Honeywell International Inc. (HON) Management Presents at Leadership Webcast Series – Innovations in Sustainable Buildings (Transcript)

Honeywell International Inc. (NASDAQ:HON) Leadership Webcast Series – Innovations in Sustainable Buildings June 16, 2022 11:00 AM ET

Company Participants

Sean Meakim – Vice President, Investor Relations

Doug Wright – President and Chief Executive Officer, Honeywell Building Technologies

Mike Stepniak – Vice President and Chief Financial Officer, Honeywell Building Technologies

Conference Call Participants

John Walsh – Credit Suisse

Sean Meakim

Morning, everyone. This is Sean Meakim speaking, Vice President of Investor Relations for Honeywell. Welcome to second quarter 2022 installment of the Honeywell leadership webcast series.

The purpose of these webcasts is to provide our investors with the opportunity to hear from a wide range of Honeywell leaders on topics of special interest. Today, we’d like to highlight how Honeywell is using new and innovative technologies to help shape the future of healthy and sustainable buildings.

Joining me today are Honeywell Building Technologies President and CEO, Doug Wright, HBT’s Vice President and Chief Financial Officer, Mike Stepniak, and senior analyst and head of US electrical equipment and multi-industry research from Credit Suisse, John Walsh.

This presentation and webcast are available on our website at Honeywell also uses 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 of our business 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.

All right. Well, now with all the formalities out of the way, Doug, Mike and John, thanks for being here today. Before we dive into John’s questions, let me turn the floor over to Doug, HBT’s President CEO, and let him walk through a few of our prepared slides. Doug?

Doug Wright

Thanks, Sean. Good morning, everyone. We’re going to start on slide 4. This is a slide that we presented at the last investor day in the spring when we met with many of you. So we just wanted to recap that, from a Honeywell perspective, there’s three key messages we want you to take away from HBT.

First is that we are aligned with strong macro tailwinds. We believe, and we’re going to discuss today, we have a differentiated portfolio related to digital and sustainability. And from a financial perspective, we believe that we perform at a high level versus our peer group.

Today, we’re going to spend the time focused on the box in the middle, which is around how we differentiate with technology to solve what I define as this generational problem around sustainability in buildings.

So, now I’m going to slip over to slide number 5. This is also a slide that we talked about at Investor Day, just want to recap, that if you think about the history of HBT, we start off in the left hand side where we have multi-decade experience in building system domains, where we come into buildings every day, there’s a Honeywell employee in thousands of buildings every day, improving the facility, making it safe, secure and productive. And we believe that we have a service business that’s about $1.5 billion that runs at mid-single digit growth. So that’s our legacy, if you will.

It’s also a platform for what we’re going to talk about on the right. The second is we go into intelligent control. So this is as an industry and as Honeywell as we’ve learned how to deploy software and digitization tools to make buildings more intelligent, so that we can make better decisions with them and we can ultimately work toward the problem that we’re going to talk about mostly today around sustainability. So, this is where we have about an existing $1.2 billion controls and software business that grows at high-single digit growth. In a lot of our technologies, we’re in situations where we invented the capability in our industry.

And then, finally, we’re going to spend most of our time today talking about sustainability. And this is really the new problem that our industry and our customer base and our world has about how we reduce the amount of carbon that we consume in buildings. I think it’s well understood that buildings produce a significant portion of the carbon that goes into our world. And owners, occupants, investors are very adamant now that they want to try to work toward reducing that impact. So, that’s why we’ve created this new sustainability business we’re going to talk about today. We believe it’s a billion dollar plus business over the over the three to five year horizon with 20% growth.

And now, we’re going to get into sort of the how we do that in the next slide. So, moving on to slide number 6. So how do we deliver? Customers have three primary issues or needs that we work on. The first that we started with two years ago when we announced our healthy building offering, we went into the pandemic phase, there’s a lot of focus around the health and wellbeing of occupants. Air quality is considered a safety issue now in a lot of locations. So, this is really where we started.

