Q2 2021 Honeywell International Inc Earnings Call

And ladies and gentlemen, please standby.

Ladies and gentlemen, and welcome to Honeywell's second quarter earnings release at this time, all participants are in a listen only mode and the floor will be opened for your questions. Following the presentation. As a reminder, this conference is being recorded I would now like to introduce your host for today's conference Rena video.

Rector of Investor Relations. Please go ahead ma'am.

Thank you Jake and good morning, and welcome to Honeywell second quarter, 'twenty, 'twenty, 1 and earnings conference call.

On the call with me today are chairman and CEO, Jerry Saddam checks and senior Vice President and Chief Financial Officer, Greg Lewis.

This call and webcast, including any non-GAAP reconciliations are available on our webcast website at www Dot Honeywell dotcom forward Slash investor.

Note that elements of this presentation contain forward looking statements that are based on our best view of the world and of our businesses and 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 and that lights.

We identify the principal risks and uncertainties that may affect our performance and our annual report on form 10-K, and other SEC filings.

This morning, we will review our financial results for the second quarter of 2021.

Share our guidance for the third quarter and provide an update to our full year 2021.

I've always believed time for your questions at the and.

With that I'll turn the call over to chairman and CEO Jerry systems.

Thank you Regina and good morning, everyone. Let's begin on slide 2 we delivered another outstanding quarter debt exceeded the high end of our second quarter organic sales growth.

Arjun and adjusted earnings per share guidance range with topline growth and margin expansion and.

All 4 segments, we delivered organic sales growth of 15% led by double digit growth and safety and productivity solutions, Honeywell building technologies and advanced materials and performance materials.

And technologies, we also returned to growth and our commercial aerospace aftermarket and U O P amid per promising signs of recovery and the oil and gas and aerospace markets segment margin expanded 190 basis points to 24% driven by the impact on higher sales volumes adjusted earnings.

Our share was $2 and <unk> up 60% year over year and <unk> <unk> above the high end of our guidance range, we delivered a strong second quarter and the first half the year I'm pleased with our performance and confident it will continue to execute and deliver through the ongoing recovery in our end markets.

We are driving near term growth in several areas of the portfolio, including warehouse automation and productivity solutions building products and advanced materials.

While the industries most affected by the pandemic will continue improving throughout the year and into 2022 orders were up over 20% year over year organically driven by strength in aerospace PMT, HPT and productivity solutions, creating a strong setup for growth is.

And always we continue to execute on our rigorous and proven operating system that drives outstanding shareholder value now, let's turn to slide 3 to discuss our recent leadership announcements.

Last week, we announced changes to our senior leadership team that will take place over the coming weeks and months Honeywell consistent success is driven by our highly talented and committed workforce, which is guided by a world class leadership team, we have a deep bench of high quality capable leaders it's demonstrated by.

The recent announcements burst and mockup pour will succeed rajeev gautam as president and CEO of performance materials and technologies Rajeev will retire in August after 43 years with Honeywell and will serve as President Emeritus.

And you all PMT until the end of January to ensure a smooth transition.

Rajeev has led PMT for the past 5 year and guided the business through a deep industry downturn in 2020.

And unwavering focus on taking care of employees and.

And customers, we greatly appreciate rajeev exemplary leadership over the past 4 decades.

BMO will transition to PMT from his prior role as President and CEO of Honeywell building technologies. He has been on Honeywell for 32 years and brings outstanding leadership capabilities and a deep knowledge of our end markets to the PMT CEO role. This will mark Bmo's returned to PMT.

And where he was previously president of process solutions business.

Doug right will succeed venmo as president and CEO of HPT, Doug joined Honeywell in July 2020, as president of Hpt's fire and security business, bringing deep industry experience and has quickly made a significant impact.

To joining Honeywell Douglas President and CEO of source Photonics, a global provider of optical communications products used in telecommunications systems and data communication networks prior to that Doug spent 6 years at United Technologies, where he is.

Served as President of Asia, where the company's fire and security business based in Shanghai, and President of countries, 2 and $5 billion of automation and control solutions business.

Finally, Ben Driggs has been and Chief operating officer of global high growth regions and will succeed Shane Petro Heidi as president.

Global high growth regions, when Shane retires at the end of 2021. After 17 years with Honeywell Ciena has played an essential role in establishing and aggressively growing Honeywell presence in high growth regions and we appreciate everything he has done to make Honeywell a truly global company Shane will remain.

And then in and advisory capacity over the next 3 years.

Ben has been with Honeywell for more than 16 years and brings a wealth of global experience to his new role as CEO on global high growth regions. Most recently bandwidth Vice president of global strategic accounts, where he was responsible for all aspects of our relationships with key customers and a global law.

Prior to this role been served in a variety of positions with Honeywell, including President of Americas Aerospace President of Honeywell, Latin America, and a vice President of Aerospace Asia Pacific.

I'd like to thank Rajeev and Shane for the numerous contributions they make to a honeywell over their highly productive careers and I'd also like to congratulate nimble and Doug and then on their new roles, let's turn to slide 4 and talk about another exciting recent announcement.

The combination of Honeywell quantum solutions, and Cambridge, quantum computing or CQC from the largest most advanced standalone quantum computing company and the world.

Honeywell H series quantum computer offers the world's highest demonstrated quite a volume of 1024 and CPUC has the first and most advanced quantum operating system together they create a unique full stack quantum player and a league of its own quantum computing will add.

Soluti remain a key breakthrough initiative for Honeywell, we will own a majority of the stake and the new company of commensurate governance rights and we will have a long term agreement to help manufactured a critical eye on traps needed to power. The accompanies quantum hardware Honeywell business will also continue serving as a proving ground.

For the company's quantum offerings, the combination of Honeywell quantum solutions and CPUC is essential to advance and the value that quantum solutions provide to customers to advance this value. The new company will co develop integrated quite a hardware and software solutions to enable our 1 stop shop for quantum.

