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Honeywell International Inc. (NASDAQ:HON) Jefferies eVTOL Summit Conference Transcript March 28, 2023 3:20 PM ET
Executives
Mike Madsen – President and CEO, Honeywell Aerospace
Analysts
Sheila Kahyaoglu – Jefferies
Sheila Kahyaoglu
Thank you for joining us.
Mike Madsen
Thank you. It’s a pleasure.
Question-and-Answer Session
Q – Sheila Kahyaoglu
Okay. We will start it off. Thanks everyone for being here for our last presentation of the day. My name is Sheila Kahyaoglu. I am KC listed [ph]. I run the Jefferies Aerospace, Defense and Airlines franchise. And this is our first, hopefully, eVTOL Jefferies Summit.
We are lucky enough to have Mike Madsen with us, who’s President and CEO of Honeywell Aerospace. We will be discussing Honeywell’s — how Honeywell is enabling the [Audio Gap] all market. And Mike is in Phoenix at his facility, I believe, judging by that view. The facility we were lucky enough to visit only in November. So really cool products you guys have out there to enable the market.
For those of you who don’t know, Mike, a little bit of background about him. He’s responsible for the entire Aerospace business, which accounts for 40% of Honeywell’s sales. And Honeywell products, as everybody knows, are found virtually on every commercial defense and space aircraft.
In over more than three decades in the Aerospace business, Mike has held a variety of executive roles, leading multibillion-dollar businesses, as well as global support functions. Prior to his current role, he served as VP of Integrated Supply Chain, a very important role today, of course, with responsibility for the global supply chain and manufacturing facilities.
Previously, he was President of Aerospace, Defense and Space, and Vice President of the Airline Customer business team within Air Transport and Regional for Honeywell. Mike joined Honeywell in 1986 as an engine performance engineer. With that, Mike, thanks so much for being with us and always helping us learn more about the Honeywell franchise within Aerospace.
So maybe just to start for those who weren’t there in November and most of the people in the room with the exception of Carl Burn [ph]. How does Honeywell — what role does Honeywell play in the NBS air mobility market?
Mike Madsen
Well, first of all, thanks for giving me the chance to participate today. It’s a really great, Sheila, to see you and to talk to the team. We are excited about this market and we participate in different ways. I think, first of all, obviously, as a component supplier, but also as a systems integrator.
This is a nascent industry. A lot of the players in this space are new, they are entrepreneurial companies. And one of the things that Honeywell brings in addition to components and products is, also the ability to provide systems integration and certification support.
The technologies cover the entire range of what we make, everything from the cockpit systems with Anthem to actuation systems, cooling systems, electric motors, compact fly-by-wire computers, all of that.
The other role that we play, I think, in this industry, and I think, it’s an important one, is really helping to shape the regulatory environment a bit, providing guidance as an Aerospace OEM and systems provider, providing guidance to the rule-making authorities around what makes sense in terms of how to certify these vehicles, how to operate these vehicles, and that of course, includes some engagements with Congress as well. So it’s a pretty broad role that we play.
Sheila Kahyaoglu
Great. We have heard a lot about the regulatory aspect all day from the OEMs. So that’s helpful that as a supplier, you are enabling that. What other ways does Honeywell enable the adoption and uptake of UAM as a safe transport?
Mike Madsen
Well, in addition to working with the OEM customers, we are also trying to partner with them, again, with the airworthiness authorities to help shape the rule-making and making certain that the authorities understand what capability we are bringing to the vehicle, as well as what we can and cannot feasibly do in terms of certification.
We are very familiar, of course, with the FAR Part 23 world, the FAR Part 25 world. So we are able to bring a little bit of that experience with us and say, and of course, rotorcraft and bring that experience with us and say, this, to us, makes sense. Our products will work in this environment. They can be certified to that level.
And even with like the folks on the Senate, we have testified in front of the Senate on what it takes for the industry to succeed and also what we think makes sense. And I think, in some ways, we participate as a bit of an honest broker in that discussion, because we are not an airframe or we are not one of the OEMs in that space.
