Honeywell International Inc (HON) — Q1 2024 Earnings Call Transcript

Thank you. Good morning, and welcome to Honeywell's First Quarter 2024 Earnings Conference Call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first quarter, share our guidance for the second quarter and provide an update on full year 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapur.

Thank you, Sean, and good morning, everyone. We delivered a very strong first quarter, exceeding the high end of our first quarter adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. The disciplined execution of our world-class Accelerator operating system and differentiated portfolio of technologies enabled this strong performance amidst a dynamic macroeconomic backdrop. As expected, our long-cycle Aerospace and energy-oriented businesses led the way with healthy organic volume growth. We are starting to see recovery in some areas of our short-cycle portfolio, including consecutive quarters of order growth in productivity solutions and services, while the other short-cycle businesses continue to normalize as the effects of destocking fade consistent with our second half acceleration framework. Before we get into a more detailed discussion on the first quarter 2024 results and updates to our full year 2024 expectation, let me take a minute to revisit my priorities for Honeywell. First, we are keenly focused on accelerating organic sales growth towards the upper end of our long-term target range of 4% to 7%. We are doing this by enhancing our innovation playbook, accelerating sustainability and software offerings, increasing penetration of our installed base and leveraging our leadership position in high-growth regions. Second, we are evolving Honeywell Accelerator to drive incremental value through deploying global design model across the portfolio to enhance our growth capabilities. Following the great integration inside of Honeywell over the past several years, we are now an integrated operating company that deploys world-class digital supply chain and technology development capabilities at scale, along with multiple growth drivers that benefit the entire enterprise. This includes leveraging generative AI to maximize the potential benefit of our operating system, both for our customers and internally. Of the strong digitally enabled foundation, Accelerator is providing to be a powerful source of profitable growth across all of our businesses and potential addition to our portfolio. Third, we are executing on our portfolio, optimizing goals, upgrading the quality of our business and financial profile by executing on strategic bolt-on acquisitions while divesting noncore lines of business to accelerate value creation. We expect to deliver profitable growth and strong cash generation as we demonstrate progress against these priorities, creating a compelling long-term value proposition for our shareholders. In the spirit of that progress, let's turn to Slide 3 to discuss the latest action in our portfolio-shaping goals. Our M&A playbook is yielding positive results. Over the last few years, we have accumulated several quality bolt-ons and tuck-in assets that strategically add to our technological capabilities, enhancing our alignment to compelling megatrends and provide accretive growth that supports Honeywell's overall long-term financial framework. We remain focused on creating a flywheel of bolt-on M&A transactions roughly in the $1 billion to $7 billion purchase price range. We have successfully executed on meaningful deals that add technological adjacencies to our portfolio and are accretive to our growth and margin rate profile with attractive business mix characteristics. The most recent example of this came in the fourth quarter when we announced our intention to acquire Carrier's Global Access Solutions business for nearly $5 billion, enabling Honeywell to become a leader in security solutions for the digital age. The transaction further enhances our equipment-agnostic, high-margin product business mix within Building Automation. Last year's acquisition of Compressor Controls Corporation, or CCC, a leading provider of turbomachinery control and optimization solutions that will play a critical role in the early transition, aligns with this playbook as well. CCC technologies, including controlled hardware, software and services bolster Honeywell's high-growth sustainability and digitalization portfolio with new carbon capture control solutions. CCC has seamlessly integrated into our Process Solutions business, and we are already seeing meaningful revenue synergies benefit with Honeywell Forge. Second, acquisition is also an important growth lever for us as we continuously evaluate a build, buy or partner approach to add strategically important offerings that solve our customers' toughest challenges. Last month, Honeywell announced our intention to acquire Civitanavi Systems for approximately EUR 200 million. Civitanavi's technology will reinforce our leading navigation solutions across aerospace, defense, and industrial platforms. This acquisition furthers our ability to create value for our customers from nose to tail, whether they are traditional operators seeking to increase the autonomous capability of their existing fleets or new entries in the advanced air mobility space. Last year, we acquired SCADAfence, a business that delivers Internet of Things and operational technology cybersecurity solutions for monitoring large-scale networks. SCADAfence brought proven technologies in asset recovery, threat detection, and security governance into our SC portfolio, all key components for critical infrastructure and industrial cybersecurity. The acquisition has bolstered our strategic foundation in an attractive market for us to continue to build on both organically and inorganically. With the recent portfolio announcement, including Carrier's Global Access Solutions business and Civitanavi, we are on track to accelerate capital deployment in 2024 and exceed our commitment to deploy at least $25 billion of capital in 2023 through 2025. Our robust balance sheet capacity enables us to allocate capital to opportunistic share repurchases, high-return growth CapEx, and accretive M&A. As the deal environment remains relatively favorable in 2024, we will build on our already strong pipeline of high-value M&A opportunities, supporting the execution of our portfolio-shaping strategy.

Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, we're now reporting our results using the new segment structure, which went into effect in the first quarter. With that, let's discuss the results. We delivered a very strong first quarter, exceeding the high end of our adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. Despite a dynamic macro backdrop, Honeywell's disciplined execution and differentiated solutions enabled us to deliver on our commitments. First quarter organic sales growth were up 3% year-over-year, led by 18% organic growth in Aerospace Technologies. This was the 12th consecutive quarter of double-digit growth in our commercial aerospace business in addition to double-digit growth in Defense & Space. Segment profit grew 4% year-over-year, and segment margins expanded by 20 basis points to 22.2%, driven by expansion in Aerospace. Improved business mix, our focus on commercial excellence, and benefits from productivity allowed us to expand margins in line with the high end of our guidance range. Earnings per share for the first quarter was $2.23, up 8% year-over-year. And adjusted earnings per share was $2.25, up 9% year-over-year. While tax was a bit lighter relative to our first quarter guide, our full year tax expectations have not changed. A bridge for adjusted EPS from 1Q '23 to 1Q '24 can be found in the appendix of this presentation. Orders were $10.2 billion in the quarter, down 1% year-on-year, which supported our backlog growth of 6% to a new record of $32 billion. This was led by quarter-over-quarter growth in aero, Building Automation and Industrial Automation, including in key short-cycle product businesses, namely productivity solutions and services in IA and fire in BA. This setup gives us confidence in our back half 2024 outlook, which I'll discuss in a few minutes. Free cash flow was approximately $200 million, up $1.2 billion versus the first quarter of 2023, due to the absence of last year's onetime settlement of legacy legal matters that derisked our balance sheet. Excluding the impact of these settlements, net of tax, free cash flow is up approximately $200 million as higher net income was partially offset by a higher working capital due to lower payables. However, we see working capital becoming a tailwind in the coming quarters as we unwind the multiyear buildup of excess inventory. We also continue to execute on our capital deployment strategy, putting our robust balance sheet to work through $1.6 billion, including $700 million in dividends, $700 million in share repurchases, and $200 million in high-return capital expenditures. As you saw in February, we successfully issued $5.8 billion in bonds during the first quarter, including our first-ever 4-year maturity, taking advantage of strong demand in both the euro and dollar markets and locking in attractive long-term spreads while extending our weighted average bond maturity from 7 to 10 years. Proceeds will be used primarily to fund our acquisition of the Carrier Global Access Solutions business and to address current debt maturities. This really demonstrates the attractiveness and strength of Honeywell in the capital markets that we have built over time. Now let's spend a few minutes on the first quarter performance by business. In Aerospace Technologies, sales were up 18% organically year-on-year, matching the third quarter of last year as among our strongest performances in over a decade. Increases in commercial aviation were led by original equipment, which saw over 20% growth in both air transport and Business & General Aviation as supply unlocks and deliveries continue to increase. We also saw significant growth in air transport aftermarket as global flight activity remains strong. In Defense & Space, robust demand and improvements in our supply chain enabled us to grow sales 16% in the quarter. AT had book-to-bill of approximately 1.1 in the quarter as commercial demand and benefits from the impact of an increased global focus on national security support a strong growth trajectory. Supply chain continues to show sustained modest sequential improvement, leading to a 15% increase in output year-on-year, marking the 7th consecutive quarter of double-digit output growth. Segment margin in Aerospace expanded 150 basis points year-over-year, driven by commercial excellence and volume leverage, partially offset by cost inflation and mix pressures within our original equipment business. For Industrial Automation, sales decreased 13% organically in the quarter, primarily as a result of lower volumes in warehouse and workflow solutions as investments in warehouse automation remain subdued. Our short-cycle sensing and safety technologies and productivity solutions and services sales were stable but lower year-over-year with orders in our productivity solutions and services business growing sequentially and year-over-year for the second consecutive quarter, a positive sign that we're nearing a return to growth in that business. Process Solutions revenue was flat in the first quarter as growth in our aftermarket services business was offset by mega