Additionally, the focus will be on developing hardware agnostic software solutions and our unique quantum operating system, which is optimized for the quantum hardware and on which it is used these technologies will support customer needs for improved computation diverse areas, including cyber security.

Drug discovery and delivery materials science finance and optimization across all major industrial markets.

And we're already working on global customers to deliver solutions from markets with massive scale more commercialization opportunity, including JP Morgan BMW, Samsung, Google DHL and many others.

The combined company holds over 150 technical patents and we'll have a staff over proximately 330 people, which is the largest pool of quantum talent and the world more than 120 of whom home doctorates and over 200 of whom are scientists and including some of the world's leading quantum computing experts.

And the long term financial prospects of the new companies are substantial debt.

Combination is expected to significantly accelerate the path to commercial scale, creating the potential for approximately $1 billion and sales within 2 to 5 years. We are excited about the new company's prospects and we expect to continue to be a global quantum computing leader shaping the few.

And what is projected to become a 1 trillion dollar industry over the next 30 years now.

Now, let me turn it over to Greg on slide 5 to discuss our second quarter results and more detail and to provide and update on our 2021 outlook.

Thank you Darius and good morning, everyone as Darius highlighted we had a very strong second quarter with sales up 15% organically to $8.8 billion segment.

Segment margin expansion of 190 basis points to 24% and free cash flow of about $1.5 billion. We over delivered on our commitments again building on the strong start we had in Q1, let's take a minute to discuss how each of the segments contributed to that starting with aerospace second quarter sales were up 7%.

Organically as flight hours continue to improve resulting in double digit commercial aerospace aftermarket growth that.

And that was partially offset by lower commercial original equipment and softer defense volumes business aviation continues to be very robust where flight hours have already returned to 2019 levels as a portion of customers that previously traveled commercially have transitioned to business Jets for health and safety reasons, we continue to expect the recovery and <unk>.

And this travel to lag the leisure travel recovery. However, we do expect to pick up as we enter the second half of the year.

And as expected Air transport flight hours are recovering led by narrow body flight hours, while wide bodies remained soft as domestic travel recovers faster than international travel.

As a result, our business aviation aftermarket sales were up 90% organically year over year, while our air transport aftermarket sales were up 32% year over year organically.

Sequentially overall commercial aftermarket sales were up 12% from <unk> 21, a promising sign that the recovery is gaining traction aerospace segment margin expanded 490 basis points to 25, 7%.

Turning to building technologies sales were up 13% organically driven by robust demand for building products and solutions. We are seeing broad based strength across the building technologies portfolio and around the world as people return to schools offices and transportation hubs building product sales and orders were both up double digits year over year driven by demand from.

Fire, <unk> security and electrical products as well as building management systems.

Orders for building solutions projects and services were up over 25% year over year and the services backlog is up more than 30% positioning the business for future growth and addition to our portfolio of healthy building solutions maintained strong customer momentum with approximately $90 million of orders booked in the second quarter for a total of approximately 150.

<unk> million dollars.

And the first half H.

<unk> segment margins expanded 120 basis points to 22, 4%.

On to PMT, where sales were up 10% organically driven by 30% organic growth and advanced materials and a return to growth and <unk>.

PMT had a strong quarter with total orders up 20% year on year over year organically and backlog up mid single digits. These are encouraging signs for the future of this business to 30% year over year growth and advanced materials was broad based particularly in automotive refrigerants foam products and specialty additives.

And <unk> sales were up 8% organically driven by higher petrochemical catalyst shipments licensing and equipment volumes.

<unk> orders were up over 25%, which should drive growth and the second half and into 2022.

Finally process solutions down, 1% organically, but up 6% sequentially from the first quarter as the recovery gains traction and the oil and gas industry.

The year over year decline was driven by fewer global Mega projects, partially offset by short cycle strength and the products and thermal solutions businesses as well as demand for our lifecycle solutions and services.

Hps orders were up high single digits, providing confidence and the oncoming recovery.

PMT segment margins expanded 190 basis points to 28% and the quarter.

Finally, and safety and productivity solutions. Despite battling some supply shortages sales were up 35% organically driven by continued strength across the portfolio, including another quarter of high double digit organic growth and the warehouse and workflow solutions and productivity solutions and services businesses, which grew 57%.

And 38% respectively.

Personal protective equipment was also up double digits organically as we delivered from our strong backlog.

In addition demand accelerated and the short cycled gas detection and advanced sensor businesses driving high single digit sequential sales growth from the first quarter.

Orders and productivity solutions and services were up triple digits year over year exhibiting strong ongoing demand, which we expect to fuel second half growth and this business.

<unk> segment margins expanded 20 basis points and the quarter to 14%.

Growth across our portfolio was underpinned by progress on Honeywell connected enterprise second quarter recurring revenue growth was up double digits and orders for connected solutions were up over 20% year over year as we continue to drive SaaS growth or.

Our connected buildings and cyber solutions, which have been very strong and the past year continued to grow double digits organically and our connected industrial solutions business was up double digits year over year as the industrial markets begin to recover.

So in total for Honeywell, our robust sales growth, coupled with strong pricing and cost management drove a 190 basis points of improvement and segment margins 10 basis points above the high end of our <unk> guidance. Despite the mix headwind from much stronger sales and Sps our lowest margin segment.

For the quarter, we delivered adjusted earnings per share of $2 and <unk> up 76% excuse me up 76 or.

And we're 60% year over year.

<unk> above the high end of our guidance <unk> <unk> of which was due to over delivery on sales and segment profit.

The majority of our year over year earnings growth 43 was driven by our strong segment profit improvement below the line items were 25 tailwind driven by lower repositioning and higher pension income a lower effective tax rate of 23% and lower weighted average share count of 703 million shares drove a 6 and <unk>.

Benefit respectively.

A bridge from <unk> 20, adjusted earnings per share to <unk> 21, adjusted earnings per share can be found in the appendix of this presentation.

On free cash flow, we generated $1.5 billion and the quarter or 17% of sales, resulting in 103% adjusted conversion free cash flow was up 17% year over year.

