Q4 2022 Honeywell International Inc Earnings Call

February 2, 2023

Thank you for standing by and welcome to the Honeywell fourth quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Please be advised that today's call is being recorded.

I'd now like to hand, the call over to Sean Meacham, Vice President of Investor Relations. Please go ahead.

Thank you Crystal.

Good morning, and welcome to Honeywell's fourth quarter 2022 earnings in 2023 outlook Conference call.

On the call with me today are chairman and CEO , Darius Adamczyk, Senior Vice President and Chief Financial Officer, Greg Lewis, President and Chief operating officer of embark aboard.

Our Vice President General Counsel and Matt.

This call and webcast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell Dot com forward slash investor.

Honeywell also use our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under regulation FD.

Accordingly investors should monitor our Investor Relations website. In addition to following our press releases SEC filings public conference call webcast and social media.

Note that elements of this presentation contain forward looking statements that are based on our best view of the world and all of the 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 in our annual report on Form 10-K, and other SEC filings.

Morning, We will review our financial results for the fourth quarter and full year 2022.

Discuss our 2023 outlook, including sharing our guidance for the first quarter of 2023 and full year 2023 as always we'll leave time for your questions at the end with that I will turn the call over to chairman and CEO Darius adopt check.

Thank you Sean and good morning, everyone. Let's begin on slide two the fourth quarter was another challenging one with supply chain constraints and inflation headwinds still at play, but Honeywell disciplined execution and differentiated solutions enable us to deliver on our organic sales segment margin earnings and free cash flow commitments.

Organic sales were up 10% year over year or up 11%, excluding the impact.

Wind down of operations in Russia led by double digit growth in commercial aviation building products and materials and <unk> businesses are testament to the underlying strength, we're seeing across our end markets, particularly in long cycle businesses.

The fourth quarter was another strong one for our backlog, which grew to a new record of $29 6 billion.

Up 7% year over year, and 2% sequentially due to the strength in aerospace and performance materials and technologies.

We're also a positive story in Aero and PMT, leading to a 2% organic orders growth and 6% sequential growth in the fourth quarter detail. The tailwind will continue to see in these two businesses gives us confidence in our 2023 outlook, which Greg and BMO will share more detail about it.

Few minutes.

Our segment margin expanded 150 basis points year over year led by over 900 basis points of expansion safety and productivity solutions as volumes improve and we continue to stay ahead of inflation curve through our strategic pricing actions.

Excluding the year over year impact of our investment in quantum the margin expansion was 180 basis points free cash flow was $2 $1 billion in the fourth quarter with 125% adjusted conversion down 18% year over year, but delivering in line with our original guidance for the year.

<unk>.

Capital deployment in the fourth quarter was $2 3 billion.

Including one 4 billion of share repurchases, bringing our full year total to $4 2 billion in shares repurchased and exceeding our goal of 4 billion from our March Investor Day.

For the full year of 2022, we delivered outstanding results above the high end of our initial guidance for segment margin and adjusted earnings per share. Despite approximately $2 billion in a year over year top line headwinds and constantly shifting macroeconomic conditions. We finished the year of six.

<unk> organic sales grew 70 basis points of margin expansion and $8 76 tenths of adjusted earnings per share up 9% year over year and above the top end of our original $8 Seven guide.

Orders ended the year up 8% on organic basis.

Backlog reached an all time high of $29 6 billion.

Generated $4 $9 billion of cash in the year, 14% of our revenue.

Appendix of this presentation contains a slide highlighting our guidance progression through 2022 as well as our performance against these guys.

Capital deployment for 2022 was $7 9 billion in total in addition to the $4 2 billion in share repurchase repurchases, which lowered our weighted average share count by two 5%, we deployed $800 million of high return capital expenditures and $200 million on closing the acquisition of <unk>.

<unk> digital designs.

Finally, we maintained our dividend growth policy paying out $2 7 billion.

And raising our dividend reported 13 time in 12 years as always we continue to execute on our proven value creation framework, which is underpinned by our accelerator operating system I am confident in the strength of our backlog.

Tailwind, we're seeing across our end markets.

Proud of our ability to execute and drive share owner value because the current challenging environment now lets turn to slide three to discuss an important development from the fourth quarter, which further improved our company's strength for the future.

In the fourth quarter, we announced the final court approval of our buyout agreement the Narco trust, providing the elimination of our funding obligations in exchange for 132 5 billion cash payment to the trust.

This liability has been weighing on our balance sheet. Since 2002, one of the numbers of legacy liabilities. The company has been carefully managing.

We recognized the charge from the buyout in the fourth quarter and the cash outflow.

Place in January .

Partially offsetting the impact of the buyout is the sale Harbison Walker international the reorganized and renamed entity that emerged from the narco bankruptcy, which is announced.

<unk> announced it and will be acquired from the trust by private equity firm Platinum equity. We expect this transaction to be completed later in 2023, reducing the net free cash flow impact by approximately $300 million.

This development represents a significant improvement in our financial strength.

<unk> simplifies our balance sheet by eliminating our evergreen funding obligations eliminates quarterly asbestos charges relates to narco.

English is any further uncertainty on our company's financial health now, let me turn it over to <unk> to discuss our fourth quarter results in more detail on slide four.

Thank you Danielle and good morning, everyone, let's turn to slide four as Darius mentioned, we continued to deliver on our financial commitments. Despite a very challenging operating environment in the fourth quarter grew 10% organically with double digit growth in three of our four SPD SPD BMT and payroll.

We generated volume improvement from third quarter in Aero and SPD. Despite continued supply chain constraints as expected we are seeing some signs of demand weakness in pockets of our shorter cycle businesses in Sps and SPD, but demand across our long cycle portfolio remains robust with <unk>.

<unk>, our warehouse automation as evidenced by 2% organic growth in orders and 7% growth in backlog.

Supply chain remains a constraint on our overall growth, but we are encouraged by another quarter of sequential volume improvement in Aero as output expanded by double digits in Q <unk>.

Alongside solid organic growth came robust segment margin expansion of 150 basis point year over year to nearly 23% as an investment in Honeywell digital enabled us to make a nimble and surgical approach to staying ahead of price cost, but SPF other loan segment experienced a decline in revenue year over year.

<unk> also generated the most productive quarter in it.

History, which we'll discuss in more detail shortly.

Let's spend a few minutes on the fourth quarter performance by business.

Space sales.

For the fourth quarter are up 11% organically year over year led by 23% growth in commercial aviation. This marks a second consecutive quarter of double digit aerospace organic sales growth and the seventh straight for commercial aviation, which gives us confidence despite the state of the Aero supply chain or the path to <unk>.

Years supply chain remains a gating factor to volume growth Dolby made further progress this quarter with our factory output up 15% year over year, and 14% sequentially. Our past due backlog grew an accelerated pace in the fourth quarter, but this was more driven by the strength of inbound orders.

Growth was highest in commercial OE, we had increased shipside deliveries led to 25% sales growth year over year.

Commercial aftermarket sales were up 20% in the fourth quarter as increased flight hours resulted in higher spare shipments and repair and overhaul activity. While defense volumes continued to be in the lower on a year on year basis in the fourth quarter. Our order rates remained strong up high single digits for the quarter.

And mid single digit for the year, giving us positive momentum for 2023.

Segment margins contracted 120 basis point to 27, 8% due to higher sales of lower margin all your products, partially offset by our commercial excellence efforts.

Building technologies delivered another outstanding.

And 21% organic growth in building products, however, supply chain still have not fully unlocked, we exited 2022 with higher past due backlog than we entered the year and considerably higher levels than our pre COVID-19 norms.

Building solutions sales also increased organically with double digit organic growth in product sales for the third consecutive quarter. We finished the year with higher project backlog levels than the start of the year, providing a solid runway for 2023.

Our continued commercial excellence in this inflationary environment enabled us to expand <unk> segment margins 370 basis points to 24, 8% substantial progress nearly nearly reaching our long term margin target of 25%.

Performance materials and technologies sales grew 15% organically in the fourth quarter, despite a 4% headwind from Russia.

Advanced materials grew 20% organically in the quarter as we continue to see robust value capture across the portfolio and demand in fluorine products.

<unk> was our fourth consecutive quarter, where our advanced materials that BMT growth.

<unk> grew 13% organically overcoming 9% headwind year over year from loss ratio sale.

Growth in <unk> was led by defining catalyst shipments and we also saw double digit sales increase.

Tenable technology solutions.

Process technology return to growth in the quarter as a result of strong gas processing demand.

Process solutions also grew double digit in the quarter with a trend across the portfolio led by thermal solutions lifecycle solutions and services and projects.

A late 2022, whether three Scots on operational challenges at one of our plants reducing output in the quarter.

<unk> won the game grew organically in the fourth quarter underpinned by strength in fluorine products segment margins contracted 100 basis point in the quarter to 22% driven by cost inflation and higher sales of lower margin products, partially offset by our commercial excellence efforts.

Safety and productivity solutions sales decreased 5% organically in the quarter in line with our expectation as continued growth in sensing portion of sensing and safety technology business offset by lower volume and warehouse automation and productivity solution and services.

While Antigua and delegated volumes declined overall, our after market services business saw another quarter of double digit growth BSS continues to see some demand moderation from macroeconomic conditions, but we remain confident in our differentiated solutions.

Segment margin was a standout for SBS that expansion of 940 basis point to 22% our highest evident this business due to commercial excellence improve say its mix and productivity actions more than offsetting lower volume leverage and cost inflation headwinds.

Growth across portfolio continues to be supported by positive results in Honeywell connected enterprise, we had another quarter of double digit revenue growth, including over 20% growth in our recurring and SaaS business year over year cyber spud our system that connected building all grew by more than 35% year over year in the quarter or the full year.

At <unk> sales and profit both grew by double digits, which is an indicator of the power of our strong software franchise.

Overall this was a great operation as Doug for Honeywell, our adjusted earnings per share in the fourth quarter grew 21% to $2 52, a penny above the midpoint of our prior guidance range segment margin drove 29% of year on year improvement in earnings per share. The main driver of our year over year growth.

A lower adjusted effective tax rate contributed 10% of improvement and reduced share count added an additional seven.

A bridge for adjusted EPS from <unk>, 21% to $4 22 can be found in the appendix of this presentation.

Moving to cash we generated $2 $1 billion of free cash flow in the quarter down 18% year over year, but delivering the mid point of our full year free cash flow guidance at $4 $9 billion cash continue to be challenged by higher receivables and inventory as we continue to work through the supply constrained environment.