project timing. Segment margin in Industrial Automation contracted 200 basis points to 16.8%, driven by lower volume leverage and cost inflation, partially offset by productivity actions and commercial excellence. Building Automation sales were down 3% organically. We had another strong quarter of growth in our long-cycle building solutions business while we worked through the volume challenges and the short-cycle building products area. Solutions grew 7% in the quarter, led by double-digit growth in building projects, driven by strong execution of our backlog. On a year-over-year basis, orders and building projects were up double digits with strength in our core business and robust performance in energy and airports. Sequentially, orders for Building Automation improved in the first quarter, highlighted by a seasonal lift in building services and modest improvement in fire, resulting in an overall Building Automation book-to-bill of 1.1. Segment margins contracted 120 basis points to 24%, due to mix headwinds from softer product volumes and cost inflation, partially offset by productivity actions and commercial excellence. Energy and Sustainability Solutions sales grew 5% organically in the first quarter. Advanced materials gained 6%, primarily driven by double-digit growth in flooring products. In UOP, sales were up 3% year-over-year as robust demand led to a double-digit increase in both petrochemical catalyst shipments and refining equipment more than offset expected challenging year-over-year comps in gas processing equipment projects. ESS book-to-bill was 1.2 in the first quarter, the second consecutive quarter of a book-to-bill above 1. Segment margin contracted 70 basis points on a year-over-year basis to 19.8% as onetime factory restart costs were partially offset by favorable business mix and productivity actions. Growth across our portfolio was supported by another quarter of double-digit sales growth in Honeywell Connected Enterprise, a powerful indicator of our strong software franchise powered by our differentiated Forge AI IoT platform. Our offerings in cyber, life sciences, and connected industrials all grew by more than 20% year-over-year in the quarter. HCE continues to generate not only value for our customers but accretive growth and profitability for Honeywell. The ongoing tailwinds in our long-cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current operating environment. We continue to execute on our proven value creation framework underpinned by our Accelerator operating system, which will enable us to drive compelling growth in earnings and cash for quarters to come. Now let's turn to Slide 6 and talk about our second quarter and full year guidance. We delivered on our 1Q commitments while maneuvering through known risks. And as we look to the rest of 2024, our original guidance framework continues to be solid. We expect the environment to remain dynamic as we were reminded again by recent geopolitical events. However, our Accelerator operating system that enables us to move quickly and decisively, our exposure to attractive megatrends and our record backlog will continue to support organic growth for the business. This outlook includes continued progress among our long-cycle portfolio as well as a modest back half recovery in short cycle as markets continue to normalize. Overall, we have a strong setup that will drive growth within our long-term financial framework for sales, margin, earnings, and cash in 2024. Now let's discuss how these dynamics come together for our 2024 guidance. Given the backdrop I just laid out, in total for 2024, we continue to expect sales to be in the range of $38.1 billion to $38.9 billion, which represents overall organic sales growth of 4% to 6% for the year with a greater balance between volume and price. We expect sequential improvement in the second half of 2024 over the first as Aerospace continues to grow its supply capabilities, coupled with a modest short-cycle recovery that should build momentum in the second half of the year, albeit with different rates of improvement for our various end markets. For the second quarter, we anticipate sales in the range of $9.2 billion to $9.5 billion, up 1% to 4% organically. We anticipate our overall segment margin to expand 30 to 60 basis points this year, supported by improving business mix, price/cost discipline, and productivity actions, including our precision focus on reducing raw material costs. Similar to last year, Building Automation margins will lead the group in margin expansion, followed by Industrial Automation and Energy and Sustainability Solutions. For Aerospace, margins should remain relatively comparable to the last few years as volume leverage covers higher sales from the build-out of our original equipment installed base, which is driving robust year-over-year profit growth. For the second quarter, we expect overall segment margin in the range of 22.0% to 22.4%, roughly flat sequentially, but down 40 basis points to flat year-over-year, primarily due to volume deleverage in IA and the expiration of the Zebra licensing payments.