Free cash flow. This quarter includes the $375 million cash received from Garrett as we resolved our contractual claims under the plan of reorganization and signed last quarter.

As a reminder, we will continue to include cash receipts from Garrett going forward within free cash flow and order to be comparable to prior periods, where the cash proceeds from the indemnification and reimbursement agreement were recognized.

Finally, we strategically deployed $1.9 billion to share repurchases dividends and Capex and the second quarter with significantly exceeded operating cash flow, we paid $664 million and dividends.

Lloyd $185 million and capital expenditures and repurchased more than $1 billion of Honeywell shares, reducing our share count to 703 million.

And all this was a very strong quarter and capped a successful first half of 2021, we're prudently managing through the multi speed recovery across the portfolio continuing to make disciplined investments for the future, while meeting or exceeding our financial commitments.

With that let's turn to slide 6 to discuss our expectations for the third quarter and the remainder of the year.

Okay.

We ended the third quarter, well positioned to manage the multi speed economic recovery, which will be influenced by unique and market and regional dynamics as vaccination rates expand and a global pandemic subsides.

At a high level, we expect ongoing strength across the portfolio and the second half, we should see acceleration and businesses that were most affected by the town the downturn, particularly the commercial aerospace aftermarket and the oil and gas exposed hps and <unk> businesses, we do expect some deceleration and respiratory masks warehouse and workflow solutions to come down some.

<unk> as large and calibrated projects complete and lower year over year volumes and U S and international defense and the back half of the year, though it will grow sequentially from the second quarter.

With that as a backdrop, we expect third quarter sales to be and a range of 8 and a half to $8.8 billion.

Up 7% to 11% on an organic basis, and we now expect full year sales up 34.6 to $35.2 billion.

$400 million from the high end of our previous guidance. This represents overall organic sales growth and the range of 4% to 6% and increase of 1 point on both ends compared to our previous guidance we.

We will talk more about our expectations by segment momentarily.

And update on our 2021 and market outlook can be found in the appendix of this presentation.

1 area to keep in mind is that we have been facing supply chain constraints as the sourcing environment for direct materials and components, such as semiconductors and resin has been very tight as we mentioned last quarter, we proactively partnered with distributors and alternative suppliers to mitigate these impacts and have had success, but the situation remains very <unk>.

Fluid as global supply chain and ramp up we continue to work through this issue, but it will continue to be a constraint on our growth potential, particularly in Sps and HPT and to a lesser degree and aerospace.

Now, let's take a moment to walk through the third quarter and full year expectations by segment.

And aerospace our commercial aerospace business will continue to improve gradually throughout the year, we expect business aviation aftermarket to continue to lead and the recovery and track 2019 levels or better for the balance of the year.

We expect air transport flight hours to continue improving and the third and the fourth quarter driving sequential and year over year growth and commercial aftermarket sales and.

The pace of the air transport acceleration will vary regionally and the second half with domestic travel recovering faster than international and with difficult to predict country by country dynamics tied to vaccinations.

We expect narrow body and wide body flight hours to fully recover to 2019 levels by 2024.

Commercial original equipment build rates are progressing gradually as we expected.

Second half defense and sales defense and space sales will be pressured by lower demand from U S. Dod programs, driven by moderating U S defense spend as well as by slower than expected International defense volumes as a result, as a result of these defense and space dynamics, we now expect full year organic sales growth to be down low.

Digits for the year and aerospace.

And building technologies, we expect ongoing demand and the second half for products services and projects as business conditions continue to improve as the world Reopens, we anticipate broad based order strength and the third and the fourth quarters, particularly for building solutions projects, which we expect will ramp up as energy projects and the government and education verticals gain true.

<unk> we.

We will continue to execute on our strong projects and services backlog driving strength in the back half. In addition, we will benefit from continued customer demand for our portfolio of healthy building solutions. Overall, we now expect full year organic sales growth to be up mid single digits for the full year trending better than expected.

And PMT, we were encouraged by the signs of recovery and process solutions and <unk> and the second quarter and we expect to see this trend and continue and the third quarter and beyond and while we expect the pace of recovery to be gradual and market dynamics and energy are creating a strong setup for 2022 and beyond.

We anticipate that <unk> will return to growth and <unk> driven by the short cycle products and service businesses, which should deliver on strong first half orders and we also expect sequential improvement and automation projects driven by backlog and execution.

Orders for global Mega projects increased and the second quarter, which is an encouraging sign for the business. Though these orders will have a larger impact on 2022.

Overall, hps should grow sequentially quarter over quarter for the remainder of the year.

<unk>, we're pleased with the <unk> outcome, which included strong catalyst and project orders that should drive growth and the second half last we expect continued strength and advanced materials and the third quarter driven by demand for a wide range of the business as products.

And April we said that we were trending towards the low end of our plus or minus low single digit full year growth expectations for PMT. Since then our outlook has improved and we now expect full year organic sales to be up low single digits for the year.

Finally, we anticipate continued strength and Sps driven by another quarter of robust double digit organic growth and warehouse and workflow solutions and productivity solutions and services that we expect year over year growth rates to remain strong and warehouse and workflow solutions <unk> represented the high watermark for sales and that business. This year.

As we had previously said.

We will see sequential declines and <unk> and <unk> due to normal project timing as customers enter the busy holiday season, our productivity solutions and services backlog is up triple digits, which will drive growth in the third quarter for this business.

Distributor demand continues to be strong and we expect this to continue throughout the second half. So as I mentioned, we will be managing some supply constraints.

We will continue to execute our backlog of personal protective equipment and the third quarter. However, respiratory demand is decelerating as various regions of the world recover from the pandemic. This deceleration will be partially offset by stronger demand and other areas of our PPA portfolio, including gloves, and head and hearing protection, which we expect to ramp up and the <unk>.

Second half.

And finally, we expect continued short cycle acceleration, our gas analysis and advanced sensing business overall.

Overall, we expect strong double digit sales growth and Sps for the full year.