$200 million headwind from guided receipt in the fourth quarter of 2021, so overall Honeywell rigorous operating principles allowed us to manage successfully through another challenging quarter as we close out 2022, now, let's turn to slide five to talk about where do we expect to see across our end markets and the broader macro environment in 2023.

Looking ahead to 2023, we see a continuation of many of the challenges we faced in 2022, but we also see ongoing progress in our key initiative to unlock more value from our supply chain in order to meet very robust demand in several of our key end markets commercial aerospace will continue to be a standout in terms of demand.

Both bell rates amongst our OEM customers as less after market flight hours, particularly as wide body make them more meaningful contribution on its way back to normalization.

Longsight back strong demand profile, we expect steady progress of the Aero supply chain in 2022 to continue into 2023 and as a result, we expect exploration that narrows topline growth compared to 2022 potentially achieving low double digits.

We continue.

We see continued tailwind for the investment in sustainable building solutions, particularly through institutional channels as well and the production of both current and future energy supply as evidenced by strength in orders across both sustainable building technologies.

And sustainable technology solutions, including Greenfields, we expect a moderation in raw material inflation, but for it to remain at elevated levels, coupled with a gradual improvement in supply chain, we should see more of a balance between volume and price to drive our topline growth in 2023.

Our <unk> growth of 2% decelerated in the fourth quarter compared to 8% for the full year, but remained in positive territory, including sequential growth from the third quarter for Arrow, BMT and SBS, our backlog up almost $30 billion remains at record levels growing 7% year over year in fourth.

Quarter, we reduced our past due backlog and all SPD, except arrow for the second consecutive quarter, reflecting supply chain loosening and the effects of effort to mitigate box shortages.

The current macroeconomic uncertainty is giving some customers pause amongst our short cycle businesses in Sps and SPD and Theres a lot of near term uncertainty regarding how the reversal of China's vehicle with policy will impact <unk>, particularly with the potential impact of Chinese new year. So this may be a tailwind in the second half.

As discussed on the third quarter call lower noncash pension income as a headwind to EPS growth in 2023, but our underlying segment profit growth continues to look robust underpinning our expectation of the confidence we have in our continued operational execution underpinned by our operating system called Honeywell accelerator, well manage through another challenging operational environment.

And with a rigor.

To expect from US now, let me turn it over to Greg as we move to slide six to discuss in more detail. How these dynamics come together for our 2023 financial guidance.

Thanks, Namal and good morning, everyone.

Given the backdrop that we will just shared in total for 2023, we expect sales of 36 to 37 billion, which represents an overall organic growth sales range of 2% to 5% for the year.

While we will continue to drive pricing actions, where needed to offset the impact of cost inflation, we expect more balanced between the contribution to volume and price in 2022.

Similar to last year, we believe the first half of the year will be slower as supply chain improve sequentially throughout the year and potential headwinds from the reversal of zero Covid policies in China are strongest in the first quarter.

In aerospace the demand backdrop remains very encouraging in both commercial aviation and defense and space.

In the commercial aftermarket, we expect continued flight hour growth, particularly in wide body as international borders opened and travel further normalizes to drive growth in air transport aftermarket sales.

The policy change in China should provide added fuel to this dynamic.

On the commercial OE side build rate schedules among the Oems are trending upwards year over year, leading to more ships that the deliveries for Honeywell driving revenue growth, but also translating into a corresponding increase in selection credits a headwind to margins.

In defence and space, we plan to convert our strong order book into sales and expect defense to return to growth in 2023 as the supply chain improves.

Supply chain constraints not demand remain the gating factor to both commercial and defense volume growth in 2023, but we are encouraged by the improvements our team has executed in recent months, resulting in 7% output growth in 2022.

The sourcing environment for electronic components in Aero improved over the past quarter, but the supply chain for mechanical components remains constrained due to skilled labor shortages among tier three and four suppliers.

We entered 2023 with aerospace backlog levels that are more than 20% higher year over year, giving us confidence in our growth projections for overall arrow, we expect organic growth for the year to be in the high single digit to low double digit range, while aerospace will likely be our strongest top line grower in 2023, we expect only modest margin expansion year.

Over year as increased volume leverage is largely offset by unfavorable mix due to increased election credits in the commercial OE business.

And building technologies, we're cognizant of the broader economic environment and expect private investment in non res construction to continue to be impacted by increased financing costs. However throughout 2022, and we built a strong slate of orders partially as a result of the supply chain environment that provide solid sales visibility and buffer for 2023.

In addition, we believe that institutional investment will remain robust buoyed by government stimulus funds that have not yet been deployed supporting key verticals, such as education airports and health care.

We see the most significant sales growth this year coming from building projects in building management systems as we capitalize on our robust 2022 book to Bill in these businesses.

We also expect increased spot orders for our building services throughout the year as the supply chain normalizes layer in incremental demand in.

For overall HPT, we remain cautious in the current environment expecting our strong backlog to support its early in the year and anticipate low single digit organic sales growth for 2023 overall however.

However, we remain very confident in our long term framework for building technologies as much of our portfolio is aligned with secular trends in sustainability and energy efficiency on.

On a segment margins, we expect to carry the momentum from 2022 strong exit rate, resulting in year over year expansion for the full year.

And PMT, where we're set up to build upon an impressive 2022 and convert favorable macro conditions into another solid year with sales growth sequentially throughout the year.

Backlog built through 2022 will enable another year of growth in process solutions led by lifecycle solutions and services and thermal solutions and.

<unk> improved comps as we lapped the loss Russian sales headwinds will provide support to a business that already has potential for upside.

Our process technologies business returned to growth in the fourth quarter and is poised to continue to grow at 23, while catalyst shipments should remain robust throughout the year.

Demand for new energy capacity to offset loss Russian supply will also be a tailwind, particularly for our LNG business.

In advanced materials growth will continue despite difficult comps, thanks to strong demand for our solstice products and supply chain improvements.

In addition to solstice, our other sustainable offerings will benefit from legislation such as the inflation reduction at.

And increased customer focus on environmental responsibility.

Orders in our sustainable technology solutions business had accelerated dramatically over the past two years and we're expecting more of the same in 'twenty three as we continue towards our $700 million sales target by the end of 2024.

In total we expect PMT sales to be up mid single digits for 2003.

PMT margins should expand modestly as a result of improved volume leverage and continued pricing and productivity actions.

Turning to safety and productivity solutions that will be the business most impacted by the macroeconomic environment in 'twenty, three and calibrated decreased investment in new warehouse capacity, we will continue to limit near term opportunities in our long cycle project business with a trough in demand likely coming this year before returning to growth in 'twenty four.

However, our aftermarket services business has been growing at double digit rates and we expect that to continue in 2023.

And productivity solutions and services short cycle demand softness and the distributor Destocking will impact sales in the first half of 'twenty three but we expect this dynamic to taper off and should see sequential improvement later in the year.

And sensing and safety technologies sales growth will continue in 2003 after a strong finish to 2022.

In total we expect Sps sales to be down mid to high single digits for the year.

From a margin standpoint, 23 should be another solid year for Sps as we continued to benefit from improved business mix and drive our operational improvements.

While <unk> 22 was the high watermark for the business and will not necessarily be the new standard moving forward. We believe high teen margin rates are achievable in 2023.

So we expect our overall segment margin to expand 50 to 90 basis points next year supported by higher sales volumes. Our continued commercial excellence efforts and productivity actions similar to last year, we expect Sps margins to expand the most as we build on our operational improvements in 'twenty, two and continue to benefit from.

Through mix and cost structure in that business for.

For the year, we expect earnings per share of $8 80 to.

To $9 20.

That to up 5% adjusted despite an approximately 55 headwind of lower pension income.

Excluding this impact our adjusted EPS range would have been $9 35.

To $9 75.

<unk> up 7% to 11% adjusted.

On the free cash flow front, we expect a range of $3 nine to $4 $3 billion in 2023 or five one to $5 5 billion. Excluding the one time $1 $2 billion net impact of narco Hwy and <unk> matters.

I'll walk through the puts and takes for our 'twenty free cash flow in greater detail in a couple of minutes, but first let's turn to slide seven and walk through our EPS bridge for 2023.

As you can see segment profit will be the key driver of our earnings growth in 'twenty three contributing 59 at the midpoint of our guidance range.

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 475 million to $625 million, which includes capacity for $200 million to $325 million of repositioning which is lower than the approximately $400 million we used in 'twenty two.

For tax we expect an effective tax rate of approximately 21% for the year.

With these inputs below the line in other items, excluding pension are expected to be up <unk> <unk> per share year over year at the midpoint of guidance, primarily driven by lower repositioning and as fastest charges, partially offset by higher net interest expense.

For share count our base case for 2023 is that our minimum 1% share count reduction program will result in a benefit of approximately <unk> 15 per share, reducing our weighted average share count to approximately $672 million from the 683 in 2022.

As we previously communicated we expect a large decline in pension and <unk> income this year as a result of the industry and the increased interest rate environment for.

For the full year, we expect approximately $550 million of pension and <unk> income down about $500 million from 2022, driving about 55% headwinds to EPS.

However, this is a noncash accounting items as our overfunded pension status will ensure that no incremental contribution are needed. We ended 22 with our pension funded status of over 125% as a result of diligent management and strong returns a great position to be in for our employees and shareholders.

In total we expect 23 earnings per share to be in the range of $8 80.

To $9 20.

Flat to up 5% year on year on an adjusted basis. However, excluding the impact of noncash pension headwinds our guidance would be a range of $9 35 to $9 75.

Up 9% at the midpoint.

Now, let's turn to slide eight and talk about the drivers of our free cash guidance for 2023.

As we've outlined in the bridge are 23 free cash flow story can be characterized as strong operational performance offset by a few discrete non operational items.

Income growth is the largest driver of free cash flow and we expect to make further progress this year on working capital as the supply chain normalizes.

We expect 23 free cash flow, excluding the settlement of the legacy legal matters, we discussed earlier to range between five one to $5 5 billion.

Up 8% year over year at the midpoint as we had previously spoken about.

Accounting for the settlements, we are expecting free cash flow for 2023 in the range of $3 nine to $4 3 billion.

Now, let's turn to slide nine we can discuss our guidance for Q1.

Yeah.

As we highlighted earlier, we enter 'twenty three with record backlog, providing a solid foundation for the first quarter <unk>.

Supply chain has remained constrained however, we anticipate modest sequential improvement in volumes, we're closely monitoring the impacts of zero Covid policy changes in China as the country reopens and he's it's COVID-19 restrictions and are wary of potential Q1 impacts. However, we anticipate that these policy changes will be a net positive for demand as we progress.

Throughout the year and will result in a robust second half in China.

