going to put us in parallel so I.
Just think that this is sort of a safe haven in terms of an area that frankly is a big question Mark from other companies out there for us, it's a big positive and it's going to stay that way.
Seeable future.
Alright, thank you.
Sure.
We've been let's take one last question. Please.
Yes, Sir we will take our final question from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Good morning, everybody. Thanks for fitting me in.
So I have a have a little bit of a longer term question actually on the <unk> business.
<unk>.
How do you think about that business.
With the backdrop that we've got.
EV is obviously going to become a much bigger portion of other market going forward, there's going to be some biofuel conversions. How are you thinking about that business kind of structurally more longer term.
Yes.
Good question.
Good morning.
Two fold the first one.
Overall, obviously the world of energy and how energy's generating is going to change over time and the direction of that is clear it's going to be.
Renewables energies can become much more prevalent part of the future.
But it's also not immediate it's not going to happen in 2022, or 23, and it's going to be slow gradual progress.
So all other things that you can still does who will become relevant, particularly who are a big part of that business being around gas natural growth products, which we know is the cleanest other hydrocarbon.
Phase one so I think that we've got to continue to serve our customer base and frankly, many of them will be transforming in terms of how they provide energy to the world.
Second part.
As you know, we launched a new business with <unk> technology solutions business, which is going to become a bigger and bigger and bigger part of the <unk> portfolio and it really has three primary chronic levers one is <unk>.
Energy storage, which is economically feasible and viable and we are building and deploying our first prototype of that this year. So it's not a dream. Two is 360 degree plastics Recyclability, which also were going to be deploying from <unk>.
<unk> this year and then last one where we're really the pioneers, which is eco finding which is going to become a bigger and bigger part of our refining footprint. So we've got three sort of.
Under one business umbrella and that's going to become.
Our growth engine for the for the future growth.
Would I envision happening is.
<unk> longer term some of the more hydrocarbon oriented offerings will slowly I emphasized on very slowly decline.
Our sustainability technology solutions business will grow very very quickly.
That's sort of how I see that business evolving got forward. This is another place we're investing for our dollars to work and we're we're excited about the future and the kinds of solutions that we have and as you know we don't have better scientists anywhere in our company that <unk> when it comes to material science from I'm quite confident.
Some of these technology breakthroughs will work and we're really enable a path.
For future energy footprint copper world.
That's helpful. Thanks Darius.
Thank you.
This concludes today's kind of wanted an answer session. At this time I would like to turn the conference back to our speakers for any additional closing remarks.
Thank you I want to thank our shareholders for their continued support of Honeywell throughout the macro economic challenges of 2020, I am pleased by our execution throughout the year proving that we can and will outperform in all economic conditions, we are well positioned for the recovery I am excited.
For the opportunities to come in 2021 and beyond Thank you all for listening and please stay safe and healthy.
Thank you. This does conclude today's conference. Please disconnect your lines at this time and have a wonderful day.
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