Honeywell International Inc.

Thank you for standing by, and welcome to Honeywell's second quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the call over to Sean Mecham. Please, go ahead.

Thank you, Lateef. Good morning and welcome to Honeywell's second quarter 2022 earnings conference call. On the call with me today are Chairman and CEO Dariusz Adamczyk and Senior Vice President and Chief Financial Officer Greg Willis. Also joining us are Senior Vice President and General Counsel Ann Madden and Senior Vice President and Chief Supply Chain Officer Torsten Pils. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com forward slash investor. Honeywell also uses our website as a means of disclosing information which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our investor relations website in addition to following our press releases, SEC filings, public conference calls, webcasts, and social media. Note that elements of this presentation contain forward-looking statements which are based on our best view of the world and of our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. This morning, we will review our financial results for the second quarter of 2022 and share our guidance for the third quarter and provide an update to our full-year 2022 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Gary Podomchik.

Thank you, Sean, and good morning, everyone. Let's begin on slide two. The second quarter is another strong one for Honeywell. We over-delivered on our commitments as our rigorous operating principles enable us to navigate a challenging backdrop and remain highly resilient amid ongoing supply chain constraints, inflation headwinds, and geopolitical unrest. We met or exceeded our second quarter guidance despite these challenges of adjusted earnings per share of $2.10, up 4% year-over-year, and 2 cents above the high end of the guidance range. Organic sales grew 4% year-over-year, led by strong double-digit growth in our commercial aviation, building products, productivity solutions and services, advanced sensing technologies, advanced materials, and recurring connected software businesses. This was partially offset by three percentage points impact from a combination of the wind down of our Russian operations and lower COVID-related mass sales as we lapped the height of demand in 2021. We expanded segment margin by 50 basis points year-over-year to 20.9%, meaning the high end of the guidance range as commercial excellence enabled us to remain ahead of the inflation curve, excluding the impact of our investment continuum The margin expansion was 80 basis points year over year. Orders and backlog strength continued in the second quarter, led by Arrow, HBT, and PMT as our end markets continue to recover, giving us confidence or demand outlook for the back half year. Orders were up 12% year over year, and closing backlog was $29.5 billion, also up 12% year over year. In terms of capital, We deployed $2.3 billion to share repurchases, dividends, and capital expenditures. We leveraged the strength of our balance sheet to opportunistically purchase 7.5 million shares throughout the quarter, reducing our average share count to 685 million shares and continue to execute on our commitment to buy back $4 billion in shares in 2022. As always, we continue to execute our rigorous and proven value creation framework which drives outstanding shareholder value. I am proud of Honeywell's ability to rise to the challenge to deliver strong results amid such a fluid operating environment. Now let's turn to slide three to discuss recent senior leadership changes. This morning, we announced that Vimal Kapoor has been appointed to the role of President and Chief Operating Officer, effective immediately. Vimal is currently the President and CEO of Honeywell Performance Materials and Technologies, and will maintain his PMT role until his successor's name. Honeywell is fortunate to benefit from a very deep bench of experienced leaders like Vimal with 33 years across various Honeywell businesses. As COO, you will work closely with me to drive the continued profitable growth of Honeywell's operating businesses. This includes creating new solutions to help our customers drive their sustainability transformations and accelerate their digital transformation journeys. Vimal will also oversee the continued integration of Honeywell's operating system, which we call Honeywell Accelerator. Vimal is uniquely qualified for this role, having proven his operational capabilities across many different industries, business models, regions, and business cycles. This appointment provides me additional bandwidth to focus on strategy, business development, customer engagement, and people development. Now, many of you will recall that I served as COO once upon a time as well. This announcement today is not a repeat of that playbook. While I won't be chairman and CEO indefinitely, I have no definitive plans to retire and will continue to lead Honeywell. Vimal's appointment is going to allow me additional flexibility to focus on our overarching objectives. In addition, effective earlier this month, we expanded both Sheila Jordan's and Suresh Ventricle's role and welcomed them to the executive leadership team as Honeywell officers reporting to me to ensure we continue to advance our enterprise transformation. Sheila expanded her role to include all digital transformation efforts, becoming Senior Vice President, Chief Digital Technology Officer. Sheila joined Honeywell in January 2020, and has proven significant value working to modernize our IT infrastructure, applications, digital capabilities, and talent. Suresh took an expanded role becoming Senior Vice President, Chief Technology and Innovation Officer. Suresh has been with Honeywell almost 30 years and has held a series of engineering and IT leadership positions, including CTO of Honeywell and SPS. Suresh is responsible for new product development and introduction processes, including development for breakthrough technologies. I'd like to congratulate Vimal, Sheila, and Suresh on their new roles, and I look forward to working closely with them as they enter the next phase of Honeywell's transformation. Next, let me turn the slide forward to discuss other exciting recent announcements. In the second quarter, we continued to build on our reputation as one of the premier providers of cutting-edge technologies that can deliver more sustainable solutions. We announced yesterday that Archer Aviation selected Honeywell to provide flight control actuation and thermal management technologies for the urban air mobility aircraft. Archer's production aircraft will operate dense urban environments, making critical precision from the aircraft's flight controls and actuators a must for civilian safety. Honeywell's actuators can accept hundreds of micro adjustments and commands per second from fly by wire computers, enabling precise navigation, which will enhance safety and accommodate the unique elements of Archer's electric vertical takeoff and landing aircraft. Honeywell has a wide variety of ready now solutions that will create a more sustainable future for the aviation sector. It's a great example of that. In addition, Last month we announced a partnership with Enlink Midstream to deliver carbon capture solutions to industrial scale CO2 emitters along the Louisiana Gulf Coast. Our carbon capture and hydrogen purification technologies combined with Enlink's planned CO2 pipeline transportation network provides a cost efficient solution for customers looking to reduce the environmental impact of their operations. Lastly, We discussed in our Q2 leadership webcast on sustainable building technologies, we released a new carbon and energy management software focused on the energy optimization and carbon reduction of commercial buildings. Commercial buildings currently account for almost a third of global energy consumption and 37% of global energy-related CO2 emissions. Building owners recognize that this issue needs to be addressed. and thousands of companies have voluntarily pledged to meet sustainability targets. Honeywell's new software offering enables building owners to track and optimize energy performance down to a device or asset level. Our carbon and energy management software leverages Honeywell's forged artificial intelligence and machine learning algorithms to autonomously identify and implement energy conservation measures. This makes it possible for building owners to reduce the environmental impact of their building while at the same time improving the well-being of their occupants. As you can see, we are leveraging our expertise and culture of innovation to enable a more sustainable future. Now let me turn it over to Greg on slide five to discuss our second quarter results in more detail and to provide an update on our 2022 outlook.