Looking at the segments, we expect sales growth in aerospace in the first quarter as the demand environment remains robust and we execute on our strong backlog. However, the rate of growth will be more subdued than our full year expectation as we anticipate <unk> will be the most supply constrained for the quarter.

And building technologies, we anticipate modest organic sales growth in the first quarter as we worked through our backlog and the supply chain continues to heal we.

We see the strongest sales growth in building projects, followed by increased sales of fire.

In PMT, we expect another quarter of year over year growth in <unk>, we expect that growth to be once again led by advanced materials with process solutions the laggard.

With strong year over year growth.

We're expecting our sorry, we experienced a disruption in one of our PMT plants that will cause some unplanned downtime. So that is embedded in our guidance.

In safety and productivity solutions short cycle and warehouse automation demand softness will offset growth in <unk> aftermarket services and the sensing part of our sensing and safety technologies business, leading to a decline in year over year sales. However, we expect another strong margin performance in the high teens.

So for overall Honeywell, we anticipate sales in the range of eight three to $8 6 billion in the first quarter up 1% to 5% organically.

We expect margins in the range of 21 for the 21, 8% up 30 to 70 basis points year over year as we remain diligent in our price cost management and benefit from favorable business mix.

The net below the line impact is expected to be between $165 million to $210 million of an expense with a range of repositioning between 80 and $120 million as we continue to provide capacity to fund our transformational efforts, we expect the effective tax rate to be in the range of 21% to 22% for the quarter and.

Average share count to be approximately 675 million shares.

As a result, we expect first quarter EPS between $1 86, and $1 96.

Down three to up 3% year over year or up 5% to 10%, excluding the year over year impact of lower noncash pension income.

And lastly, while the first quarter is already historically, our lowest from a free cash flow perspective, the settlement payments related to the aforementioned legal liabilities were paid out in January and we expect cash from operations to be a net use in <unk>.

Overall, while we maintain a prudent level of caution we're confident in our operational abilities and our portfolio of differentiated technologies. Our portfolio is well positioned for this stage of the cycle and we will continue to innovate and invest in the businesses to support long term growth now with that I'll turn the call back over to Dario.

On slide 10.

2022 was another year of both challenges and progress for Honeywell. Despite another host of macroeconomic and geopolitical difficulties you attack. The challenges we faced head on we over delivered on our financial commitments, while 2023 brings new.

Including potential recession scenarios, bringing to uncertain demand in short cycle with a record $30 billion backlog, a robust balance sheet and one that has been further de risk due to the of narcos settlement.

Ability to deploy capital organically.

Inorganically I remain optimistic about the future of Honeywell and believe the company is well positioned to drive innovation.

To solve some of the world's most challenging problems.

One last item before we move to Q&A I'm pleased to announce that our 2023 Investor day will be held on May 11th in New York City.

At this investor day.

Along with other members of the senior management team, who will provide an update on honeywell's business strategy exciting new growth opportunities and our long term growth algorithm, we look forward to sharing more about honeywell's future at that time.

With that Sean let's move to Q&A.

Thank you Darius.

Darius Greg nimble and <unk> are now available to answer your questions. We ask you. Please be mindful of others in the queue by only asking one question Crystal. Please open the line for Q&A.

Thank you.

At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone you will then hear an automated message advising you that your hand is raised to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

And our first question will come from Julian Mitchell from Barclays. Your line is open.

Hi, good morning.

Good morning.

Just wanted to start my question would be around the first quarter.

Outlook.

So maybe two parts on that firstly, just on the module segment margin assumption.

We assuming within that that you have sort of two or 300 points increase at Sps year on year, and then maybe a down in aerospace and PMT on margins just wanted to check that.

And then also in Q1 should we expect orders.

To be down.

So they were up kind of low single digit in the second half of last year. Thank you.

Hey, Thanks Julien.

First off we don't guide orders, so we're not really going to comment on that specifically as it relates to the margin outlook. You highlighted I think you are in the right neighborhood again, we don't guard our guide our individual margin rates for each of the segments.

But to expect that arrow might be down in <unk> is probably a reasonable expectation as I highlighted Sps is going to be on the top end of our margin expansion in all year long frankly.

Given given all the work that that team has done adjusting their cost structure for the realities of the sales environment that they've been in as well as as we talked about before the reductions in <unk>.

And celebrated sales are actually not painful from a margin standpoint, it actually helped.

Given the margin profile of that business. So I think you are.

Your instincts are right, but we're not going to be specific on that and maybe just to add to that I mean, I think Sps results, particularly in Q4 really exemplify our off the strength of our operating systems and how quickly we adjust to market conditions. As you saw they posted record margins and that's not by accident Thats.

<unk> very pronounced actions that you'd say, we're facing some challenges on the revenue side the adjusted their cost structure. They maximized, our aftermarket services business, which resulted really nice margin profile.

As an example, Honeywell operates which is when we see challenges we act upon them early and make sure that we are still very good results. Despite some market headwinds.

Thank you.

One moment for our next question.

And our next question will come from Steve Tusa from Jpmorgan. Your line is open.

Hi, good morning.

Good morning.

Can you just give a little more color on how much the OEM incentives or what kind of headwind that is and then are you guys on track for the longer term target.

And any color on the trajectory and timing towards that.

You said historically or last year was.

29% are you guys still on track for that.

Yes, we absolutely are I think.

We're very committed to that number.

As we look at the outlook for this year, we're very much within our operating algorithm that we provide last investor day.

If you just take the midpoint, we're sort of at the lower end on revenue where we are.

Above our margin profile, but in terms of our commitment to our long term gains.

It's we're very much on track.

The OEM credits are significant.

As a headwind.

Yes, yes, so and think about that.

That is tied to boeing's delivery, specifically at airplanes and incentives that we have.

For with the Airlines, who are taking those airplanes and that is going to be multi year realignment.

They've promised in excess of their production rate in terms of deliveries and so that's going to that's what's going to move the needle is going to impact our sales when we print our OE sales growth rates youre going to see that as a as an offset and it's obviously a margin headwind so.

It's measured in the hundreds of millions of dollars, we're not going to be precise about what that is and again there is going to be variability around that depending on.

The actual delivery performance of the Oes to the airlines themselves and two maybe just some closing two points, we do expect modest margin expansion in April .

And we're very committed to the goal we gave you at the last Investor day.

Thank you one moment for our next question. Please.

And our next question comes from Scott Davis from Melius Research. Your line is open.

Hey, good morning, guys.

Good morning.

I was wondering if you guys could walk through a little bit of what your cost inflation assumptions are and maybe a little color around kind of that the price cost environment.

Just in context.

Are we kind of done with the inflation part of the cycle or your suppliers still.

Still raising prices on you guys.

Are you still raising prices on your side I'm, just a little bit of color per segment I think would be helpful. Thanks, I'll pass it on after that.

So Scott as a headline I would say that inflation is moderating it's not going away. So we are not losing our eye on our model on driving positive price cost and.

But on a trend basis, there's some deflation in some commodities or labor cost is high.

Energy costs are kind of more on a standstill basis, so thats our entry assumption that it's on.

More on a reducing trend, but not getting moving away so our pricing targets have been.

Our justice be stillborn positive price cost model into our P&L so be it.

I'm going to go away from that execution, we did in 2022, but we're also sensitive that with the market being tighter compared to 2022, we want to also protect our volumes.

That extent, we are watching how are we going to adjust our price cost algorithm. So that is kind of lower auction principles, David within the businesses, a little bit, but directionally thats, how guiding principles, maybe Greg if you want to add anything yes, I mean, all I would say is what that means rather than double digit price increases were planning on.

Mid single digits, maybe low single digits this year with inflation in that same neighborhood.

I think thats important is that we do we just don't do twice pricing why.

Mark watched demand versus pricing versus balancing our inflation and we tried to do that thoughtfully such that it's not just blind increases. We also have to be mindful of market share demand et cetera.

<unk> got a set of analytics to do that I mean, this is the power of Honeywell digital which we've been implementing last three to four years our level of visibility accuracy is actually really good and it's a new set of muscles. We've developed actually in the last year and a half as we face this inflationary environment.

Thank you one moment for our next question.

And our next question comes from Sheila <unk>.

From Jefferies. Your line is open.

Good morning, everyone and thank you.

Good morning, maybe if I could ask about supply chain and pigments you have a little bit of improvement in working capital year over year on supply chain can you frame. The total impact in 2022 supply chain and how do you expect the panning out in 'twenty three you've called it out in aerospace.

Tier three care for suppliers, having labor issues.

Or else are you seeing and how do you kind of expected.

Across the segments.

Yes, let me kind of there is sort of not one way to describe it but I'll give you a few metrics, which indicate the direction I mean, I think the punch line summary franchise. It is improving and we saw that I mean, we saw a reduction in our past due in three out of the four spg's you're only one.

<unk> went up in.

Q4 was arrow, but we also saw very robust demand in Aero. So I think you have to offset that is that an issue set of opportunities.

And I would tell you that our aero output on a year over year basis was up around 15%. So that's actually a pretty good outcome, which also tells you that we're.

Migrating into right direction, and given that the past dues reduced and the other one so let me kind of split the discussion on two segments.

One for semiconductors, it is definitely getting better.

It is improving and we see that sort of really moderating towards a normal state before the end of this year that sort of what we saw we saw some clearing of the past dues, we still have some left and thats, how we see it.

In Aero.

It's also improving the pace is likely going to be slower than awarded to us in semiconductors, our level of <unk> in Q4 was below 20% which was.

LOE for the year.

Every year every quarter prior to Q.

Q4, local Zika mix from our supply base was over 20% actually under 20%, which is also a good sign so we see a slow and steady improvement as we move throughout the year, that's sort of our expectation for the supply chain.

Thank you one moment our next question.

And our next question comes from Nigel Coe from Wolfe Research. Your line is open.

Thanks, Good morning, everyone.

I just wanted to.

Hi, Good morning, just what it's done into Sps a bit more so if we think about.

Maybe first of all can we just dive.

Diving a bit deeper into what happened with the PPS I know theres been some channel headwinds there, but that's a big change from what we saw last quarter and then when you think about the train train III outlook. It looks like it kind of goes down 15% to 20%.

Is that representative of the markets.

Or are you being more selective in terms of the projects you have.

Would be accepting and therefore converting.

And then on some of the App I know Thats only one question but.

It looks like margins.

High teens, maybe 20% range when we normalize for mix beyond this year are we going to be above 20%.

Any color there would be helpful.

Can you repeat the last one because I didn't quite get the last question there Nigel.

Yes.

The last part of the one question.

When we normalize the mix sort of integrated PPS.

In 'twenty four 'twenty five.

At 20 and above margin.

Yes.