And then, we talk about decarbonization. Most parts of the world are setting very aggressive goals to decarbonize their building stock. And so, that’s another big problem that the customer is dealing with. And then, finally, ultimately trying to work toward a net zero capability in buildings is the next thing. So, we’re going to talk about some specific technologies in each of those areas.

But I also wanted to highlight in the middle of the page that Honeywell is an organization, so we’re a building controls and building technologies organization. But as part of Honeywell, we have access to other relevant technologies that are very critical to the sustainability equation.

If you think about it, most of our time over the last several decades has been about trying to reduce energy consumption and buildings. But in order to really decarbonize, you have to start looking at the supply side, you have to look at other sources of – the sources of carbon. So, this is where we start thinking about energy storage, which is our sister division, PMT. We’re partnering with other types of sensors even out to looking at low global warming potential refrigerants, which the PMT division has.

So, we believe that Honeywell has a unique position being not just in the building controls, which we think is a very critical part of the capability, but also in the material systems and other technologies that are going to enable us to go at this problem more holistically.

So, now I’m going to go on to slide number seven. So this is the healthy buildings point. We started several years ago working through how to improve the health of a building, how we filter the air better, how do we deploy touchless technologies, how do we find a way to make buildings more safe for occupants. Talk about the ASHRAE compliance. This is the kind of the industry bellwether to define what type of air quality is required.

If we look at institutions like WELL, which are defining standards for building owners and operators to deploy to make their buildings more secure, safe for their occupants. The challenge that we have as an industry is that a lot of that technology requires energy to be used.

So, we go to the right hand side of the page, how do we solve this problem by needing to improve the quality of the air, but do it in a way that’s responsible from an energy standpoint, and this is where we’re now focused. So, we’re developing and have developed technologies that allow us to crack that code to be able to improve the air quality and safety of the building, but also reduce energy consumption by really the pieces in the middle, this differentiated technology, about how we use the intelligence of our controls or software, which includes a lot of investment in our AI/ML capabilities that allow us to basically optimize between these two somewhat opposing objectives of needing to have very clean air, but, frankly, a lot of buildings today over-clean their air for parts of the building that are unoccupied. So, with controls and good sensor technologies and software, we can actually solve that problem.

This creates about a $3 billion expansion in our serviceable market. This is a very robust pipeline for us. Even as we’ve gone into post pandemic phase, we’ve seen sustained interest levels in healthy building technologies and we see that continuing in the future.

So, now I’m going to go on to slide number 8 and talk about – I’m going to talk about two particular technologies that we’re introducing in real time to help solve this problem. So, this first one is called multimodal optimization. That’s a fancy engineering speak for the way we look at this polarity of healthy mode and energy efficiency in a building. So, how do we crack that code?

Well, the reality is when we crack it with the things that we do traditionally, good sensors and controls, with a lot of advances in our software stack that we’re working in partnership with our Forge colleagues to develop really leading technology around artificial intelligence to be able to take traditional building controls to another level of capability.

So what this technology does is it looks at various types of sensors in the building, some of which are existing, some of which we bring in new, and then we can use good learning algorithms to allow the building to learn what is necessary to optimize for the specific air quality, not just carbon dioxide levels, but things like PM 2.5 and VOCs, so we can get into a more sophisticated a capability that allows us to get that energy balance correct for the right level of occupant health. This market, by itself, represents about a billion of our SAM expansion and is growing nicely. And I’m going to share an example later in the presentation about where we’re actually deploying this, as we speak.

Moving on to slide number 9, as we crack the code with respect to how we balance health and energy, we then have another level of focus as we start looking at decarbonization. So, how do we do that? And this is ultimately going to be a much bigger market, we believe, as industry, investors, regulators start driving for a net zero capability in most of the regions that we serve. So, this is how we look at – holistically how we track carbon. So, carbon is produced not just by the energy that we consume, in running our HVAC or our lighting or hot water systems. It also gets into how that energy was produced. Was it producer with a green source, which doesn’t create any carbon, or is it produced with brown energy, which is – so you can’t really be net zero if you’re consuming a brown energy.

