Q2 2025 Honeywell International Inc Earnings Call
Thank you for standing by and welcome to the Honeywell second quarter, 2025 earnings conference call.
At this time, all participants are on 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.
Thank you. Good morning and welcome to Honeywell second quarter 2025 earnings conference call.
On the call with me today are chairman and chief executive officer and will Kapoor and Senior vice president, and Chief Financial Officer Mike stepniak. This webcast and the presentation materials including non-gaap, reconciliations are available on our investor relations website from time to time, we post new information that may be of interest or material to our investors. On this website, our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and our 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 on full year 2025 as always, we'll leave time for your questions at the end.
Speaker Change: with that, I'll turn the call over to Chairman and CEO then look for
Thank you, Sean and good morning, everyone.
Speaker Change: Honey. Well, again delivered solid results in the second quarter meeting or exceeding. All our financial commitments in a time of significant, global economic change, our organic says, and orders growth, both accelerated during this quarter. As we are seeing the benefit of our consistent spending and execution on new product development, across our businesses. Given the strong first, our performance. We are raising sales and earnings guidance for the full year, while incorporating into our Outlook. All currently known tariffs and the uncertain business condition.
Speaker Change: Going forward. Are proactive multi-prong. Mitigation efforts, coordinating closely with suppliers and customers on productivity and pricing initiatives have been working as planned. And because of our systemic approach, we are in a position to deliver strong sales, profit and cash flow growth in 2025 as our business users have been solely focused on meeting and exceeding. Our financial commitment management and the board have been fulfilling our promise to transform our portfolio ahead of our upcoming separation to best position. Each of the future independent companies for Success throughout the comprehensive portfolio review. I initiated shortly after becoming CEO we have diligently analyzed how to further simplify and optimize Honeywell
Speaker Change: Earlier this month, we entered the final stage of this process announcing Our intention to pursue strategic alternative, for our productivity solution, and services, and warehouse and workflow solution businesses.
Speaker Change: The results of this Pursuit, whatever they may be, will clarify the Standalone automation companies. Go forward strategy and value propositions with many changes in flights are dedicated separation management office have kept us right on track to execute our spin-off transactions both on time and without commercial disruption.
Speaker Change: Let's not turn to slide 3 for further update, on our formation of 3 industry-leading, public companies.
Speaker Change: We continue to make great progress, along with the path to separate into 3 independent companies. Which we believe will maximize long-term value for all Honeywell stakeholders. As independent entities with clear alignment and purpose, increase organizational, agility, and customize Capital allocation priorities. Each will be better positioned to accelerate future growth opportunities.
Speaker Change: Given the pace of our progress. We cannot narrow the timing for the spin-offs of this Advanced Materials, to Honeywell shareholders, to the fourth quarter of this year.
Speaker Change: So social share will trade under the ticker s o LS solves on the NASDAQ Stock Exchange.
Speaker Change: If a few weeks prior to the spin, the sauces leadership team will host an investor day in New York. They will lay out in detail, the powerful investment case for this Innovative market leader in the secularly, growing adversity and markets that will carry on honeywell's Legacy of operational excellence.
Speaker Change: We hope you will join CEO, David swell and his team at this event.
Speaker Change: But also making great progress on Aerospace spin.
Speaker Change: Which is planned for the second half of next year. Last month, Aerospace president, Jim Courier and I presented an investor reception ahead of Paris Air Show.
Jim Courier: Jim highlighted arrows industry. Dating position as a mission critical supplier of systems across Aerospace verticals and platforms.
In addition, he provided insights into drivers for our strong growth profile. Underpinned by a broad Aerospace and defense upcycles which we enhanced with our powerful decoupled says initiative.
Jim Courier: Selectively deploy Capital towards acquisition, announcing 2, new deals in the past couple of months, we are also looking to recycle Capital as I discussed earlier by pursuing alternative for businesses that do not fit our future.
Jim Courier: In combination of these actions will drive value creation, as we await becoming separately publicly traded vehicles.
Jim Courier: If you turn to slide 4, I will discuss our recent portfolio announcement. In more detail. In June, we agreed to 1.8 billion pounds bolt on purchase of Johnson's mes Catalyst, technology business.
Jim Courier: We have long identified. Our UOP process technology business as a natural owner of this highly complimentary business, because it gives us additional capabilities in sustainable, methanol, sustainable aviation fuel hydrogen and ammonia to better serve our extensive customer base.
Jim Courier: It also brings attractive says from catalysts which fit very well with our existing offerings. The transaction is expected to close in the first half of 2026 and will Hass our growth and margin profile over time while providing a strong financial return.
Jim Courier: In early July, we also announced that technology tuck in acquisition of line, Tammer that enhances our building automation capability, in high growth, energy, storage and data center, and markets. While such smaller DS, do not offer get much investment attention in aggregate. They can accelerate our strategic road map and boost growth with a lower risk profile. We recently announced our intent to evaluate strategic alternatives for our PSS and Warehouse automation businesses.
Jim Courier: Just as we want to acquire businesses, such as Catalyst, Technologies and law enforcement or
Jim Courier: where we believe we are natural owner. We must also acknowledge when the time comes then we better owner of parts of our portfolio. We're looking to create a pure play automation company with a consistent business model and focus. And of end markets in which we have durable, competitive advantages, both PSS and integrated have strong customer bases, long, history of innovation and best-in-class operation. And we will evaluate options for them from a position of strength to avoid interfering, with the review process. We will hold for the updates until it's completed.
Jim Courier: I will now turn it over to Mike to provide more details on our excellent second quarter results.
Mike: Thank you, Bo, and good morning, everyone. Let's begin on slide 5, in the second quarter, we build upon a strong start to the year. As we again, exceeded our guidance for organic sales growth and adjusted earnings per share.