We also participate in all the industry groups and we try to use those forums to help advocate for the adoption of consistent and appropriate standards. We are part of about 65 different industry working groups in advanced air mobility and a lot of the hard work gets done there at the grassroots level to kind of build consensus around what makes sense for certification of different types of vehicles and the technologies that enable that.
So it’s AIA, it’s GAMA, it’s NBAA, it’s the Commercial Drone Alliance. It’s all these different industry associations that we use to try to rally support for those positions that we ultimately advocate for.
Sheila Kahyaoglu
Okay. UAM, you have talked about $7 billion of content wins and then, of course, being one of the products and a market pipeline of $10 billion plus. Where are you seeing and winning the largest opportunities across fly-by wire, avionics, rotors?
Mike Madsen
Yeah. Anthem is probably the biggest — it’s kind of tied with actuation, flight surface and motor tilt actuation. These vehicles are all going to use electric systems, so electromechanical actuators. That’s also been a very big space for us and we have headwinds there with a couple of OEMs.
When you start to go down from there, fly-by-wire is a big one. The e-motor program with Lilium is a big one. And then down from there, some of the systems around air thermal management, cooling, et cetera. But the big ones are really actuation in the Anthem cockpit system, and not surprisingly, those two kind of go together a bit as well. So it’s nice to be able to bring that integration to bear.
Sheila Kahyaoglu
How do you think about the areas of investment that are required to compete in the UAM market or does much of your product suite transfer from the commercial aerospace arena? You have this co-development effort with DENSO, a new e-motor to support Lilium, which we got to see. I couldn’t take pictures of it, though, for my report, but and you are also offering the Micro Vapor Cycle System?
Mike Madsen
Yeah. The investments, first of all, the way we look at this is, it’s every — in every product area, it’s a bifurcated approach. We are making a core investment in a core product for every system, okay? So there’s a core Anthem system. There’s a core EM actuation system for both tilt and flight surface actuation. There’s a core vapor cooling system, et cetera, et cetera. We do that to build a product family approach that we can then build on.
There’s also an application, and in some cases, more than 1 application. So when I look at Anthem, there’s a core Anthem program and then there’s an Anthem program for Lilium and Anthem program for Vertical, et cetera.
And by doing that, we are going to be able to reuse these technologies, not just on other advanced air mobility platforms, but also in other market Vertical’s, like business aviation, general aviation, air transport, defense.
So we want to keep that core product as common as we can and then use the application specific investments from our customers to tailor those to each of those applications. So it’s a bit bifurcated.
And the other thing that I would mention is, we are partnered, of course, like with DENSO and looking at other partnerships. We try to focus those on areas where we can benefit both from a technology standpoint as well as manufacturing capability.
I think that’s a really important point in this market space is, these vehicles are going to be produced in much higher numbers, particularly when you think about the cargo space, much higher numbers than even the helicopter industry has today. And so manufacturing capability at scale is really important and it’s not something that most aerospace companies sort of think of as a natural talent, right?
We tend to think of 500 if something is a lot or 1,000 or something, there’s a lot. This is the great thing about the DENSO partnership. They are used to high volume manufacturing and thinking from a manufacturing standpoint and the design of the product. So one of the benefits of that partnership there.
Sheila Kahyaoglu
No. That’s great. And when we think about your UAM ramp. I think you have talked about $2 billion of revenue without a time line associated with it. How do we think about that ramp and when does Honeywell specifically start generating revenue, do we have to wait for FAA certification? How much visibility is there?
Mike Madsen
Yeah. It’s still obviously not as clear as conventional aircraft where we have had these standards and these processes in place for decades and decades and they make just small changes. But we still believe strongly that this will be a very big market by the end of the decade. That $2 billion revenue number still seems quite reasonable to us.
It will follow sort of an S curve. We are going to start to see entry into service the middle of the decade, kind of the 2025 timeframe. It will ramp slowly as we get into the next couple of years beyond that and then really start to accelerate, we think, in the 2028, 2029 and 2030 timeframe.
It’s unclear really what sector is going to lead or even which OEM is going to get there first. There’s quite a few that are sort of neck and neck right now. But I do think that we will see cargo take hold pretty quickly simply because the use case is there, the economics are there.
