Investing Club: Honeywell CEO says chip crunch is improving, energy transition can drive growth
After Investing Club name Honeywell International (HON) held an analyst event Thursday, Chairman and CEO Darius Adamczyk gave CNBC an exclusive interview that aired Friday morning. Adamczyk provided updates on key headwinds the industrial conglomerate has faced, as well as offering a detailed look at the company's raised targets for organic sales growth. We're recapping it for subscribers here. Supply chain progress? Honeywell has been hurt by supply chain constraints, and they were a big theme on the company's most recent earnings call about a month ago. How big? Management mentioned the term "supply chain" more than two dozen times, according to a FactSet transcript. Adamczyk told CNBC Honeywell is starting to feel better about semiconductors, the small but essential parts to many electronic devices in our increasingly digital world. A shortage of these chips arose during the Covid pandemic, hindering industries and contributing to high inflation. "On the semiconductor side, we actually see some small, some green shoots of improvement. We've actually seen some positive things happen, and we're more and more optimistic," Adamczyk said. It's not all good, though. The CEO said Honeywell's aerospace segment — currently its largest by revenue — continues to have issues after that industry scaled back capacity during the early parts of the pandemic. "The market is coming back, both on the [original equipment manufacturer] side, as well as on the after-market side. There is some challenges that we're seeing, particularly in things like forgings, castings and things of that nature," Adamczyk said. "We're working with our supply base to help them try to get back to capacity, and that will take a few months to work itself out," he added. It's worth noting that a significant source of neon gas, used in the production of semiconductors comes from Ukraine, which has been under attack from Russia for more than a week now. Growth targets Honeywell is aiming for organic sales growth between 4% and 7% per year, up from its prior target between 3% and 5%. Over the past five years, the Charlotte, North Carolina-based company averaged 5% annual organic sales growth. Adamczyk said innovation is the main catalyst for the improved financial goals, which also cover operating profit margin. The company is now looking to expand that by 40 to 60 basis points per year; its old target was 30 to 50 basis points. One basis point equals 0.01%. Honeywell is seeing innovation not only in its core operations, Adamczyk said, but also in what he labeled "breakthrough initiatives," such as quantum computing and its "brand new business" called sustainable technology solutions. The latter is focused on the energy transition. "From hydrocarbon intensive to a lot less hydrocarbon intensive. Think about green fuels. Think about plastics recycling. Energy storage, hydrogen. Carbon capture. Literally, this business unit has every one of those technologies in it," Adamczyk said. Honeywell expects its sustainable technology solutions division to have a 50% compound annual growth rate "for the foreseeable future," the CEO said. "Some of our current customers, we envision very much are future customers as they make that transition" and reduce emissions, he added. Russia-Ukraine war In addition to its humanitarian consequences, Russia's invasion of Ukraine also has an economic impact. Adamczyk said Honeywell's business in Ukraine is "relatively small," with less than 15 employees working for the company in the country. The company is been "trying to assist them in the best way we can and making sure sure that they're getting to safety," he said. However, Russia accounts for about 1% of the company's revenue base, according to the CEO. Adamczyk explained how Honeywell is approaching it. (Reminder, he spoke to CNBC on Thursday afternoon). "We're trying to monitor both the supply chain, the sanctions and so on. the situation obviously changes by the hour, so it's hit us fast and furious. ... The safety of all our employees is our first and foremost objective. We're also looking at the supply chain, the ability to continue to transact business, all those things. Obviously, making a lot of contingency plans if we can't do certain things." Adamczyk stressed that it's hard to judge the long-term business impact of the ongoing war. There's also a little bit of a give-and-take, he explained, because it may help some of its defense and space business. On the other hand, its aviation side may "slightly impacted" on a temporary basis, he said, even if the broader trends around the pandemic recovery will help it gain momentum overall. (Jim Cramer's Charitable Trust is long HON. See here for a full list of the stocks.) 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Darius Adamczyk, chairman of Honeywell. Adam Jeffery | CNBC