Mike: Our results demonstrate the resilience of our accelerator operating system to adapt to changes in the environment quickly and deliver on our financial commitments. The same time, we remain committed not to compromise on our investment in growth initiatives, as we are beginning to see evidence of our progress.
Mike: Second quarter sales, grew 5% organically, with 3 out of our 4, segments Above This level, the finance and space and Europe, that grow up with double digit performances.
Mike: segment profit, expanded 8% from the prior year in line with sales and segment margin finished nearly flat and within our guidance range
Mike: margin expansion in building Automation and Industrial Automation. And lower corporate costs were slightly more than offset by margin pressure in Aerospace Technologies and energy and sustainably solutions.
Mike: An increase in research and development, expense up, 60 basis points. As percentage of self from the previous year to 4.6%. Pushed down current period margin at the segment level, but will enhance future period growth.
Mike: Earnings per share in the second quarter was 2.45 cents. Per share up 4% from the prior year, while adjusted earnings per share was 2.75 per share up 10% year-over-year organic, and inorganic segment profit growth, as well as the lower tax rate more than offset headwinds from higher interest expense, and lower pension income. You can find a bridge for adjusted earnings per share from 2q 24 to 225 Independents of this presentation orders were 10.5 billion dollars. In the quarter up 6%, year-over-year excluding the effect of Acquisitions and the budgets led by strong double digit increase in Aerospace orders backlog. Grew 10% organically from the prior year to a new record of 36.6 billion.
Mike: Second quarter free cash flow was 1 billion dollars down roughly 100 million dollars from the previous year as stiff related causing inflation pushed up inventory levels and couple of projects spending expanded as planned.
Mike: To complete the activation of sundyne and over 2.4 billion dollars returned to shareholders roughly 1.7 billion dollars of share repurchases and 700 million dollars of dividends. We also allocated million dollars for a couple of projects. Now, let's turn to slide 6 to discuss our second quarter performance by segment.
Mike: I will give a high-level view of results and with additional commentary provided on the right hand side of the slide.
Mike: In the second quarter Aerospace, Technologies groups 6% organically highlighted by another strong quarter of our defense and space and Commercial. After market businesses segment, margin Contracting, 170 basis points to 25.5% as 11% output growth. Commercial excellence and productivity actions were more than offset by higher quality inflation and then impact of case acquisition
Mike: In Industrial Automation sales were above our guidance range coming in flat on an organic basis. Segment, margin expanded 20 basis points to 19.2% driven by productivity actions and Commercial Excellence, which more than compensated for cost pressures? In may, we completed the sale of the PPE business, which will be a creative to organic growth and margins in the second half of the year.
Mike: Building automation delivered, another quarter. That surpassed our expectations with sales increasing 8% organically from the previous year. Second quarter, margin expanded 90 basis points year-over-year led by volume leverage and full, quarter benefit from access Solutions, energy and sustainability, solution, sales, grew 6% organically in the second quarter. Exceeding, our expectations driven by double digit growth in EOP segment, margin contracted 110 basis points to 24.1% as volume leverage and benefit from the margin. Accretive energy Acquisitions were more than offset by impact from a customer settlement, as well as causing inflation.
Mike: Now, move to slide. 7 to discuss our third quarter and 4 year guidance.
Mike: our first half, outperformance has given us confidence to increase our outlook for the year, even, as we remain cautious regarding the logging effect on business, demand, from tariff announced in recent months,
Mike: Despite this our framework for the year remains larger and change, we're factoring in non terrorists, as they are written. Assuming any more atorium means at later? Revision to higher rates. Net of all of our mitigation options, keeping in close communication, with our customers and suppliers. We remain committed to fully offsetting the fact of these terrorists with a combination of productivity pricing and alternative sourcing as we balance protecting both margins and demand
Mike: We're raising the lower end of our full year. Organic sales growth guidance, range by 200 basis points. Factoring in our first half performance, and recent short cycle order Trends. We now project growth of 4% to 5% for the year for 3% to 4% when excluding the prior year impact from the Bombardier agreement per year to date results have exceeded previous expectations, while maintaining a pragmatic approach to the back half.
We have increasingly seen large energy projects and Catalyst spend, which can carry attractive incremental, margins in our European, and process solution, business pushed out into 2026, because of macroeconomic and legislative uncertainty.
Mike: All your cells are in a projected to 40.8 billion to 41.3 billion dollars driven primarily Higher by better organic growth Tailwinds, from foreign currency translation and the additional revenue from the Sunday. Acquisition in June, we expect year-over-year, organic sales Improvement to be similar involved. The third and fourth quarter, when excluding the impact of the Bombardier agreement in the fourth quarter of last year.
Mike: We anticipated a third quarter, organic sales growth of 2% to 4% which equates to 10 billion to 10.3 billion dollars.
Mike: For the full year. We now expect our overall segment margin to be up 40 to 60 basis points or be down 30 to 10 basis points. X for those margin expectations from the Pion guidance stem from the high decremental of delayed energy project work and the L effect of pricing relative to tariff related cost pressures in our Aerospace business.
Mike: In the third quarter, segment margin is anticipated to be in the range of 22.7 to 23.1% down, 90 basis points to down 50 basis points from the prior year, with ba margins, expanding esa's margin, roughly flat are margin Contracting, modesty and Aero, margin. Similar to its second quarter level.
Mike: We now expect fur earnings per share of ten dollars to ten dollars 65 cents. Top 6% to 8% or up 1% to 3%, excluding the 2024 impact of the Bombardier agreement.
Mike: 60 cents down 3 to up 1% from the prior year.
Mike: I will provide further details on changes to our full year EPS guidance later in the presentation.
Mike: We continue to expect 3 cash flow for the year between 5.4 billion, to 5.8 billion down 2% to up 5% X Bombardier, which remains approximately in line with adjusted earnings per share growth. We give additional information on changes in free cash flow from the prior year, in the appendix, having the place 7.8 billion in the first half of the year for share repurchases Acquisitions, dividends and couple of projects will remain opportunistic in allocating additional Capital to beyond that already committed for the rest of the year.
