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00:00The big trend for markets, for M&A, for industry, and for all corporations really late last year and this
00:05year has been corporate consolidation.
00:07We've seen a wave of it, thanks to maybe more relaxed, regulatory and antitrust.
00:14Honeywell is definitely swimming against the current at this moment.
00:18Why do these spinoffs, why separate into three when it does feel like we are in this moment of the
00:23mega mergers?
00:24No, I think our story was driven more by a compelling opportunity that we strongly believe that we have a
00:31strong set of capability as a company in Honeywell,
00:33but individual segments will perform better if we are a standalone company in specialty chemicals, in aerospace and automation.
00:41And that thesis is coming out true.
00:43We spun off our spec chem business in October of last year.
00:47It's doing extremely well.
00:49The aerospace separation will occur in about another 45 days' time.
00:53I'm very confident that aerospace is going to be one of the best-in-class aerospace, both operating company and
00:59stock, and so is automation.
01:00So our scale allowed us to create three large-scale companies.
01:05So I think our position is coming from a very different set of circumstances compared to others.
01:11And can I just say, you were thrust into this whole thing.
01:14You and I were just talking about this moments ago.
01:15So you started in 2023.
01:17The process kicks off late 2024.
01:19And as you're doing this, by the way, every disruption that could possibly happen in the world is also happening
01:24between supply chains getting rewritten,
01:26between AI scares, you know, war in the Middle East now.
01:31How was it just from a leadership portfolio, not only leading this spinoff and corporate transformation,
01:37but just all these existential issues happening in the world right now?
01:42Look, I think I kind of separate the two.
01:46We took on the journey that we need to separate into three companies.
01:48We started that process, you said it right, in early 2024, and then we started announcing it one at a
01:55time.
01:56But at the same time, external disruption becomes part of how you operate as a company.
02:02And that's where maturity of companies like Honeywell come in, because we have built operating capabilities over decades.
02:08Those operating capabilities allow us to deal with disruption, which was COVID in 2020.
02:13Then there were the chip shortages.
02:15Now there is a war.
02:17There's a Ukraine war.
02:18There's a non-war.
02:19You are absolutely right.
02:20Each of them create a period of uncertainty into our operations wherever they get impacted.
02:27But thankfully, companies like us have a strong capability over a period of time that we know how to deal
02:31with it,
02:32both in terms of our people capability, our global scale.
02:36And someone like me, I would say we are kind of used to it.
02:40And I wish there is a time in which there is no disruption.
02:44But for whatever, you know, things keep happening all the time.
02:49It is certainly the world we're living in.
02:51And as frightening and upsetting as some of it might be, there's also an element where it feels like Honeywell
02:56has a role to play.
02:57I mean, whether it be, you know, aerospace, for example, huge amounts of CapEx because of what's happening in the
03:03digital economy.
03:04Did it change at all the timeline for some of these deals to get done?
03:08Actually, I would say the timeline was more driven by our ability to do the separation, right?
03:13So because it's a finite amount of time, you have to create legal entities, you have to do physical separation
03:17of the offices and IT systems.
03:19So most of the time is more determined by this act of performing the task.
03:24And none of our strategic plans have changed because of external factors.
03:28In fact, if anything, compared to two years back when we started doing this work, I feel more compelled that
03:34each of these businesses are going to do even better.
03:37Aerospace cycle is even stronger.
03:39When we made a decision, there was a Ukraine war already, but the Iran war hadn't occurred at that time.
03:45So now that generates the defense-related demand into our business because we serve that sector, too.
03:50And when I come to the automation business, AI was not this prominent play for automation companies.
03:57But increasingly, as an automation business, we generate a lot of data.
04:02That data can be used to make our customers more productive.
04:05So as the data science is becoming more mature and we have ability to buy offering from likes of NVIDIA
04:12and Google to ingest into our product, that's creating additional set of opportunity for us in our business.
04:18So actually, where we started from versus where we are today, our net opportunity set has actually increased.
04:24So our decision is actually even more compelling compared to when we started this whole journey.
04:28Is there anywhere where customers, because, I mean, it's a lot of opportunity but a lot of uncertainty, too.
04:32Is there anywhere where they've kind of pulled back because of that uncertainty?
04:35I think long-term decisions, absolutely not.
04:37Actually, there's a unique phenomenon that long-cycle orders for companies like Honeywell or, for that matter, many of our
04:45peer companies.
04:45The backlog keeps growing to a bigger and bigger number.
04:48In some of our businesses, for example, we have a big business for liquefaction of gas to make LNG.
04:55So two-thirds of the global LNG is made by our technology.
04:59That business is booked for next three or four years.
05:02So there are long-cycle businesses where customers are actually moving their demand upwards, whether it is generation of power,
05:10producing of LNG, building of data centers.
05:12And we all know about the news.
05:14And that trend is actually coming even to some of our short-cycle businesses where typically our delivery times are
05:20four, six, eight weeks.
05:21But we also see customers pulling forward their demand due to fear of inflation.
05:26Some can be fearful about, you know, worried about shortage of products because of semiconductor.
05:31So I would say generally the demand has been very stable.
05:35But there is more pull forward of the demand due to uncertainty, which the markets are creating at this point
05:40of time.
05:41So you're talking about, you know, you feel even more conviction about these, about these, the three-way split and
05:47the strategy you have going forward.