Now, let me turn to our expectations for the other core guided metrics to third quarter segment margins, we expect to be and the range of 23% to 26%, resulting in 40 to 70 basis points of year over year margin expansion.

And we will continue to show strong expansion. Despite the headwinds of the temporary cost actions from 2020, and our investments and growth and the businesses.

Third quarter net below the line impact, which is the difference between segment profit and income before tax is expected to be and the range of negative 5 million to positive $55 million with a range of repositioning between 50 and $100 million as we continue to fund ongoing restructuring projects.

We expect the effective tax rate to be and the range of 22% to 23% and the average share count to be approximately 703 million shares.

As a result, we expect adjusted third quarter earnings per share between $1.97.

And $2 and <unk>.

Up 26% to 29% year over year.

Given these third quarter expectations are strong out performance in the first half and our continued confidence and our businesses. In addition to raising our full year sales expectations and we're also raising our other full year guided metrics, including segment margins adjusted earnings per share and free cash flow.

We're raising the low end of our segment margin guidance by 10 basis points for a new range of 28 to 21, 1% representing an expansion of 40 to 70 basis points, we expect margin expansion and all our segments as we carefully invest back into the business, while managing a multi speed recovery across the portfolio our fixed.

Cost management remains a focus and we are on track to a net increase of $500 million per the year cementing the permanent reduction of $1 billion of fixed costs from our 2020 cost actions.

We expect our net below the line impact to be and the range of negative 110 to positive $40 million, including capacity for $400 million to $525 million of repositioning we.

We continue to expect our full year effective tax rate of approximately 21% to 22% and we now expect a weighted average share count of approximately 703 million for the year, achieving our minimum 1% reduction in shares.

As a result, we are raising our full year adjusted earnings per share guidance. We now expect a range of $7.95.

The $8.10 up 12% to 14% year over year.

This represents an increase of 10 on the high end and 15 cents at the midpoint, reflecting our confidence and the recovery across the portfolio.

Finally, we are raising our free cash flow guidance by $100 million on both ends for a range of $5.3 to $5.6 billion.

So in total we delivered a great second quarter and anticipate a strong second half and have significantly upgraded our full year view for sales and segment margin adjusted EPS and free cash flow as we manage through this recovery.

Let's turn to page 7 and for a quick look at our guidance progression through the year.

At the beginning of 'twenty..1 there was a lot of uncertainty about the virus case rates that pace of vaccinations and the recovery around the world.

We're committed to providing guidance that is commensurate with our level of visibility and the environment, where and at the time and January with the unknown pace of recovery in mind, we took a pragmatic approach to our outlook. After the first quarter with a little more visibility into the full year and confidence and our first quarter results. We raised several key guidance metrics now halfway through the year, we have raised them.

Again, our full year sales guidance is now $800 million higher than our original guidance on the high and we've also raised the midpoint of our earnings per share guidance by approximately 23% on 23.

And our free cash flow guidance has been raised by $100 million and the high and as.

As always you can count on us to provide an outlook that is consistent with our level of visibility.

With that I will turn the call back to Darius to talk about the end market tailwind that we're creating.

And our seasons that are creating a strong setup for 2022 and beyond.

Thank you Greg current end market and macro dynamics are creating the best set of circumstances that I've seen in the last 10, plus years that I've been with Honeywell and the commercial aerospace recovery and view upcoming capital reinvestment and the energy sector nonresidential construction spending returning to 2019 levels and the <unk>.

Exponential growth and we continue see e-commerce, who are setting up for an incredibly strong runway for medium term growth. This macro setup coupled with the strategies. We have in place that are focused on driving uniquely innovative and differentiated technologies to the rest of worlds increasing demand for digital.

<unk> formation.

<unk> technology and sustainable solutions gives me great confidence and our outlook for 2022 and beyond let me start by talking about the medium term dynamics and some of our key end markets and commercial aerospace pent up demand for leisure and business travel is expected to drive approximately 2.

20% growth and flight hours over the next 2 to 3 years business and general Aviation flight hours have already recovered to 2019 levels and we expect air transport narrow body and wide body flight hours to recover by 2024, we're seeing a slower defense business we are.

We're absorbing debt and our strong 2021 outlook and our growth trajectory for the next 2 years should remain robust.

The energy markets are gaining traction and stabilizing oil prices support and uncovering a wave of capital reinvestment and this sector with downstream customer capex expected to grow at a fixed and a 5% compound annual growth rate over the next 3 years.

As I've said before the investment cycle post downturn is a consistent theme and will be well positioned to capture our unfair share of it.

Acceleration and refining and petrochemical volumes will drive demand for high margin catalysts, and new Greenfield and brownfield projects over the medium term will drive demand for licensing engineering and equipment as well as our software and automation solutions.

Our building technologies portfolio will continue to benefit from the ongoing global macro trends of sustainability Digitization and public safety building owners are looking for healthy building solutions to Greg safe public spaces, while optimizing energy consumption and productivity.

Non residential construction.

As expected to grow by $230 billion to $2.5 trillion by 2024 Refurbishments for healthy building is growing at a high single digit compound annual growth rate over the next 3 years. We also expect tailwind from sizable U S stimulus programs targeting airports education.

And health care as well as potential government infrastructure plans, which will provide a favorable setup for our building technologies business.

And we remain very well positioned to address the rep rapid evolution that we see and the click and collect consumer buying behavior, which is creating complex fulfillment and delivery needs.

In fact e-commerce is expected to make up approximately 30% of total retail sales by 2024 to meet this growing demand as well as to prepare for intensifying label shortages retail retailers are meaningfully stepping up investments and a workflow technologies and automation.

And amplifying our already strong trajectory and this market who are on.

Growing installed base and ample runway for our high margin aftermarket opportunities.

See our macro setup is as strong as it has been and a very long time now, let's turn to next page to highlight a few of our strategic vectors and how they will play into our growth algorithm.

Let's start with urban air mobility, or Uhm, 1 space, where we see significant growth opportunity and the total available market will be around $120 billion annually and 2030 of which we are positioned to address 30 billion, we have leading fly by wire systems for urban air mobility.