Mike: To summarize our strong execution. In the first half, has raised the bar for the year, even as we prioritize setting prudent expectations in a highly Dynamic environment focusing on what we can control. Our company remains poised for strong. Performance ahead of our pending separations are now turned to slide 8 to give high level overview of our Outlook by segment with further details by business unit provided in the commentary portion of the slide.
Mike: In Aerospace Technologies, we continue to anticipate 4 year sales growth in the high single digit, range or mid single digit to high single digit. When excluding the impact of the 2024. Bombardier agreement supported by supply chain, analog and elevated, Global demand amid geopolitical complex, our defense and space business should lead segment growth for the year.
Mike: Commercial aftermarket growth remains consistent with Air transport currently stronger than business. Aviation, we still expect commercial OE sales to recover and grow in the back half of the year as customers work down existing inventories, allowing our sales to better align. We we build rates
Mike: For the third quarter, organic sales are expected to be up mid single digits to high single digits led by Defence and space with continued solid growth in commercial aftermarket and Commercial we no longer address margins. For the first quarter should be consistent with the prior quarter for the full year. Margins are expected to approach. 26% as volume. Leverage is more than offset by the impact of Acquisitions and the stiff driven, cause inflation, temporarily outpaces pricing.
Mike: In Industrial Automation, we are increasing our 2025 sales Outlook to down low single digits to down mid single digits, given second quarter, Topline result and short cycle orders holding a better today than initially feared. In April, those still down year-over-year,
Mike: Or the declines are not contained to a IIA short, cycle businesses given long cycle. Pressures from delayed Energy customer topics decisions. We expect fully year IIA. Margin to be roughly flat versus 2024 as incremental tariff related cause inflation and volume The Leverage are offset by commercial Excellence improved productivity and second half accretion from the PPE sell for the third quarter. We also anticipate a similar sales
Mike: Performance, it's full year.
Mike: As growth in sensing thermal Solutions and warehouse and workflow Solutions is offset by muted demand in PSS and project. Timing delays in core process Solutions, margins are expected to contract modestly from the previous year, but increased sequentially
Mike: In building automation, we are raising our 2025 sales outlook for the second cosine of quarter as 2q sells, exceeding expectations and second half, prospects have improved from our viewing, solid order Trends. As a result. We now expect mid single digit to high single digit, organic sales growth products, and solutions should grow at similar rates through the second half driven by software lead new product introductions momentum in the US and high growth regions and customer wins in Focus particles.
Mike: For the third quarter, we anticipate sells to be up mid single digits, as comes from the, prior year become modestly. More difficult in the back half, we expect building automation to expand margins, meaningfully for the third quarter, and for the year supported by volume leverage and productivity actions in energy. And the sustainability Solutions where slightly reducing our organic sales, growth Outlook to reflect a more cautious, couple of spending posture, from Europe's energy customers. We now expect full year sales to be flat to up slightly.
Mike: Advanced Materials should lead growth in the second, half on improving the mental elements and the uplift from easing priority comps in flooring products.
Mike: We anticipate fully year USS margin to remain roughly flat as commercial. Excellence and uplift from the LNG acquisition are offset by less favorable, mix from reduced, high margin project and Catalyst cell, and cause inflation.
Mike: And the headwind from the timing of coverage, shipment shifting forward into the second quarter. Just as for the full year margin is anticipated to be around flat to 2024
Mike: Now, let's move to slide 9 to walk through our 2025 Epps Bridge.
Mike: We see organic segment growth contributing an additional 13 cents per share for the full year in line with our view in the prior quarter. While second quarter results, finish above our guided range, the performance included a couple cents of benefits of the line from the Sunday acquisition and few extra weeks of owning PPE.
Mike: It also included some up catalog shipments that were expected to occur later in the year. As a result, we are, largely maintaining our outlook for the second half of the year with some pluses and minuses under the surface. Organic cells should be better both in building Automation and Industrial Automation. Which we do not anticipate being down as much as contemplated in April. However, segment margin will be pressured. Some in IIA because of negative mix from reduced demand for energy projects and in Aerospace because of pricing increases in logging behind tariff related cost. Inflation.
Mike: Acquisitions are now expected to add roughly, 40 cents, per share to 2025, EPS with sundyne being added into the mix.
Mike: The impact of effects quarterly tax rates. And below the line items are fairly straightforward in the bridge.
Mike: As the company focuses, its transformational efforts on completing 2 spin-off, transactions, repositioning projects have slowed. However we anticipate more spending in the second half of the year and return to a normalized level post. Separation additional details on these items are available in the appendix of this presentation.
Speaker Change: I'll now hand the call back over to vimo to conclude our prepared remarks.
Speaker Change: Thank you, Mike and you will performed Admiral in the first half of 2025, with back-to-back quarters. That delivered earnings about the high-end of our Target. Ranges. Our investment in Innovation is gaining traction, driving improved sales growth, and yet another record quarter for our backlog.
Speaker Change: On the back of this operational momentum we are raising our organic sales growth and adjusted earning per share guide for the year. While being mindful that we may not yet have failed the full impact of escalation of global data rates in recent months,
Speaker Change: Business demand has remained resilient in most sectors and geographic region thus far, but we are well prepared for potential changes ahead in the macro Regulatory and geopolitical environment, utilizing A playbook that has served us well over many cycles as our businesses focus on delivering our financial targets. We have also made substantial progress in Transforming Our portfolio to maximize their value.
Speaker Change: Through separation acquisition and destur. We are simply finding honey. Well for investors customers and our future Shapers, all our transactions are proceeding according to plan, even as the first chapter of my tenure, as CEO comes closer to an end. With a conclusion of the comprehensive portfolio review, our Dynamic approach to Capital, allocation and portfolio, optimization remains Evergreen,
Speaker Change: We are confident that the combination of our accelerating growth and high return Capital deployment, will compound the value of Honeywell going forward with that. Sean, let's take questions.
