Q2 2023 Honeywell International Inc Earnings Call

July 27, 2023

Okay.

Thank you for standing by and welcome to the Honeywell's second quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Please be advised that today's call is being recorded.

I would now like to hand, the call over to Sean make them Vice President of Investor Relations. Please go ahead.

Thank you Liz.

Good morning, and welcome to Honeywell's second quarter 2023 earnings Conference call.

On the call with me today are Chief Executive Officer of Venmo, Gabor, Senior Vice President and Chief Financial Officer, Greg Lewis Senior Vice President and General Counsel and Matt.

This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website from time to time, we will post new information that may be of interest or material to our investors on this website.

Our discussion today includes forward looking statements that are based on our best view of the world and of our businesses as we see them today.

And are subject to risks and uncertainties, including the ones described in our SEC filings.

This morning, we will review our financial results for the second quarter share our guidance for the third quarter and provide an update to our full year 2023 outlook as always we'll leave time for your questions at the end with that I'll turn the call over to CEO I'm looking for thank you Sean.

And good morning, everyone. Let's begin on slide two the second quarter was another strong one for Honeywell, we met or exceeded our commitments.

That's operating principles enable us to navigate a challenging backdrop.

We grew our adjusted earnings per share of 6% year over year to $2 23.

8%, excluding <unk> and.

Noncash pension headwind.

Second quarter organic sales were up 3% year over year led by double digit growth in commercial aerospace process solutions and <unk>.

Aerospace business continues to perform at very high level.

The second quarter backlog grew to a new record of $35 billion up 4% year over year, and 1% sequentially due to strengthen arrow BMD and SPD similar to last quarter.

Orders continue to grow double digit organically aero or other segment unfavorable comparison to last year's peak supply chain disruption led to a single digit decline in orders for autumn Honeywell.

We remain confident in our 2023 outlook as the covering end markets and operational excellence continue deliver resilient results despite macroeconomic uncertainty.

Our segment margin expanded 150 basis point year over year exceeding the high end of our guidance range by 20 basis points led by expansion in SBS HPT and Arrow. Our continued focus on commercial excellence in greater gains from productivity enabled us to remain ahead of our inflation curve free.

Free cash flow was $1 1 billion in second quarter up 34% year over year, driven by strong net income and improved working capital in line with our expectations. Greg will walk you through the free cash flow drivers in more detail in few minutes.

We deployed $2 1 billion through dividends, M&A and share repurchases and growth capex, including Opportunistically repurchasing two 4 million shares throughout the quarter, reducing our weighted average share count of $670 million I'm pleased with the progress we made this quarter on our portfolio shaping priorities, we invested in multiple new.

These utilizing our robust M&A playbook, including completing the acquisition of compressor control Corporation for approximately $700 million.

As always we continue to execute on our proven value creation framework, which is underpinned by accelerator operating system. The operating system, along with ongoing growth in our key end markets and technologically differentiated portfolio of solution is enabling us to navigate a challenging economic backdrop and delivered on our commitment again this quarter looking forward.

I am encouraged by the trends, we are seeing in our long cycle Aero and energy vertical and remain confident in our position to outperform.

Let's turn to slide three to discuss the important leadership announcement.

Last month, we announced that Jim Korea will be succeeding Mike Madsen as Honeywell Aerospace CEO I want to congratulate Mike Madison honest their diamond and extend my sincere gratitude for 37 years. He has given to Honeywell, Mike has been extremely effective leader and change in exchange.

And the ore and the ore industry has a rich history of exceeding expectations as aerospace on an unprecedented $35 billion of new business. In these last two years his leadership and commitment to customers employees and the communities unparalleled during his tenure at Arrow CEO , Mike navigated the business to <unk>.

<unk> ended pandemic disruptions by growing the top line expanding margins by about 200 basis points because of Mike's passion and dedication of our business. He helped set up Honeywell aerospace to be even more successful in the years to come we're excited about the next phase of growth and Honeywell the ERO business under Jim Korea Theater ship, we have partner to have someone with his level of experience.

And are ready to take the helm, a true testament to honeywell's bench strength and focus on succession planning Jim has been with Honeywell for Arrow for 17 years and prior to his current position. He has held multiple roles of increasing responsibility across function and geography, most recently as president of our electronic solutions business.

The medium term setup, our arrow is the strongest it has ever been flight hours continue to be strong including wide body upside, which is now underway. We are diverse and optimized platform exposure, particularly in business aviation in fact over the last few months alone we have around $3 billion in business to provide Oems and airlines with our engines.

We then breaks Apu and flight management system, along with the associated aftermarket services. In addition supplier in a gradually improving and we have returned to growth in defense and space.

This momentum points to a robust multiyear directory for the largest businesses in Honeywell portfolio.

Let's turn to slide four to discuss our recent corporate development activity.

I am excited about our recent capital deployment announcement and closing on our previously announced compressor control calculation acquisition, and adding new strategic assets that will drive enhanced innovation and strengthen our technology portfolio. This mix really exemplifies the type of deals that we look to generate on a consistent basis.

Last month, we closed our acquisition of CCC, a leading provider of turbo machinery control and optimization solution deploying approximately $700 million dollars, an all cash transaction.

<unk> technologies, including control hardware software and services.

Bolster honeywell's high growth sustainability, and digitization portfolio with new carbon capture control solution.

Integrate seamlessly into our process control process solutions business and provide meaningful revenue synergy potential with Honeywell Forge. We are excited to extend Honeywell dealership in automation and help customer accelerated energy transition with this with the completion of this acquisition.

We also acquired <unk> in Israel based company that delivered operational technology, or Ot and internet of things or Iot cyber security solutions for monitoring large scale network scatter fence brings proven technology that asset discovery threat detection and security governance, which are key to.

Real and critical infrastructure cyber security program into our <unk> portfolio. The <unk> cyber security industrial is expected to grow at a greater than $10 billion in next several years and our scale and portfolio per seamlessly with Honeywell cyber security business, providing an end to end enterprise solution that helps customers enhance enterprises resilience.

In addition, we signed an agreement with <unk> to acquire it heads up.

Play or hard asset bolstering honeywell's comprehensive end to end avionics and safety offering will partner with software development Center in the heart product line, which enables pilots increase situational awareness. So typically at night are in difficult weather condition importantly, the heart will be integrated into Honeywell and term out.

Evolutionary integrated flight deck with an intuitive user interface and highly scalable design. In addition to honeywell's Primus epic flight deck and retrofit solutions.

I am excited about our new technology in an adjacency we have unlocked through our recent M&A activity, we've said before and we have an active and robust pipeline and this is further evidenced that we are continuously enhancing our portfolio by investing in new opportunities. We look forward to continuing to deploy our capital in coming quarters to create more value for Honeywell shareholders now, let me turn it off.

Over to Greg on slide five to discuss our second quarter results in more detail as less provide our views on guidance.

Thank you <unk> and good morning, everyone.

We delivered another strong quarter in a very challenging operating environment.

Second quarter sales grew 3% organically led by double digit organic sales growth in commercial aerospace process solutions, and <unk>, where demand strength continues to support Honeywell short term and long term outlook PMT growth grew at a robust 7% pace after four consecutive quarters of double digit growth.

Our long cycle warehouse automation business is around trough levels as expected, which led to overall volume decline of 1% for the quarter.

However, excluding Sps volumes were up 5% across the remainder of the portfolio.

Our backlog remains at a record level ending the second quarter at $35 billion up 4% year over year, driven by strength in Aero and PMT <unk>.

Supply chain constraints continue to moderate our overall growth rate. However, we continue to record sequential improvements in aero output as expected and are reducing our past due backlog across our short cycle businesses.

Our investments in Honeywell digital have continued to yield commercial and operating benefits through surgical pricing actions, enabling us to expand segment margin by 150 basis points year over year to 22, 4% and exceed the high end of our guidance by 20 basis points.

Three out of four segments expanded margins in the quarter each by more than 100 basis points with Sps, leading the way as expected.

On cash we generated $1 $1 billion of free cash flow up 34% year over year.

This increase was driven by stronger net income as well as improved working capital performance with higher collection and good progress on inventory, where we have improved our demand planning and optimize our production and materials management using our improved end to end process and digitalization capabilities now lets.

Spend a few minutes on our second quarter performance by business.

Aerospace sales for the second quarter were up 16% organically led by over 20% growth in commercial aviation. This.

This marks the fourth consecutive quarter of double digit aerospace organic sales growth in over two years of double digit growth for commercial aviation supported by strong recovery in both flight hours at higher ship set deliveries.

Growth remained strongest in commercial aviation aftermarket up over 25% led by over 30% growth in air transport as increased flight hours resulted in higher spare shipments and repair and overhaul activity.

Commercial original equipment sales also increased double digits driven by increased build rates.

<unk> space grew for the second consecutive quarter as we were able to execute on our strong backlog and increase our sales volumes.

The Aero supply chain continue to make progressive improvements as better material availability enabled 20% year over year growth in original equipment and spare shipments again in Q2.

Historically high past due backlog increased again in the quarter as orders growth outpaced our backlog burn down.

Segment margin aerospace expanded 120 basis points year over year to 27, 7% due to commercial excellence and higher volume leverage partially offset by cost inflation.

Performance materials and technologies sales grew 7% organically in the second quarter with double digit growth for the third consecutive quarter and both HTS and <unk>.