The avionics and vehicle management systems, and addition to highly differentiated and high assurance detect and avoid systems. We have already won $3.4 billion of content and another $1.8 billion of wins pending and and we have $7 billion and <unk>.

<unk> cumulative pipeline over next 5 years growing to $55 billion and cumulative pipeline out to 2030. So this is a really exciting business, where we are already generating substantial wins with significant future potential.

We're also generating growth through Honeywell connected enterprise, which is underpinned by Honeywell Forge our suite of SaaS applications that drive operational excellence and are essential to day to day management of company's complex operations.

Honeywell connected enterprise delivered double digit recurring revenue growth and orders were up over 20% and the second quarter, which serves as an excellent proof point as we continue to focus on driving software growth.

<unk> also recently launched our cloud based connected building solutions jointly developed through our SAP partnership.

Our portfolio of connected solutions is demonstrating great momentum 1 million instances of tritium Niagara deployed worldwide and over 5000, Honeywell Forge Ot cyber security projects delivered to name a few examples.

1 of the newest.

Additions to our portfolio Sparta systems is also contributing to a honeywell software growth with orders up over 30% and the first half of 2021.

<unk> SaaS customer base has grown double digits since year end 2020, and Spider ended the second quarter of our backlog and backlog of over $100 million.

Sparta systems recently announced at a leading European specialty pharmaceutical company implemented track Wise digital solutions suite that includes <unk> processes. In addition to complaints handling supplier quality management document management and training management to seamlessly integrate.

Quality processes and data across its manufacturing operations and suppliers sort of BARDA integration is progressing smoothly and I'm pleased with the results thus far.

Finally, we continue to see strong demand for our portfolio of healthy building solutions, which I mentioned earlier, we booked around $150 million of.

Healthy building orders and the first half and have a global pipeline of over $2 billion.

A few examples of our customer wins across major verticals include the Pittsburgh and the San Diego International airports, Syracuse University, and Wuhan Chengdu Hospital and.

Dissipate the demand for healthy buildings will remain strong for the foreseeable future as building managers seek to support occupant safety and comfort for returning workers students travelers and visitors.

All 4 of the technologies on this page are proof points for our strategy of focusing R&D and breakthrough initiatives around disruptive trends that will shape the global economy for years to come.

We have many other equally exciting breakthroughs, including quantum and sustainable technology solutions and smart cities. As an example, these provide numerous growth vectors, which will be accretive to the recovery and our major end markets, which underpins my confidence and what is to come and the outlet.

So I'll wrap up on slide 10, and so overall you are encouraged by the performance of our first half of 2021, our second quarter results exceeded our expectations and given our confidence and our businesses. We have a meaningfully raised our full year sales and segment margin adjusted EPS and free cash flow guidance.

The Honeywell value creation framework continues to set us apart and will continue to deliver for all of our shareholders with debt arena, let's move to Q&A.

Thank you Gary.

Terry and Greg and now available to answer your questions.

Yes. Thank you please be mindful of others on the Q I only ask 1 question.

Please open the line.

Yes, ladies and gentlemen to ask a question. Please send them by pressing star 1 on your telephone keypad keep in mind. If you are using your speaker phone. Please make sure. Your mute function is released so that signal can reach our equipment.

Once again star 1 for questions, we will begin with Jeff Sprague with vertical research.

Thank you good morning, everyone.

Good morning.

Good morning.

And while there is a lot there's a lot to ask actually.

And I'm going to go the quantum.

Thing that interested me and your comments there Darius.

Obviously, the technology stuff is interesting but.

The commercialization revenue so.

$1 billion.

As soon as 2 years I Wonder if you could kind of talk a little bit about the difference between the 2 year and the 5 year framework there is there.

Something in terms of the technical breakthrough further technical break through that's required or it's.

It's more an issue of just developing the business model and.

And kind of getting a customer set on board with what you're doing here.

Yes, well I think I think Jeff more importantly, it's a toggle between focused on progressing debt technology versus focusing on commercialization in Europe. This business is generating revenue today for CQC and it's generating revenue today for.

Honeywell quantum systems, and and we could focus on energy.

And our energen and continuing to drive commercialization, but we're trying to be balance between yes, driving some commercialization securing some blue blue chip customers, but also continuing to advance the technology I mean, this isn't isn't necessarily and instant gratification kind of a business because if we just over <unk>.

And to commercialization.

Although we have a year or 2 lead on just about everybody else and the industry with debt.

Could get that could get.

Sure sure changed if we don't continue to advance it but I think thats more than anything so that 2 to 4 year kind of a number is based on both how we see the technology evolving or 2 to 5 and also how we see.

Really us focusing on technology progress versus commercialization and.

And I think we want and maintained bolt and not necessarily just full toggles to commercialization because I think that that could sacrifice progress on the technology.

Understood. Thanks, a lot.

Thank you.

I will now move to Scott Davis with Melius research.

Hey, good morning, guys.

Hey, Scott and you didn't.

Good morning, you didn't fix it as much on supply chain and logistics and some of the other folks out there so far this quarter, but.

And did allude to it potentially holding back growth on 4 did it in fact hold back some growth this quarter or is there anything that you can kind of report and measure on there.

Oh, well, it's got to be honest. The answer is yes, I mean, I think our results for Q3 would have easily been $1 million to $200 million harder or higher than that and we're saying because of supply chain constraints. So it is we're dealing with it too it's a daily <unk>.

That'll.

Some of the areas that were particularly challenged our semiconductors.

Resins, those are probably our top 2 but we're kind of seeing some supply chain pressure across the board and.

Our orders are Super strong, particularly and Sps and we could easily do a 100 to 200 million more and revenue this quarter and Q3, if we didn't have those challenges so what we projected.

Our reasonable best estimate of.

The supply we're going to get based on what our suppliers are committed but it's a daily battle and we're we've stood up a team on the supply side stood up a team on the pricing side to really kind of manage both of those things because we're continuing to see inflation and we're actively managing price, which actually has been a good story because we.