Speaker Change: Thank you demo demo and Mike are now available to answer your questions. We ask you, please be mindful of others in the queue. By only asking 1 question and 1 related, follow-up.
Speaker Change: Operator. Please open the line for Q&A.
Speaker Change: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2. If you'd like to remove your question from the queue.
Speaker Change: For participants, use, a speaker equipment. It may be necessary to pick up your handset before pressing the star Keys 1 moment, please while we pull for questions.
Speaker Change: Our first question comes from the line of Julian Mitchell with Barclays Bank. The Line is now open
Speaker Change: hi, good morning. Um just um maybe wanted to start off with um Aerospace um to try and understand kind of the the moving Parts there. I suppose it sounded in Paris as if there was a bit more confidence around um sort of supply chain issues and and getting those resolved and that might help the commercial OE Topline. But it seems something sort of, you know, moved the other way. So just trying to understand is that BGA or or large commercial, you know, what's the the pace at which
Speaker Change: Yeah. Should we think about this sort of 25 to 26% margin? Being the new sort of Baseline for the next 12 or 18 months?
Speaker Change: Good morning, Julian. How are you? Um,
Speaker Change: So I would say first orders in Aerospace, extremely strong um continue to be strong on on all fronts defense and space commercial we Etc. Um, what do we see in our commercial or we in the second quarter? It's um, it's really a transitory um item. I would say we experienced some. These stocking with 1 of our oems and we expect those um, our shipments to normalize to do we build rates in the in the second half. So I feel very confident that um, you will see better OE profile from from us in the, in the second half. But like I said, we, we feel quite bullish on on aerial performance for the year. Um, from a margin standpoint. Um, as we, as we talked earlier, we were integrating case, um, and that's about 100 bits drug for us, um, year over year that's still going to start to normalize in the in in the next year. Um, Case, by the way is growing Revenue this year at
Speaker Change: High double digits. So it's uh, ahead of our proforma really encouraged by that. And we also year-over-year are putting about 200 million dollars of incremental R&D into the Aerospace business to help support our um, our NPI growth uh, and and new Revenue next year. So uh, I think uh in the second half margin profile for a will be better than what you've seen this quarter. And like I said, I'm quite confident about the the high single digit growth on on revenue for the for the rest of the year.
The only thing Julian I'll add is everything. What Mike said is uh is all transition transitionary issue, uh, items. If you see the margin related, uh, discussions, we have the OE mixes the transition because of the T stocking R&D, is we evaluated to a level, we can perform for the future. So that's going to become new normal and then case acquisition is only going to become Tailwind in the future. So that these are not your other question. Is it a new Baseline? Answer is no because these issues are transitionary and we have very high confidence on the Aero margin projections, we have laid out,
Got it and just following up on that vo. So the, the sort of R&D hike you think by the end of this year, kind of R&D to sales in in a row shouldn't be a headwind next year. And and then case margins start to, uh, improve over the next year or so. Yeah, yeah.
Both face, men are true and then the OED is talking issue. Also goes away because the the rates will converge to the normal Baseline. That's why I mentioned these are all transitionary issues. By the way, on the R&D spends the R&D, spend Rises not only in Aerospace. It's a cross All 4, segments of Honeywell, uh, we feel continued confidence on our ability to accelerate organic growth through new products.
Speaker Change: We see part of that happening in building automation, pockets of Industrial Automation Aerospace, we talked about wins, but overall, uh, we have a meaningful, uh, acceleration of R&D, spend for the right projects, and this is going to set up a new Baseline for Honeywell for the future. So, this is, again, a transitionary for the overall company. Uh, we do expect, don't expect that to repeat, uh, in the year ahead at the same level.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Andrew oen with Bank of America, your line is now live.
Speaker Change: I guess. Good morning.
Speaker Change: Morning, morning morning. Yeah. Can we just talk a little bit about uh, EOP? Uh, you know, and my question is very strong growth, uh, this quarter, uh but you're seemingly uh, talking it down for the second half of the year. Can we just understand what verticals uh Drive drove to upside and what D verticals are driving the downside if we could disaggregate it, thank you.
Speaker Change: I would say, Andrew for the quarter 2, we had 2 favorable items. Uh, we had a big licensing agreement with the customer, but, uh, you know, uh, gave us long strong growth and also Catalyst sales were much stronger in Q2, so some of the catalysts got pulled through from second, half to first half. So that's more of a cycle of this long cycle business to the second part of your question. You know, the impact we see is energy project spend is moving more to the right. Uh
Speaker Change: Side for uh, for ESS business and uh to a certain degree also, an IIA for process Automation. And I would just add that uh just looking at the ob3 and the IRA, it's mostly preserved for us. So it's, it's not really a headwind for us into into next year. Yeah.
Speaker Change: I gotcha and then on an Industrial Automation just to follow up so, HPS, similar Dynamics. So is it fair to say that when you say we can demand and price cost to leverage on the second half of the slide that it mostly uh, relates to HPS. And that's what's driving sort of, slightly lower margin Outlook there. Is that the key driver
Speaker Change: yeah, primarily I would say in case of hp's, the same energy projects, the projects, part of the business, uh, will see the similar pressure, uh,
Speaker Change: The services side remains strong uh Mike anything you want to add on the just I would just say been more. I continue to be prudent about the second half. Um I love moving Parts. Um I feel confident, we'll be able to deliver on the on the guide that that we put put a prompt but just continue to be prudent on the second half especially around the short cycle orders.
Speaker Change: But you don't have 1 specific industry vertical region to call out other than this big tariff uncertainty.