The operational part of the cert — from a certification standpoint maybe a little easier than it is to operate in a congested space like the urban air mobility vehicle as well. But this is going to go from entry into service in 2025 to a pretty big space we think over the five years to six years beyond that.
Sheila Kahyaoglu
And I apologize, when you think about your partnerships, you mentioned Lilium and Vertical. Are you — do you have an offering across all the OEMs, whether it’s passenger, cargo, autonomous pilot?
Mike Madsen
Yeah. We do. The Lilium Motor is one offering. The motor that they have on their vehicle that we have developed with DENSO is one. And then we have also got a core motor product that we have developed with DENSO, that’s a bit different size. It’s a dual motor.
It’s a bit bigger than the one that’s used on the Lilium application that we think would be well suited to some of the larger e-motor requirements that we see out there. And it’s too is a family approach that can be used at — one at a time or in pairs to be able to create different scalable power levels.
And we continue to look also at in the other product areas for partners that make sense, particularly for manufacturing. We have designs that are Honeywell designs for these other systems, like, Anthem and the cooling system and the actuation system, but still looking closely for manufacturing partners in all of those areas.
Sheila Kahyaoglu
And when you think about the growth rate associated with Lilium beyond 2030 and that $2 billion revenue number. How should we be thinking about it, I always associate air traffic with 4% to 6% growth. What’s the growth rate you are thinking about?
Mike Madsen
Yeah. I think it’s going to be a lot different than what we are all used to. I think it’s going to be really slow at the beginning. There will be some initial vehicles introduced. They will be used for some limited use cases, maybe under some pretty strict requirements and then I think it will take off. I think it’s going to be strong double-digit growth as we get into the back half of the decade. And that will continue for some time until the market finds a bit of an equilibrium with the level of technology in those vehicles.
There’s going to be early adopters, mid-adopters and then it will level off a bit. And then I think it will start to behave as we go into the 2030s more like a regular conventional aircraft market where you see these step changes come along every few years and capability and those aircraft get adopted. So slow in the 2025, 2026 range, then probably really fast for a five-year to 10-year period and then kind of leveling off again, and at some point, more like a conventional aircraft industry.
Sheila Kahyaoglu
How do we think about the opportunities across the different geographies? Are you more focused on the U.S. or Europe to start?
Mike Madsen
We are seeing adoption and interest in every geography in some cases for different reasons, right? The green aspect of this mode of transportation is very appealing especially in Europe. The ability to be able to move people and freight without an infrastructure investment is attractive in certain geographies. It’s everywhere.
But I do think — so I think we are going to see all the geographies adopted more or less at the same time. When I say all the geographies, I mean, the developed areas of Asia-Pacific, the U.S. and the Europe areas all at the same time.
Where I think it’s going to be some bets to be placed is what sector. I personally think that military and cargo will find a little bit of an easier path to growth in the early days. But the air mobility piece of this, the ability to move people to and from airports or within cities is very compelling.
The economics are going to be the key there, as well as the regulatory hurdles. But I think we will probably see cargo and military go first, but only by a short amount of time and then we will see the advanced air mobility piece catch up to that.
Sheila Kahyaoglu
That’s great. And then if we could talk about Anthem, maybe taking a step back because people might have not spent as much time with the Anthem engineers as I did in November. What is Anthem? How does it — how is it differentiated from your Epic platform and then we will talk about specific?
Mike Madsen
Yeah. So Anthem is our first real major new cockpit system in about 20 years. Epic has served us well, it was modular and it was — it had a lot of capabilities in it that were just groundbreaking at the time it was introduced and still very powerful and we continue to do software upgrades there every couple of years to those systems. But Anthem is a real step change.
Anthem has all the sort of capability that people will become used to in advanced cockpit systems today and flight management and flight planning, but it has some features that make it really unique.
First of all, it’s modular. It can be scaled up to the size of an air transport aircraft or all the way down to a general aviation aircraft. The boxes themselves that host the processing capability are about half the size and less than half the weight of competitor systems, including Honeywell systems today.
