Jeffrey Sprague: How it might play out in 2024 and 2025?
Greg Lewis: Yeah. Great question, Jeff, and your €“ again, your instincts are on €“ this is the 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 2023 is going to be the top and then it starts coming back down. But again, that’s going to depend entirely on the pace of those deliveries. But it ought to be, let’s say, reoriented back with deliveries in our view by 2025, for sure, and maybe into 2024. So this is going to be 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.
Darius Adamczyk: Yeah. I think that’s exactly right. I think that, this is probably an unusual 2023 headwind. But even the headwind, 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 Aero.
Vimal Kapur: Supply chain is
Darius Adamczyk: Supply chain is getting better. Our ISC teams have really demonstrated unlock of a lot of capacity. And I think there’s nothing other than to be excited for the next three years in Aerospace. It’s €“ I’m very confident in the backlog position, and it’s going to be a really nice period for that business.
Operator: Thank you. One moment for our next question. And our next question will come from Andrew Kaplowitz from Citigroup. Your line is open.
Andrew Kaplowitz: Good morning, everyone.
Darius Adamczyk: Good morning.
Andrew Kaplowitz: So you mentioned capital deployment in line with three year $25 billion plan for 2023, I think, which would mean another year somewhat similar to 2022. You deployed almost $8 billion of cash. Obviously, out there, you’ve got National Instruments conducting a strategic review, as I’m sure you know. If Honeywell were to 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 you’ve been disciplined when you’ve done M&A and really stuck to more bolt-ons. Can you remind us of your return hurdles to do a larger acquisition? And what, if any, strategic requirements you have to make a larger acquisition?
Darius Adamczyk: Yeah. I think good question. Yeah. So I mean, obviously, we have a balance sheet that’s strong. And over the last two years, we have, let’s call it, roughly around $15 billion-plus to deploy it based on our 2025, over the next two years, so we have the capacity. But I’d just point out a couple of things. Number one is, we are disciplined in our approach. That’s point one. So point two is, where our controls and automation and sustainability and digital company. And point three is, we typically don’t do hospital acquisitions. So we are interested in doing more M&A €“ smart M&A in 2023. I think you should expect that at some point. But it’s 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’s going to be something that we can €“ is truly strategic and fit what we do as a company.
Operator: Thank you. One moment for our next question, please. And our next question will come from Josh Pokrzywinski from Morgan Stanley. Your line is open.
Josh Pokrzywinski: Hi. Good morning.
Darius Adamczyk: Good morning.
Josh Pokrzywinski: Good morning. Thanks Darius for taking the question. I understand 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 should end or hopefully end if you’re able to start getting more product out the door? I think teasing out the demand environment versus the supply chain environment has been a bit of a trick here for a while?
Darius Adamczyk: Yeah. Maybe I’ll start and I’ll turn it over to Vimal. So first of all, we feel very good about the backlog, because if you 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, if — we can debate whether it’s in that $3 billion to $5 billion more than normal. So the backlog position is very strong. From a long-cycle perspective, Aero, especially PMT, very strong position. Even in the short-cycle businesses, which are predominantly HBT and 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, we don’t know this yet, but we’re cautiously optimistic it can actually be one of those unique periods where the short cycle and long cycle are turning at a really good pace. We have much more confidence in the first half based on the strength of the long cycle, and we expect an uptick in the second half in the short cycles too. Vimal?
Vimal Kapur: So maybe do in-person on 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 burn our past dues/backlog better than our — what we did in 2022. And we also expect that our project businesses will also execute on our backlog on a more determined basis, because they also faced a lot of headwinds on supply chain constraints in 2022. Where the back will land, it’s just indirectly answering the question of orders 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.
Operator: Thank you. One moment for our next question please. And our next question comes from Joe Ritchie from Goldman Sachs. Your line is open.
Joe Ritchie: Thanks. Good morning, everyone. I want to ask that last question, maybe slightly differently, because guidance is a little bit wider than normal. And so perhaps maybe under what scenario would you guys see yourselves coming in below the midpoint of the guidance, the EPS guidance for the year?
Darius Adamczyk: Yeah. I mean, I think — first of all, let me — there’s a couple of questions. And the first one is why is the guidance wider than normal, because I think we would probably admit that in terms of the economic scenarios this year are probably a bit wider than most people guess. And 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 highway perspective, and this is, I think, consistent of how we guide every year is — 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 were compared to this year versus 2022 or 2021, it’s probably more uncertainty rather than us.
So that’s the reason for the wide range. In terms of the range, it’s out, sure. At the lower end €“ at the lower end, it’s probably — it probably means that tougher economic conditions. The second half is the economic conditions turn worse, the short cycle is worse than we expect at the top end. It’s a bit more of what we hope is the expectation, which is some of the order activity turns. Short cycle becomes more robust in the second half and China returns to growth. I mean we — 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 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. And by the way, we did guide a wider range like this historically it could. Since it’s not that much wider and 2022 was a little bit narrower. But I think it’s just — it’s as simple as it’s indicative of the economic uncertainty that I think many of us are facing. And there’s a wide range of educated guess as to…
Greg Lewis: Yes. I think we’ll know a lot more come June, right? I mean as we talked about, I think we feel pretty good about where we are from a backlog position. And no one really knows what the level of activity in the economy will be. I mean we’ve had some good things. The European winter has been more mild than people thought, and Europe has held up relatively well and — versus what some have figured it could be. But I think, as you said, we feel really good about where we are right now. And we’ll continue to take that temperature as we go through the first four to five months a year.
Operator: 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.
Deane Dray: 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. So nice to see.