Speaker Change: That's correct. No no. I absolutely right. I mean in fact we see much more balanced
Speaker Change: Growth across the world. Now, of course us Remains the leading growth no doubt about it, but uh, the the headwinds we saw couple of quarters last year in particular, on Europe and China have subsidized now. So the growth is more normalized across the globe with the us, being the leading growth.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question is from Nigel. Co with wolf research, your line is now open.
Nigel: Thanks, good morning, everyone. Um, just want to pick up on maybe the first couple of questions. Um, just just on the NG project. Um, uh, timing. I guess is, is that does that mean on the clean energy project? So is it is it is it just large process um, projects in general and then maybe just uh you know, find a point on error margins. Um, it seems like tariff inflation should be better news today than it was like in April. So I'm just curious what additional inflationary pressures you see in in, um, in Arrow.
Nigel: So nice level uh energy projects just to kind of dig into little details. You're asking for, I'll I'll provide into a couple of buckets LNG remain, very strong, the business. We acquired is performing extremely well, and we remain very bullish on LNG. So that's going to benefit ESS, that's going to benefit process automation, because our 2 in a box strategy, uh sustainable. Uh,
Nigel: Fuels projects for are the ones which are most impacted moving to the right. Uh, I think they were primarily, uh, policy around Ira. How will they fold out with ob3? Now things have got cleared up in last 10 days, so we do believe that will, that should bring up the positive momentum on the traditional refining. Petrochemical side, I would say that, we, we saw higher Catalyst, spend in Q2, in fact, if you got accelerated, which led to strong performance for Q2. Uh but we do see some uh you know, weakening demand there. Uh, I think customers are more cautious on making large Catalyst spend in in certain segments, but overall I think the performance, uh, we had a chance to attend OPEC meeting a couple of days back and uh the outlook for energy segment remains extremely bullish, across the co core gas uh refining biomass base products coming up in the future so our Outlook remains extremely bullish. I think we just going through a typical cycle in the energy right now.
Nigel: And then on the Arrow question, what I would tell you is that if you look at terrorists, um, terrorists, when we incurred tariffs, we pay them in 10 days. Um, it's easy to pass, terrorists. As far as timing on short cycle businesses when it comes to Aerospace and our AE contracts. These these matters take a a longer time because we have to open the contract and these contractors usually are set for 10 years and prescribed by Sir Turner Frameworks. So the team is working through it and it will take them a little bit longer to
Nigel: To get the price aligned with with the cost. As we as we obviously keep in mind that how we impact our customers.
Speaker Change: And Mike could you maybe just touch on the changes um to the R&D tax um expensing the tax purposes. Um you've got about a billion dollars of deferred tax assets so you balance sheet. So just how does that? How does that unwind over the next couple of years?
Speaker Change: Yeah, so I would say net positive for us. Um, and we'll right now we're just evaluating it with, um, with our tax team thinking through.
Speaker Change: Says Italian for us, for 26 and 27, but we'll have more to say about it. Um, as we go into into next year, but you are correct. This is this is a talent for us.
Speaker Change: Okay, thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Steve Tusa with JP Morgan. Your line is now open.
Steve Tusa: Hi, good morning.
Steve Tusa: Good morning. Um, just trying to like get to the the margin uh, guide for the year. Are you guys giving some good details? Um, I guess for for I think to get into the range, um, this building automation like close to 28 this year.
Steve Tusa: Is that roughly the right ballpark?
Steve Tusa: um,
Steve Tusa: I would say, um,
Steve Tusa: It, it really depends how you look at it and where you look at it on the product side, it where we see the increments are extremely high for us right now. Um, projects, uh, is a bit lower but I would say, incremental, are are quite High? Yes, this is Sean. I would just say, um, thinking about the full year, that's probably a little bit aggressive, but in terms of is that business capable of delivering a number like that it has the capability of doing. So it's fair to say Steve that the VA will be the highest margin business in our portfolio in 25. So that that'll be a fair statement. Okay. And then just 1 follow-up, just on the, uh, on the Hedge. I guess the contingency you guys had put into place uh, last quarter.
Speaker Change: What what's the, what kind of the status of the contingency. Um, obviously a better visibility now, but just just curious as to, where that went
Speaker Change: Yeah. So I would say we we learned a lot over 9 last 90 days when we were talking last time we were evaluating terrorists live. I think if you look at the guy that we we just gave I feel high level of confidence, we can deliver that. Um, third quarter obviously is a is a very important quarter for us. Um, like we said earlier that some of the longer cycle project Milestones have have moved out on us. Um, and then we had some, some of the demand on capitalist software to be be softer, but on the other hand, building Automation and IIA short cycle orders are better. So I think that net we kind of in the vers more spot that we were last quarter.
Speaker Change: Okay, great. Thanks a lot.
Speaker Change: Thank you.
Scott Davis: Our next question, comes from Scott Davis with Milas research, your line is now open.
Scott Davis: Hey yeah. Good morning been on Mike and Sean.
Speaker Change: Good morning guys. Um
Speaker Change: can we talk a little bit about Quentin? Um I I it looks like it's still bleeding. A little bit of cash for you guys but um what are the hurdles specifically? What what are you guys looking for to be able to get that to uh to an IPO uh ready uh situation.
Scott Davis: Scott, I would say the, the uh, in principle we are committed to, uh, decolonizing. Uh, and actually, as we speak, uh, we are doing the fund raise so that we could capitalize the company between now, and the IPO time to a specific question. I think we are looking at, uh, more commercial evidence, uh, which can prove the revenue stream for it. We had a big win in Qatar, when President was visiting there, there was a big announcement that Qatar is going to invest for Quantum infrastructure. So winds like that gives investor confidence in the foreign Revenue stream. And the way I see timeline today is, uh,
Speaker Change: End of 27 is the out. I would say the, uh,
Speaker Change: The the outline at the at the most. Can we pull it Forward by a couple of months or quarter? Yeah. That possibility always remains. So we're working with that kind of timeline and we do have a good visibility on Commercial progress between now and then uh, to to execute that. We also expect uh, Scott to unveil the plans of Continuum in the, in the Q4 time frame. So we'll keep uh, all our share owners informed on some of the progress, we are making. And we'll, we'll we'll share that on a more broader basis.