Process solutions sales grew 11% organically driven by strength in our projects business and and lifecycle solutions and services and <unk> sales also grew 11% organically led by gas processing and refining catalyst shipments sustainable.

Technology solutions within <unk> had another standout quarter in Q2 with strong triple digit orders growth and over 30% sales growth.

In advanced materials continued demand for flooring products portfolio.

Was offset by expected macro driven softness in our electronics and chemicals business.

The flat organic growth despite challenging year over year comps.

The margin contracted 60 basis points to 21, 7% as favorable price cost was more than offset by challenges in advanced materials, including lower volumes and the previously communicated disruption in one of our plants.

Safety and productivity solutions sales decreased 21% organically in the quarter sales.

Sales declines were primarily driven by warehouse and workflow solutions and productivity solutions and services, while the project portion of our <unk> business is around trough levels in the current low investment warehouse automation environment. The aftermarket services portion of the business continues to deliver solid double digit growth.

Sensing and safety technologies was flattish in the quarter with ongoing strength in our industrial sensing product portfolio offset by modestly lower volumes in safety.

Segment margin performance for Sps once again led Honeywell expanded 410 basis points to 16, 7% as a result of productivity actions and commercial excellence, partially offset by lower volume leverage and cost inflation.

Honeywell building technologies sales were flat year over year on an organic basis in the second quarter building solutions sales grew 2% organically despite expected year over year order softness as we continued to execute on our robust backlog with organic growth in our services business and no change year over year and projects.

Turning to our product portfolio, we continue to see sequential improvements in our supply chain environment.

And were burning down our past due backlog as expected.

Building product sales decreased 1% organically as continued growth in our world class fire products business was offset by declines in security and building management systems. Our continued commercial excellence and productivity actions have allowed us to once again mitigate the effects of elevated inflation expanding HPT segment margin by 200 basis points.

25, 5%.

Honeywell connected enterprise is strong software franchise continues to be accretive to overall Honeywell and a powerful differentiator overall double digit organic growth was supported by strength in cyber industrial aircrafts in buildings double digit orders growth in the quarter and supportive of continued strong performance for HCA.

Overall this was a great result for Honeywell, our operational efforts enabled us to grow second quarter GAAP earnings per share, 21% year over year to $2 22.

And adjusted earnings per share, 6% year over year to $2 23.

Despite a <unk> <unk> headwind from lower noncash income from our overfunded pension.

From a year over year perspective segment profit drove 21 21 sense of the improvement in earnings the main driver of our EPS growth.

A lower adjusted effective tax rate contributed <unk> <unk> of improvement and reduce share count added an additional <unk> <unk>.

Excluding the pension headwind below the line in other created a <unk> <unk> year over year headwind due to higher net interest expense for a total EPS, excluding the pension impact of $2 38.

Up 13% year over year.

Rich for adjusted EPS from <unk> 22 to <unk> 23 can be found in the appendix of this presentation.

Finally, as Bill mentioned earlier, we continue to leverage our strong balance sheet.

$2 1 billion in the quarter, bringing the year to date total to $3 $7 billion as we execute on our capital deployment strategy with meaningful portfolio updates.

So overall disciplined adherence to our best in class Honeywell value creation framework provided us with the operational agility to meet or exceed our guided financial metrics now, let's turn to slide six to discuss our third quarter and full year outlook.

While a number of challenges persist in the current environment, our rigorous operating principles enable us to increase our guided metrics for the full year.

Our demand profile remains robust with record backlog levels, particularly in aerospace and PMT and stabilized sequential short cycle order rates across much of the portfolio.

For our Q3 sales guidance, we expect to be in the range of $9 one to $9 3 billion.

Up 1% to 4% on an organic basis.

We now expect full year sales of $36 seven at $37 3 billion.

Which represents an increase of $200 million on the low end incorporating our strong second quarter results were.

We're raising the low end of our organic growth range now, 4% to 6% and we continue to expect a greater balance of price and volume versus last year.

We've upgraded our full year expectations in PMT, while softening our outlook for Sps to reflect our latest views on the end markets each.

Moving to our segment margin guidance, we expect the third quarter to be in the range of 22, three to 22, 6%, resulting in year over year margin expansion of 50 to 80 basis points due to commercial excellence and productivity actions.

Full year 2023, we are upgrading our segment margin expectations by 10 basis points on the low end to a new range of $22 four to 22, 6% or 70% to 90 basis points of year over year expansion driven by improvement in HPT Sps at PM.

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

Looking ahead for aerospace we continue to be excited about demand across our end markets and expect sequential sales growth throughout the second half supported by ongoing sequential factory output increases and strong orders commercial aftermarket.

Aftermarket, particularly in air transport should lead growth in the Aero portfolio as flight hours continue to recover and we see further recovery in the wide body market from increased international travel on.

On the commercial original equipment side, we expected build rate strength to drive volume progression in the second half in.

In defence and space, we expect sequential and year over year growth in the second half and continue to work through our robust backlog.

As a result, we expect defense and space to grow at a mid single digit rate for the full year 2023.

We continue to expect modest sequential improvement in the aerospace supply chain as growing commitments from our suppliers year to date, coupled with a second consecutive quarter of 20% output increases give us continued confidence in our outlook.

Given these factors, we still expect our organic sales growth in the low double digit rate.

For segment margin, we still expect <unk> to be flattish for the year as we see modest mixed pressure within our OE business offsetting overall volume.

In performance materials and technologies encouraging fundamentals persist across our end markets driving favorable growth.

For the third quarter, we expect sales to increase year over year and sequentially, coupled with a seasonally strong fourth quarter.

Growth will be led by smart energy projects and lifecycle solutions and services within process solution as the strength of these businesses saw in the first half continued into the second half in.

In <unk> our growth outlook for the year are supported by robust demand for petrochemical and refining catalysts.

The sustainability technology solutions business within <unk> will also provide growth as we capitalize on legislation that mill.

For advanced materials, we see ongoing demand for flooring products combined with improvements in electronic materials supportive of sequential growth in the first half.

Despite more challenging comps in the second half these favorable market conditions and our strong execution gives us confidence to upgrade our full year sales growth expectations for PMT, the high single digits compared to mid single digits last quarter.

For segment margin, we expect sequential improvement throughout the year, including robust expansion in the fourth quarter, resulting in modest year over year improvement for overall 2023.

Looking ahead for safety and productivity solutions, our outlook continues to be impacted by the decline in capex for new warehouse capacity.

However, our short cycle businesses appear to be stabilizing as we awaited demand acceleration in the coming quarters.

For the third quarter, we expect this to lead organic sales decline similar to Q2. However.

However, we anticipate another quarter of strong growth in the aftermarket services portion of our <unk> business and sensing and safety technologies should return to growth.

With the Sps portfolio bouncing along the bottom of the cycle. We now expect full year sales to be down low double digits in 2023.

However segment margin continues to be a bright spot for Sps as we implement productivity actions and drive operational improvements and we still expect strong margin expansion for the full year.

In building technologies, the macroeconomic environment remains challenging.

<unk> continues to execute well.

And burned down our past due backlog.

For the third quarter, we expect sales to be relatively flat year over year as we continue to see more challenging comps and the timing of short cycle recovery remains uncertain.

For the year, we still expect sales in our long cycle building solutions business to outgrow the more short cycle building products.

Our institutional verticals, such as airports and education will remain strong as we continued stimulus that come through.

The business is well aligned to energy efficiency and sustainability Megatrends given these dynamics, we still expect HPT sales for the year to grow low single digits organically and we see potential for growth acceleration as we exit 'twenty three.

For segment margins, we now expect HPT to lead Honeywell margin expansion as a result of strong inflation management and productivity actions.

Turning to our other core guided metrics net below the line impact which is the difference between segment profit and income before tax is expected to be in the range of negative $120 million to negative $170 million in the third quarter and negative 500 million to negative $625 million for the full year.

This guidance includes a range of repositioning between 40 and $85 million in the quarter and $225 million to $325 million for the year as we continued to fund attractive restructuring projects and properly positioned Honeywell for the future.

We expect the adjusted effective tax rate to be roughly 23% in the third quarter two points higher than our full year guide of 21% and two points higher than <unk>, which is unchanged from our previous guidance that implies a lower <unk> rate due to the timing of discrete items.

Importantly, this higher tax rate in Q3 reflects an approximately 6% headwind to EPS, but will be offset by a commensurate tailwind in <unk>.

Full year unchanged.

We expect average share count to be around 669 million shares in Q3, and 670 million shares for the full year.

As a result of these inputs our adjusted EPS guidance range is now between $2 15.

To $2 25 for the third quarter, which would be down 4% to flat year over year.

Excluding the pension headwinds third quarter EPS growth would be up to two up 6%.

For full year EPS, we are increasing the midpoint of our guide upgrading the low end of the range by <unk> <unk> for a new range of $9 <unk> to.

At $9 25.

Up 3% to 6%.

<unk>, our continued confidence that 2023 will be a solid growth year for Honeywell, despite the year over year pension headwinds excluding these headwinds.

Growth would be 10% to 12% for the year.

After a strong first half and continued progress on inventory and receivables management, we expect to meet our original free cash flow guidance of $3 nine to $4 $3 billion in 2023 or five one a $5 5 billion <unk>.

Excluding the net impact of the settlement.

So to wrap up.

Our original thesis for 'twenty three remains intact.

Robust backlog of $30 billion underpins our strength our growth.