So, how do we track each building, each layer of a building, each building in a network in terms of what type of energy are they using? When are they consuming power? Is it green? Is it brown? If I have the ability to store it in the middle of the day, when solar or wind power is available, I can actually find – my algorithm can say okay, now’s a good time to buy power because it’s very green today and it cost us low from a carbon standpoint, so I’m going to store it today. Maybe tomorrow when weather is not as good, the power is not as green, so I’m going to run off the battery that day. So, this is really the intelligence of the building able to balance its carbon consumption, not just its energy consumption, which is obviously a related topic, but it’s different.

So, what this is really allowing us to do is not just to measure and analyze the data, but to actually rebalance the load in the building, so that we can say, at this time, this particular situation, you should run off the grid because you can get green power off the grid. If you’re in a location like some of our factories with the solar power on the roof, it’s a sunny day, you should run off the sun and maybe put the excess into your batteries for sort of saving it for later. So, this is how – this is not just about a dashboard that allows to get visibility to the consumption of carbon. That honestly is fairly straightforward technology. But the ability to actually take that information, generate insights, and then drive control logic into a facility to say, based on these conditions, you should drive these control decisions, that’s really how controls companies think about how we actually control things, not just be able to look at.

So now I’m going to move on to a summary on slide number 10. So how does this all come together? What does it mean to our markets? So, we look at healthy building, energy optimization, and net zero, kind of left to right. This expands our TAM for about $6 billion. So this is a material opportunity in our industry. I consider it to be a generational challenge. It’s not cyclical, it’s not a flash in the pan. It’s not because of stimulus. There is a real traction in the marketplace to deploy these technologies, everywhere from – I go to China or the Middle East last week, obviously, US and Europe, this is a very, very relevant capability.

But I also wanted to talk about how we do it because the technology stack is really critical. We have a very strong capability there. But it also requires you to have a service capability. It requires you to be able to show up in these sites that have multiple generations of technology in their building, and be able to manage that complexity in a school system or a multi real estate company that owns many buildings. The ability to bring all of the information together in a coherent way, but then also to be able to deploy service capabilities to manage that over time is a very, very critical part of how we can take this technology to scale.

And this is an area that Honeywell because we have an in-house service company and we’re also very – we have very good presence in most of the high growth regions, whether it’s China or India, Southeast Asia, Middle East, we can actually take this technology to scale at a differentiated way, we believe.

So I’m going to close with an example. So, Phoenix Union High School District, this is a school district with about 23 high schools in Phoenix. They serve about 28,000 students. They have about 4,000 staff members. And we’ve been working with them for many years. We have our building controls technology, our fire system technology – access control technology in this building for many years. It’s a very longstanding relationship.

But now what we’re doing is we’ve now deployed our sign visitor management system. So that’s part of Forge ecosystem. We brought in healthy buildings dashboard, also part of our Forge ecosystem. And the technologies that I just talked about with multimodal and CEMS, which is carbon energy management system, those are actually being deployed as we speak. This is one of our co-innovation customers. So we’re actually active with those customers, bringing this technology over top of our existing control systems in that building, and we have several other – the education segment is actually pretty robust for us right now. This is a very important constituency. They have intentionality to invest in their facilities, and these technologies are going to help them solve their problems. So this is a very – a typical example of the type of multisite complex institutional customer that we as Honeywell have to go serve. So, that’s a kind of an example of we’re going to be doing in the future.

So, with that, I’ll turn it back to the group here.

John Walsh

Great. This is John Walsh speaking. And so, first, a thank you to the Honeywell organization for including me as part of this event, and certainly very interesting content. And it’s great to hear what Honeywell is doing to bring sustainability to the largest asset class in the world.