That one was going to be it's.

Probably too early to tell but what I will tell you is that.

Four we already basically demonstrated that we can get to 20% margins in Sps in Q4, so the target Hasnt changed.

In terms of what's happening overall with the business.

Yes, and calibrate it is the markets are down we see at the warehouse and distribution segment is down there is an overbuilt that occurred in the year 2020 at 2021.

Markets are absorbing that capacity, we do expect.

An uptick in orders and returned to growth in 2024.

We actually are encouraged by the pipeline that is starting to form.

And at the same time, we're also are being a little bit more selective in terms of margin profile and so on and we have.

Algorithm in terms of the kinds of orders that we want so it's a little bit of both.

PSS has.

Then a bit softer.

No.

And then Ben into prior we got to remember that we're coming off of record orders, particularly in the first half.

But overall, we expect to see a fair.

Fairly strong robust level of business in the second half this year, we still have a backlog to draw for them. So.

I don't think there is there was nothing in Sps in Q4 that was out of expectations. It was actually incredibly consistent and frankly I was very encouraged by the margin range and that team has done a nice job and really managing to the card sales fell from a revenue base user.

Our accelerator operating system to really deliver a strong financial result.

We have been with some revenue headwinds I don't know if <unk> Ics I think just one other comment on idea I think topline.

Top line challenge, whether it be there in 'twenty three but we are focused on margin in this business of our aftermarket service business is growing double digits.

Our last several years that trend will continue in 2023 in fact, we wanted to do everything possible to continue to drive that at a higher rates and other margin improvement opportunity by better operating efficiency executing projects better than foster is going to be another focus area. So while the volumes are down we're constantly looking at <unk>.

Expansion strategy and dedicated business.

Thank you.

One moment for our next question please.

And our next question comes from Andrew <unk> from Bank of America. Your line is open.

Hi, yes, good morning.

Good morning.

Just a couple of questions on.

PMT so first on.

De carbonization, clearly big revenue driver, but are you seeing any delays.

And process and fund disbursement at the federal level, because we've sort of heard.

I would just shortage of staffing there. So that's question one and second if you could just talk about visibility on advanced materials strength, because that seems to be just get better and better every quarter. Thank you.

So on the Andrew on the Decarbonization I would say at least I see much stronger trend and artisan a sustainable technology solution business as we had forecasted IRS at least helping we had a pretty strong performance in our sustainable aviation fuel part of the portfolio, we see thats further strengthening and <unk>.

<unk> three but in addition, obviously activity happening in carbon capture and hydrogen space.

So we see more active projects.

Where customers are making decisions. So we remain very optimistic on good performance by STS business.

In 2023 on advanced materials, I would say the momentum on solstice continue.

We see more application adoption in newer areas.

As an example heat pump is becoming another exciting area, where we are developing new applications and that business is all about expanding new application and expanding new geographies. So we see that trend there are pockets in advanced material, where there is a.

Economic headwind on residential side. So that's a smaller part of the business, but there are headwinds there are pockets in electronic materials, where there the server related demand in PC. So we supply some products and that but on an overall picture advanced materials has a strong momentum and you said it I believe the momentum will continue in 2022.

Yes, maybe just to add a couple of things a couple of specific numbers I mean, our orders in Q4, particularly in our Florida business were very very strong double digit strong.

Our <unk> business is strong <unk> is well positioned for the year Spider business was extraordinarily strong RV acquisition, we made.

In 2021, so all in all I think it was a very strong orders quarter as we pointed out in our track. If you remember some of the very very unusual cold weather that we face around the Christmas time caused us some challenges some of our process operations because frankly, they're just not built to operate in five degree weather.

That's not what you typically see in Louisiana in December so all in all I think that this is our AAM in PMT business is well positioned good orders growth and.

Strong performance should be expected.

Thank you.

Our next question please.

And our next question comes from Jeffrey Sprague from vertical research. Your line is open.

Hey, Thanks, Good morning, everyone. Just a follow up on Aero margins for me if I could I appreciate the color on the OEM incentives I'm just trying to think about the next couple of years also.

You can give us some directional help right its not its not hard to imagine those incentives continue to escalate. The next couple of years as Boeing delivers more but I think you might be getting some help going the other way and business jet or other parts of Aero. So can you just give us a sense of.

Is 2023 kind of peak headwind for incentives how it might play out in 'twenty, four and 'twenty five.

Yes, Great question, Jeff in your again your instincts are on.

This is a bubble right because they Boeing in particular was not able to deliver jets when they were grounded.

And so that acceleration is going to go up and then come back down again.

As we see it right now it looks like 23 is going to be the top and then it starts coming back down, but again thats going to depend entirely on the pace of those deliveries, but it ought to be.

Let's say reoriented back with.

Back with deliveries in our view.

By 2025 for sure and maybe into 2024. So so this is going to be a a temporary a temporary headwind.

And then things will realign back where deliveries and shipments come back into line and so therefore, our P&L will become more aligned.

I think thats exactly right.

That this is just as probably an unusual 23 headwind, but even there Edwin we expect to modestly expand margins, but I think the most important thing that's missing here as well.

We're very excited about the future of aerospace I mean, the orders are up <unk>.

Backlog is way up I mean, we think the next three years will be very exciting for Aero supply chain is thoughts on supply chain is getting better or.

ISC teams are really demonstrated unlock.

A lot of the capacity.

I think theres nothing other than to be excited for the next three years in aerospace it's.

I am very confident in the backlog position and.

It's going to be it's going to be a really nice period for that business.

Thank you.

Our next question.

And our next question will come from Andrew Kaplowitz from Citigroup. Your line is open good morning.

Everyone.

Good morning.

So you mentioned capital deployment in line with three year $25 billion plan for 'twenty, three I think which would mean another year somewhat similar to 2002 when you deploy it almost 8 billion of cash obviously out there you've got national instruments conducting a strategic review as I'm sure. You know is Honeywell, where do you consider to be quite a bit larger than you've done in the past there. So.

We know you have the financial capacity to do it but <unk> been disciplined when you've done M&A and really stuck to more bolt ons can you remind us of your return hurdle is to do a larger acquisition, what if any strategic requirements you have to make a larger acquisition.

Yes, I think its good.

Good question, yes, so I mean, obviously, we have a balance sheet, that's strong and over.

Over the last two years, we have let's call it roughly around $15 billion plus to deploy it based on our 25 over the next three years. So we have the capacity, but I just pointed out a couple of things number. One is we are disciplined in our approach.

One so.

0.2 is where our controls and automation and sustainability and digital company.

Three is we typically don't do hospital acquisitions.

No.

We are interested in doing more M&A smart M&A in 'twenty three I think you should expect that at some point.

But it is going to be thoughtful it's going to be acquired at a price where we have a lot of confidence in generating shareholder value.

It's going to be something that we can truly strategic and what we do as a company.

Thank you.

Our next question please.

And our next question will come from Josh Poker Winski from Morgan Stanley . Your line is open.

Hi, good morning.

Good morning, you have yes. Good morning, Thanks for taking the question understanding you guys have above average backlog right now obviously some longer cycle businesses as well as supply chain any way, we should think about backlog conversion this year or where do you guys think maybe backlog.

Good and hopefully and if youre able to start getting more product out the door I think Ts.

Teasing out the demand environment versus the supply chain environment has been a bit of a trick here for a while.

Yes, maybe I'll start and I'll turn it over to Bill.

First of all we feel very good about tobacco, because if you sort of look at the backlog, where we are in totality, it's about $3 billion to $4 billion more than what I call a normal state. If you go back two three years.

We can debate, whether it's three it's in that $3 billion to $5 billion more than normal. So the backlog position is very strong from a long cycle perspective, aerospace through especially PMT very strong position.

Even in the short cycle businesses, which are predominantly to HPT in Sps.

We've got strong backlog through at least the first half of this year, we do expect an uptick as we go into the second half of this year in terms of some of those businesses because we have some unusual pull forward order activity in the first half.

So, especially as we get into the second half of this year.

Don't know this yet, but we are cautiously optimistic it can actually be one of those unique periods, where the short cycle and long cycle are turning it at a really good pace with much more confidence in the first half based on the strength of the long cycle.

We expect an uptick in the second half in short cycles.

So maybe two in person that in addition, as we talked earlier, we do expect supply chain performance to get better.

Both on the Aero supply chain and semiconductor constraint, which will mean that we can fund our past dues slash backlog.

So then what we did in 2002.

And we also expect that our project businesses will also execute on our backlog on a more determined basis, because they also faced headwinds on supply chain constrains in.

2022.

We have the backfill Atlanta, just indirectly answering the question of artist forecast and we don't guide that but we remain optimistic.

And we will get our fair share of demand in the market that we can commit and as long as market performs we will perform in.

In line with the market.

Thank you.

Our next question please.

And our next question comes from Joe Ritchie.

From Goldman Sachs. Your line is open.

Thanks, Good morning, everyone.

I wanted to ask that last that last question, maybe slightly differently because our guidance.

Is a little bit wider than normal until.

So perhaps maybe.

What scenario would.

Do you guys see yourselves coming in.

Below the midpoint of the guidance EPS guidance for the year.

Yes, I mean, I think first of all let me there's a couple of questions. The first one is why is the guidance wider than normal.

I think we would probably admit that in terms of the economic scenarios. This year.

Probably a bit wider than most people would guests you have anything ranging from a soft landing out there to a deep recession and I've heard opinions anywhere in that range.

So I just think from a Honeywell perspective, and this is I think consistent of how we guide every years and probably this year more than ever we try to have a little bit of a wider range, which is indicative of the uncertainty around the economic conditions and I would say if I would compare this year versus 'twenty, two or 'twenty one.

It's probably more uncertainty rather than less so.

It's sort of.

That's sort of the.

The reason for the wide range in terms of the range itself sure.

Lower end.

At the lower end, it's probably.

It's probably means that tougher economic conditions in the second half is the.

Economic conditions turn worse to short cycle is worse than we expect that the top end.

<unk>.

It's a bit more of what we hope is the expectation, which is some of the order activity turns short cycled becomes more robust in the second half.

And China returns to growth I mean, Q1, we actually think Q1 in China could be challenging.

Because of the lifting of the Covid restrictions Chinese new year, and so on and we've embedded that in our guide.

But we actually think that.

Second half in China could actually be quite strong and if that comes to fruition that sort of points to the upper end of our guide so.

That's where we kind of have a bit of a wider range in and by the way. We did guide a wider range like this historically at 40, it's not that much quieter in 'twenty two was a little bit narrower, but I think it's just it's as simple as it is indicative of the economic uncertainty.

Many of us are facing and if there is a wide range of age.