Are able to pass most of that through.

Okay I'll stick to 1 question. Thank you good luck Darius and Greg.

Thank you.

Now, we will hear from Steve Tusa with J P. Morgan.

Hey, guys good morning.

Good morning.

Can you just maybe talk about.

You've mentioned before kind of a mid twenties margin potential and you guys continue to do very well on the operating margin front you sound, obviously pretty bullish even though your markets aren't really firing on all cylinders yet.

Is there a point and time, where youre going to kind of officially update and kind of put a number like that up on.

As a midterm target.

And similarly on the growth side.

Your current organic growth guidance is okay longer term, but like if you had this bullish on these growth factors.

Shouldn't it be a bit better than that and again is there a time, where you would kind of update those medium term targets.

Yes, I think Thats a fair question I think we are tentatively planning and Investor day in November and it's probably a good time to really look at our targets, but as you here.

We are very very optimistic about our market share in the short to midterm I mean that we're going to have a strong tailwind.

And now starting to see some of our higher margin long cycle businesses. You saw very first evidence of that pickup and PMT.

Arrow is going to continue to improve wide body and narrow body traffic is going to continue.

And to improve we absorbed some of the defense and space challenges. This year. So that's already embedded and we expect that to normalize so as we look into next year.

And then the year after the year. After I mean, we are going to be re looking at our growth and margin expansion algorithm as well as you know don't forget we still have plenty of firepower on the balance sheet, which we plan to deploy and and.

And.

On the pipeline is good and we plan to be using it a bit more aggressively as we move forward. So I think that setup for Honeywell and I mean this.

I haven't seen it be any better.

Since I've been at Honeywell and Thats 13 years, So I think I couldnt be more excited about what the future holds.

Yes.

Go ahead, sorry, Greg go ahead, I was just going to stay and Steve I agree with all of that I mean, as you know we're pretty close to R. R.

Targets and HPT already we've made really steady progress and aerospace.

Sps has a lot of room to run with.

Rolling out all of the the project business and and <unk> and all of the services and <unk>.

And software that we expect to come behind it still still to come. So so yes, I think we'll I think we'll talk to you about that and the back half of this year as we get closer to the year and and our guide for 2022.

Yes, I guess I'm, just trying to reconcile like a 3% to 5% growth outlook longer term.

And it doesn't really Jive with how bullish you sound on on kind of the topline opportunities, including quantum and these other things that are out there. So.

Yes.

And that's kind of the Genesis of the question, Yes look forward to sharing more with you at our Investor day.

And so on I think sorry.

Right.

We've got 1 running today go ahead sorry.

Got it and 1 last.

Quick today.

Go ahead.

1 last quick 1 just on the masks.

Is there any difference in profitability on on the <unk> side with those masks that are beginning to roll down here are they particularly profitable or.

What's kind of the earnings contribution because.

I think you set those up in a hurry a year ago, just curious as to what the profit impact is.

Yes.

As you may have heard within the quarter I mean, some of that production.

And we basically shut down because.

When we set it up in a hurry literally within 30 days when the pandemic struck and April 2020.

We did and optimized for cost we optimized for speed and frankly that wasn't a very high margin gain for us we did debt because the country needed us to do it we didn't do it to maximize profit.

So now when we reduced production, we reduced production and highly inefficient and highly manual cells that we were that we could bring up quickly, but what we replaced debt production with highly automated cells, which will drop our cost per mask on the range of 50%.

And so positioning the business for the future is still going to be very very strong and you know.

And <unk> and that's assuming there's not a pickup in future of masks and as we read more and more about delta variance debt, we don't know what's going to happen, but even debt.

<unk> greater than 20%, so better than any other investment and like I said this wasn't done to sort of optimize profitability. So we got some revenue, but we didn't necessarily get a ton of margin with it and now we're in a better position because we got production.

And it's done through automation, which will drop our cost profile by about 15% per mask right. So actually accretive to incrementals as that as that kind of rolls down and your other stuff rolls on yes, great. Okay. Thanks, a lot that's correct yep.

We'll now take a question from Sheila <unk> with.

Jefferies.

Thanks, so much and good morning, Alright, Darius and Greg Good morning.

And since on the Arrow person I guess I'll ask on defense, Yes, Hello growth over the last 3 years and.

And maybe can you talk about and then.

Decline you saw on the quarter, what drove that with the U S budget and internationally.

How do you expect that trajectory to improve from here and.

And impact on maybe profitability. Thank you.

Sure So maybe I'll start.

1 is obviously the defence and space segment is the 1 that's been a bit worse than and we expected. This year. That's the bad news the bad news. The good news is that we expect that to normalize 2022 and 2023. So we're kind of taking a little bit of what I would say cut on that.

And that hits this year.

The narrow body wide body flight hours, you see debt in the deck, we expect it to continue to progress.

And the ATR OE.

Business is also going to continue to progress we kind of see steady progress here in Q3 Q4, and so on business aviation has been strong both on the aftermarket as well as the OE side Thats going to continue to progress. So overall there is we have great deal of optimism for what we're going to see in aerospace and.

And the margin performance will be very commensurate with that because.

So wide.

Wide body narrow body aftermarket revenue is still not kicking in which as you know is going to be some of our highest margin profile. So we're feels like we're kind of taking a hit on defence and space. This year net.

<unk> debt excuse me much more normalized and then next year. We're also expect to see a high level of growth and commercial aerospace.

Okay. Thank you very much.

Thank you.

Next question will be from Andrew <unk> with Bank of America.

Yes, good morning.

Good morning, Andrew.

Can you just talk sort of big picture on what are you seeing on TMT very good to see your outlook and prove what is sort of the big trends that made your customer base.

More positive and.

And you know what are the big sort of data points or trends, we should be watching out for to gauge on what are you trying to look at to gauge you know sort of the direction of the industry into 'twenty, 2 and 'twenty 3 thank you.

Yes.

Thank you Andrew for the question I mean, I think the first thing we always look at is <unk> is a leading indicator with debt business hps.