Because they are so small and because they are such lightweight, they can be located outside of an avionics cabinet. You are not going to see an avionics cabinet with these racks of processing modules. You are going to see these distributed.
And they can also host processing capability today that sits in other boxes. So that means that, because they have so much more processing power, it takes other weight off the airplane as well. They are passively cooled, so you don’t have fans, that improves the reliability.
The system will always be connected. It’s connected to the Internet just like your — like if you have a Tesla, you get in and it’s connected, just like your smartphone is always connected, the systems in the Anthem cockpit will also be connected.
That means you can upload, download flight plans, flight information from the aircraft to your company or your personal website. You can do fuel management. You can check the status of the systems on your aircraft remotely.
It’s also tailorable. We can configure the primary displays the way the OEM wants to have them very easily and there’s a section of the software and for the displays that’s user tailorable. It’s got a secure web browser built into it.
So things that a pilot a day might need to use an ePad or an iPad for they can do right there on the center stack, and again, it can be programmed or set up for a specific operator, an airline or a charter operator or a fractional can set it up the way they want to have that.
Lastly, it’s really got built-in capability for autonomy. We have built processing capability into it to allow simplified pilot operations, as well as ultimately, single pilot and even remote operation. And so it’s got that capability, it’s got that processing built into it and as the rule-making allows that to occur, the systems will be ready for that.
Sheila Kahyaoglu
Then maybe can you talk about the R&D investment. When does Anthem go into service? What product platform does it go into service first, whether it’s commercial or business jet or UAM and the investment has likely been dilutive to segment margins. Can you maybe help frame the margin profile of Anthem and is there any associated recurring revenue given the cloud connectivity element as mentioned?
Mike Madsen
Yeah. It’s a great question. So first of all, Anthem fits within our investment profile that we have for the business, which we always sort of talk about it in that range of 5% to 8% of our revenue base from a total investment perspective. We have managed to fit that in and so it’s not going to be a big impact in terms of the profitability of the business. It just consumes investment that we would have made anyway.
But I would say that it’s not too far away. The program is well underway. It’s been underway for a couple of years now. Entry into service will be in that 2025 timeframe. Probably with Lilium, Vertical is also right there in terms of timing for entry into service. So one of those two will go first.
And what’s really exciting about it is, because the software has this tailorability and this configurability to it, we think there will be an even bigger appetite by the operators for software enhancements, not just for things that we do today to improve flyability of the aircraft or aircraft behavior, but even just functionality and think of apps that they could put on there, we think that will be an ongoing revenue stream as well.
And because it’s connected, that really opens the door to be able to bring information into and out of those non-certified parts of the cockpit that operators will benefit from. So we do expect a pretty strong recurring revenue stream there and that will start shortly after entry into service, I am sure.
Sheila Kahyaoglu
And we should think about it as a new platform first to start off and potentially retrofits thereafter and you mentioned the connectivity. So how should we think about the connectivity to your other solutions?
Mike Madsen
Yeah. We are anticipating that operators will want to have connectivity to a wide variety of systems. So we are not going to make operators, you have to be connected to a Honeywell hub or anything like that. It will be set up so they can connect to a hub that we establish for them or that they have for themselves.
We anticipate airlines, for example, are going to want to be able to connect to their operating systems and their fleet operations and planning systems. So it will be set up so that it’s enabled to do that very easily. It can also connect to Honeywell systems or even an OEM system for monitoring the airplanes in ways that are of value to the OEM.
The other thing I would say is that, it’s important that, that tailorability exists because what connected means and what connect it does for the operator and for the airline, let’s just say, or for the user of the aircraft, is very different as you move between a military space or business aviation space or in your transport space. So we didn’t want to create anything that was too constraining, we wanted it to be pretty flexible and that’s what we have achieved.
Sheila Kahyaoglu
That makes sense. And then you have mentioned a few of the UAM partners. How selective are you in terms of picking your UAM partners? What’s the risk to Honeywell there?
Mike Madsen
Well, we do look carefully at the partners that we choose to do business with. This has always been on top of mind for us. The partners have to choose us, of course, the OEMs have to choose us, but we also choose them.