Timing of the short cycle recovery remains uncertain.

We're encouraged by the strength of our portfolio and continue to execute on a rigorous operating playbook through a challenging backdrop to deliver outstanding results.

Now, let's turn to slide seven and I'll hand, the call back to demo for some long term comments. Thank you Greg I'd like to take a minute to zoom out from the quarterly result to emphasize the long term journey Honeywell is on as you can see from the charts on slide Honeywell has made tremendous progress whether it is accelerating organic growth expanding gross margins and segment margin are growing.

Free cash flow, we have come a long way, but we're not done and we have identified the critical levers that will enable us to reach even higher level upper face financial performance. We remain committed to our long term growth algorithm that we discussed during our May investor day, and during 2023 guidance.

Closely aligned with this framework, we carefully tracked our progression towards achieving our targets and remain confident in our ability to accelerate growth achieved 25% segment margin and expand gross margins above 40% and free cash flow margins to mid teens and beyond.

As I said in May my priorities as CEO include accelerating organic growth and enhancing our innovation playbook growing our sustainability and it started this <unk> capability and maintaining our leadership position in high growth regions. I also plan to evolve the accelerating operating system to drive incremental value through business model optimization Adil.

Ali Honeywell has undergone substantial internal transformation. The result of which you can see in our topline and bottom line improvements over the last decade, our plan to further optimize the portfolio through strategic capital deployment and reduce exposure to noncore areas.

<unk> announced this quarter demonstrated the strength of our M&A pipeline and our commitment to deploy capital.

Excited to lead the change for this next phase of transformation for Honeywell and I am confident in our ability to deliver superior returns for our shareholders as we deploy our global design model across our portfolio. We are uncovering substantial opportunities to capture value whether it is expanding margins driving incremental sales growth are generating more cash.

And we will continue to update you as these efforts prostate increasingly and to enhance financial performance now lets turn to slide eight into clothing part before we move into Q&A.

Honeywell executed very well in what remains a very dynamic operating environment will continue to effectively manage through ongoing external factors, while delivering on our commitment by relying on our value creation framework. The macro economy remains challenging and the timing of a short cycle exploration is uncertain, but with ongoing strength in our two bigger.

End markets Aerospace and energy combined with the operating rigor you have come to expect from Honeywell, we are confident in our ability to weather near term challenges and meet our performance targets. Thank you all to our Honeywell colleagues, who continue to enable us to outperform in any environment, but that Sean let's move to Q&A.

Thank you Pamela.

Memo Greg in hand are now available to answer your questions. We ask that you. Please be mindful of others in the queue I only asking one question.

Liz Please open the line for Q&A.

Our first question comes from the line of Andrew <unk> with Bank of America.

Now I can hear him.

Yes can you hear me.

Yes, good morning, Andrew Yes. Good morning, just a question on advanced materials.

It's a good return business when should we expect this business.

To return to growth and also do you guys do to add capacity to grow this business. How strong is the structural demand. Thank you.

Yes, thanks, Andrew so.

The key is the comps of advanced materials to 2022, we grew more than 20% last year. So.

Combine that with some of the weaknesses, we see in electronic materials side, we are having a moderate year for advanced material. This year, we do expect.

Markets are done better during second half and more importantly in 2024.

To your question on capacity expansion, we remain very excited in fact in the next draft cycle, we expect.

More capital investment and increase our capacity for advanced material for some update existing offering and potentially some new offering. So it all we remain very bullish on advanced materials portfolio.

Thank you.

Our next question comes from the line of Steve Tusa with Jpmorgan.

Hey, good morning, guys.

Hey, Brian .

The underlying.

I guess on the positive side the very.

Strong margin in aerospace.

Tough to kind of like cut through the OE incentives was there anything unusual there like where the OEM incentives, we just under the quarterly timing of those.

I'm kind of getting to an underlying incremental of around like 40% for that business. If we adjust for some of these OE incentives.

Can you just maybe talk about some of the moving parts, there and whether I'm roughly right on the math.

Yes, so the OE incentives.

We haven't disclosed the exact amount, but the first half is going to be a little lighter than the second half in.

In terms of those OE incentives. So that's why when we talk about the full year margins still being flattish.

Even though we had a pretty strong Q2, I think that's really what's going on.

In that regard.

Yes.

Okay, and then just one last one on HPT.

Is that business, just perhaps should be growing better in this environment.

Even even building solutions was kind of like a week, so theres really not a function of the state thats really can't be a function of destocking. So maybe.

What are the moving parts there and why are you guys not keeping up with the.

The other non res players out there thanks.

Yes, so Steve.

We are conscious of our margin rates in HPT and make careful selection of our projects, which have Eddie great margins and strong service date.

So.

I think given that choice. We made you can see impact of that in margin expansion of building technologies and that comes to a certain degree at the organic growth.

All right. So it's a choice to be made.

And we wanted to deliver both an ideal world, but we remain biased more towards growth and margin expansion versus the top line growth.

Great. Thanks, a lot.

Yes.

Our next question comes from the line of Sheila <unk> with Jefferies.

Good morning, guys and thank you.

I wanted to ask on aerospace.

That's perfect line. If that's okay last quarter you raised your aerospace guidance of up low double digits and I think the bulk of that raise has come from that side, which you guys are doing well and.

There's been a bunch of moving pieces this quarter with the Max, especially going into 38 per month yesterday.

Then of course engine issues could force like.

Newborn for some spares issue at Airbus on the April 22.

Are you thinking about the puts and takes for aerospace OE as we get into the second half following 13% correct in the first half.

So sheila of our deliveries for the year are pretty well aligned with all Oems both on eight on air transport as well as on the business business jet side.

Have our commits to all key Oems on for Q3, Q4, and our predictions are based upon those commentary so I can't comment on their commitments to their customers, but we are pretty well aligned arguments to them and our revenue growth.

Volume growth is linked to that.

And it's going to be pretty strong I mean, we expect the momentum in aerospace not to change.

In 2023 or four documentary even in 2024, our backlog is extremely strong and our supply chain continues to improve every quarter and the recent events have not changed their expectations of us to this stage.

Got it thank you very much.

Okay.

Our next question comes from the line of Julian Mitchell with Barclays.

Hi, good morning.

Maybe just my question would be on Sps.

Just wanted to try and understand.

Kind of how the sort of orders in backlog there is moving I can imagine it is not moving well and Thats why the revenue guide has come down.

And if we think about the shorter cycle businesses, how severe do you think the inventory depletion needs are in that business and what does that mean for exit rates.

Sps from this year on the topline.

Sure. So I would say if we take Ics first.

Our order rates are down meaningfully as we've.

We've talked about is at but when we look at the overall pipeline, we're starting to see the pipeline build back to a little bit better levels that may not occur.

Immediately.

But we see there is a chance that we may be growing again in 2024.

Because the first half of the year was particularly high.

We're seeing stabilization in the last two to three quarters.

Have been either going up sequentially or staying roughly flat. So I think we've reached us stabilization point on the short cycle.

As.

As and when some of those markets begin to recover.

Then we will see some growth so as we think about Sps overall I would expect that's going to grow in 2024, it's probably not going to be at the high end of our of our.

Growth rate for our SPG, but that's how we see it with the data that's coming through right now.

Thanks very much.

Yes.

Our next question comes from Scott Davis with Melius research.

Hey, good morning, everybody and welcome demo.

So a couple of small things here one I mean, you guys are spending a couple of hundred million dollars a year on.

One of them.

Tim what do you have a kind of an evolved vision of.

Okay.

Where this business goes in.

Is it kind of <unk>.

Cash flow. Please go down a little bit over time or is there some.

Kind of positive end game that you see here.

So Scott I mean, we have publicly stated that we will like to monetize value of the quantum investment we have made in <unk> and continuum and as the markets are more ready for IPO, which probably.

Our head for a while.

We are we are getting prepared for that so we're doing everything towards that end game.

And the strategy Hasnt changed to create more value for our shareholders at appropriate time through an IPO for that business.

Okay fair enough and just quickly.

Just following up on Steve's question, I mean, I would've thought forged for buildings would have given you a little bit of a lift given the timing of when you roll that out.

I understand project selectivity, but I would've thought that would've given you a little bit more of a tailwind into the quarter as for timing issues, there and that those orders haven't really kicked in yet.

And we will see that later in the year or are there other competitive dynamics.

Look I mean, we are definitely seeing better bookings for horsepower buildings, but.

<unk> I would like to state is that business runs on a SaaS model. So even a large booking the revenue recognition process is different from traditional perpetual license based model. So the revenue accretion is going to spread over multiple years for that and we are a function as they make that decision because rather than showing a sharp turn.

When we are more biasing.

Our cell towards more recurring revenue model there as I started before so thats why youll see lesser impact, but we are scoring wins in force for buildings and I continue to remain very bullish on that segment.

Okay Fair enough best of luck. Thanks.

Thank you Scott.

Our next question comes from Nigel Coe with Wolfe Research.

Thanks, Good morning, Thanks for the question.

Just wanted to.

Maybe just put a final point on Julians question on Sps.

No.

We see encouraging signs of a bottoming process here, but it does feel like the guidance embeds.

Flat to maybe maybe flattish plus or minus growth in fourth quarter, just want to make sure. That's the case.

And maybe on HPT, just breakdown geographically, what you're seeing versus North America, Europe , and China on weather.

Does any channel dynamics here that we should think about as well.