Speaker Change: Okay, that's helpful. Uh demo and and just to switch to the R&D, you know, that it's um and we don't have to make a big deal out of this, but the timing I I don't think I've ever seen a company prior to a breakup increase R&D spend. So I'm just kind of curious. Is that is that some, is that a message coming from the businesses that they felt like they were behind? Or is there just a? Is it just happen to be a little bit of just a, you know?
Speaker Change: Is what it is. You, you know, I'll just stop there. I don't want to make look. This is uh,
Speaker Change: This is part of the message. I've been seeing since last year that Honeywell organic growth with the strength of improving our fundamentals.
Speaker Change: Investing in the right spot. We have the right Talent, the basics, and then we made decision, sometime last year to accelerate R&D where we think we have opportunity to grow, and you can imagine hiring people in a domains, we play. Like, Aerospace energy is very, very long cycle. So you, I can't make a decision in June and people show up in July. This is much much longer than that. So principally across the board. Uh, we investing R&D escalation acceleration. It's higher than Arrow compared to others, but we are also growing Auto, uh, uh, R&D spend across the board and my, my strong conviction is that it's really preparing Honeywell for the future for the better organic growth, because we are putting bets in the right spots. Uh, some evidences are already seen in some segments, with our acceleration of our organic growth, but more to come as we as we go along. So, it's really not linked to Spain. I would say, I treat those those 2 as 2 separate events, but we are just getting better prepared as a organic growth driver company.
Speaker Change: Compared to what it was. Historically Scott. I said as a as a good thing for us, uh, given given where we want to go from a Topline growth standpoint and migration to higher growth verticals. Um, this this investment is good for us and and has a high Roi for us in in 2026.
Speaker Change: And it's actually put, I mean in the should have mentioned to you. We were always at the median or R&D spend. So I think this is going to push us more towards upper quartile now as the year closes. And I'm sure as You observe the number will start differentiating ourselves on the money. We invest for growth
Speaker Change: Okay, thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: All right, next question comes from Sheila. Caillou with Jefferies group your line is now open.
Caillou: Good morning guys and thank you. Um, if I could ask to Aerospace questions, please, uh, the first 1 on aftermarket, um, you know, the 7% growth decelerating from 15% in q1 and lagging some of the early reports from peers. Um, you know, how do we think about what weight on that growth? Was it Air transport business Aviation and how are you thinking about the full year there?
Speaker Change: I, I would say Sheila that, um,
Speaker Change: The aftermarket is normalizing for us and I think you should the range that you receive in this. Like, in the second quarter, that's kind of the range. We, we're expect, we're expecting in the in the second half. Um, we see as we catching up with demand, Etc. Um, we, we see this as a kind of more normal go forward rate for us, um, as you see the hours are, are early stable, but on the ATR and and, and business and uh, and I think that's a um that's kind of a normal new normal for us going forward.
Speaker Change: Okay. Um and then if I could maybe uh hone in on the Aerospace OE decline once again if that's possible why the destocking now and it seems like deliveries are actually increasing was it related to 1 specific platform? Or is it inventory across?
Speaker Change: Uh, multiple platforms.
Speaker Change: Um, it's only has a is the impact from
Speaker Change: Uh, November America platforms, um, on the east side. And if you think about last year, I said, uh, we were shipping a lot into uh, into our oese uh inventories. And now they're depleting this in inventories. They, they have better visibility in terms of how much Safety stock they need. So we're working our our self through this, through this blip. And I think that's going at least based everything I know today is going to normalize uh, some in the in the third quarter and then we should be back to normal in the, in the fourth quarter.
Speaker Change: And then Sheila I would just add the nuances. Not everything is the same inside of OE. And so electromechanical is where we've had the supply chain challenges and continue to work towards making sequential Improvement. Whereas electronic Solutions have been caught up for quite a while and so you can see a little bit of a difference in terms of what those needs look like for customers between those 2 businesses.
Speaker Change: Got it. Thank you.
Speaker Change: Our next question comes from Chris Snyder with Morgan Stanley, your line is now open.
Chris Snyder: Thank you. I wanted to ask about portfolio actions, um, you know, vimma. You guys have remained quite busy here in the first half of 25. Um, after you announced the separation in 24 of last year. So should we assume that everything was died? Has been completed or announced, um, at this point and then just on some of the, um, you know, strategic reviews. Um, I think I understand why PSS doesn't fit aftermarket business but Warehouse is both Automation and aftermarket driven. So it does fit, you know the the characteristics that that Honeywell is looking for, can you see? You can just pop by that. 1 doesn't fit in the future portfolio.
Chris Snyder: We are we are complete on the portfolio review. What? What? I started 2 years back. So, from this point onward, we do not expect any major portfolio. Uh, you know,
Chris Snyder: Exits if I can use the word normal way, could we do things? I mean we are a large company so there could be
Chris Snyder: Something's always happening, but fundamental we have completed the process, uh, the, the decision on, uh, integrated and PSS was more of a sectoral decision to look at the end markets, we want to participate and 1 of the in automation is a very large Market, you know, it's a 500 billion dollar T. So we are very large opportunity in those swim Lanes of the 3, vertical we have you know, built for ourselves industrial process and buildings. So within that now we are making choices and we obviously want to buy us towards verticals which are higher growth so that we could, you know, deliver high growth to our share owners and our, our belief playing in this segment of logistics and warehouse and transport. These are, these are very good segments, but they also have demonstrated certain, uh, rates of growth and lumpiness, which we believe are lesser fit into our Port, our portfolio in the future. So, it's a, it's a choice to be made, we we, we are, we are making some additional, some subtractions, uh, uh,
Chris Snyder: The the warehouse automation does bring very strong aftermarket but I think it's more of the End Market participation choices. We are making and uh that was the driver of the decision.