And what we look for is, first and foremost, sound aircraft design, something that we think is going to work, be differentiated, compelling, be certifiable. Second thing we look for is the strength of the leadership team. Is this a group of business people and technologists that can get this vehicle certified? The third is we look for funding, are they well funded? And then last, but not least, of course, is how do we fit with them, if our skills overlap with their skills, it’s not nearly as good a fit as if we are complementary.
And it’s interesting, because I do reflect on this quite a bit that, if you went back in time, 75 years ago, 80 years ago, 90 years ago, the early days of commercial aviation, it was very much like that. A lot of players, a lot of partnerships, a lot of people working together to try to conquer this domain of air travel.
And now air travel has become ubiquitous and it’s a little bit incremental and this is a space where it’s back into the kind of wide open spaces like it was in the regular way maybe a long time ago and it’s very exciting to be part of that.
Sheila Kahyaoglu
And then beyond aircraft certification, you mentioned you are helping with regulation. But one of the focus items has been operational regulation, which we haven’t really touched upon with the OEMs that presented, because they are so focused on certifying their own aircraft. How do you think it will all work out at the end of the day with all the FAA has to handle?
Mike Madsen
Well, a couple of things. There’s a long way to go, I would say. EASA really kind of led the way on this. I think they early on recognized that they had to adopt standards. The standards had to be pretty rigorous, more or less along the lines of air transport aircraft, which seemed like a real challenge at the time, but I think was smart, because it sets the bar high.
Now what we are seeing is the FAA is pretty tightly aligned with that and we are starting to see a convergence between what EASA and the FAA are doing in this space. That’s super important. We take that for granted, right, in regular way aircraft that aircraft that are certified by EASA will get reciprocal certification by the FAA and CAC and others as well.
We sort of take that for granted. But without that, it creates a real problem for aircraft that an OEM wants to sell into different markets. So we are starting to see that come together. That’s great.
I would also say that the certification standards are ahead of the operational standards for sure, and one of the areas that we think is really important for operating standards is going to be those that are associated with autonomous operation and beyond visual line of sight operations, sense and avoid navigation technologies, the ability to operate at flight altitudes that are below where a helicopter would typically operate, in a congested space, in a GPS-denied space, for example, in adverse weather.
So there’s a lot of problems that have to be solved operationally to allow vehicles to be operated in a more flexible way than a helicopter is operated today and also more safely and that’s going to be absolutely essential when it comes to the urban air mobility piece of this.
You start to think about flying at 200 feet or so above a city street between buildings. It’s a very different environment than a helicopter going from a rooftop out to the airport. Of course, the eVTOL would be able to do that, they will take advantage of those. Rotary lifts sort of helicopter rules from day one, but they want to be able to do a lot more than that.
Sheila Kahyaoglu
And how do you think about the pilot element of it, given autonomous likely won’t be the first to lead the way, given the pilot shortages we are seeing in commercial. What do you think the industry is doing around that?
Mike Madsen
It’s really exciting and there’s kind of this parallel thing going on. I was talking to some of the freight folks the other day about this is that, look, these vehicles, in order for them to make economic sense, they need to be single pilot operated, and ultimately, they need to be operated by what I would call an operator, not a pilot. They need to be managed by someone who has far less training and experience than an air transport pilot.
So early days, it’s going to be an air transport pilot and it’s going to evolve towards someone who’s maybe a commercial pilot and then ultimately an operator. Think about a train or a bus, right?
That means the avionics need to have the power and the capability to manage the vehicle 95% of the time. The person in the cockpit needs to be able to handle those 5% of the cases that are outliers, push a button, land the vehicle safely type of thing.
They are more of a monitor than they are a pilot. And this is sort of a scary idea, but this is what’s going to be necessary for us to be able to see these vehicles really be commercially viable, particularly for passenger use.
But what’s interesting is, is if you talk to people that fly freight in 767s and 777s and 747s today, they have the same challenge. They want to be able to operate with three pilots instead of four or two pilots instead of three. So the very same technologies that are going to enable this to occur in an AAM space, in Advanced Air Mobility space. I think you are going to see a real strong pull in conventional aircraft as well.