Yes. So Scott, if I understand your question correctly, you were asking about warehouse automation. Thank you for clarifying. The need for warehouse automation is definitely strong, and it enhances labor productivity, so there’s no question about that. Our pipeline remains robust, but we are seeing weak order conversion, particularly on the project side. Another positive aspect of the business is that the aftermarket continues to grow, indicating that once systems are deployed, they are effectively utilized, with our aftermarket business exceeding $0.5 billion. We have also streamlined our cost structure. Overall, I would say the business is currently at a low point, and we are anticipating a recovery. However, we remain very optimistic and confident about the future prospects of the business.

Guys, in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period?

Scott, I would say it in two parts. I have committed that we will take action on about 10% of our portfolio, which doesn't fit with the 3 megatrends, and we are absolutely taking action on that. We will make progress one step at a time because that constitutes a few businesses and no one big thing. On a broader basis, I will review with both, as I did last year on a broader Honeywell portfolio, and we will continue to be our own activist. And wherever there's a case to look at things differently, we absolutely will do that.

Yes. And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Civitanavi announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10 billion this year with just what we know about, and we're not done.

Can you just talk about maybe just sequentially how you see the earnings trajectory in 3 and 4Q?

Yes. So I would say the earnings, as we guided here, we gave the guide for Q2 and rest of the year. So I think the headline is that H2 will be stronger than H1, and that's built upon our order spacing. If you see our orders performance in Q1 was on expected lines, our book-to-bill is 1.1, our backlog is up 6%. Long cycle remains strong across the board in Aerospace and building solutions, and we expect the same trend in European Process Solutions. And short cycle is recovering on expected lines. You saw the results of ESS. The chemical business did perform well on the strength of short cycle. We saw a recovery in scanning and mobility business. We saw some early green shoots in fire business. So things are progressing as we expected, and that's the basis of our guide for rest of the year. So the punchline is we're going to have stronger second half versus first half, and that's reflected on our earnings guide for the year.

Yes. And we know that that's outside of the normal historical comps that you've seen, but that's not really different than the way we've modeled the year so far. And to Vimal's point, we are starting to see some of those short-cycle order patterns. And we said that those were going to be different by end market as the year progresses. So no real change, Steve, to what we outlined in the original guidance.

I think a lot of that second half pickup rests on the IA segment. So maybe just wanted to home in on that for a second. I think you'd guided full year sales there flattish, so about $10.8 billion. And it sounds like you're doing $2.5 billion a quarter in the first half. So you've got a sort of high teens half-on-half step-up in the second half in IA revenue from sort of $5 billion to $5.8 billion. Maybe help us understand which of the pieces inside IA will lead or lag that delta, and if it's similar to the firm-wide where there's some pickup in Q3 and then a steeper one in Q4 sequentially.