<unk> guess is yes, I think we'll know a lot more come June .

As we talked about I think we feel pretty good about where we are from a backlog position.

No one really knows what the.

The level of activity in the economy will be I mean, we've had some good things.

European.

Winter has been more mild than people thought and Europe's held up relatively well.

Versus what some of that let's figure it could be but I think as you said well we feel really good about where we are right now and.

We will continue to take that temperature as we go through the first four to five months of the year.

Thank you one moment for our next question. Please.

And our next question comes from Deane Dray from RBC capital markets. Your line is open.

Thank you and good morning, everyone and start with congrats on getting to the finish line on the Narco Trust that was a really long road and I know you had to get all the approvals so nice to see thank you Deane.

Yes.

It's Ben.

A long road, but Honeywell was one of the first two.

Pursue that trust and you've got all the approvals with the plaintiff and so forth, but great to see it derisked.

And just a follow up on the last question on the geography is anything really surprise you in the quarter in terms of the geographies. It seems like Europe was it excuse me just the weather that not as dire on the energy side, but what were the surprises on the geographies and what's baked in for.

23 major geographies I know you gave a little bit on China, but if you could round that out that'd be helpful. Thanks.

Maybe I'll start.

Similarly, any further commentary I would say no major surprises I mean in terms of how we ended up I mean Europe was.

Softer, particularly the U K was really soft in Q4 that probably stood up for us in Europe , but then as we looked at December exit rates were actually bad So November and that total were a bit weaker December exit rates were better.

In terms of the overall business performance.

It was actually incredibly consistent of what we guided.

We guided.

We came in roughly at the middle of our range, a little bit better on operating margin.

We guide for a reason and that's sort of where where we where we ended and by the way. Thank you for acknowledging the narco I mean, I think as you kind of read the articles and some of the other companies out there.

Can't under.

Under a state.

Or overstate how important it is to eliminate liabilities from your balance sheet and when you can do that permanently.

<unk>.

Stan Schlie de risked the future of the company I think maybe just didn't get as much offensive as I think it was.

Was it was a huge deal.

It hit up a lot of bandwidth, but I am thrilled to have this liability reduced off the balance sheet. So I think when leasing allowed us that I think everybody is a bit of commentary on U S and Europe , So I won't repeat it but high growth region represented $80 part of annual revenue we.

We do expect China to have a strong growth in 2023, we are cautious in Q1, but very optimistic for the year, but other high growth region markets. We are we are confident on good growth middle East we have good backlog and a very strong pipeline for orders, India. We remain very optimistic Turkey Central Asia, we remain very optimistic ASEAN.

So overall.

As part of the World should should offset some of the headwinds we see in Europe and Thats, what we are kind of dialing in into our planning process.

Thank you that does conclude our question and answer session I would now like to turn the conference back over to Daria Saddam check for any closing remarks.

I want to thank our shareholders for your ongoing support we delivered strong fourth quarter results and continued to navigate effectively through multiple uncertainties with a typical level of operational rigor you've come to expect from Honeywell.

Our future is bright and we look forward to discussing this further at our upcoming Investor day in May. Thank you all for listening and please stay safe and.

And healthy thank you.

This concludes today's conference call. Thank you for your participation you may now disconnect.

The conference will begin shortly.

Jayson lower Johan during Q&A, you can dial star one one.

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Thank you for standing by and welcome to the Honeywell fourth quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session. Please.

Please be advised that today's call is being recorded.

I'd now like to hand, the call over to Sean Meacham, Vice President of Investor Relations. Please go ahead.

Yes.

Thank you Crystal good morning, and welcome to Honeywell's fourth quarter 2022 earnings in 2023 outlook conference call on.

On the call with me today are chairman and CEO , Darius Adamczyk, Senior Vice President and Chief Financial Officer, Greg Lewis, President and Chief operating Officer of <unk>, and senior Vice President General Counsel and Matt.

This call and webcast, including any non-GAAP reconciliations are available on our website at www Dot Honeywell Dot com forward slash investor.

Honeywell also use our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under regulation FD Accordingly investors should monitor our Investor Relations website. In addition to following our press releases SEC filings public conference calls webcast and social media.

Note that elements of this presentation contain forward looking statements that are based on our best view of the world and other 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 in our annual report on Form 10-K, and other SEC filings. This morning, We will review our financial results for the fourth quarter and full year 2022, and discuss our 2023 outlook, including sharing our guidance for the first quarter of 2023 and full year 2023 as always.

We'll leave time for your questions at the end with that I will turn the call over to chairman and CEO , Gary Saddam check.

Thank you Sean and good morning, everyone, let's begin on slide two.

Fourth quarter was another challenging one with supply chain constraints and inflation headwinds still at play, but Honeywell disciplined execution and differentiated solutions enable us to deliver on our organic sales segment margin earnings and free cash flow commitments.

Organic sales were up 10% year over year or up 11%, excluding the impact of the.

Wind down of operations in Russia led by double digit growth in commercial aviation building products advanced materials and <unk> businesses are testament to the underlying strength, we're seeing across our end markets, particularly in long cycle businesses.

The fourth quarter was another strong one for our backlog, which grew to a new record of $29 6 billion.

Up 7% year over year, and 2% sequentially due to the strength in aerospace and performance materials and technologies.

Few minutes.

Our segment margin expanded 150 basis points year over year led by over 900 basis points of expansion safety and productivity solutions as volumes improve and we continue to stay ahead of the inflation curve through our strategic pricing actions.

<unk>.

Capital deployment in the fourth quarter was $2 3 billion in.

Including one 4 billion of share repurchases, bringing our full year total to $4 2 billion in shares repurchased and exceeding our goal of 4 billion from our March Investor Day.

For the full year of 2022, we delivered outstanding results above the high end of our initial guidance for segment margin and adjusted earnings per share. Despite approximately $2 billion in year over year top line headwinds and constantly shifting macroeconomic conditions. We finished the year with.

6% organic sales grew 70 basis points of margin expansion and $8 76 tenths of adjusted earnings per share up 9% year over year and above the top end of our original $8 seven guidance.

Orders ended the year up 8% on organic basis.

Backlog reached an all time high of $29 6 billion.

We generated $4 $9 billion of cash in the year, 14% of our revenue.

<unk> of this presentation contains a slide highlighting our guidance progression through 2022 as well as our performance against these guys.

<unk> digital designs.

Finally, we will maintain our dividend growth policy of paying out $2 $7 billion and raising our dividend reported 13 time in 12 years as always we continue to execute on our proven value creation framework, which is underpinned by our accelerator operating system.

Confident in the strength of our backlog.

Tailwind that we're seeing across our end markets.

In the fourth quarter, we announced the final court approval of our biotech agreement the Narco trust, providing the elimination of our funding obligations in exchange for 132 5 billion cash payment to the trust.

This liability has been weighing on our balance sheet. Since 2002, one of the numbers of legacy liabilities. The company has been carefully managing.

We recognized the charge from the buy up in the fourth quarter and the cash outflow took place in January .

Partially offsetting the impact of the buyout is Brazil, Harbison Walker international the reorganized and renamed entity that emerged from the narco bankruptcy, which is announced which have announced it and will be acquired from the trust by private equity firms platinum equity. We expect this transaction to be completed later in 2023.

Reducing the net free cash flow impact by approximately $300 million.

This development represents a significant improvement in our financial strength, specifically to simplify our balance sheet by eliminating our evergreen funding obligations eliminates quarterly asbestos charges relate to narco.

English is any further uncertainty on our Companys financial health now, let me turn it over to <unk> to discuss our fourth quarter results in more detail on slide four thank you Danielle and good morning, everyone, Let's turn to slide four as Darius mentioned, we continued to deliver on our financial commitments. Despite a very challenging operating environment.

The fourth quarter sales grew 10% organically with double digit growth in three of our four SPD SPD BMT and payroll regenerated volume improvement from third quarter in Aero and SPD. Despite continued supply chain constraints.

As expected we are seeing some signs of demand weakness in pockets of our shorter cycle businesses in Sps and SPD, but demand across our long cycle portfolio remains robust with exception of warehouse automation as evidenced by 2% organic growth in orders and 7% growth in backlog.

Supply chain remains a constraint on our overall growth, but we are encouraged by another quarter of sequential volume improvement in ERO as output expanded by double digits in Q <unk>.

Alongside solid organic growth came robust segment margin expansion of 150 basis point year over year to nearly 23% as an investment in Honeywell digital enable us to make a nimble and surgical approach to staying ahead of price cost, but let's be also the loan segment experienced a decline in revenue year over year the business.

<unk> also generated the most productive quarter in its history, which we'll discuss in more detail shortly.

Let's spend a few minutes on the fourth quarter performance by business Aerospace sales for the fourth quarter are up 11% organically year over year led by 23% growth in commercial aviation. This marks a second consecutive quarter of double digit aerospace organic sales growth and the seventh straight for commercial aviation.

<unk>, which gives us confidence despite the state of the Aero supply chain over the past two years supply chain remains a gating factor to volume growth Dolby made further progress this quarter with our factory output up 15% year over year and 14% sequentially.

Our past due backlog grew and accelerated pace in the fourth quarter, but this was more driven by the strength of inbound orders growth was highest in commercial OE. We had increased chipset deliveries led to 25% sales growth year over year.

Mid single digit for the year, giving us positive momentum for 2023.

<unk> segment margins contracted 120 basis points to 27, 8% due to higher sales of lower margin <unk> products, partially offset by our commercial excellence efforts.

Building technologies.

Levered and others.

Outstanding quarter, with 15% organic sales growth year over year modest improvement in supply chain enabled us to reduce our fossil fuels backlog sequentially and deliver more fire products and building management systems, resulting in 21% organic growth in building products. However supply chain still have not fully unlocked.

We exited 2022 with higher past due backlog than we entered the year and considerably higher levels than our pre COVID-19 norms.

Our continued commercial excellence in this inflationary environment enabled us to expand SPD segment margins 370 basis points to 24, 8% substantial progress nearly nearly reaching our long term margin target of 25%.

Performance materials and technologies sales grew 15% organically in fourth quarter, Despite a 4% headwind from Russia.

Advanced materials grew 20% organically in the quarter as we continue to see robust value capture across the portfolio and demand in fluorine products. The quarter was the fourth consecutive quarter, where our advanced materials that BMT growth.

<unk> grew 13% organically overcoming 9% headwind year over year from loss ratio of sales growth in <unk> was led by defining catalyst shipments and we also saw double digit sales increase in sustainable technology solutions.

Process technology return to growth in the quarter as a result of strong gas processing demand.