So, maybe, Doug, we could start by talking a little bit more about that tension that you alluded to between kind of energy efficiency, decarbonization and healthy buildings. And just maybe go one step deeper around, is this going to be solved solely with controls and software? Is there an equipment component? Obviously, you also have a very strong products portfolio, maybe help us understand how all three of those come together?

Doug Wright

Sure. Thank you. I think that the majority of the cases, we have two ways that we can, can deal with the challenge. The first is at the equipment layer, we can bring in more efficient technologies that are readily available to help whether it’s advanced lighting controls or advanced HVAC systems. And that business we’ve been in for decades to go into a school or a hospital system or a commercial office building and do that. So, that’s one layer, and that’s to continue on an important part of our portfolio.

And we work with partners in cases – we have own technology. And then we have partners that we work with as a as a solution provider. I think where the real differentiation from a technology standpoint is coming is really in the controls and software layer. We now have software capabilities and network capabilities, whether it’s sort of edge cloud architecture or the advanced AI/ML capabilities that we’ve deployed that allow us to do much different things with the controls environment. So, I think that’s really where most of the new differentiation comes from.

But frankly, the ability to have service technicians go into a school system and do traditional upgrades and service is also very important. And we have to be able to balance both – we have to take the buildings the way they are. And typical school system will have a very wide variety of building stock or a hospital system will have – or airports, they have very, very different technologies in different parts of their facility. And we have to take the legacy content and make that better. And we also have to migrate them toward the new technologies. So, it’s a blended approach that’s required.

John Walsh

Great. And then maybe we can touch on a little bit between kind of some of the historical controls that you mentioned and where you’re pushing with Forge, and maybe actually help us kind of understand the difference between what you might be controlling with a traditional BMS and what you’re doing with you Forge capabilities.

Doug Wright

I think there’s two layers. The first is traditional controls is deterministic. So we have an air quality sensor, we have a ventilation system, we have a motor and an HVAC system. And those we – our smart people sit down and write a piece of logic and a code or firmware that says, if this then that. So, it’s deterministic. That’s a traditional way we’ve done controllers for decades. And we’re all pretty good at it as an industry.

But what Forge has allowed us to do is to take it to another level, which is now with IoT capabilities in buildings with all types of sensors, whether it’s air sensors, lighting, control sensors, occupancy sensors, that we can now create an artificial intelligence capability that will – we set basic objectives to say, use the least amount of energy to maintain the air quality at these levels based on the occupancy requirements. And the machine learning actually drives it to a different level of optimization that adapts over time. So, it’s not just one setting that I set. Based on today’s pattern, I set it for this condition. The AI capability is continuously learning. That’s one very, very important change as we go from traditional BMS controls to Forge like controls.

The other level that is really important to a lot of our large customers and big institutional customers is, as you go from an individual system level in a building to a building itself to now a network of buildings, all of which have different layouts, different configurations, different uses, in some cases, the high school has a very, very different setup than a hospital versus a church. So, if you have a network of all of those types of buildings and you’re, let’s say, a facility management company or you’re a school district, the ability to actually solve that carbon energy equation across, in some cases, hundreds of buildings, we just simply can’t do that with traditional controls and clipboards and trucks, which is kind of the way it’s attempted to do now.

So, Forge also allows us to bring that level of controls capability to a multi-site application in a fundamentally different way.

John Walsh

And that kind of segues into some of those secular growth drivers you talked about. And so, you brought that example up about a portfolio of buildings. So, as we understood it, historically, a lot of these building owners cared about their core urban space, right, and the other parts of the portfolio might not have gotten everything that that core urban space got. It sounds like that’s changed. Why are they changing that behavior? Why are they looking at as a portfolio now than just a couple of their core urban assets?