So I'm sorry of SPD to integrate.

Respond to Sps cushion I think HPT from.

Geographic perspective.

Europe continues to be.

B, one had better better outcome, I think thats a bit of a drag at this point the strength is in high growth regions.

We see strength in Middle East, India, and China in buildings and North America is more of I would say.

Sequentially no change within the business. So that's kind of our overall dynamic on the channel side I mean, the channel demand will be determined by the end market demand. So we.

It's a very short cycle business. So we don't see any dynamics of channels, having less or more inventory at least in the SPD business.

Greg going to spud to SBS, yes. So.

Yes. It is.

Likely to be down in the fourth quarter. So I would say, it's not going to be flattish, it's going to be probably more like down.

I think <unk> and <unk>, we're going to look pretty pretty similar to one another and then we will get a little bit of a normal seasonal bump in the fourth quarter.

So that's that's the way I would think about the progression for Sps top line overall.

Great. Thanks.

Yes. Thank you.

Our next question comes from the line of Jeffrey Sprague with vertical research partners.

Hey, Thank you good morning, everyone.

Yes, I was going to ask I was going to ask a near term question, but.

It will given your response about margins in HPT I Wonder if we could maybe just zoom out.

Just kind of think philosophically about kind of the trade off between growth and margins right.

We have seen situations in the past where companies with high margins good.

For lack of a better term a little bit trapped in wanting to maintain or grow the margins right in growth ends up suffering as a result.

So could you addressed this to some degree obviously when we're together in New York, but could you maybe elaborate a little bit more on your philosophy.

Relative to managing those two metrics and.

And how you make sure you don't hinder growth.

Oh really focusing on margins.

If our business model and SPD is combination of serving the market both to direct and channel. So we have to make choice.

Our business, we wanted to serve direct and bought business, we monitor sell through channels and indirect we want to big projects, which have a strong first party content and after market services, so given that algorithm.

<unk>.

We make choices with that tool.

We are sensitive to drive topline growth, but we are not going to compromise to book projects, which are lower margins and show a shiny topline growth without any margin expansion that has been our principles and the reason we are.

Right.

Determined on in principle is it takes one bad projects or deteriorate the entire business and the portfolio. So we remain.

<unk> committed to that model.

I am not suggesting that we will not see growth in building technologies I do believe that as energy efficiency becomes more prominent across the board our energy business there to do well.

And we will deliver more growth in the project side of the house too, but that remains our overarching.

Yeah. Thanks, guys I was sort of met the question on a total Honeywell basis also.

Okay.

On a total Honeywell basis, I mean organic growth on the top end of our range is my biggest priority I stated that at Investor day, if something I want to make my contribution in my tenure is AOI growth at a higher rate now we are having favorable macros in two of our biggest SPD both in Aero and PMT. So on the strength of that and if you couple that with.

The right new products I see no reason that we should be delivering our growth and upper end of our four to seven algorithm and that's why I work on every day and continuing to drive our new product execution, and then M&A accelerating our overall growth algorithm.

My top commitment.

Thank you for the perspective.

Our next question comes from the line of Josh Poker Winski with Morgan Stanley .

Hi, good morning.

Hey, Josh.

Hey, So just wanted to maybe split around the HPT question.

From the other perspective on PMT, I mean, youre seeing some of the bulk chemical guys go through Destocking I think.

Traditional oil spending has been okay, but maybe not as strong as what you guys are seeing.

And some of the other process guys are seeing I guess, just how much are we getting away from kind of traditional oil versus either.

Some of these mega projects or energy transition this business really transcending yes.

So even kind of 567 years ago.

Sure So Josh.

If I look at each of the three segments.

Our automation business process solution has.

Increasingly reduce its dependence on oil and gas it has diversified very well in other end markets.

Energy storage.

The Giga factory.

Metals and mining et cetera. So we can see that in the growth rate of revenue generation for our process solution and we remain very bullish on that business for 2023 and 2024.

<unk> segment, our strategy has been to grow our business into sustainable technologies renewable fuels clean hydrogen carbon capture and we see pretty strong bookings in our.

And sustainable technologies business, just as a data point.

Normally you have licensed 40 renewable fuel projects till Q3 and on a path to be 50 by I would say Q1 of 2024, which I mentioned in a couple of earlier.

<unk> meetings.

So <unk> business is becoming also less linked to traditional refining petrochemicals.

But fast moving towards renewable technology and in advanced materials, our businesses very speciality chemicals solstice product line continues to grow we see.

Some pressure in electronic materials, which is affected in our overall growth rate, but we do expect that to turn back into normal fee in 2024. So overall.

<unk> positive outcome.

Bullish.

Our view on BNP for second half of 2023 and 2020 the booking rates remains strong backlog is very strong new innovation pipeline is very very strong. So all good news there.

Understood. Thank you.

Our next question comes from Joe Ritchie with Goldman Sachs.

Okay.

Hey, good morning, guys.

Hey, Tony.

Yes.

Two quick ones I guess, I guess just on Sps side.

Talk a little bit about the growth dynamics for the year I'm just curious how the reduction in the short cycle businesses.

Perhaps impacting margins for the second half of the year and then the other question is really around the defense business, it's nice to see the inflection there.

Just curious at what point do you really start to see an acceleration and defense growth just given what you know about your production schedules.

So.

The.

The way we have guided we are.

Short cycle orders have stabilized and we are expecting similar trend over the next few months and our guidance based upon that we are expecting stronger performance in warehouse automation orders because the pipeline has become better but that will really strengthen our 2024 position given the long cycle nature of the business and Thats our.

Forecast right now.

And we will continue to update you if things change and I would just say Joe.

We have the teams have.

Resize their cost envelope to the current reality.

And as and when the short cycle businesses Reaccelerate.

Can imagine those are very high margin at the bcm level and that will create a lot of acceleration from a margin rate standpoint.

So the margin rates that were going to be printing now are going to be within.

Tighter band until we see that acceleration come but their business is poised for it.

And we will see is that going to be Q4 or is it going to be Q1.

It remains to be seen but we've sized the business properly.

And there's going to be a fairly substantial leverage opportunities.

When that acceleration happens.

And then he had a question on defense and we can see.

He is an acceleration in demand there.

So in defense of our bookings remain very very strong.

So we are working our supply chain constraints, there and we do expect our delivery performance to be better in second half versus the sponsor.

Low single digits in the first half of the year.

We expect the year to finish more in the mid single digits for the defense business.

And from here, though.

Past probably the the.

Comps were small increments are going to create means.

Meaningful growth.

From a percentage basis, so it should be all.

Accretive from this point on and I will say I should also mention we see.

Longer term for defense business pretty strong demand outside the United States.

As we can all imagine the recent.

What in Ukraine has created more higher budgets by different governments, and we clearly see those signals coming to us in terms of demand from NATO countries. Other friendly countries and that will play out even more stronger for the defense business in the times to come.

Great. Thank you.

Okay.

Our next question comes from the line of Deane Dray with RBC capital markets.

Thank you and good morning, everyone.

Good evening, Hey, just wanted to circle back on Sps, if we could.

On warehouse automation, what are you seeing in the pipeline that suggests a bottoming and then a related question is can you give us any sense of when you'll hit this.

Targeted critical mass of installations that will drive that flywheel of attractive aftermarket how close are you to that.

Kind of timeframe.

So the pipeline is growing very nicely.

That gives us a little bit more optimism on better orders performance further business in the second half of the year and the part of the pipeline growth is driven by much more diversified end markets. We serve not so we are not limited to E. Commerce, we have diversified into retail into fashion into logistics. So thats by their coverage is giving us.

Better pipeline then.

We are we are anticipating.

Good progress in the orders in the second half of the year on the after market slightly.

I would say it's been working now we are growing double digits and after market in 2023 and across our aftermarket business more than half a billion dollars in bookings.

Much nearly the same revenue for the year and we don't expect our momentum to stop that's our strength Honeywell has strong playbook on how to drive aftermarket services and Thats a value will continue to add into the business and.

Our strength in that business in 2024, therefore, we anticipate.

<unk>.

Low to moderate growth, but very strong margin expansion, because we continue to build more business with more first party content and very strong aftermarket and we have a couple the two together, we do expect pretty healthy margin growth in warehouse automation business in 2024, yeah. So I mean that business was around $200 million of the total in 2018 by 2022.

It doubled to roughly four.

400 million is dermal said this year is going to be over $500 million aftermarket so that aftermarket is happening.

Great. Thank you.

Welcome.

Our next question comes from the line of Nicole to plays with Deutsche Bank.

Yeah. Thanks, guys good morning.

Good morning.

And then just maybe on PMT. If you guys could talk a little bit more about the order activity you saw within <unk> and <unk> in the quarter and then on the margins you talked about the challenges in advanced materials, I guess, how does that kind of phase through the second half of the year. Thank you.

The orders.

<unk> been pretty strong in first half where youll be in SBS, and we expect to finish year strong in both the businesses I would say high single digit orders growth in both European SBS and explain the rationale for it.

In Sps, it's more diversified end markets and our strength of our aftermarket business there and in Europe . It is diversifying to renewable technologies as they become more and more important part of our portfolio. It continues to grow the business and you will be the catalyst business continues to have a lot of strength in.

Both refining and petrochemical catalysts advanced materials as I mentioned in 'twenty to 'twenty, two 2022 was an outstanding year.

20% plus growth so our comps year on year are tough.