Thank you, Julian. The company's growth will primarily come from IA and BA, with a significant increase in ESS during the fourth quarter as well. It's important to consider all the product lines within those portfolios. In IA, focus on the PSS and sensing business. In BA, consider fire and the BMS business. Additionally, as Vimal mentioned earlier, in ESS, we will see continued growth in electronics and chemicals, along with our typical fourth quarter rise in the catalyst business. This growth won't rely on a single segment; instead, it's spread across the entire portfolio. Your estimates for IA's first and second halves are approximately accurate, and you should expect a balanced contribution across the portfolio rather than in just one specific area.

Only thing I'll add, Julian there, is that in IA, the HPS continues to perform very well. It's going to mirror the performance it had in 2023. So similar growth rates. The bookings remain very strong. Aftermarket is performing extremely strong. And that's the biggest constituents of the newly framed IA business. And the short cycle is recovering. I remain very confident on short-cycle recovery. We have seen that in PSS business; it has two successive quarters of orders growth. We see that in early cycle in other businesses. So net-net, we are going to see strong exit rates in IA business at end of the year.

That's helpful. I have a quick follow-up regarding the margins in the buildings division. They are expected to increase by about 100 basis points for the year, above the overall firm-wide margin expansion. However, the first quarter started off down over 100 basis points, which is a tricky situation. Could you explain how we should expect the buildings margins to perform in the second quarter and how quickly we might see a shift towards margin expansion for the rest of the year?

Sure. You will notice that this is closely related to product volumes because of the volume leverage it provides, and the associated margin rates will be beneficial for that margin increase along with the productivity improvements we have made, especially concerning direct materials this year. Our last two quarters were similar, around 24 points with a lower product mix. As the year continues, you can expect to see that gradually increase throughout the remaining three quarters.

Good to hear that short cycle is finally starting to move.

Absolutely, Andrew.

Just a question on defense and space. That picked up very nicely, nice lever. Can you just talk specifically, and I know there are a lot of programs there. But what is driving that? And what's the outlook specifically for defense and space into the second half because this is a very, very impressive performance there.

Yes. Thanks, Andrew. Look, the Q1 performance of defense and space was more linked to the supply chain unlock. That remains the biggest variable in Aerospace even in 2024. We are very pleased with the strong growth in Q1. We expect high single-digit growth in defense and space in the revenue, but order booking will be much stronger. And that's driven by the fact of not only the demand in U.S. but the international demand, which is coming up in this business. And those trends are extremely favorable. So net-net, we do expect to finish the year strong, not only in the revenue side but equally strong on the order side on the defense.

Got you. Can you talk about the visibility of UOP regarding ESS? I know there was optimism about some green projects coming in, but it seems like regulatory issues are causing delays. What does the pipeline look like, and how is the ramp-up for this business headed into year-end? Additionally, how do you manage visibility on these projects along with the time required for approvals?

So very bullish on UOP. I would say this business is headed for a great time ahead. The traditional projects continues to remain active while the new energy project on sustainability, a strong pipeline, and we see decisions now maturing. You saw in one of our exciting wins, we mentioned here a new way to make SAF with the biomass now, which is a new technology we have launched. So net-net, with the strength in traditional energy, strength in renewable technologies and catalysts, we are going to have a strong year for UOP, both in orders and revenue. And that's not only 2024. Look ahead for the business remains extremely, extremely positive in the times ahead.

I wanted to ask about Aerospace. Commercial OE was really strong, up 24% in the quarter. How are you thinking about that for the full year just given slower MAX production we're seeing and the new news of the 787 also slowing down production there? Any top line margin or cash impact that you foresee? And then I just want to clarify the comment about margins for Aerospace. You said it would dampen just given OE mix, but I would think aftermarket would accelerate as we progress through the year.

I believe there are three questions, Sheila, so let me address them. Overall, we expect commercial original equipment to grow by double digits, as well as the aftermarket, maintaining the strong growth trend outlined in our guidance for the remainder of the year. Regarding your specific question about the 787 MAX, I cannot provide details about a particular platform, but I want to emphasize that our demand for Boeing remains unchanged. We heard their earnings call yesterday, which highlighted various factors, but Honeywell is involved in multiple platforms, and our demand stays strong. I've spoken with Boeing's leadership, and I am confident this trend will continue. Concerning margins, Q1 was strong but mixed. As the year progresses, we will see different product mixes between original equipment and aftermarket. Overall, we still expect margins to remain flat for the year, in line with our guidance.