Doug Wright

Yeah. I think that’s a – as we think about the history of green buildings, I guess we can accept that, in some cases, folks were doing it as much as a marketing exercise as a real kind of carbon reduction exercise. But now with investors being much more diligent about what their portfolio companies are doing, with what governments are looking at in terms of their energy, the sustainability goals, I think now there’s an awareness that you have to – if you’re going to reduce – if you’re going to achieve carbon reduction, you have to do it at a much more holistic level across the portfolio of buildings. And I think the day isn’t just having your sort of your headquarters building, having all the great new technology, and then all the other hundreds of sites don’t have the energy savings, I think those days are well behind us. We’re seeing it in school systems, we’re seeing it in industrial sites, warehouses, there’s a lot of focus on – in solving the problem at a holistic level, not just on the, let’s call it, the reference site level.

John Walsh

Great. And so, when you think about that, on the controls and the software side, can you talk about the ability for Honeywell to kind of scale to that and kind of some of the investments you’re making to be able to scale?

Doug Wright

Yeah, that’s a good question. I think part of it is – the technology stack, whether you’re doing 5 buildings or 20 buildings, it’s not necessarily a big technology jump. But what it really is, is actually how you have the built-in service network to be able to go to that customer and say, now I can take over all of these assets and make them better because most customers don’t do it themselves. They outsource it or they do it at a building by building level. So, part of our focus has been – and one of the advantages I think that full service companies have is that we have, around the world, Honeywell employees that can roll the truck to any building in any major city and work with those customers to do that. So, part of it is I think the service channel leverage that we get. Obviously, we have an independent channel that we sell our technologies through, and they cover a certain part of the market. But I think for a lot of the large institutional customers and big portfolio owners, they’re going to rely on us to help them solve that problem. I think our channel and our service footprint actually are really what set us apart.

John Walsh

Very interesting. And so, I guess if we take a step back and we think about your forward projections, how are you thinking about products, control, software, what kind of growth rates can you see there?

Mike Stepniak

Good question. This opportunity – this part of the market represents about $6 billion plus SAM for us. And if you think about it, the big piece of it obviously is products, then the traditional services. But if you look at it, even our early presentation this year, we are shifting more of our focus to software and outcome-based services, especially with what we’re doing right now with net zero carbon. We’re starting to help our customers baselining the building portfolios and leveraging Forge to get the deep insight in terms of how those buildings are running and how you get scale, cost savings and meet your ESG goals. So, we see that our space, especially on the ESG side, go up for us based on our installed base and where we think we’re going, about 20% a year to about billion dollars over the next three to five years. And we see that trend and what are we doing, we see it actually globally. It’s not just US and Europe where you have a lot of stimulus. Doug and I, we spend a lot of time this year in Middle East, in India, we see those trends everywhere. So big opportunity for us.

John Walsh

And when you take that kind of global perspective, are you seeing the same drivers in each of those geographic regions? Is it being driven by investors? Is it being driven by changes in utilities, with energy a big focus today with everything going on? Is it the same everywhere? Are you seeing different things?

Doug Wright

I think, at a high level, I think building occupants and investors are all kind of similar, in that they realize that – I think there’s a recognition that a sustainable building or a sustainable city is just more efficient and it’ll be a better investment. But I would say that different parts of the world approach – just like anything else in the building industry, they approach things a little bit differently. In some markets, they use energy rate policy to drive the cost of – electrical energy up to drive – to help provide an incentive for people to become more efficient. That’s what’s happening in a lot of the Middle East as an example.

In Europe, it’s largely being driven by access to stimulus funding. If you want to upgrade your building, there’s funding that can be deployed, but it has to be deployed to achieve a certain carbon out.

And in places like China, it’s largely being driven through rebate structures and a little bit of just sort of edict from municipalities.

In the US, it’s generally being driven by institutional, like government customers, like schools and hospitals, they genuinely just recognize that they need to upgrade their facilities. Part of it is that they want to save their costs. But I think they also – I think their constituents, their investors, their voters, their students, they want to have that. So there’s a lot of focus on green buildings in some markets in the US from a more of a consumer side. And then, of course, investors are very focused on it. So people that are owning big real estate portfolios, they’re definitely getting pressure from investors to be more sustainable.