The margin rates are drill.

Driven by some of the.

Lawrence shutdown, which we had announced earlier so that certainly put pressure on our cost positions.

And then some contraction in electronic materials business, which is depressing our margin, but overall I'd say its still highest margin business in the PMT portfolio and as mentioned before the potential capacity expansion coming in years to come this business is poised.

Performed very well in our portfolio, yes, Nicole if you think about this year.

We're literally going to progress each and every quarter sequentially a little bit better.

We picked up about 110 basis points sequentially from <unk> to <unk>, we expect.

Some additional sequential improvement in Q3, and then again in Q4.

So I think as we get to the end of the year. It will look like modest year over year for the full year, but it's going to be a nice.

Sequential step up quarter to quarter to quarter.

Thanks, guys.

Welcome here.

I think we have time for one more question.

Next question comes from the line of Andrew Kaplowitz with Citigroup.

Good morning, everyone.

Hey, Andrew.

And then could you talk about the stepped up level of acquisition you did in the quarter would you expect that kind of activity to continue over the next few quarters have you changed any of your methods for assessing potential acquisitions I think given the Investor day, you probably didn't but could you talk about the pipeline of opportunities going forward.

Look Andrew the pipeline remains extremely strong we are actively working more outbound.

Activities in M&A.

We remain very optimistic if we can get the deals done at the right price because bumping the nominal compromises our deal metrics, we want to stay disciplined to create shareholder value, but at the same time, our number of opportunities in the play are at the much higher elevated level compared to this time in the past so and if you want to add any comment.

In.

From your perspective, yes, I would just add in the pipeline is growing its rich we feel good as a strategic acquirer, we maintain the view that it's a hospitable environment first strategic acquirers, while the private equity community still.

Is having a harder time financing so it's a good time for us to be a buyer and we expect that environment to continue into 2024 and beyond thank you.

Thank you.

Thank you I'd now like to turn the call back over to them I'll Kapoor for closing remarks.

Thank you our value creation framework is working we are deploying our rigorous operating playbook to navigate near term uncertainty Honeywell remains well positioned to outperform in any environment as we capitalized on recovering end markets combined with solid operational execution. Thank you all our Honeywell colleagues, who continue to do.

<unk> differentiated performance for all of our customers and shareholders. Thank you for listening and please stay safe and healthy.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Thank you for standing by and welcome to the Honeywell's second quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Please be advised that today's call is being recorded.

I would now like to hand, the call over to Sean make them Vice President of Investor Relations. Please go ahead.

Thank you Liz and.

Good morning, and welcome to Honeywell's second quarter 2023 earnings Conference call.

On the call with me today are Chief Executive Officer of Venmo Kapoor, Senior Vice President and Chief Financial Officer, Greg Lewis, and senior Vice President and General Counsel and Matt.

Our discussion today includes forward looking statements that are based on our best view of the world and of our businesses as we see them today.

And are subject to risks and uncertainties, including the ones described in our SEC filings.

And good morning, everyone. Let's begin on slide two the second quarter was another strong one for Honeywell, we met or exceeded our commitments and our rigorous operating principles enable us to navigate a challenging backdrop.

Grew our adjusted earnings per share of 6% year over year to $2 and 23 are up 13%, excluding a <unk> <unk> noncash pension headwind.

Second quarter organic sales were up 3% year over year led by double digit growth in commercial aerospace process solutions and <unk>, our aerospace business continues to perform at very high level.

The second part of the backlog grew to a new record.

$5 billion up 4% year over year, and 1% sequentially due to strengthen arrow BMT in HPT similar to last quarter.

Orders continue to grow double digit organically aero or other segment unfavorable comparison to last year's peak supply chain disruption led to a single digit decline in orders for all of Honeywell, We remain confident in our 2023 outlook as the covering end markets and operational excellence continue to lever the leant results despite macroeconomic answer.

<unk>.

Our segment margin expanded 150 basis point year over year exceeding the high end of our guidance range by 20 basis points led by expansion in SBS SPD and Arrow. Our continued focus on commercial excellence in greater gains from productivity enabled us to remain ahead of our inflation curve free.

We deployed $2 1 billion through dividends, M&A and share repurchases and growth capex, including Opportunistically repurchasing two 4 million shares throughout the quarter, reducing our weighted average share count of $370 million I'm pleased with the progress we made this quarter on our portfolio shaping priorities, we invested in multiple new.

Disease, utilizing our robust M&A playbook, including completing the acquisition of compressor control Corporation for approximately $700 million.

I am encouraged by the trends, we are seeing in our long cycle Aero and energy vertical and remain confident in our position to outperform.

Let's turn to slide three to discuss the important leadership announcement.

<unk> ended pandemic disruptions by growing the top line expanding margins by about 200 basis points because of Mike's passion and dedication of our business. He helped set up Honeywell aerospace to be even more successful in the years ago. We're excited about the next phase of growth and Honeywell the Aero business under Jim Korea dealership.

Partner to have someone with his level of experience and are ready to take the helm, a true Testament to honeywell's bench strength and focus on succession planning Jim has been with Honeywell for Arrow for 17 years and prior to his current position. He has held multiple roles of increasing responsibility across function and geography, most recently as president of our <unk>.

Electronic solutions business.

The medium term set up our arrow is the strongest it has ever been.

<unk> continues to be strong, including wide body upside, which is now underway, we are diverse and optimized platform exposure, particularly in business aviation in fact over the last few months alone. We have one $3 billion in business to provide Oems and airlines with our engines. These in brakes abuse and flight management system, along with the associated aftermarket service.

In addition supply in a gradually improving and we have returned to growth in defense and space. This momentum points to a robust multiyear directory for the largest businesses in Honeywell portfolio.

Let's turn to slide four to discuss our recent corporate development activity.

Last month, we closed our acquisition of CCC, a leading provider of turbo machinery control and optimization solution deploying approximately $700 million dollars, an all cash transaction.

<unk> technologies, including control hardware software and services.

Bolster honeywell's high growth sustainability, and Digitization portfolio with new carbon capture control solution PTC integrate seamlessly into our process control across the solutions business and provide meaningful revenue synergy potential with Honeywell Forge, we're excited to extend honeywell's leadership in automation and help customers accelerate the energy transition with this.

With the completion of this acquisition.

We also acquired <unk> and Israel based company that delivered operational technology, our odie and internet of things or Iot cyber security solutions for monitoring large scale network scatter fence brings proven technologies and asset discovery threat detection and security governance, which are key to industrial.

And critical infrastructure cyber security program into our SDE portfolio. The Ot cyber security industrial is expected to grow at a greater than $10 billion in next several years, and thus get up and portfolio per seamlessly with Honeywell cyber security business, providing an end to end enterprise solution that helps customers enhance enterprises resilience.

In addition, we signed an agreement with <unk> to acquire heads.

Heads up display or hard asset bolstering honeywell's comprehensive end to end avionics and safety offering will partner with software development Center in the heart product line, which enables pilots increase situational awareness. So let's quickly at night are in difficult weather condition importantly, the heart will be integrated into Honeywell and term.

Our revolutionary integrated flight deck with an intuitive user interface and highly scalable design. In addition to honeywell's Primus epic flight deck and retrofit solutions.

Over to Greg on slide five to discuss our second quarter results in more detail as less provide our views on guidance.

Thank you Bill and good morning, everyone.

We delivered another strong quarter in a very challenging operating environment.

Second quarter sales grew 3% organically led by double digit organic sales growth in commercial aerospace process solutions, and <unk>, where demand strength continues to support Honeywell short term and long term outlook PMT grow grew at a robust 7% pace after four consecutive quarters of double digit growth.

Our long cycle warehouse automation business is around trough levels as expected, which led to overall volume decline of 1% for the quarter.

However, excluding Sps volumes were up 5% across the remainder of the portfolio.

Our backlog remains at a record level ending the second quarter at $35 billion up 4% year over year, driven by strength in Aero and PMT <unk>.

Three out of four segments expanded margins in the quarter each by more than 100 basis points with Sps, leading the way as expected.

On cash we generated $1 1 billion of free cash flow up 34% year over year.

Spend a few minutes on our second quarter performance by business.

Aerospace sales for the second quarter were up 16% organically led by over 20% growth in commercial aviation. This.

Commercial original equipment sales also increased double digits driven by increased build rates.

Defense and space grew for the second consecutive quarter as we were able to execute on our strong backlog and increase our sales volumes.

The Aero supply chain continue to make progressive improvement is better material availability enabled 20% year over year growth in original equipment and spare shipments again in Q2.

Historically high past due backlog increased again in the quarter as orders growth outpaced our backlog burn down.

Margin aerospace expanded 120 basis points year over year to 27, 7% due to commercial excellence and higher volume leverage partially offset by cost inflation.

Performance materials and technologies sales grew 7% organically in the second quarter with double digit growth for the third consecutive quarter and both HTS and <unk>.

Growth and over 30% sales growth.

In advanced materials continued demand for flooring products portfolio was offset by expected macro driven softness in our electronics and chemicals business, leading to flat organic growth despite challenging year over year comps.

Segment margin contracted 60 basis points to 21, 7% as favorable price cost was more than offset by challenges in advanced materials, including lower volumes and the previously communicated disruption in one of our plants.

Safety and productivity solutions sales decreased 21% organically in the quarter.

Sensing and safety technologies was flattish in the quarter with ongoing strength in our industrial sensing product portfolio offset by modestly lower volumes in safety.