I just want to really focus my questions on margins. So just making sure that I understood some of the comments already. As you think about the rest of the year, I guess, how much of the margin expansion that you're expecting in both BA and IA is really dependent on short cycle accelerating? And then, Vimal, just a quick clarification on the answer you just gave on the aero side of the business. The OE business was up, I think it was over 24% or something like that in aero. I'm just curious, like what were some of the kind of mix tailwinds you saw this quarter in aero? And again, why doesn't that continue going forward?

Yes, Joe, regarding the mix, I won't go into too much detail, but it varies significantly among the different original equipment manufacturers and their respective shipsets. This will fluctuate throughout the year, so there isn't a single factor at play. However, as Vimal pointed out, we expect to maintain strong original equipment volumes this year. In fact, I wouldn't be surprised if growth in original equipment actually picks up in the next few quarters, albeit not dramatically, but relative to its mix within the overall portfolio. As for the aero segment, both the IA and BA divisions are experiencing a product mix that is trending downwards with softer products. Increasing the mix with growing products will certainly enhance those margins. This improvement is also tied to our efforts on the productivity front, specifically in direct materials and our ongoing cost base repositioning. Therefore, our margin growth will depend on a combination of volume leverage, product mix, and our ongoing productivity initiatives, which are a consistent strength for Honeywell.

Sorry to bore you again. The aerospace margins were strong. What is the timing of Boeing's shipments to customers affected by this? I'm curious if there's a timing issue. My main question is regarding the margin dynamics in the second quarter. Considering the decline in the Zebra royalty income in the second quarter, are we anticipating a decrease in margins, perhaps around 300 basis points year-over-year for Industrial Automation? And thus, is the overall segment margin performance actually more in line with trends? Any additional details on the second quarter margins by segment would be appreciated.

Yes. No, we don't expect IA margins to be down 300 basis points in 2Q on a year-over-year basis. We talked about the Zebra impact. Again, it's $45 million a quarter on the revenue side. There is some costs associated with that as we talked about over the last 2 years, as we've had that impact into our P&L. So you guys can do the math on the direct impact of just that item all by itself. But we have other actions in place to continue to offset that. I don't expect margins to necessarily be up year-on-year in IA, but nothing to the degree that we described in terms of 300 basis point drop. Yes. Just that I would expect them to be down sequentially from Q1, that Q1 is going to be the high point. And as we go through the year, again, our overall expectation is flattish on a year-on-year basis, but Q1 will be the high point.

Vimal, maybe can you talk a little bit more about what you're seeing by region? I think you mentioned strength in India. How important is that region becoming? And what are you seeing in China and Europe?

We continue to see strong performance in our high-growth areas, particularly in India and the Middle East. Both regions are doing well. China has also performed positively for us, with high single-digit growth driven by our aerospace and energy sectors. Overall, we are observing a sustained positive trend in emerging markets. Europe has shown signs of stabilization, and I believe the most challenging times are behind us, with signs of recovery, especially in short-cycle markets that we've discussed earlier. The U.S. contributes to the overall balance. In summary, high-growth regions are a significant advantage in our total revenue mix for Honeywell.

Great. And I just want to follow up on the process business. I think you mentioned delays. Is it you're seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business. Maybe talk about it a little bit more.

The Process Solutions business is performing well. We have a strong backlog, and our booking trends are positive. The aftermarket has experienced double-digit growth for several quarters, and we anticipate that business will follow a high growth pattern similar to 2023. We expect to continue succeeding in that segment by monetizing our installed base and leveraging aftermarket software. Our strategies are proving effective, and we are also diversifying into new verticals, such as the emerging energy segment, which includes battery storage and gigafactories, all of which present attractive growth opportunities for us in this business.