Speaker Change: Thank you, I appreciate that. And then I just want to follow up on, on building automation. Um, just in a really, um, impressive turnaround here over the last year. So can you and it seems like the global non-res backdrop has not been to accommodative, so can you just maybe talk to company specific actions? That is driving, um, the turnaround and growth and are we seeing Revenue synergies? Um, from the uh, the big security acquisition, you guys did last year, thank you.
Speaker Change: We have large install base, how we mine it higher and deliver High single digit growth in Services? That's certainly working in building Automation. And finally, the new product acceleration. The comment. I mentioned to the Scott's question, we have elevated R&D even in building Automation, and they are the most ahead in delivering, higher growth with new products. So, when you pull the all 3 3 things together, we are participating in high growth markets. We are mining our install base better. We are turning more new products. That's becoming the driver for, uh, uh, you know, high growth. The final point there is, uh, we had some pressure and some geographies. Like there was a drag in China, there's a dragon Europe in some Pockets, those have normalized now. So, the building automation growth is double digit in North America but like low single domain single in other different parts of the world. So that also helps because we don't have any pullbacks from some other geographies which normalizes our results here.
Speaker Change: Thank you very much, appreciate that.
Speaker Change: Our next question comes from Andy kaplowitz with Citi group, your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Morning and good morning de can you get a little more color into what you're seeing in Defence and space as it continues to accelerate here? I think the growth you've talked about in the past has been pretty balanced between the US and international, but I think International defense then is just starting to accelerate. So could you talk a little bit more about what you're seeing?
Speaker Change: Yeah, I think the defense and space growth is driven by both on the supply chain healing, because it was last to heal. We have much more mechanical content in in Defence and space compared to, uh, commercial. So that certainly seen as part of our reserves and on the demand side, the orders remain, very strong, both domestically and, uh, International defense, which is our strength, uh, is growing double digit, and it will remain. So for many years to come, we see strength in Europe. We see strength in parts of Asia, like, uh, you know, Korea, Etc. So I think it's a combination of accelerated Demand with the geopolitical circumstances in the world and the supply chain healing which is giving us a performance in defense and space uh as we are demonstrating.
Speaker Change: Now, the I want to ask you about a couple other initiatives, you've been working on direct material, productivity, and harnessing AI, uh, you seem to mention quite a bit today cost inflation. You're facing across the portfolio, but I imagine a lot of that should've been expected. So update us on your ability to upset that with your, your initiative here around direct material savings and then maybe how sticky have your price increases been uh, that you've made here this year.
I think that the pricing initiative have been quite sticky. I think we have been very thoughtful to build a strategy now which protects our earnings but also protects our volume that has been a Playbook. We have been doing for 2025 and it's a tough balance because you don't want to raise the price to a point that you destroy demand and we have been able to execute that with a minor exception of the Aerospace, OE. Which Mike mentioned earlier because there's a lag on given the nature of the contract but across honey, well, we have been able to execute our our pricing quite successfully uh whatsoever helping you is uh productivity is very meaningful, which is also giving us more optionality or to what extent we want to go pricing in a certain segment and and versus the margins. We can drive margins through productivity. Uh value Engineering, in particular is performing extremely well and that's where AI is playing a role. We have been you know uh deploying use of AI to self-determine design of the boards.
Speaker Change: Versus Engineers taking months and months to figure out that they want to do this design or some other design so that gains you time. So something which was used to take 2 or 3 months or take a week. So that accelerates the net saving we can drive in a certain in a given year. And what gives me and my confidence is that value engineering is becoming a meaningful liver for honey. Well, now we can count on it. We can financially plan it and that can become a liver for us to think about price versus volume, not only for 2025, but in the
Speaker Change: Years to come.
Speaker Change: And Andy from a financial framework and we talked a little bit about it before in terms of looking at our 6 quarters rolling forecasts Etc. What what I'm really focused with the team is on, demonstrating growth over longer periods of time consistent growth. And like the more said really focusing on the top line growth and then on the bottom line growth and then within that, whether it's price volume, mix teams have a little bit more leeway in terms of managing, uh, based on the verticals. They're in customers said, Etc. So, um, but really just setting the framework on on.
Delivering over longer period of time on consistent basis.
Speaker Change: Appreciate the color, guys.
Speaker Change: Thank you. Thank you.
Question comes from Dan Ray. With RBC Capital markets, your line is now open.
Speaker Change: Thank you. Good morning everyone.
Speaker Change: Good morning. Good morning.
Hey, it was open to get some, uh, caller on free cash flow. So you boosted the EPS guide but cap free cash flow Guidance. The same just, uh, are there any puts and takes, uh, related to free cash flow for the second half that you'd like to highlight.
Speaker Change: Sure, so we have a pretty broad range on cash flow. The 5.4 to 5.8 billion dollars. If you look at the moving pieces, I would say our inventory. Got a little bit worse, just, uh, just because of what we are facing right now in, in arrow, that hopefully will normalize in the second. Half, on the other hand, I have a little bit of Tailwind from from stronger Collections, and, uh, and, uh, and higher sales and, and pricing. So net, net. We're we're the same. We're really focusing on moving towards that, 90 plus percent conversion in 2026.
Speaker Change: Great. And then just uh, related question, anything in the second half on price cost uh that you'd particularly want to highlight here.
Speaker Change: So I think generally, if you think about our guide, um our price, probably Visa be the last uh, last time we talked, we probably 100 Pips better.
Speaker Change: So if you you thought about price of 1 to 2, now it's 2 2 to 3, volume is uh probably going to be 1, 1 to 2%. Um and then from a cost price standpoint a short cycle businesses will will offset. And then error, like I said earlier we it's still working through their through their OE contracts and that should normalize uh going towards the end and an early half of of next year.
Speaker Change: Great. Thank you.
