Closing Bell - Closing Bell+ Exclusive with Honeywell CEO Vimal Kapur 7/27/23

Episode Date: July 27, 2023

Honeywell reported mixed second quarter results after seeing sales decline year over year for its safety and productivity solutions division. In this exclusive interview, Morgan Brennan spoke with CEO Vimal Kapur in his first broadcast interview since becoming CEO.

A small miss on sales, taking shares of Honeywell down this morning, despite aerospace profits up 20%. If it's aerospace, it's got to be Morgan Brennan. She joins us now with Honeywell CEO Vimal Kapoor. Morgan. All right. Thanks, Melissa. And Vimal, it's great to speak with you. This is first earnings with you at the helm as CEO since you took over in the beginning of June. I do want to jump right into the results specifically, and that is the fact that you raised the lower end of guidance for the full year, both for sales and earnings. But it's really the current quarter and expectations there that analysts are pointing to and saying is putting the stock under pressure. What are you seeing in real time across your portfolio, across end markets, across the world right now?

So I would start with saying we printed pretty good results for Q2. We were on the upper end of our guidance for EPS at 2.23. Our upper end of guide was 2.25. Very strong cash flow, free cash flow up 34%. Our backlog is up 5%, and we raised our guide for full year. So we are pretty pleased with the results. Looking ahead, I would say we feel pretty good about 23 and look ahead for 24. Our end markets are pretty strong, aerospace and energy. And there's no

reason we are going to perform pretty well for rest of the year and the times to come. So what does that mean in terms of the macroeconomic landscape right now? I do want to get into some of these areas like aerospace more specifically, but more broadly, what are you seeing given the fact that we're less than 24 hours off of a Fed rate decision? We just had the ECB this morning, and there's a lot of talk about the possibility of a soft landing. So we see two parts of Honeywell. At one hand, our long cycle businesses are performing extremely well. Our aerospace business, like most of the other companies in that segment, have very strong double-digit growths. Our energy business, our business energy segments are performing extremely well.

Where we see, you know, recovery required is in the short cycle. There's a portion of our business which is linked to economy, the short cycle. The orders have stabilized there now, and we are hoping things turn better in the next few months ahead. Interesting. stabilized there now, and we are hoping things turn better in the next few months ahead. Interesting. In terms of the long cycle, aerospace, of course, is part of that piece of the puzzle. Organic sales up 16% last quarter. Strength in particularly aftermarket, it would seem, and the commercial aerospace part of that business, but also seeing some acceleration, if you will, of sales in defense. I guess walk me through how strong aerospace is right now and how far we have to go in terms of this growth. So aerospace growth is here for a long time. I think that's a punchline here.

The constraint here was more around supply chain. They're increasingly getting relieved every quarter. Our volumes were up 20% in quarter one, 20% in quarter two. And we expect that trend to continue and maintain a strong growth for 2023 and 2024. So runway for aerospace growth for Honeywell and many of our other companies in this sector is here for a long time. Okay. Automation equipment, you sell it to warehouses, you sell it into the industrial sector. That's been an area of softness, of weakness. Going back to the short cycle parts of the business,

is this an area where you are seeing stabilization? Yeah, so certainly in automation, we have automation into three sectors in process automation, building automation into three sectors in process automation building automation and in warehouse where we've seen softness since last year has been warehouse automation there was over build during 2020 2021 and it's more like settling at the trough right now uh our pipeline for the new opportunities in warehouse automation remains pretty strong. And we expect that that turn into orders for later half of the year and turn into strong performance for us in 2024. But if I take an overarching automation team for Honeywell,

we are doing the whole business in process, in buildings, they are doing extremely well. And the theme of automation is here to stay for several years to come. And we remain pretty bullish on that. Yeah. You've been at Honeywell for a number of decades, but you did just take the helm as CEO in the beginning of June. What do investors need to know about you and your strategy and vision for running this multinational industrial conglomerate? So I would say maybe three things.

First is Honeywell is known for meeting its financial commitments every quarter, as we did in quarter two, as we have recommitted our earnings for the year. So expect that to continue. You know, this is something which works well for us, and I don't expect to change. Where I really want to work on is two things. First is make Honeywell more growth-oriented. Our organic growth, how do we drive higher organic growth through innovation, is clearly my priority. And second is how we work on our portfolio. Our portfolio can be refreshed more. There should be acquisition and divestitures.

To really align our portfolio into three big themes Honeywell will work on, aviation, automation, and energy transition. And that's my priority, that how we make our portfolio more targeted and really enable it for a higher growth in the years ahead. Your successor, or I guess predecessor, I should say, Darius Damchik was very, very focused during his tenure on digitization and software. We had many conversations about that. How are you thinking about tech innovation? How does it factor into that vision you just laid out? So tech innovation is a big part of our priority. Software offering is something we consider

as a way to solve our customers' problem. We serve four sectors, and customers have things to work on, cybersecurity, sustainability, and asset performance. And that's where we see software being an integral part of our strategy. AI really brings a great opportunity for us. We can see newer ways of applying AI

in mission critical sectors we serve, because we have to be careful how we apply AI in aerospace or industrial automation or in building controls, because you have to be careful how we apply AI in aerospace or industrial automation or in building controls because you have to be more thoughtful on more like an assist mode versus you know 100 automation through through AI but overall AI is going to provide potential growth opportunity for Honeywell this is something we're really good at and you know we're going to work with our customer to generate more growth using AI interesting look. Look forward to hearing more about that as those applications continue to evolve and get applied in real time. Vimal Kapoor, thank you so much for joining us in your

first broadcast interview since becoming CEO of Honeywell. Thank you very much. Look forward to talk to you soon. Bye-bye. I mean, this is one of the big trends that's emerging, not only AI applications and manufacturing, but just looking at aerospace specifically. This is one of the big trends that's emerging in earnings season overall right now, which is just this ongoing recovery and how strong it is in aerospace, both on the commercial side and even increasingly on the defense side, as you're starting to see all of that demand, all of those defense dollars, not only from the U.S., but from allies, beginning to make their way into backlogs

and make their way into the sales results that we're seeing for defense contractors. Case in point, north of Grumman this morning, the latest report, even though that stock is under pressure, but aerospace really strong. Why has Honeywell been an underperformer relative to its industrial peers for the past year to date, you know, 12 months, you name it? Yeah, I mean, I think it's, and we sort of just touched on that a little bit. This is a portfolio that, you know, spans countries and spans different end markets. So while you have strength in something like aerospace, while you have, he was talking about energy and energy transition, and these are more secular, longer

term trends, you also have these short-cycle businesses that are much more tied to what's going on in real time, economically speaking. And we know the industrial part of the economy has been under a lot of pressure, and not just here in the U.S., where you've had manufacturing data that has been in contraction for however many months now, but in other parts of the world, too. I think it sort of speaks in part to that shift from goods to services. There was not a lot of high expectations for this report specifically going into the print this morning. I think that's why you're seeing shares under as much pressure as they have been, because it has been an underperformer relative to its peers. And that current quarter guidance is really what's sticking out in analyst reaction. Morgan, thank you.

Morgan Brennan. quarter guidance is really what's sticking out in analyst reaction. Morgan, thank you. Morgan Brennan.