The regulatory push down, I think, will come eventually. But that’s not really what’s driving – statutory requirements to say, thou shalt have a green building are not really what’s driving the activity. It’s real, sort of, I would say, bottoms up kind of activities in most markets.

And just like any other building code, whether it’s fire code or other things, it starts ultimately with industry and owners of facilities recognizing that there’s a problem. And then eventually it will become codified in some sort of a regulation. But that’s not really what’s driving this right now. We’re not relying on any law or code to say, you’ve got to upgrade your system or improve your air quality. It’s generally been driven by, I call it, the grassroots of most of the markets.

John Walsh

That’s great. So, you had the slide on One Honeywell, right, talking about the other businesses you’re leveraging? Can you maybe give us a little bit more around that, particularly as it relates to decarbonization and net zero?

Doug Wright

Yeah. So, as we think about the engineering problem, we have a lot of tools to be able to reduce the energy consumption in buildings that we talked about. But if you’re going to achieve net zero, you ultimately have to be able to procure energy at zero carbon balance. You can’t reduce your way to net zero unless you turn the lights off and shut everything down. So, what that requires us to do is actually look at the inbound energy coming into a building. So, this is really where our PMT team member – colleagues, between energy storage, smart grid management technologies, but how we actually manage the inbound energy coming into a building, it might be controlling solar panels on the roof and bringing that energy into the equation. Or it might mean putting in battery storage or thermal storage systems in a building to be able to store energy when it’s green and use it when the only available energy is brown.

So, I think this is really where we are – I think as our next generation of growth is moving beyond energy consumption issues and actually working on the supply side, and that’s really where – if you think about our HPS organization, this is an – they’re into largely – historically in the industrial side of the industry, looking at battery storage and managing of energy. But we believe that now that technology will be scaled down to the building commercial scale, and we’ll be able to deploy that. So, we’re really excited about that potential to bring that technology to our customers.

John Walsh

Right. And then maybe we can use that as a way to pivot into kind of the competitive landscape. So, we’re seeing a lot of activity and excitement around this space. You have it from some of the major equipment suppliers on the HVAC side. You have some of the medium and low voltage players on the electrical side, the kind of traditional software guys and controls players out there, and then a whole field of startups. So when you look across that competitive landscape, where do you feel Honeywell is kind of most differentiated?

Doug Wright

I think there’s probably three layers that I would refer to. The first is the kind of some of the new participants. I think we simply have decades of domain knowledge to understand how buildings work. Those aren’t trivial skill sets. So, I think we feel very comfortable that we understand the problem, we have access to the right customers and we’re good on that side.

I think the other is that we’ve invested – Honeywell has invested very, very heavily over the last particularly five plus years in really raising our game in our Forge type capability, the artificial intelligence, the machine learning. We have a lot of engineers dedicated every day to creating novel software capabilities. And I think this is an area that Honeywell, and particularly in HBT, and our partnership – there’s a lot of interaction between HBT and our HCE colleagues. And that really helps us – I think we’re just better at software.

And then finally is that you have to – the building industry is very fragmented. And if you’re going to do things at scale in this industry, you have to have access to thousands of buildings, thousands of points on the globe you have to roll a truck into and actually install hardware, install software, solve problems on a daily basis. And having a channel – a service channel that can actually – we can show up in Riyadh, Saudi Arabia and actually go into a hotel and turn a wrench. If you don’t have that ability, if you don’t have that scale of service, then you can provide hardware, but you’re ultimately never going to – you’re going to have a hard time getting to scale quickly. So, this is another advantage that we have, and we’ve got service portfolio around the world, we’ve got – and it’s not just about access to the customer, it’s – installed base is not just about ability to know the address of the customer and be able to knock on their door. You’re in a position of trust with them. If you are responsible for maintaining the fire alarm system of a big airport in a major metropolitan city, they trust you and you have relationships with them and you can then bring these new capabilities to. And if you’re standing – if you don’t have that installed base, it’s really hard to establish that position of trust. So, I think that’s another competitive advantage that we have. So, the domain knowledge with the software investments, with the access to the channel, service channel, I think those are the three things that really separate us.