And trails.

<unk> orders by anywhere from 12 to 18 months and and <unk> orders for the quarter were nearly 30% up just to give you a perspective. So that's probably the single best data point.

Overall total every business was up just about double digits in terms of orders and PMT, our backlog was up and PMT. So all good signs and the other part debt debt, we're starting to see strong level of presence both for Honeywell process solutions business.

As well as <unk> and some of the renewable projects and you probably saw the Wabash valley announcements around carbon capture and captured that <unk> process solutions is winning and a lot of the <unk>.

Wind farm projects Solar farm project. So we're shifting focus to where the future is while maintaining our presence and some of our traditional markets and as we know and we saw this movie before and the 15 and 16.

Graeme you can only depressed that downstream investment for so long and we saw that come back strong in 17 and 18, we anticipate the very same thing happened and 22 and 'twenty 3 and Oh by the way a lot of these petrochemical refining.

<unk> are going to have to get reconfigured for the future of energy, which is going to be incremental growth, which is yet to see so we're actually very very bullish on that market and it's being reflected today and some of our orders and order rates.

Thank you very much.

Thank you Andrew.

Moving on to Joe Ritchie with Goldman Sachs.

Hey, good morning, guys.

Good morning, Joe.

Yes.

He says as I think about.

Your your portfolio and then also your capital structure. It just seems like 1 of the biggest levers you have really to get to move the needle is putting your capital to work.

Via M&A and I know, we've talked a lot about the organic growth opportunities, but I'm just curious like as you think about prioritizing capital.

And the areas that youre looking to invest from an inorganic standpoint like how is this how are you thinking about the priority I know you mentioned the pipeline looks good and pits.

And any additional color there Darius it would be great.

Yes, let me, let me take that 1 Joe.

Obviously, our balance sheet as we've talked about all through last year is incredibly strong.

And as a world class balance sheet, whether you look at our pension funding or cash position.

And so on and M&A is a priority for us as we've always talked about we're not going to overpay and spend silly multiples on things.

But we definitely are prioritizing M&A you saw that and the first half of the year with some of what we've done with with Florida and <unk>.

<unk> and you can imagine quantum is essentially.

And M&A deal if you will in terms of the 2 to 300 million net we're going to be plowing into that here and that will happen as we close out on on that combination. So we're very excited about.

Using our balance sheet.

To drive M&A and add accretive business to our portfolio and.

Just to maybe add 1 other point to that is.

Our balance sheet is more pristine net et cetera has ever been because if.

If you look at our pension funding, it's now around 120% Mark.

And if you look at our liabilities, which are either dropping or their secured through other instruments. So we have a very very different balance sheet debt. We did even 5 years ago, and we're going to be a bit more comfortable and in terms of having a greater level of leverage given the safety of the balance sheet, which actually provides even more potential.

For capital deployment.

And with you I think capital deployment is a big lever.

So this is kind of goes back to my prior point that I made in the presentation, which is on.

Our markets are at a tailwind and we've got tremendous capacity on our balance sheet.

This is kind of a rare point and the Honeywell history, where you've got good tailwind from the markets I talked about our strategies are working and we've got a lot of deployment capacity on the balance sheet.

I don't think theres been a better time to really for our positioning debt and now.

Hey, guys. That's super helpful. Thanks, and just 1 quick follow on there because this has been brought up a few times around the balance sheet.

References recently and a.

And a settlement with 3 and on <unk> and and that that is a concern in terms of like their ability to deploy their capital and their balance sheet.

And I guess focused on typically thinking of you guys as being.

Tied into those liabilities and so any comments just around and that settlement or our potential liability from <unk> yesterday.

Yes, the only comment I would make Joe is our environmental reserves cover everything that is.

Is that we're working on we've done a ton of work over the last gosh, probably 15 years relative to all the environmental obligations debt. The company has had we've done tremendous things to clean up the areas.

That we've had involvement in and I think those have been some of our greatest accomplishments from an ESG perspective.

And so this this announcement that you're referring to is is no is no big news for Honeywell.

And is is captured in our financial position as we have continued to reported data.

Certainly not and weird is any new news or incremental or some new liability debt surfacing on the units. It's a matter of fact, I think that there was a subset of reporting and actually brought that debt as it falls thing to a close so I wouldn't read anything more into that.

Great. Thank you.

Okay.

And next we'll hear from John Walsh with Credit Suisse.

Hi, good morning.

Good morning, John.

I wanted to ask.

Kind of a question combo question here about pricing and all.

So kind of the margin youre booking and backlog here and a couple of your longer cycle businesses and tele grade at HPT PMT.

And clearly strong demand you have stimulus dollars flowing into these markets were not hearing theres really much excess capacity so how.

Should we think about kind of the margin profile of the projects that are now coming into the backlog and and the visibility that gives you go and forward.

Yes, so maybe first on the pricing side.

Serious mentioned and some of his comments, that's something that we have always and continue to.

Have a very strong eye on and so everywhere in our books of business that we can we continue to pass through the.

Inflation, that's being seen and the materials and also on the labor because and the and the projects business is labor is also important as well.

So I would say as we're looking at our our margin and backlog, we're not seeing any material challenges to them. It doesn't mean that.

Because we are being able to price these things in.

So I wouldn't call that as any any like big a big change and our profile, but it's something we keep a very strong ion and we talked about and Intel are graded the projects business. There is.

Lower than the line average for the business overall and that's part of the that's part of the hypothesis for the business and general capture.

And capture the volume and then follow that through with services and software just as we had done and process solutions.

So I think what we're doing is we're finding success and being able to price with the inflationary environment that we're seeing on.

And we're going to continue to manage through that I think quite well and and all of our projects businesses, but it is something to keep an eye on.

Yes, I was actually even coming at it from it could it actually be and unexpected tailwind just given how tight.

Some of these markets are right I mean, there's only a handful of <unk>.

Players that can stand up and automated warehouse or do some of these really large performance contracting.

Projects it sounds like Youre seeing a good pipeline and that develops but I appreciate the color. Thank you.