Process solutions also grew double digit in the quarter with the strength across the portfolio led by thermal solutions lifecycle solutions and services and projects.

A late 2022, better three Scots on operational challenges at one of our plants reducing output in the quarter.

<unk> won the game grew organically in the fourth quarter underpinned by strength in fluorine products segment margins contracted 100 basis points in the quarter to 22% driven by cost inflation and higher sales of lower margin products, partially offset by our commercial excellence efforts.

While in David and delegated volume declined overall, our aftermarket services business saw another quarter of double digit growth BSA.

<unk> continues to see some demand moderation from macroeconomic conditions, but we remain confident in our differentiated solutions.

Segment margin was a standout for Sps with expansion of 940 basis points to 22% our highest evident this business due to commercial excellence improved sales mix and productivity actions more than offsetting lower volume leverage and cost inflation headwinds.

Growth across portfolio continues to be supported by accretive results in Honeywell connected enterprise, we had another quarter of double digit revenue growth, including over 20% growth in our recurring and SaaS business year over year.

Cyber spud our system that connected building all grew by more than 35% year over year in the quarter or the full year at seed sales and profit both grew by double digits, which is an indicator of the power of our strong software franchise.

Overall this is a great operation as Doug for Honeywell, our adjusted earnings per share in the fourth quarter grew 21% to $2 52.

If any above the midpoint of our prior guidance range segment margin drove 29% of year on year improvement in earnings per share. The main driver of our year over year growth a lower adjusted effective tax rate contributed 10% of improvement and reduced share count added an additional seven.

A bridge for adjusted EPS from <unk> 21 to $4 22 can be found in the appendix of this presentation.

Moving to cash we generated $2 $1 billion of free cash flow in the quarter down 18% year over year, but delivering the midpoint of our full year free cash flow guidance at $4 $9 billion cash continue to be challenged by high receivables and inventory as we continue to work through the supply constrained environment.

$200 million headwind from guided receipt in the fourth quarter of 2021.

So overall Honeywell rigorous operating principles allowed us to manage successfully through another challenging quarter as we close out 2022, now, let's turn to slide five to talk about where do we expect to see across our end markets and the broader macro environment in 2023.

Looking ahead to 2023, we see a continuation of many of the challenges we faced in 2022, but we also see ongoing progress in our key initiatives to unlock more volume from our supply chain in order to meet very robust demand in several of our key end markets commercial aerospace will continue to be a standout in terms of demand both.

Rates amongst our OEM customers as less after market flight hours, particularly as wide body makes a more meaningful contribution on its way back to normalization.

Alongside that strong demand profile, we expect steady progress of the Aero supply chain in 2022 to continue into 2023 and as a result, we expect exploration that nato's topline growth compared to 2022 potentially achieving low double digits.

We continue.

We see continued tailwind for the investment in sustainable building solutions, particularly through institutional channels as well and the production of both current and future energy supply.

As evidenced by strength in orders across both sustainable building technologies and sustainable technology solutions, including Greenfields, we expect a moderation in raw material inflation, but to remain at elevated levels.

With the gradual improvement in supply chain, we should see more of a balance between volume and price to drive our topline growth in 2023.

Our order growth of 2% decelerated in the fourth quarter compared to 8% for the full year, but remained in positive territory, including sequential growth from the third quarter for Arrow, BMT and Sps our backlog up almost $30 billion remains at record levels growing 7% year over year in fourth quarter.

We reduced our past due backlog and all SPD accept their ROE for the second consecutive quarter, reflecting supply chain loosening and the effects of effort to mitigate box shortages.

The current macroeconomic uncertainty is giving some customers pause amongst our short cycle businesses in SBS and SPD and Theres a lot of near term uncertainty regarding how the reversal of China's vehicle with policy will impact <unk>, particularly with the potential impact of Chinese new year, though this may be a tailwind in the second half.

And with a rigor you've come to expect from US now, let me turn it over to Greg as we move to slide six to discuss in more detail. How these dynamics come together for our 2023 financial guidance.

Thanks, Namal and good morning, everyone.

Given the backdrop demo just shared in total for 2023, we expect sales of $36 billion to $37 billion.

Which represents an overall organic growth sales range of 2% to 5% for the year.

While we will continue to drive pricing actions, where needed to offset the impact of cost inflation, we expect more balanced between the contributions of volume and price in 2022.

In aerospace the demand backdrop remains very encouraging in both commercial aviation and defense and space and.

In the commercial aftermarket, we expect continued flight hour growth, particularly in wide body as international borders open and travel further normalizes to drive growth in air transport aftermarket sales.

The policy change in China should provide added fuel to this dynamic.

On the commercial OE side build rate schedules among the Oems are trending upwards year over year, leading to more shifts at the deliveries for Honeywell driving revenue growth, but also translating into a corresponding increase in selection credits a headwind to margins.

In defence and space, we plan to convert our strong order book into sales and expect defense to return to growth in 2023 as the supply chain improves.

Supply chain constraints not demand remain the gating factor to both commercial and defense volume growth in 2023, but we're encouraged by the improvements our team has executed in recent months, resulting in 7% output growth in 2022.

The sourcing environment for electronic components in Harrow improved over the past quarter, but the supply chain for mechanical components remains constrained due to skilled labor shortages among tier three and four suppliers.

We enter 2023 with aerospace backlog levels that are more than 20% higher year over year, giving us confidence in our growth projections for overall arrow, we expect organic growth for the year to be in the high single digit to low double digit range, while aerospace will likely be our strongest top line grower in 2023, we expect only modest margin expansion year over.

Over year as increased volume leverage is largely offset by unfavorable mix due to increased selection credits in the commercial OE business.

And building technologies, we are cognizant of the broader economic environment and expect private investment in non res construction to continue to be impacted by increased financing costs. However throughout 2022, we built a strong slate of orders partially as a result of the supply chain environment that provides solid sales visibility and buffer for 2023.

We see the most significant sales growth this year coming from building projects in building management systems as we capitalize on our robust 2022 book to Bill in these businesses.

We also expect increased spot orders for our building services throughout the year as the supply chain normalizes layer in incremental demand in.

For overall HPT, we remain cautious in the current environment expecting our strong backlog to support as early in the year and anticipate low single digit organic sales growth for 2023 overall.

However, we remain very confident in our long term framework for building technologies as much of our portfolio is aligned with secular trends in sustainability and energy efficiency.

On a segment margins, we expect to carry the momentum from 2022 strong exit rate, resulting in year over year expansion for the full year.

In PMT, we are set up to build upon an impressive 2022 and convert favorable macro conditions into another solid year with sales growth sequentially throughout the year.

Backlog built through 2022 will enable another year of growth in process solutions led by lifecycle solutions and services and thermal solutions.

<unk> improved comps as we lapped the loss Russian sales headwinds will provide support to a business that already has potential for upside.

Our process technologies business returned to growth in the fourth quarter and is poised to continue to grow at 23, while catalyst shipments should remain robust throughout the year.

Demand for new energy capacity to offset loss Russian supply will also be a tailwind, particularly for our LNG business and.

In advanced materials growth will continue despite difficult comps, thanks to strong demand for our solstice products and supply chain improvements.

In addition to solstice, our other sustainable offerings will benefit from legislation such as the inflation reduction act and increased customer focus on environmental responsibility.

In total we expect PMT sales to be up mid single digits for 2003 <unk>.

PMT margins should expand modestly as a result of improved volume leverage and continued pricing and productivity actions.

Turning to safety and productivity solutions that will be the business most impacted by the macroeconomic environment in 'twenty, three and <unk> decreased investment in new warehouse capacity, we will continue to limit near term opportunities in our long cycle project business with a trough in demand likely coming this year before returning to growth in 'twenty four.

However, our aftermarket services business has been growing at double digit rates and we expect that to continue in 2023.

And productivity solutions and services short cycle demand softness in the distributor Destocking will impact sales in the first half of 'twenty three but we expect this dynamic to taper off and should see sequential improvement later in the year.

And sensing and safety technologies sales growth will continue in 2003 after a strong finish to 2022.

In total we expect Sps sales to be down mid to high single digits for the year.

From a margin standpoint, 23 should be another solid year for Sps as we continued to benefit from improved business mix and drive our operational improvements.

While <unk> 22 was the high watermark for the business and will not necessarily be the new standard moving forward. We believe high teen margin rates are achievable in 2023.

So we expect our overall segment margin to expand 50 to 90 basis points next year supported by higher sales volumes. Our continued commercial excellence efforts and productivity actions similar to last year, we expect Sps margin to extend the most as we build on our operational improvements in 'twenty, two and continue to benefit.

From improved mix and cost structure in that business.

For the year, we expect earnings per share of $8 80.

To $9 20.

Lat to up 5% adjusted despite an approximately 55 headwind of lower pension income.

Excluding this impact our adjusted EPS range would have been $9 35.

To $9 75 up 7% to 11% adjusted.

On the free cash flow front, we expect a range of $3 nine to $4 $3 billion in 2023 or five one to $5 5 billion. Excluding the one time $1 $2 billion net impact of narco Hwy and <unk> matters.

I'll walk through the puts and takes for our 'twenty free cash flow in greater detail in a couple of minutes, but first let's turn to slide seven and walk through our EPS bridge for 2023.

As you can see segment profit will be the key driver of our earnings growth in 'twenty three contributing 59 at the midpoint of our guidance range.

For tax we expect an effective tax rate of approximately 21% for the year.

With these inputs below the line in other items, excluding pension are expected to be up five <unk> per share year over year at the midpoint of guidance, primarily driven by lower repositioning and assessed charges, partially offset by higher net interest expense.

As we previously communicated we expect a large decline in pension and <unk> income this year as a result of the industry and the increased interest rate environment for.

For the full year, we expect approximately $550 million of pension and <unk> income down about $500 million from 2022, driving about 55 headwind to EPS.

However, this is a noncash accounting items as our overfunded pension status, we will ensure that no incremental contribution are needed. We ended 22 with our pension funded status of over 125% as a result of diligent management and strong returns a great position to be in for our employees and shareholders.

In total we expect 23 earnings per share to be in the range of $8 80.

To $9 20.

Flat to up 5% year on year on an adjusted basis. However, excluding the impact of noncash pension headwinds our guidance would be a range of $9 35 to $9 75.

Up 9% at the midpoint.

Now, let's turn to slide eight and talk about the drivers of our free cash guidance for 2023.

As we've outlined in the bridge are 23 free cash flow story can be characterized as strong operational performance offset by a few discrete non operational items.

<unk> growth is the largest driver of free cash flow and we expect to make further progress this year on working capital as the supply chain normalizes we.

We expect 23 free cash flow, excluding the settlement of a legacy legal matters, we discussed earlier to range between five 1% to $5 5 billion.