John Walsh

And then maybe just sticking along there, that kind of line of thought, how about the ability to go from being equipment into that IoT layer? And then, maybe vice versa? So going from somebody who’s strong in software thinking about going down into equipment, how do you think about that?

Doug Wright

Well, I think there’s a lot of innovative companies out there that have gotten a lot of software capabilities, and in some cases, if we see something novel, we partner with them. We’ve acquired them in some cases. So, I think there’s a place for the startup folks to participate in the industry. They create sort of intellectual tension with what’s possible, and we surveil those and work with them routinely. And if we find something very interesting, we’ll deploy it.

I think it’s probably not – honestly, there’s not very many of them that I think are really going to be looking at getting into making the investments to get into the hardware or the equipment side of things. I think that’s, frankly – once the industry is relatively standardized on the hardware side, so I don’t see that being quite an issue.

I do think that we have to be very aware that all of our building system competitors are also investing in software and partnering and things like that. So, I don’t think it’s a static process. I think we are ahead today, but we certainly have to continue to invest heavily in our software R&D to be able to stay ahead. So I think that tension is always going to be there.

Mike Stepniak

I would also add then – I think it’s very important point that ability to fund and invest during the pandemic was very important. We did not scale back on our software investment in innovation during the pandemic. I think coming out of cycle that it puts us on the different playing field as far as being able to progress not only in our traditional NPI, if you will, but also looking at the new trends that emerged through the pandemic relating to healthy buildings, air quality, etc.

John Walsh

So then, I guess, where are you putting those incremental dollars today? Is it…?

Mike Stepniak

So, the allocation of dollars is similar in terms of the size of the investment, but we’re spending more dollars, if you will, for revenue now on software, on solutions, on things like Tridium. Like Doug said, we also invest with our venture partners. When we see somebody that has a unique technology coming in, that’s where we spend our investment dollars.

So, we’re much more conscious as far as growing that side of the business right now.

John Walsh

Great. So, kind of a question around that software capability. So, you commission a building, day one, it’s working within all tolerances, but buildings, I would argue, are kind of living assets, right? So there’s always something that’s falling out of fault. So what are you doing so that when someone makes this investment, you know what they’re getting day one, day 100, year five of operations? Can you walk us through that?

Doug Wright

Sure. Really two things that we’re doing differently today that are – that will answer that question. First is that we have converted a lot of our maintenance contracts for buildings that we service directly. We’ve converted them to go forward digitize maintenance. So, we put a gateway into the building, and we monitor it. We have network operation centers in – all over the globe. We have four of them spaced around the time zones, so we will actually monitor those buildings in real time. And in some cases, we’ll see a fault and we’ll clear it remotely and the customer never knew. In some cases, there’s a condition that we need to schedule a service call for next week when there – maybe somebody else’s in that zip code, or some cases, we get a red flag condition and we have to roll the truck and be there to fix it.

So, a lot of the digital tools that we’re deploying allow us to do – and frankly, I think this was something that was happening already. But during the pandemic and we had to have a lot more remote automation, it actually accelerated customers – a lot more customers got on board with the idea of remote monitoring because they were struggling with service technician availability. So that’s the first one, is that we’ve developed – we have over – it’s a several hundred million dollar business of digitized maintenance contracts that are all based on Forge and that connectivity. So that’s number one, is we need to see it, we need to be able to know what’s happening. So as you said, two months after the building is commissioned, something bad happens, we have to be able to see that. In some cases, our customers can’t even contextualize what’s wrong. So we have to have that data access. So that’s the first.