Got it.

Our next question will come from Nigel Coe with Wolfe research.

Thanks, and good morning, Thanks for the question.

And so when I go back to Steve's question on the medium term margins, Greg did you and dose.

At the same again and Tim margins just to clarify that my real question is in terms of the cadence from here on.

Number 1 can you just confirm again, Greg if the cost space is now fully loaded with a temporary costs I think them and 3 it will back in and TQ, but on any big investment.

Pending on the horizon it doesn't feel like aerospace has a big investment cycle ahead of it.

Some of these breakthrough initiatives, maybe quantum Mike and maybe just talk about that.

Yes, yes, so the temporary cost we still have the third quarter to go because if you think about last year. As an example, we furloughed and the second quarter and and the third quarter of 2020.

And if you think about the return to things like travel and the cost that comes along with T. I mean, we're just now on the second quarter, starting to get the organization and back out on the streets to see customers and to go visit our businesses. So I would say youre still going to see.

Other step up here in the third quarter in terms of the return of those temporary costs and then the majority of those will be gone and they'll still be a little bit of trickle in and <unk>, but third quarter is still yet to come we are investing and the businesses, though and that's again part of the reason when we talk about the $1 billion net cost reduction and that half a billion of increase.

That is also absorbing some increase in R&D, which is happening and places like quantum it's happening and places like aerospace that's happening and our Honeywell connected enterprise just to name a few and we continue as the as the as the environment strength and commercially we're going to invest back in the business in terms of sales resources and feet on the street and so on so.

We have a lot of confidence and being able to deliver the year with the net half a billion increase that we talked about and that is going to encompass both the temporary cost return and some additional investments.

Okay.

Okay. Thank you very much.

And next we will hear from Josh Puckered zone.

Winski with Morgan Stanley go ahead.

Hi, good morning, guys.

Maybe just a follow up on on Nigel as questions there either.

On the Aero side from margins, obviously, if we look back over the last call. It 18 months, there's some pretty high watermarks and low watermarks, where where do you see that trending over the next kind of couple of quarters here I understand and maybe the mix implications and what's going on on the defence and space side, but maybe sort of a.

Unbound by calendar year and timeframe of what that progression, maybe it looks like as that business normalizes.

Yes, I would say, Josh what youre going to see I mean, we talked about the fact that <unk> is abnormally high we had a we had a $30 million on <unk>.

And 1 time benefit that flew through the P&L.

We also were still.

And getting the benefit of some of the big cost outs that we had taken last year.

We came in <unk>, just about where we had expected and that call. It high 25 type of range I think we printed something like 25, 7% and I expect youre going to see that just kind of creep up through the third and the fourth quarter as we go forward prospectively and again more of the aftermarket business I'll start.

Making its way through the P&L.

The segments that we actually are looking forward to enjoying the benefits from a margin perspective more as just return to flight hours and particularly for wide bodies and somewhat to narrow bodies and we project debt will slowly improve and and it's going to be correlated to vaccination rates throughout the world We're seeing true.

<unk> pick up the <unk>.

<unk> traffic is strong actually.

Theres a lot of pent up traffic demand for international and travel and.

And and that's what I said is debt as we look at the next 2 to 3 years, it's going to get gradually better and better and probably if there was a drawback. We absorb this year in terms of defence and space and we expect that to normalize next year or so.

And that's probably the only segment that we had some concerns about but thats already reflected in there and our 2021 guide and as I said 2022 and beyond looks better.

Got it that's helpful. I appreciate the question guys.

You bet. Thank you.

Yeah.

And our final question today and will come from Nicole <unk> with Deutsche Bank.

Yeah. Thanks for squeezing me in guys.

And you Nicole good morning.

Hi, there so I guess.

Maybe a follow up here Josh is come on up on idle cash.

Thinking about margins for Sps and PMT and the second half.

And both segments are usually pretty heavily influenced by mix and there's a lot of moving pieces and so can you just talk a little bit about you know along the lines of what you discussed for aerospace and what you're thinking for Sps and PMT and the second half.

Yes.

It's going to be a pretty similar theme again as we as we think about the mix for Sps and particular, that's actually going to improve I talked about the fact that we hit the peak for this year in terms of the.

The project Rollouts and celebrated so that's going to come down a little bit which will provide a little bit of a mix benefit on the overall profile. So I expect to see again sequential improvement and <unk>.

And margins and the back half of the year in and Sps and again, the same thing being true as we think about PMT ramping up and <unk>.

And to see what we did here this quarter in terms of the catalyst shipments coming through.

Darius highlighted our yoki backlog very strong and so as that begins delivering particularly around the catalyst side and that brings with it some nice margin accretion and we've always talked about the fact that you can't look at la.

PMT margins in any 1 quarter as indicative that moves around a bit with the with the mix around catalysts, but I do expect that to also improve and the back half of the year as we continue to see that strengthening growth rates. So again, that's why we feel we feel very good about where we are right now as we exit.

The first half and we look forward to a very good second half of the year and a nice finish that's why we upgraded our margin range on the low and.

By the 10 basis points that we did so I think things are trending.

Trending nicely across all of the all the segments and I think.

And maybe just something else to add which maybe goes on notice, but I mean, if you look at sort of his deepest we were hit in 2020 with some of our end markets. We're now projecting for EPS range, we're basically kind of be right back where we were in 2019, So think about that as a 1 year pause will be busy.

And this that's better position more tailwind than it's ever had and a strong balance sheet. So.

I think that I think from from where we sit things look quite quite strong.

Got it thanks, Darius and Greg.

You bet. Thank you.

And this will conclude today's question and answer session I will now turn the call back over to Darius and Tom check for closing remarks.

I want to thank our shareholders for your ongoing support we have delivered strong results and the first half of and uncertain year, and we're well positioned to capitalize on improving conditions in key end markets, while driving near term growth opportunities across our portfolio I've never been more excited about honeywell's futures and I am today.

Thank you for listening please.

A safe and healthy.

Ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation and you may now disconnect.

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