Dean: Thank you, Dean.
Speaker Change: Our next question comes from Joe Richie. With Goldman Sachs, your line is now open.
Joe Richie: Uh hey. Good morning, guys.
Joe Richie: So, I just want, I just want to make sure I understand the relationship between, uh, the terrorists and the demand contingency and so seems like uh, the moratorium is is um, you kind of kept the, you kind of kept the kind of paraphrase at a higher rate. And if the moratorium were to become permanent, I'd assume that maybe, you know, the demand contingency gets released to some degree. Just trying to make sure that I understand that correctly and and are there any specific segments that you could see benefiting in the second half of the year? If in fact, you know, tariffs come in at lower rates permanently.
Joe Richie: Sure, the way I look at the second half, if you think about the short cycle businesses, they're they're managing through it quite well. Um, we haven't seen any pre-b, buy or demand destruction there. So, building automation is doing well, IIA is doing better than what. We thought it was it was going to do. It's really about our energy business. And uh, and these, um, these orders and how they convert into Revenue, because we're at the point now of the Year where we, if we get an order on an energy project, it takes a while to engineer it. So Revenue might might fall out of the year, so we're just managing that piece, um, looking in the first half of next year. And then also monitoring our Catalyst orders, which have been a little bit softer, um, from a forecast, 10 point Visa be what we expected. And that's really just a behavior that that our customers can exhibit. When when they have sometimes a, a choice, they might delay those Catalyst orders for a quarter or 2, um, and still operate. The the refineries and, and their and their facility.
Speaker Change: With just the lower output.
Speaker Change: that's helpful and then and then maybe just my quick follow on, on the, you know, strategic alternative announcement on on psss and and Warehouse
Speaker Change: Um, you know, kind of looks like the demand environment. There is getting getting a little bit worse again, so, you know kind of bouncing along a bottom I guess then we'll I know that we can't Bank on any, you know, on any outcome here. But I guess how are you thinking about the timeline for a decision to be made, uh, on on that piece of the business?
Speaker Change: So, we'll kick a we kicked off the process. Uh uh Joe just just last week now after we made the announcement.
When the spin gets completed that's 1 of the reason, we initiated the Strategic review now so that we could somehow Converse the timing. But as you can imagine these processes are, you know can't you can't put a certain certainty of timeline around it at this point.
Speaker Change: Yeah, thanks. Good morning, guys.
Speaker Change: Um, maybe just starting with some of the orders that you guys saw throughout the quarter. How would you say that orders progressed, um, each month and then into July, it sounds like maybe energy was the only area where you saw a discernable difference. But if you talk a little bit about, you know, ABI more on the short cycle side through the quarter, that would be helpful.
Speaker Change: Sure. So I will tell you um overall orders 6% up um really pleased with that better orders than in the first quarter.
Speaker Change: Um, Aero led the orders grow for us? Uh, once again, very strong orders on both on defense and space and and Commercial, um, building automation was, uh, low single digits, but it's had tougher comps so we didn't see anything there. And then for IIA and Es, I would say we saw strong. Um, strong first 2 months and June was a little bit softer, uh, going into July.
Speaker Change: By, uh, on the other hand, orders are continued to be strong. So um, June might have been kind of a false positive in general. I feel like orders are are sticking and, uh, second quarter was better than than the first quarter and in terms of what the team is is showed us for the third quarter. And the forecast, we don't see a lot of concern in our order rates slowing down.
Speaker Change: Okay, got it. Thanks, Mike. That's really helpful. And then there's a lot of discussion around what you guys are doing from a portfolio perspective, but I don't think we talked much about future m&a plans, and you guys have clearly done a lot more active recently. How does the m&a pipeline look today? And what is your appetite for doing more deals before the spin happens?
Speaker Change: So Nicole we absolutely are building our pipeline. We we are going to be slightly slowing down, given the activity we have or the spins in motion and some acquisition integration work. We are doing but we are not slowing down on, uh, uh, building the pipeline, uh, the pipeline remains. Uh, it means strong and will will execute, uh, you know, opportunities as as they become available. I think what gives me more confidence is that we're getting much more comfortable. Not only doing the normal deal, but also acting like a sponsor to do car work deals. We have demonstrated that capability repeatably. Now, over the last 2 years and that additional skill increases. Our optionality now because we are willing to go to other partner, suggests an optionality for them to create value for both sides and that gives
Speaker Change: Me confidence that we can remain, you know, active in the portfolio site in the in the years ahead. So more to come uh uh, you know we'll we'll continue to build our portfolio as a higher priority item and you know under under my leadership.
Speaker Change: Thanks then I'll pass it on.
Speaker Change: We have reached the end of the question and answer session. I would now like to turn the call back over to the mall Kapoor for closing remarks.
Mall Kapoor: Thank you. Uh, I want to again once. Thanks my deep appreciation, to our share owners, our Honeywell team, and our customers for the continued support during the transition time for the company and we are excited for the future and look forward to sharing more of our progress as we delivered on our commitment.
Mall Kapoor: Before we close our today's call, I want to take a moment to remember our pivotal former leader of Honeywell that we lost this week. Larry bossidy Larry was a chairman and CEO of a light signal and let the company's acquisition of Honeywell in 1999. He was a forefather of operational excellence that Honeywell is known for today and served as combined companies, chairman, and CEO until his planned, retirement in 2000.
He then came out of the retirement briefly to offer his leadership again as chairman and CEO during a challenging period of our company. And under very the leadership the board hired, Dave Kodi as honeywell's, new CEO, and setting up the company for the next 2, Decades of tremendous value creation,
Mall Kapoor: It was a remarkable leader, a committed Family Man and our thoughts are with his family and friends at this point of time. So thank you again, everyone for listening and please stay safe and healthy.
Speaker Change: Yes, includes today's conference call. We thank you for your participation. You may now disconnect from the conference. Thank you.