Turning to our product portfolio, we continue to see sequential improvements in the supply chain environment.

And were burning down our past due backlog as expected.

25, 5%.

Overall this was a great result for Honeywell, our operational efforts enabled us to grow second quarter GAAP earnings per share, 21% year over year to $2 22.

And adjusted earnings per share, 6% year over year to $2 23.

Despite a <unk> 15 headwind from lower noncash income from our overfunded pension.

From a year over year perspective segment profit drove 21 21 sense of the improvement in earnings the main driver of our EPS growth.

A lower adjusted effective tax rate contributed <unk> <unk> of improvement and reduced share count added an additional five.

Excluding the pension headwind below the line in other created a <unk> <unk>.

Year over year headwind due to higher net interest expense for a total EPS, excluding the pension impact of $2 38.

Up 13% year over year.

Bridge for adjusted EPS from <unk> 22 to <unk> 23 can be found in the appendix of this presentation.

Finally, as Bill mentioned earlier, we continue to leverage our strong balance sheet to <unk> $2 1 billion in the quarter, bringing the year to date total to $3 $7 billion as we execute on our capital deployment strategy with meaningful portfolio updates.

While a number of challenges persist in the current environment, our rigorous operating principles enable us to increase our guided metrics for the full year.

Our demand profile remains robust with record backlog levels, particularly in aerospace and PMT and stabilized sequential short cycle order rates across much of the portfolio.

For our Q3 sales guidance, we expect to be in the range of $9 one to $9 3 billion.

Up 1% to 4% on organic basis.

We now expect full year sales of $36 seven at $37 3 billion, which.

And market and expect a sequential sales growth throughout the second half supported by ongoing sequential factory output increases and strong orders.

Commercial aftermarket, particularly in air Transport should league Rosemary Arrow portfolio as flight hours continues to recover and we see further recovery and the wide body market from increased international travel on.

The commercial original equipment side, we expect to build great strength to drive volume progression in the second half.

In defense and space, we expect sequential and year over year growth in the second half and continued to work through a robust backlog.

As a result, we expect defense and space to grow at a mid single digit rate for the full year 2023.

We continue to expect modest sequential improvement in the aerospace supply chain as growing commitments from our suppliers year today, coupled with a second consecutive quarter of 20 per cent output increases give us continued confidence in our outlook.

Given these factors, we still expect arrow organic sales growth and the low double digit range.

For segment margin, we still expect her to be flattish for the year as we see modest risk mixed pressure within our own business offsetting overall volume leverage.

And performance materials and technologies encouraging fundamentals persist across our end markets driving favorable growth.

For the third quarter, we expect sales to increase year over year and sequentially, coupled with a seasonally strong fourth quarter.

Growth will be led by smart energy projects and lifecycle solutions and services within process solution as the strength. These businesses saw it in the first half continues into the second half.

And you will P. R growth outlook for the ear are supported by robots demand for petrochemical and refining catalog.

The sustainability technology solutions business within U O P will also provide growth as we capitalize on legislation vaccinated.

For advanced materials, we see ongoing demand for point products combined with improvements in electronic materials supportive of sequential growth in the first half.

Despite more challenging comps in the second half these favorable market conditions and are strong execution give us confidence to upgrade our full year sales growth expectations for P. M T. The high single digits compared to mid single digits last quarter.

For a second margin, we expect sequential improvement throughout the year, including robots expansion in the fourth quarter, resulting in modest you over your improvement for overall 2023.

Looking ahead for safety and productivity solutions are outlook continues to be impacted by the decline in capex for new warehouse capacity.

However, our short cycle businesses appear to be Stabilising, as we awaited demand acceleration in the coming quarters for.

For the third quarter, we expect this to lead to organic sales decline similar to Q2.

However, we anticipate another quarter of strong growth in the aftermarket services portion of our teller grated business and sensing a safety technologies should return to growth.

With the S. P S portfolio bounce along the bottom of the cycle. We now expect full year sales to be down low double digits in 2023. However.

However, second margin continues to be a bright spot for S. P. S. As we implement productivity actions and drive operational improvements and we still expect strong margin expansion for the full year.

And building technologies, the macroeconomic environment remains challenging so our team continues to execute well.

And burned down our past few backlog.

For the third quarter, we expect sales to be relatively flat year over year as we continue to see more challenging comps and the timing of short cycle recovery remains uncertain.

For the year, we still expect sales and our one cycle building solutions business to outgrow the more short cycle building products.

Our institutional vertical such as airports in education will remain strong as we continue to see Emily said country.

The business is well line to energy efficiency and sustainability Megatrends given these dynamics, we still expect HPT sales for the year several low single digits organically and we see potential for growth acceleration as we exit 23.

For segment margins, we now expect HPT to lead Honeywell margin expansion as a result of strong inflation management and productivity actions.

Turning to our other core guided metrics net below the line impact, which is a difference between segment profit and income before tax is expected to be in the range of negative 120 million to negative $170 million in the third quarter and negative $500 million to negative $625 million for the full year.

This guy this includes a range of repositioning between 40 and $85 million in the quarter and 225 $325 million for the year as we continued to fun attractive restructuring projects and properly position Honeywell for the future.

We expect the adjusted effective tax rate to be roughly 23% in the third quarter two point higher than our pull your guide of 21% at two points higher than <unk>, which is unchanged from our previous guidance.

That apply the lower four Q right to the timing of discrete items and.

Importantly, this higher tax rate in Q3 reflects in approximately six cent headwinds EPS, oh be offset by a commensurate tailwind four Q, leaving the full year unchanged.

We expect average share count to be around 669 million shares in Q3, and 670 million shares for the full year.

As a result of these inputs are adjusted EPS guidance range is now between $2.15 to $2.25 for the third quarter, which would be down 4% flat year over year.

Excluding the pension headwinds third quarter EPS growth would be up to two up 6%.

For full year EPS, we are increasing the mid point of our guys upgrading the low end of the range by five cents for a new range of $9.05 to $9.25 up 3% to 6%, reflecting our continued confidence at 2023 will be a solid road here for Honeywell, despite the year over year pension headwinds.

Excluding these headwinds EPS growth would be 10% to 12% this year.

After a strong first half and continued progress on inventory and receivables management, we expect to meet our original free cash flow guidance, a $3.9 billion to $4.3 billion in 2023, or 5.1 $5.5 billion, excluding the net impact of settlements.

So to wrap up.

Our original thesis for twenty-three remains intact.

Robust backlog of $30 billion underpins our strike our growth.

Though the timing of the short cycle recovery remains uncertain.

We're encouraged by the strength of our portfolio and continue to execute on a rigorous operating playbook through a challenging backdrop to deliver outstanding results.

Now, let's turn to slide seven I'll hand, the call back to them all for some longterm comments. Thank you Greg I'd like to take a minute to zoom out from the carpet as though to emphasize a longterm journey unable as long as you can see from the sharp on supply Honeywell has made tremendous progress whether it is accelerating are gonna grow up expanding gross margins in second margin of going for.

Free cash flow, we've come a long way, but we are not give us a gun and you have identified the critical liver that will enable us to reach even higher level upper face financial performance freedom in committed to our long term growth as would've come that'd be disconcerting automated Mister de enduring 2023 gardens.

Rosie align with this framework, we carefully track progression towards achieving our targets and remain confident in our ability to excavate growth achieved 25% segment margin and expand Grosse Martin into above 40 per cent and free cash flow margins through <unk> and beyond.

As I said in May my priorities at the E. O include excavating organic growth and and hunting or innovation playbook growing our sustainability and it started this capability and maintaining our leadership position in high growth regions. I also plan to have all the extra rating operating system to drive incremental value so business model optimization audits.

Suddenly Honeywell has undergone substantial <unk> transformation. The result of it you can see in our top line and bottom line improvements over the last decade or plan to further optimize a portfolio through strategic after deployment and reduce exposure to non core area.

Three D. The note this quarter demonstrated the strength, how 'bout M&A pipeline and arguments deployed capital I.

I'm excited to lead the change for this next phase of transformation for Honeywell and I'm confident in our ability to deliver superior to <unk>, our shareholders as we deploy our global design model across our portfolio uncovering substantial opportunities to capture value whether it is expanding margins driving incremental sales growth are generating more cash.

<unk> and we will continue to update you as the therefore prostate increasingly and to enhance financial performance Ah, let's turn into slight ache into closing part before we move into Q&A.

Honeywell executed very well and what remains of a dynamic upgrading environment will continue to effectively managed to ongoing external factors quite delivering on a commitment by the line on our value creation framework. The macroeconomy remains geology and the timing of a sharp cycle exploration is uncertain, but with ongoing trend in our two biggest and.

Markets Aerospace and energy combined with the upgrading rigor you have come to expect from Honeybear, we're confident in our ability to better near term challenges and meet our performance targets. Thank you all are up to our Honeywell colleagues to continue to enable us to outperform in any environment, but that sure let's move to Q&A.

Thank you very much.

And then we'll Gregory and are now available to answer your questions. We ask you. Please be mindful of others in the queue I only asking one question.

Liz please over the line for Q&A.

Our first question comes from the line of Andrew Open with Bank of America.

Yeah can you hear me yeah.

Yeah can you hear me.

Yeah. Good morning, Andrew Yeah. Good morning, I, just a question on advanced materials. So you know it's it's a good return business when should we expect those business.