So we are sort of keeping both of those things in mind as we work with the regulators, and we also develop the technology and we share that technology with the regulators. I really do think that the regulation is going to be the challenge not the technology.
Sheila Kahyaoglu
Yeah.
Mike Madsen
If we can make a car that can drive down a city street autonomously, boy, aircraft is a far easier problem statement than that, so.
Sheila Kahyaoglu
No. That makes sense on why you are focusing on the avionics of it, too. Maybe last two questions for you before we wrap it up. Can you talk about Honeywell’s offering in the eVTOL infrastructure at all, whether it’s charging stations or airports, that’s been a question that the infrastructure is not available yet?
Mike Madsen
Yeah. We are still trying to determine exactly what we want to do there, where we add value? There’s a lot of things we can do, but there’s a smaller set of things we probably should do, where we can be of greatest value to the infrastructure.
One area we are trying to do is make sure that the cockpit is set up and the systems on the aircraft are set up to be able to support a pretty extensive logistics management system. If you think about these vehicles, you are either going to need rapid recharging or rapid battery exchange, one or the other.
And being able to monitor the state of charge, to be able to monitor the health of the systems on board has to all be built in, whether we participate in that logistics space, that operating space or someone else does, we know the vehicle has to be set up to support it. So we are focused on that for sure.
We have started to talk a little bit with the OEMs and each one has their own approach to this, by the way. They are all doing things a little differently about how that works and what role we might be able to play.
I certainly think we can bring Forge, our Forge software suite to bear on some of the routing problems and the asset availability problems. This is stuff we do today, but it will be at a much bigger scale.
So think about a fleet of 100 of these, where do you need to have batteries located, where do you have charging capacity, where are you out of charging capacity, how are your crew members crew scheduling?
We have already seen how difficult that can be even with regular aircraft. It’s going to be much, much bigger problem with these because of the fact that they can operate outside of an airport environment and there will be many, many more of them. So I think software and our Forge analytics and routing software will be part of that. Beyond that, time will tell.
Sheila Kahyaoglu
Last question for you, what are you most excited about for the industry as it looks to take off?
Mike Madsen
Well, I will tell you. What I am excited about is, what we have expected to see happen is starting to become true. It’s real. It’s no longer an if, it’s just about when. This market is going to come forward and really take off.
There’s some interesting technology challenges, but nothing that’s really fatal to our use cases or to the early adopters. So what really excites me about it is, it’s real and it’s tightly connected to a couple of mega trend.
One is the growth of e-commerce. I have talked about the fact that e-commerce, which means people want stuff that they have bought online, delivered to their home today is going to drive the adoption of Advanced Air Mobility for cargo.
Not just the little drones that can drop off your pizza, but stuff that will take things 300 miles, 400 miles from a cross-dock facility to another cross-dock facility without a train, without a highway without another airport. So that’s going to fuel it and that’s here today.
We also see the need for efficient people transport within and between cities without having to build more roads and more fixed infrastructure. There’s still going to be a place for high speed rail, still going to be a place for long distance air travel for sure. But I think this fits in between those two and provides that a point-to-point solution that’s a bit infrastructure dependent.
And I think it’s going to transform the way people think about travel and the way they think about where they live and where they work. We also have more people that want to work remote. Who wouldn’t want to work in the mountains 50 miles or 60 miles from their office, right, but be able to get to the office in 45 minutes for a meeting and not have to drive a car and not have to combat the travel in the city and not have to pay taxes for another road. This opens that door as well.
And so there’s some mega trends that are starting to converge, not only that, but electrification is a technology, which is going to be ubiquitous even in regular types of aircraft in another 10 years or 15 years. This market is giving us a chance to develop those technologies now in anticipation of those markets as well later. So pretty exciting.
Sheila Kahyaoglu
That’s awesome. Thank you so much, Mike, for being with us and answering all of our questions we stated and thank you everyone for attending.
Mike Madsen
Thanks very much.
Sheila Kahyaoglu
Thanks.
Mike Madsen
Great to see you again, too.
Sheila Kahyaoglu
Yeah. See you. Thank you.
Mike Madsen
Bye-bye.
Sheila Kahyaoglu
Thanks, all.
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