Vimal, just back to kind of the ongoing portfolio review, and you said it could be many things, not one big thing. Can we take that? Or should we take that to mean as we look at kind of your revenue disaggregation, right, there's kind of 11 buckets we track and model to, that none of those entire sleeves would be gone at some point in time in your thought process?

Look, whenever we complete any action of addition and subtraction, we'll give you an early guide for that. As I mentioned, this is no one step change. So it's not that we're going to take action of a $4 billion type of thing in a single move. But whenever we are ready to communicate, we'll give you a heads up on what's likely coming in. For example, Carrier business will likely come in, Civitanavi will likely come in, and what are the implications on the guide? And then what goes out, if and when this happens, we'll provide you the guide. But what I can share with you is there is not going to be one mega event on divestiture. It's going to be a combination of multiple small events.

And one thing you have been clear on is ultimately, there's a monetization play on Quantinuum. Where are we there? Where's the spending tracking? And can you kind of give us an idea of maybe the timeline of a monetization event?

So Quantinuum is in, I would say, exciting times. We completed a major event of pre-money. We got a valuation in excess of $5 billion, got more people invested there. We talked about that in the last earnings call. We also met another major milestone. I don't know if you read that Honeywell and Microsoft announced a major milestone of testing different scenarios to deliver reliable results. So Microsoft gave, ran 14,000 experiments on H2 quantum computer, and they were able to prove that every time all 14,000 times, we're able to deliver results with accuracy. Why it matters is in quantum, the repeatability or accuracy matters more than the speed at this point. Once we are able to solve the problem solving with accuracy, we can work on the speed part. So that's a major milestone, and that's what matters in the quantum business. We continue to hit these milestones one after another, and we score some wins on the commercial side, and that has set us for the next event of the monetization somewhere in 2025. It's contingent upon hitting this, but I remain confident that we are on the right track on that. And by the way, the last comment I'll make there is AI is definitely giving us a lot more momentum. There's a deeper understanding and appreciation why quantum is necessary. And that's going to certainly help us when we are ready for an IPO or something similar in 2025.

Again, I wanted to come back to ESS. You noted the margin contraction on some of this onetime factory restart cost. Maybe could you quantify that? And then any detail on the nature of just the timing of some of these pressures?

In our clean energy business, we had been operating in a trading manner, and we closed a major facility a few years ago, which we have now restarted. This restart has brought some challenges as we work throughout the year towards stabilization. If we disregard the impact of this restart on ESS margins, we would have seen them roughly flat or slightly increased year-on-year in the first quarter. Achieving stability will take some time, but the positive news is that this is a promising business with favorable long-term dynamics regarding pricing and supply. As we approach the end of the year, we expect to have more stable internal operations, which will lead to a strong exit rate into 2025. This business is projected to generate about $400 million annually.

All right. Got it. And then just one more on M&A. Just thinking about the velocity there. I know last May, you talked about the pipeline prioritization. I think you had 90 deals looking at within your markets, and that's still at the top 10. I guess how is that 90 compared today? I mean it sounds like the enthusiasm, it sounds a little bit more optimistic about some actionability. But maybe just talk about some of the pipeline and the movement there.

Absolutely. I would say the pipeline is very strong as we sit today. Of course, we compete for every target, and we remain very sensitive to both strategic fit and valuation fit. So net-net, we do expect to continue to take some actions on adding new business to our portfolio. And overall, my tone is very positive on that. Okay. Just to wrap up here, I want to continue to express my appreciation to our shareholders for your ongoing support and, again, to our Honeywell future shapers, who continue to drive differentiated performance. Our future is bright, and look forward to sharing our progress with you as we continue to execute on our commitments. Thank you for listening, and please stay safe and healthy.

Thank you, Vimal. Vimal and Greg are now available to answer your questions. Operator, please open the line for Q&A.

Guys, in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period?

Yes. So Scott, if I understand your question correctly, did you mention industrial automation or warehouse automation?