To return to grow can also do you guys do to add capacity.

Grow this business how strong the structure <unk>. Thank you.

Yeah, Thanks, Andrew so.

The key is the comps of advanced materials to 2022, we grew more than 20 per cent last year. So <unk>.

Combine that with some of the weaknesses B C in electronic materials, sorry V R. Having a moderate here for the bus Matilda. This year, we do expect markets are done better during second half and more important to you in 2024 to your question on capacity expansion, we remain very excited.

In fact in the next draft cycle, we expect.

Capital investment and <unk> and please our capacity for advanced material for some updates this thing offering and potentially some new offering so what I'll be the main very bullish on advanced <unk> portfolio.

Thank you.

Our next question comes from the line, Steve <unk>, which J P. Morgan.

Hey, good morning, guys.

<unk> savings.

The underline.

I I guess on the positive side that very strong margin in the aerospace.

Tough to kind of like cut through you know the incentives was there anything unusual they're like where the incentives.

We just under the quarterly timing of those I mean, I'm I'm kind of getting to an underlying incremental of around like 40 per cent for that business. If we adjust for somebody Zoe incentives can you just maybe talk about some of the moving parts, there and whether I'm roughly right on the map.

Yeah. So the only incentives <unk>, we we haven't disclosed the exact amount of them, but the first half is going to be a little lighter than the second half in terms of those Zoe incentive. So that's why he is you know when we talked about the whole year margins still being flattish, even though we had a pretty strong Q too I think that that's that's really what's.

Going on.

In that regard.

[noise], Okay, and then just one last one on H B T.

You know I that that business, just perhaps should be growing better in this environment, Yeah, I I'd, even even building solutions was kind of like you know a week. So there's really not a function of these that's really can't be a function of destocking. So maybe what what are the moving parts there and why are you guys not keeping up with.

You know the other non <unk> players out there. Thanks.

Yeah. So Steve B, we are conscious of our Martin reached the niche P D and make careful selection of projects, which have adequate margins and strong service David.

So we I think given the choice to be made but you can see impact of that and margin expansion of building technology and that comes to a certain degree at the organic growth alright. So it's a choice to be made and we wanted to deliver bulletin ideal work, but we we remain biased more towards <unk> and <unk>.

Martin expansion versus a top input.

Great. Thanks, a lot.

Our next question comes from the line she like Hailu with Jeffries.

And gain some thank you I wanted to ask and everything.

<unk> that's perfect line, if that's okay Uhm last quarter you raised your aerospace Sky.

That checks and I think the bulk of that race had comes on that side with <unk> uhm, but there's been a bunch of Ms and ph says this corner with the Max, especially going at 38 per month yesterday, and then of course engine issues cut it.

<unk> first experience issue and are passed on the eighth day 20, So Kenneth How're you were thinking that the pets and takes for aerospace ele.

Get into the second half following 15 per cent correct. The first task.

Shoot out of our deliveries for the year pretty well aligned with all always both on a on a transport as well as on the business business <unk> site. We have are committed to all <unk>. Thank you for an awkward based upon those commit right. So I can't comment on their their commitments.

Their customers, but we are pretty well Ah line arguments to them and our revenue growth in a volume growth is linked to that.

And it's gonna be pretty strong I mean, we expect a momentum and aerospace not to change in 2023 or for that matter. Even in 2024 are backlog is extremely strong and our supply chain continues to improve every quarter and of the recent events have not changed their expectations of us to the stages.

Alright, Thank you very much.

Our next question comes from the line of Julian Mitchell with Barclays.

Hi, Good morning, maybe just my question would be on S. P. S. Just wanted to try and understand uhm.

How the the sort of orders and backlogs air is moving I can imagine, it's not moving well and and that's why the revenue guide has come down.

But any sign of points on the the the autism backlogs and I suppose in the conviction level around warehouse accelerating next year, if that's starting to get sort of tested now because of the ongoing backlog pressure.

And you know everything about the shortest cycle businesses, you know house of a do you think the the inventory depletion needs in in that business and what does that mean for exit rates.

S. P S from this year on the top line.

Sure. So I would say if we take I G. S first.

You know our order rates are down meaningfully as we've just as we've talked about is at but when we look at the overall pipeline, we're starting to see the pipeline.

<unk>, a little bit better levels that may not occur.

Immediately, but we see if there is a chance that we've made me growing again in 2024 that will really be dictated by how the backhouse orders really really come in but we are starting to see a little bit more strength in the pipeline, which I think is a positive as it relates to the short cycle businesses, what we talked about it it's it's down year on year.

<unk> because the first half of the year was particularly high uhm, but we're seeing stabilization the last two to three quarters.

Have been you know either going up sequentially, you're saying roughly flat. So I think we've reached this stabilization point on a short cycle and you know as and when those some of those markets begin to recover you know then we'll see some gross so as we think about Sps overall I would expect it's going to grow in 2020.

Four it's probably not going to be at the high end of our of our growth rate for R. S. P. G 's, but that's how we see it with the data that's coming through right now.

Thanks very much.

Okay.

Our next question comes from Scott Davis with me on this research.

Hey, good good morning, everybody and welcome them all.

Some a couple of small things here one I mean, you guys are spending a couple of hundred million a year on quantum.

Well do you have a kind of an evolve vision of.

Of of.

Where this business goes and.

How you can monetize it when you can monetize or if it is it can.

Cash flow bleed go down a little bit over time or something.

Some.

Kind of.

Positive N game that you you see here.

Scott via publicly stated that we would like to monetize value of the quantum <unk> and continuum and as the markets are more ready for IPO, which probably.

Here for Awhile. We are we are getting prepared for that so we are doing everything towards that end game in this tragedy hasn't changed to create more value for our shareholders at appropriate time through to an ideal for that business.

Okay fair enough and just quickly.

Just following up on Steve's question, I mean, I would've thought forged for buildings, where they're giving you a little bit of a lift a given the timing of when you roll that out.

I understand project selectivity, but I would've thought that would've given me a little bit more of a tailwind into the quarters or timing issues, there and that those orders haven't really kicked in yet.

And we'll see that later in the year or hers or other competitive dynamics.

Look I mean, the our definitely seen better bookings for for spot buildings, but one fact I would like to state is that business runs on SaaS model. So even a large booking the revenue recognition process is different from traditional perpetual license base model. So the revenue accretion that's gonna.

Spread over multiple years for that and your phone shows they make that decision because rather than showing short term than we are more <unk> towards more record any revenue model there as I started before so that's why you'll see less starting back, but we are scoring veins in forceful buildings and I continue to remain.

Very bullish on that segment.

Okay Fair enough special lock them all.

Thank you Scott.

Our next question comes from Nigel Cope with Wolf research.

Thanks, Good morning kind of the question.

Just wanted to to maybe just put a final points on Julianne. This point a question on a S. P S.

So obviously.

Obviously encouraging signs of a bottoming process here, but it does feel like the guidance and beds.

Flat too, maybe maybe flash plus or minus growth in for a call just to sort of make sure. That's the case and you'll get a lesser than that maybe on X P. T. Just this breakdown geographically what you're seeing versus you know North America, Europe , and China and whether.

Does any channels dynamics here that we should think about it as well.

So I'll start with a speed data integrate for respond to ask this question I think it should be from geography perspective, we Europe continues to be you know it'd be one kind of better better outcome I think that's a bit of a drag at this point the strength.

As in high growth regions, we see strength in Middle East, India, and China in buildings and North America is more off I would say sequences no change within the business. So that's kind of our dynamic on the channel site I mean, the channel demand will be determined by the end market demand. So.

<unk>, it's a very sharp cycle business. So we don't see any dynamic self channels, having less or more inventory at the in in the end H B D business.

Maybe the regular respond to spss, yeah. So Sps, it's it's likely to be down in the fourth quarter. So I would say, it's not gonna be flattish, it's gonna be probably more like down I think three Q and <unk>, we're gonna look pretty pretty similar to one another and then we'll get a little bit of a normal seasonal bump in the fourth quarter.

So that's that's the way I would think about the progression for Sps topline overall.

Great. Thanks.

Yep. Thank you.

Our next question comes from the line of Jeffrey Sprague with vertical research partners.

Hey, Thank you good morning, everyone.

I was gonna I was gonna ask a near term question, but they will giving your response about margins in H B G. I wonder if we could maybe just zoom out and just kind of think philosophically about kind of the trade off between growth and margins right.

You know we have seen situations in the past where companies with high margins get like a for lack of a better term a little bit trapped in wanting to maintain or just throw the margins ride and growth ends up suffering as a result so.

So could you and your address is to some degree obviously when we're together in New York, but could you maybe elaborate a little bit more on your fill of philosophy.

Relatives of managing those two metrics.

And how you make sure you don't hinder growth.

Oh really focusing on margins.

If our business model and H P. D is combination of serving the market both to direct and channel. So we have to make a choice what what business. We wanted to serve direct and bought business you wanted to sell through channels and indirect we want to pick projects, which have a strong plus body content and after market.

Services, so given that algorithm, we make choices with that truth and I. You know we are sensitive to drive top line growth, but we are not going to compromise to book projects, which are lower margins and show a shiny top line growth without any margin expansion that has been our principles and the reason the.

Are quite determined on the principal is it takes one bad project would deteriorate into our business and a portfolio. So we we eat them in you know committed to that model and.