Up 8% year over year at the midpoint as we have previously spoken about.

Accounting for the settlements, we are expecting free cash flow for 2023 in the range of $3 nine to $4 3 billion.

Now, let's turn to slide nine we can discuss our guidance for Q1.

As we highlighted earlier, we enter 'twenty three with record backlog, providing a solid foundation for the first quarter <unk>.

Throughout the year and will result in a robust second half in China.

In building technologies, we anticipate modest organic sales growth in the first quarter as we work through our backlog and the supply chain continues to heal we.

We see the strongest sales growth in building projects, followed by increased sales of fire.

In PMT, we expect another quarter of year over year growth in <unk>, we expect that growth to be once again led by advanced materials with process solutions the laggard.

With strong year over year growth.

We're expecting our sorry, we experienced a disruption in one of our PMT plants that will cause some unplanned downtime. So that is embedded in our guidance.

In safety and productivity solutions short cycle and warehouse automation demand softness will offset growth in <unk> aftermarket services and the sensing part of our sensing and safety technology business, leading to a decline in year over year sales. However, we expect another strong margin performance in the high teens.

So for overall Honeywell, we anticipate sales in the range of eight three to $8 6 billion in the first quarter up 1% to 5% organically.

We expect margins in the range of $21 four to 21, 8% up 30 to 70 basis points year over year as we remain diligent in our price cost management and benefit from favorable business mix.

Average share count to be approximately 675 million shares.

As a result, we expect first quarter EPS between $1 86, and $1 96.

Down three to up 3% year over year or up 5% to 10%, excluding the year over year impact of lower noncash pension income.

On slide 10.

2022 was another year of both challenges and progress for Honeywell. Despite another host of macroeconomic and geopolitical difficulties. We attack the challenges we faced head on we over delivered on our financial commitments, while 2023 brings new.

And Inorganically I remain optimistic about the future of Honeywell and believe the company is well positioned to drive innovation to solve some of the world's most challenging problems. One last item before we move to Q&A I'm pleased to announce that our 2023 Investor day will be held on May 11.

In New York City.

At this investor day.

With that Sean let's move to Q&A.

Thank you Darius.

Darius Greg nimble and <unk> are now available to answer your questions. We ask that you. Please be mindful of others in the queue by only asking one question Crystal. Please open the line for Q&A.

Thank you.

To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

And our first question will come from Julian Mitchell from Barclays. Your line is open.

Hi, good morning.

Good morning.

Good morning, just wanted to start my question would be around the first quarter.

Outlook.

So maybe two parts on that firstly, just on the module segment margin assumption.

We are assuming within that that you have sort of two or 300 points increase that Sps year on year, and then maybe a down in aerospace and PMT on margins just wanted to check that.

And then also in Q1 should we expect orders.

To be down.

So they were up kind of low single digit in the second half of last year. Thank you.

Hey, Thanks Julien.

But to expect that <unk> might be down in <unk> is probably a reasonable expectation.

Highlighted Sps is going to be on the top end of our margin expansion in all year long frankly.

Given given all the work that that team has done adjusting their cost structure for the realities of the sales environment that they've been in as well as as we talked about before the reductions in.

And celebrated sales are actually not painful from a margin standpoint to actually help.

Given the margin profile of that business. So I think your your instincts are right, but we're not going to be specific on that and maybe just to add to that I mean, I think Sps results, particularly in Q4 really exemplify our off the strength of our operating systems and how quickly we adjust to market conditions.

As you saw they posted record margins and that's not by accident thats by very pronounced actions that you'd say, we're facing some challenges on the revenue side. The adjusted their cost structure. They maximized, our aftermarket services business, which resulted really nice margin profile.

As an example, Honeywell operates which is when we see challenges we act upon them early and make sure that we are still very good results. Despite some market headwinds.

Thank you.

One moment for our next question.

And our next question will come from Steve Tusa from Jpmorgan. Your line is open.

Good morning.

Can you just give a little more color on how much the OEM incentives or what kind of headwind that is and then are you guys on track for the longer term target.

And any color on the trajectory and timing towards that.

You said historically or last year was.

29% are you guys still on track for that.

Yes, we absolutely are I think that we're very committed to that number.

As we look at the outlook for this year, we're very much within our operating algorithm that we provide last investor day.

Sort of.

If you just take the midpoint, we're sort of at the lower end on revenue where we are.

Above our margin profile, but in terms of our commitment to our long term gains.

It's we're very much on track.

The OEM credits are significant.

<unk> as a headwind.

Yes, yes, and think about that.

That is tied to boeing's delivery, specifically at airplanes and incentives that we have.

For with the Airlines, who are taking those airplanes and that is going to be multi year realignment.

It's measured in the hundreds of millions of dollars, we're not going to be precise about what that is and again there is going to be variability around that depending on.

The actual delivery performance of the Oes to the airlines themselves and to maybe just close to two points. We do expect modest margin expansion in April .

And we're very committed to the goal we gave you at the last Investor day.

Yeah.

Thank you one moment for our next question. Please.

And our next question comes from Scott Davis from Melius Research. Your line is open.

Hey, good morning, guys.

Good morning.

I was wondering if you guys could walk through a little bit of what your cost inflation assumptions are and maybe a little color around kind of that the <unk>.

<unk> cost environment.

Just in context.

Are we kind of done with the inflation part of the cycle or your suppliers still.

Still raising prices on you guys.

Are you still raising prices on your side I'm, just a little bit of color per segment I think would be helpful. Thanks, I'll pass it on after that.

So Scott as a headline I would say that inflation is moderating it's not going away. So we are not losing our eye on our model on driving positive price cost.

But on a trend basis, there's some deflation in some commodity but labor cost is high.

Energy costs are kind of more on a standstill basis, so thats our entry assumption that it's on.

More on a reducing trend, but not getting moving away so our pricing targets have been.

Or just be stillborn positive price cost model into our P&L. So we're not going to go away from that execution. We did in 2022, but we're also sensitive that with the market being tighter compared to 2022, we want to also protect our volumes and so to that extent, we are watching how are we going to our desktop price cost out.

So thats kind of lower auction principles, David within the businesses, a little bit, but directionally thats, how guiding principle, maybe Greg if you want to add anything yes, I mean, all I would say is what that means rather than double digit price increases were planning on.

Mid single digits, maybe low single digits. This year with inflation in that same neighborhood, yes, and I think thats important is that we do we just don't do twice pricing why.

Q, Mark watch demand versus pricing versus balancing our inflation and we tried to do that thoughtfully such that it's not just blind increases. We also have to be mindful of market share demand et cetera.

We've got a set of analytics to do that I mean, this is the power of Honeywell digital which we've been implementing last three to four years our level of visibility accuracy is actually really good and it's a new set of muscles. We've developed actually in the last year and a half as we face this inflationary environment.

Thank you one moment for our next question.

And our next question comes from Sheila <unk>.

<unk> from Jefferies. Your line is open.

Good morning, everyone and thank you.

Good morning, maybe if I can ask about supply chain and pigments you have a little bit of improvement in working capital year over year on supply chain can you frame. The total impact in 2022 of supply chain and how do you expect that panning out in 'twenty three you've called it out in aerospace.

Tier three tier four suppliers, having labor issues.

Are you seeing and how do you kind of expect it to improve across the segments.

Yes, let me kind of there is sort of not one way to describe it but I'll give you a few metrics, which indicate the direction I mean, I think the punch line. The summary franchise. It is improving and we saw that I mean, we saw a reduction in our past due in three out of the four Spg's you only one.

<unk> went up.

Q4 was arrow, but we also saw very robust demand in Aero. So I think you have to offset that is that an issue extended opportunity.

And I would tell you that our era of output on a year over year basis was up around 15%. So that's actually a pretty good outcome, which also tells you that we're.

Migrating into right direction, and given that the past dues reduced and the other one so let me kind of split that.

<unk> two segments.

One for semiconductors, it is definitely getting better.

It is improving and we see that sort of really moderating towards a normal state before the end of this year, but sort of what we saw we saw some clearing of the past dues, we still have some left.

That's how we see it.

In Aero.

It's also improving the pace is likely going to be slower than awarded to us in semiconductors, our level of <unk> in Q4 was below 20%, which was a low for the year.

Every year every quarter prior to.

Q4, global <unk> from our supply base was over 20% actually under 20%, which is also a good sign so we see a slow and steady improvement as we move throughout the year, that's sort of our expectation for the supply chain.

Thank you one moment our next question.

And our next question comes from Nigel Coe from Wolfe Research. Your line is open.

Thanks, Good morning, everyone.

I just wanted to.

Hi, Good morning, just wanted to have done into Sps a bit more so if we think about.

Maybe first of all can we just dive.

Is that representative of the markets.

Or are you being more selective in terms of the projects you have.

Would be accepting and therefore converting.

And then I know this only one question but.

It looks like margins this year.

High teens, maybe 20% range when we normalize for mix beyond this year are we going to be above 20%.

Any color there would be helpful.

Can you repeat the last one because I didn't quite get the last question there Nigel.

Yes.

The last part of the one question.

When we normalize the mix sort of integrated PPS.

In 'twenty four 'twenty five.

At 20 and above margin.

Yes.

That one was going to be it's.

Probably too early to tell but what I will tell you is that.

Four we already basically demonstrated that we can get to 20% margins in Sps in Q4, so the target Hasnt changed.

In terms of what's happening overall with the business.

Yes, and calibrated is the markets are down we see at the warehouse and distribution segment is down there is an overbuilt that occurred in the year 2020 in 2021.

Markets are absorbing that capacity, we do expect.

An uptick in orders and return to growth in 2024.

We actually are encouraged by the pipeline that is starting to form.

And at the same time, we're also are being a little bit more selective in terms of margin profile and so on and we have.

Algorithm in terms of the kinds of orders that we want so it's a little bit of both.

PSS has.

Then a bit softer.

No.

And then Ben into prior we got to remember that we're coming off of record orders, particularly in the first half.

But overall, we expect to see a fairly strong robust level of business.

In the second half this year, we still have a backlog to draw for them. So.

I don't think there is there was nothing in <unk>.

Sps in Q4 that was out of expectations. It was actually incredibly consistent and frankly I was very encouraged by the margin range and that team has done a nice job and really managing to the card sales fell from a revenue base using our accelerator operating system to really deliver.

Our strong financial results.

We even with some revenue headwinds I don't know if <unk> Ics I think just one other comment on idea I think.

Top line challenge, whether it be there in 'twenty three but we are focused on margin in this business of our aftermarket service business is growing double digits.