05:49There's this narrative very much so that Elliott really fueled this by coming in with their investment, the activist investor.
05:55To what degree are they still involved in things like strategy and dictating timelines?
05:59So our, you know, relationship with Elliott is quite unique.
06:04We treat them as one of our big investors because we are a public company which is owned by multiple
06:09large investors and they being one of them.
06:11And I would say our engagement with them have been very productive and collaborative.
06:15I would say that bringing in an expertise of capital market becomes an additional input for us for making our
06:23different decisions.
06:23And we have to make our decision in the best interest of our shareholder and customer, but getting that insight,
06:29often somebody who plays in capital markets every day, becomes a very important data point for us.
06:34So some of the details of the strategy going forward, for example, once the aerospace split is done, might you
06:40consider, for example, beefing up some of the building automation segment with various, you know, AI-related acquisitions?
06:46It's something that your competitors have done.
06:48Have you thought about that?
06:49So in the Reminko, in the automation business, we serve three big end markets, buildings of all types.
06:55So think of buildings like schools and airports and pharmaceutical facilities, then industrial sector, which is semiconductor utilities, and then
07:05finally process industry, which is primary energy sector.
07:09Now, our acquisitions will be how do we grow our capabilities in each, specifically where the growth is higher over
07:16the next many years.
07:17So if you see our trend of our acquisition over the last two years, we either acquired an end market
07:22sphere, the growth is very compelling, like LNG.
07:25We made two acquisitions there.
07:26Or there is a technology trend, which is irreversible, people spending more money on security.
07:32So we made acquisition for physical security, for cybersecurity.
07:35So that trend will basically persist that we will make our acquisitions, which are bolt-on.
07:41We don't do transformational acquisitions.
07:43We don't want to put too much money of our shareholder at risk at one point.
07:47So typically our acquisition tends to be an enterprise value of $2 to $3 billion.
07:52So we put bets, which are meaningful for us in terms of our moving our earnings.
07:57But at the same time, you're not betting the company.
08:00But we stay focused on markets which are growing.
08:04We know which markets are growing.
08:05It's aging population.
08:07It's skill shortages.
08:08It's AI.
08:08So we know the trends.
08:09Right.
08:10What's happening in the world.
08:11So you put your bets on, which nobody debates, right?
08:14You don't want to go so much off field and try to develop your own thesis.
08:19We don't do that.
08:20But things like building around data centers, for example, I mean, valuations have to be crazy.
08:24I feel like every day there's some company that's making a pivot into data centers that's trying to do something
08:29transformational.
08:30I mean, can deals be done that even look reasonable at this moment?
08:33I would say we as a company are very disciplined.
08:36We have certain valuations as a company, and we want to stay any acquisition we do more or less in
08:42the same zone.
08:43I think paying too much of premium, which is way above your company valuation, is dilutive to our shareholders.
08:49So typically all deals we have done kind of values in and around our own valuation or even lower in
08:55many cases.
08:57So to your question on data center, I think we have a play today based upon our product set, which
09:03we sell today.
09:04Those products that get us a certain amount of revenue.
09:06What I believe is as the data center changes in its configuration, the liquid cooling becomes more prevalent compared to
09:14air-based cooling or DC-based data centers start coming in.
09:19That may open a new set of opportunities, which companies like us need to keep an eye on and use
09:24our domain knowledge and understanding of the spaces to put some bets ahead of the time, which may not give
09:29us a revenue in 26 or 27, but position us well for the longer term in the future.
09:33In the meantime, do you see other people getting caught up in that frenzy?
09:36Do you see some of the things out there and say, that's not deal discipline, that's just chasing what a
09:41trend is right now?
09:41It's my job to offer opinion on others.
09:43I know, but you're probably well-placed more than most to see what's going on out there.
09:47Everybody has a right to make their own decision.
09:49I think we are held ourselves accountable for what we do.
09:52We have so much opportunity in our own space on what we do, and we just keep ourselves well-occupied
09:59with that all the time.
10:00So just on that note, when the dust settles from the corporate transformation you're doing, how are you thinking about
10:06your capital allocations, and what's more important, things between returning shareholder capital versus holding on to some firepower for bolt
10:15-ons, for example?
10:16I think at any point of time, we have to balance between, number one investment we always make is new
10:21product development.
10:22There's no more higher ROI we have to develop organic growth.
10:26Any company like us will always deliver earnings growth through organic growth.
10:29All our dollars, maximum amount of dollars should go there.
10:32Now, as we generate free cash flow, after that, our option is we are a dividend-paying company, and we
10:39like to maintain our dividend.
10:40So that kind of becomes more or less committed cash towards paying dividend.
10:44So our only option then left is how much we spend on share buyback and how much we spend on
10:49M&A.
10:49And I would say if M&A opportunities are compelling, then we should spend money to M&A to generate
10:55more future earnings growth for our shareholders.
10:57But if it is not, then you return money through shared buyback.
11:01And we have done both.
11:02We have done, there were years under my leadership, we've done more shared buyback, but then we pivoted more towards
11:08M&A.
11:09So I think it is situational, but having a pipeline for opportunities for M&A is critical discipline, because no
11:18deals happen just because you have money.
11:20You need time, you need to build a relationship, you need to understand proposition, and we spend a lot of
11:25our quality time to think through what options we have.
11:28And if we have the money, we'll see the best use of money, which gives the best return to our
11:32shareholders.
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