I'm, not suggesting that will be the nasty growth and billing technologies I do believe that as energy efficiency becomes more prominent across the board.

Our energy business here will do well.

And we will deliver more growth in the project side of the house too but that remains <unk>.

Yeah. Thank you I I sort of meant the question on a total Honeywell basis also though.

Okay.

On total Honeywell basis, I mean organic growth on the top end of a range is my biggest priority I stated that an investor day, if something I want to make my own contribution in my tenure is how we grew up at a higher rate now we are having favorable macros and two of our biggest spg's Bolton Arrow N B M. D. So on the strength of that and if a couple of advil.

Right New products I see no reason that we should be delivering our growth in upper end of a hold of someone that go with them and that's what I work on every day and continue to drive our new product execution, and then M&A accelerating our all of our growth algorithm you know that that remains my documents.

Thank you for that perspective.

Our next question comes from the line of Josh Poker Winski with Morgan Stanley .

Hi, good morning.

Adjustments.

Just wanted to maybe he's flip around the HPT question from the other perspective on T. M. T. I mean, you're seeing some of the bulk chemical guys go through Destocking, you know I think.

Traditional oil spending has been okay, but maybe not as strong as what you guys are seeing seeing.

Seeing in some of the other process guys were saying I guess, just how much are we getting away from you know kind of traditional oil versus either some of these mega projects or energy transition like is this business really transcending.

It's <unk> you know even kind of 567 years ago.

Sure. So Joshua if I look at each of the three segments.

Automation business process solution has.

Increasingly reduce its dependence on oil and gas it has diversified very well in other end markets energy storage you know <unk>.

He got factory metals and mining the cetera. So we can see that in the growth rate of revenue generation for process solution and we demand very bullish on that business for 2023 and 2024.

You'll be segment of our strategy has been to grow our business into sustainable technologies renewable fuels clean hydrogen carbon capture and D. C pretty strong bookings in our sustainable technologies business, just as a data point nausea have license 40 renewable.

<unk> projects to Q3 and on a path to be 50 by I would say Q1 of 2024, which we I mentioned in a couple of earlier investor meetings.

So you won't be business is becoming also less linked to traditional defining petrochemicals, but fast moving towards renewable technology and then advanced materials. Our business is very specialty chemicals solstice broad product line continues to grow V C.

Some pressure in electronic materials, which is affected in our overall growth rate, but we do expect that to turn back into normalcy in 2024. So overall the extremely positive outcome and bullish out you know view on B M. P. Four second half of 2023 and 2024.

The booking Reds remained strong backlog is very strong new innovation pipeline is very very strong. So all good news there.

Understood.

Our next question comes from Joe Ritchie with Goldman Sachs.

Thanks, Good morning, guys.

Johnny.

<unk> two quick ones I guess, I guess with an S. P S.

We've talked a little bit about the group dynamics for the 30 year I'm just curious how the reduction in the short cycle businesses is perhaps impacting margins for the second half of the year and then the other question was really around the defense business. It's nice to see the influx in there I'm just curious at what point do you really start to see a and accelerate.

<unk> and defense growth just given what you know about your production schedules.

So.

Sure.

The way we have guided it we are sharp cycle orders have stabilized and were you expecting similar trend over the next few months and our guide is based upon that we are expecting stronger performance in warehouse automation orders because the pipeline has become better but that would really strengthen our 2024 position.

Given the long cycle nature of the business and that's our forecast right now and will continue to update you if things change and I would just say Joe we have the teams have.

Re size their costs envelope to the current reality and as and when the short cycle businesses. Reaccelerate. You know you can imagine those are very high margin at the D. C M level and that will create a lot of acceleration from a margin right standpoint. So you have the margin race that we're gonna be printing.

Now, we're gonna be within a tighter band until we see that acceleration come but their business is poised for it and we will see is that gonna be Q4 or is it going to be key one.

<unk> to be seen but we've sides of the business properly and there's going to be a fairly substantial leverage opportunities you know when that acceleration happens.

And then he had a question on defense and we can see.

Celebration in demand there yep yep, so in defense B R bookings domain very very strong.

So we are working our supply chain constraints, there and we do expect our delivery performance to be better in the second half was this blister. So we had no single digits in the first half of the year. We expect you to finish more in the mid single digits for the defense business.

And from here, though the past probably the the the cops were small increments are trying to create.

Meaningful growth from a percentage basis. So it should be all all accretive from this point on and I'll say I should also mention V. C. You know longer term for defense business pretty strong demand outside of the United States as you can all imagine the recent what any green as created more.

Tight budgets by different garments and it clearly see those signals coming to us in terms of demand from NATO countries. Other friendly countries and that will play out even more stronger for the defense business in the <unk>.

Great. Thank you.

Okay.

Our next question comes from the line of theme Dre with RBC capital markets.

Thank you good morning, everyone.

Good evening I, just want a circle back on Sps, if we could on warehouse automation. What are you seeing in the pipeline that suggests a bottoming and then Ah related question is can you give us any sense of when you'll hit this targeted critical mass of installations that will drive that flywheel.

All of attractive aftermarket how close are you to that.

Kind of time frame.

So the pipeline is growing very nicely and that gives us a bit more optimism on better performance for the business and that they can help of the year and the part of the pipeline growth is driven by much more diversified and <unk>. So we are not limited to e-commerce via diversified into retail into fashion.

The logistics so that by the coverage is giving us a better pipeline and you know B B R. We are anticipating good progress in the orders in the second half of the year on the after market <unk> I would say it's been working now we are growing double digits in off the market in 2020.

Three and we'll cross that off the market business more than half a billion dollars in bookings and pretty much nearly the same revenue for the year and we don't expect a momentum to stop that's our strength Honeywell has strong playbook on how to drive after market services and that's the value will continue to add into the business.

And.

Our our you know strengthen that business in 2024, therefore, we anticipate you know.

Low to moderate growth, but very strong margin expansion, because we continue to build more business with more first party content and very strong after market and be a couple of the two together, we do expect pretty healthy margin grilled in a warehouse automation business in 2024, yeah. So I mean that that business was around $200 million of the total and 18 by 2022 a double.

Roughly 400 million Zemel said this year is going to be over $500 million after market. So so that aftermarket is happening.

Great. Thank you.

Okay.

Our next question comes from the line of Nicole to place, which Deutsche Bank.

Yeah. Thanks, guys good morning.

Good morning.

Just maybe I'm P. M. T. If you guys could talk a little bit more about the order of activity you saw with an L. P. N H P. As in a corner and then on the margins. He talks about the challenges and advanced materials I guess, how does that kind of feeds through the second half of the year. Thank you.

The order is order them in pretty strong first half or you will be an S. B S. N b expect to finish your strong in both the businesses I would say high single digit artist growth in both European S. P S and explain the rationale of it.

And that's B S. It's more diversified and markets and our strength of after market business. There and then you'll be it is diversifying to renewable technologies and as they become more and more important part of our portfolio. It continues to grow the business and you'll be the catalyst business continues or abnormal strength in both are finding it better.

Chemical catalyst advanced materials as I mentioned in 22, 22, 2022 wasn't outstanding year 20 per cent plus growth. So our comps you're on your are tough.

The margin rates are you know driven by some of the.

Blonde shutdown, which we had announced earlier so that's certainly put pressure on on a cough physicians and then some contraction electronic materials business, which is depressing our margins.

Let's say, it's still highest margin business and the BNP portfolio and as mentioned before with the potential capacity expansion coming in years to come this business advice supposedly you know perform very well in a portfolio.

Nicole what do you think about this year.

Literally gonna progress, each and every quarter sequentially, a little bit better.

We picked up about 110 basis points sequentially from one <unk>. We expect you know some additional sequential improvement in Q3, and then again in queue for so I.

As as we get to the end of the year, it'll look like modest year over year for the full year, but it's gonna be a nice sequential step up quarter to quarter to quarter.

Thanks, guys.

Welcome here.

Time for one more question.

This question comes from the line of Andrew Caproate with Citigroup.

Good morning, everyone.

A N.

<unk> could you talk about the stepped up level of acquisition you didn't quit or would you expect that kind of activity to continue over the next few quarters that'd be changed and your methods for assessing potential acquisitions. I think you know, giving me a better date, you probably didn't but could you talk about the pipeline of opportunities going forward.

The <unk> the pipeline remains extremely strong we are actively working more outbound activities and M&A and remained very optimistic if we can get the deals done at the right price because one thing that I'm gonna compromise is our deal metrics, we want to stay disciplined to create shareholder value.

But at the same time or number of opportunities in the play are at a much higher elevated level compared to you know at this time in the past so and if you want to add any come in you know from your perspective, Yeah. I would just add the pipeline is growing it's rich we feel good as a strategic acquirer we we.

Maintain the view that it's a hospitable environment for strategic acquirers, while the private equity community still you know it is having a harder time financing. So it's a good time for us to be a buyer and we expect that environment to continue into 2024 and beyond thank you.

Thank you.

Thank you and I would like to turn the call back over to them <unk> for closing remarks.

Thank you are value creation framework is working we are deploying a rigorous operating playbook to navigate near term uncertainty Honeywell remains well positioned to outperform in any environment as we capitalize on recovering and market combined with solid operation on execution. Thank you all are Honeywell colleagues to continue to drive.

Differentiated performance for all of our customers and shareholders. Thank you for listening and please stay safe and healthy.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2023 Honeywell International Inc Earnings Call

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