The last several years that trend will continue in 2023 in fact, we wanted to do everything possible to continue to drive that at a higher rates and other margin improvement opportunity by better operating efficiency executing projects better than foster is going to be another focus area. So while the volumes are down.

Constantly looking at margin expansion strategy in dedicated.

Thank you.

One moment for our next question please.

And our next question comes from Andrew <unk> from Bank of America. Your line is open.

Hi, yes, good morning.

Good morning.

Just a couple of questions on.

PMT so first on.

De carbonization, clearly big revenue driver, but are you seeing any delays.

And process and fund disbursement at the federal level, because we've sort of heard.

So on the ended on the Decarbonization I would say at least I see much stronger trend and artisan a sustainable technology solution business as we had forecasted IRS at least helping we had a pretty strong performance in our sustainable aviation fuel part of the portfolio, we see thats further strengthening and <unk>.

'twenty three but in addition, obviously activity happening in carbon capture and hydrogen space.

So we see more active projects.

Where customers are making decisions. So we remain very optimistic on good performance by STS business.

In 2023 on advanced materials, I would say the momentum on solstice continue.

We see more application adoption in newer areas.

Economic headwind on residential side. So that's a smaller part of the business, but there are headwinds there are pockets in electronic materials, where theres a server related demand in PC. So we supply some products and that but on an overall picture advanced materials has a strong momentum and you said it I believe the momentum will continue in 2022.

Yes, maybe just to add a couple of things in a couple of specific numbers I mean, our orders in Q4, particularly in our Florida business were very very strong double digit strong.

Our LSP business is strong <unk> is well positioned for the year Spider business was extraordinarily strong are the acquisition we made.

In 2021, so all in all I think it was a very strong orders quarter as we pointed out in our track. If you remember some of the very very unusual cold weather that we face around the Christmas time caused us some challenges some of our processes operations, because frankly, they're just not built to operate in five degree weather.

That's not what you typically see in Louisiana in December so all in all I think that this is our AAM in PMT business is well positioned good orders growth.

Strong performance should be expected.

Thank you.

Our next question please.

And our next question comes from Jeffrey Sprague from vertical research. Your line is open.

Hey, Thanks, good morning, everyone.

Follow up on Aero margins for me if I could.

The color on the OEM incentives I'm just trying to think about the next couple of years also.

If you can give us some directional help right it's not just.

It's not hard to imagine those incentives continue to escalate. The next couple of years as Boeing delivers more but I think you might be getting some help going the other way and business jet or other parts of Aero. So can you just give us a sense of.

As 2023 kind of peak headwind for incentives how it might play out in 'twenty, four and 'twenty five.

Yes, Great question, Jeff in Europe .

Your again your instincts are on.

This is a bubble right because they Boeing in particular was not able to deliver jets when they were grounded.

And so that acceleration is going to go up and then come back down again.

As we see it right now it looks like 23 is going to be the top and then it starts coming back down, but again thats going to depend entirely on the pace of those deliveries, but it ought to be.

Let's say reoriented back with.

Back with deliveries in our view.

By 2025 for sure and maybe into 2024. So so this is going to be a a temporary a temporary headwind.

And then things will realign back where deliveries and shipments.

Come back into line and so therefore, our P&L will become more aligned.

I think thats exactly right.

I think that this is just as probably an unusual 23 headwind, but even there Edwin we expect to modestly expand margins, but I think the most important thing that's missing here is.

We're very excited about the future of aerospace I mean, the orders are up.

Backlog is way up I mean, we think the next three years will be very exciting for ore supply chain. This call center supply chain is getting better or.

ISC teams are really demonstrated unlock.

A lot of the capacity.

I think theres nothing other than to be excited for the next three years in aerospace it's.

I am very confident in the backlog position and.

It's going to be it's going to be a really nice period for that business.

Thank you one moment for our next question.

And our next question will come from Andrew Kaplowitz from Citigroup. Your line is open good morning, everyone.

Good morning.

So you mentioned capital deployment in line with three year $25 billion plan for 'twenty, three I think which would mean another year is somewhat similar to 2002 when you deploy it almost 8 billion of cash obviously out there you've got national instruments conducting a strategic review as I'm sure. You know Honeywell were to consider to be quite a bit larger than you've done in the past there. So.

Yes, I think good question, yes, so I mean, obviously, we have a balance sheet that is strong at over last two years, we have let's call it roughly around $15 billion plus to deploy it based on our 25 over the next three years. So we have the capacity, but I just pointed out a couple of things number. One is we are disciplined in our approach.

One so.

0.2 is where our controls and automation and sustainability and digital company.

Three is we typically don't do hostile acquisitions so.

We are interested in doing more M&A smart M&A in 'twenty three I think you should expect that at some point.

But it is going to be thoughtful it's going to be acquired at a price where we have a lot of confidence in generating shareholder value and it is going to be something that we can truly strategic and fit what we do as a company.

Thank you one moment our next question please.

And our next question will come from Josh Poker Winski from Morgan Stanley . Your line is open.

Hi, good morning.

Good morning, and that you have yes. Good morning. Thanks for taking the question understanding you guys have above average backlog right now obviously some longer cycle businesses as well as supply chain any way, we should think about backlog conversion this year or where do you guys think maybe backlog.

And hopefully and if youre able to start getting more product out the door I think Ts.

Teasing out the demand environment versus the supply chain environment has been a bit of a trick here for a while.

Yes, maybe I'll start and I'll turn it over to BMO.

So first of all we feel very good about the backlog because if you sort of look at the backlog, where we are in totality, it's about $3 billion to $4 billion more than what I call a normal state. If you go back two three years.

Even in the short cycle businesses, which are predominantly to HPT in Sps.

So, especially as we get into the second half of this year.

We expect an uptick in the second half in short cycles.

So maybe two in person that ambition.

As we talked earlier, we do expect supply chain performance to get better.

On the Aero supply chain and semiconductor constrained, which will mean that we can fund our Pos views slash backlog better than what we did in 2002.

And we also expect that our projects businesses will also execute on our backlog on a more determined basis because they also faced headwinds on supply chain constrains in.

2022.

We have the backfill Atlanta, just indirectly answering the question of artist forecast and we don't guide that but we remain optimistic.

We are going to get our fair share of demand in the market that we can commit and as long as market performs we will perform.

In line with the market.

Thank you.

Our next question please.

And our next question comes from Joe Ritchie.

From Goldman Sachs. Your line is open.

Thanks, Good morning, everyone.

I wanted to ask that last that last question, maybe slightly differently because the guidance.

Is a little bit wider than normal until.

So perhaps maybe.

What scenario would.

Do you guys see yourselves coming in.

Below the midpoint of the guidance EPS guidance for the year.

Yes, I think first of all let me there's a couple of questions. The first one is why is the guidance wider than normal.

I think we would probably admit that in terms of the economic scenarios. This year.

Probably a bit wider than most people would guests you have anything ranging from a soft landing out there to a deep recession and I've heard opinions anywhere in that range.

It's probably more uncertainty rather than less so.

Sort of.

That's sort of.

The reason for the wide range in terms of the range itself sure.

Lower end.

At the lower end, it's probably.

It's probably means that tougher economic conditions in the second half.

Economic conditions turn worse, the short cycle is worse than we expect at the top end.

<unk>.

It's a bit more of what we hope is the expectation, which is some of the order activity turns short cycled becomes more robust in the second half.

And China returns to growth I mean, Q1, we actually think Q1 in China could be challenging because of the lifting of the COVID-19 restrictions Chinese new year, and so on and we embedded that in our guide.

But we actually think that.

Second half in China could actually be quite strong and if that comes to fruition that sort of points to the upper end of our guidance. So.

Many of us are facing and there's a wide range of <unk>.

<unk> guess is yes, I think we'll know.

A lot more come June .

As we talked about I think we feel pretty good about where we are from a backlog position.

No one really knows what the.

The level of activity in the economy will be I mean, we've had some good things.

European.

Winter has been more mild than people thought and Europe's held up relatively well.

Versus what some Matt let's figure it could be but I think as you said well we feel really good about where we are right now and.

We will continue to take that temperature as we go through the first four to five months of the year.

Thank you one moment for our next question. Please.

And our next question comes from Deane Dray from RBC capital markets. Your line is open.

Thank you good morning, everyone and start with congrats on getting to the finish line on the Narco Trust that was a really long road and I know you had to get all the approvals.

Nice to see thank you Deane.

No.

It's Ben.

A long road, but.

<unk> was one of the first two.

Pursue that trust and you've got all the approvals with the plaintiffs and so forth, but great to see at <unk> and.

Just to follow up on the last question on the geography, if anything really surprise you in the quarter in terms of the geographies. It seems like Europe was it excuse me just the weather that not as dire on the energy side, but what were the surprises on the geographies and what's baked in for 'twenty.

23 major geographies I know you gave a little bit on China, but if you could round that out that'd be helpful. Thanks.

Maybe I'll start.

Similar to any further commentary I would say.

No major surprises in terms of how we ended up I mean Europe was.

Software, particularly the U K was really soft in Q4 that probably stood up for us in Europe , but then as we looked at December exit rates were actually bad. So so November and that total were a bit weaker December exit rates were better.

In terms of the overall business performance.

It was actually incredibly consistent with what we guided.

We guided.

We came in roughly at the middle of our range, a little bit better on operating margin.

Can't under.

Under state, how important or overstate how important it is to eliminate liabilities from your balance sheet and when you can do that permanently.

<unk>.

<unk> de risked the future of the company I think maybe just didn't get as much adventures as I think it should.

Because it was a huge deal.

It hit up a lot of bandwidth, but I am thrilled to have this liability reduced off the balance sheet. The most so I think when lithium allowed us that I think everybody is a bit of commentary on U S and Europe , So I won't repeat it but high growth regions represent a very large part of annual revenue.

We do expect China to have a strong growth in 2023.

Cautious in Q1, but very optimistic for the year, but other high growth region markets. We are we are confident on good growth middle East we have good backlog and very strong pipeline for orders, India, We remain very optimistic Turkey central Asia or at a minimum.

Optimistic ASEAN so overall.

That part of the World should should offset some of the headwinds we see in Europe and Thats, what we are kind of dialing in into our planning process.

Thank you that does conclude our question and answer session I would now like to turn the conference back over to <unk> for any closing remarks.

I want to thank our shareholders for your ongoing support we delivered strong fourth quarter results and continued to navigate effectively through multiple uncertainties with the typical level operational rigor you've come to expect from Honeywell, our future is bright and we look forward to discussing this further.

At our upcoming Investor day in May.

You all for listening and please stay safe and healthy thank you.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Q4 2022 Honeywell International Inc Earnings Call

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