And that’s really, I think, one of the advantages of this new generation of software is that, by its very nature, it adapts to the changing conditions of the building. So maybe when you commission a building historically, you might say, okay, this room – right now, this room, we’re sitting in today, it’s a conference room, well, maybe – so it’s got a certain configuration for the air, for the lighting, et cetera. Well, maybe a new tenant comes in and remodels it and turns it into a records room. So it’s a very, very different profile. Well, traditionally, you would have to rewire everything and reconfigure – do all the if then statements to bring in building engineer and to kind of recode it.

Now, with Forge, it would basically recognize that that room is not occupied more than a minute of every day. So we’re going to change the configuration automatically. So that’s, I think, the future of how we’re going to solve the problem longer term. Obviously, traditional buildings, we have to do it the old fashioned way. We have to send people in – and that’s the other the final point that I’ll make is that, as a full service provider, we have to take buildings the way they are and we take buildings and we’ll sign a multi-year contract where that’s our job is to adapt it to meet the needs, could be everything from simple stuff, like equipment breaking or being vandalized to, hey, I’ve changed my layout and I want to have a new capability. So, we live with that customer over their life. And that’s how we make sure that the technology stays relevant.

John Walsh

Right. And then maybe we could just touch on that example, that Phoenix School District you mentioned in your prepared remarks. Can you talk a little bit about why they decided to deploy the Honeywell solution across that district, maybe just a little bit more detail around the differentiation.

Doug Wright

So part of it has to do with the ongoing relationship we have with them. So I consider it to be a position of trust when you are going into a school and managing their security, fire, et cetera. So we have that base relationship with them.

And then as the schools came back to – went back last autumn, we recognize that this air quality problem was going to create a problem from an energy standpoint. So, we had the – we went to them and we sat down and we said classical kind of conversation at the C suite level, what are your biggest challenges. First challenge was getting kids back to – come back to school. But then once we got them there, the parents are concerned, teachers are concerned about air quality. So, those conversations actually drove us to make the – to invent the technology. So, someone like Phoenix is an early adopter. And that’s kind of how we’ve started.

And what I’ll tell you is that a lot of school systems are facing the same dilemma. We’re actually – we can’t name them. But there are several other big school systems that were also deploying the same technology. But I think it’s important to understand that it’s not just about having a – obviously, the new technology is the final outcome. But the existing position of trust in the relationship and the channel is also very important part of how we can go fast.

John Walsh

Right. And maybe just one last follow-on there. You talked about speaking to multiple constituents, right, the facilities person up to the superintendent. So when you’re going into a building now, how has that conversation changed? Or is that becoming more typical, where you have to pull in somebody from the C suite or from the technology office?

Doug Wright

I would say that for the challenges that we’re dealing with now around sustainability or air quality and talking about – these are very much on the top of the mind within the C suite. And I think it is different than it was maybe four or five years ago. I think, traditionally, our people would have engaged principally with the procurement department or the facilities person if there was something new going on. But now there’s a lot more focus on the part of the investor, and that’s what’s driving, of course, the C suite to react to it.

And I want to say there’s a sustainability challenge because some of this is actually – I don’t think anybody needs a lot of help to understand how that if we give them a more efficient air con system, their energy bill will go down. When you start saying, well, how are you going to manage, how are you going to get the net zero, how you’re going to meet this green building standard? In some cases, the standard is not even really very clear. So there’s a lot more open ended issues. And therefore, I think it moves up the stack in the organization of our customer, because they simply don’t have the right answers for all those questions. So, we are getting invited more and more into that level of the conversation.

John Walsh

Thank you.

Question-and-Answer Session

Q –

Sean Meakim

All right, great. Well, we’re about out of time. So Doug, Mike, John, really enjoyed the discussion. Thank you for joining us. And thanks to everyone the line for joining us on this second quarter leadership webcast.

At Honeywell, we remain focused on continuing to perform for our share owners and we’re excited about our future. We hope you’ll tune in for our next leadership webcast, which we will announce at a later date. And so for now, we’ll conclude the webcast and wish you all a great day. Thank you.

Doug Wright

Thank you

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