Thank you, Darius, and good morning, everyone. As Darius highlighted, we delivered second quarter results, which met or exceeded the high end of our guidance while navigating persistent macroeconomic uncertainties. Second quarter sales grew by 4% organically or 7%, excluding the impact of lower COVID-related mass volumes and the wind down of our operations in Russia. While demand trends remain strong, supply chain constraints continue to weigh on volume growth, predominantly in aero, HPT, and SPFs. causing our past due backlog to increase sequentially by more than $100 million in the quarter. However, we once again demonstrated our operational agility by staying ahead of the inflation curve through strategic pricing actions, enabling us to expand margins and beat the high end of our adjusted EPS guidance. Aerospace sales for the second quarter were up 5% organically compared to the second quarter of 21, as we continue to face the challenged overall aerospace supply chains. The ongoing recovery in commercial flight hours led to approximately 20% year-over-year sales growth in both air transport aftermarket and business and general aviation aftermarket sales. Business and general aviation original equipment returned to growth in the quarter, growing double digits, while air transport original equipment continued a strong 2022, growing over 25% year-over-year. Growth from our commercial aerospace business was partially offset by defense and space sales, which were down 11% year over year, though up sequentially from Q1 in both U.S. and international markets. Aerospace segment margins expanded 80 basis points in the second quarter to 26.5%. In building technologies, sales were up 14% organically, led by commercial actions and strength in both building products and building solutions. Demand remained strong with orders of double digits for the second consecutive quarter, led by building projects, building management systems, and our security products. Backlog grew double digits year over year in the second quarter, giving us continued confidence in our 2022 outlook. Our healthy buildings portfolio remains robust with over $100 million of orders in the quarter. Segment margins expanded 110 basis points to 23.5%. In performance materials and technologies, sales grew 10% organically in the quarter, despite an approximately 3% headwind from Russia. Advanced materials continues to stand out, with 21% organic sales growth in the quarter as a result of commercial excellence and greater volumes in specialty additives and electronic materials. Process solutions grew 7% organically on increased demand for thermal solutions and lifecycle solutions and services. Sparta systems grew over 40% and was earnings accretive for the second consecutive quarter. Process Solutions orders grew more than 15%, including double-digit growth in our projects business, showing continued momentum. UOP sales decreased 1% in the quarter, including a seven-point headwind to year-over-year growth from lost Russia sales. We continue to see strength in our higher-margin catalyst business, which grew more than 20%, and helped to offset lower equipment volume due to timing of larger projects. PMT segment margin expanded 150 basis points to 22.3% in the quarter. Safety and productivity solutions sales decreased 10% organically in the quarter in line with our expectations, as strength in advanced sensing technologies and productivity solutions and services was offset by lower personal protective equipment and warehouse automation volume. Elevated COVID-driven mass demand in the second quarter of 21 led to a 5% year-over-year headwind for SPS in the quarter. Advanced sensing technologies grew 25%. Productivity solutions and services grew 19%. And gas detection also grew organically in the quarter, all demonstrating excellent execution in a difficult, supply-constrained environment. We continue to be impressed by the performance of these businesses. This quarter marked six straight quarters of double-digit organic growth in productivity solutions and services and three straight quarters for advanced sensing technologies. SPS also benefited from a licensing and settlement agreement to resolve patent-related litigation with a competitor, which we entered into in the second quarter. Under this agreement, each party agreed to provide a license to its existing patent portfolio for use by the other party's existing products, and Honeywell is entitled to receive up to $360 million over two years. Honeywell received the first of these payments of $45 million in the second quarter, and recognized the corresponding sales and profit in the SPS financial results. This incremental profit in the quarter was more than offset by legal costs associated with the agreement and a one-time write-down of excess COVID-related mask inventory, which should close the book on that mask story. Overall, SPS segment margins contracted 140 basis points to 12.6% primarily due to the lower volumes and the PPE write-down. Growth across our portfolio continues to be supported by strong results in Honeywell Connected Enterprise. We had another quarter of double-digit revenue growth, including double-digit recurring and 40% SaaS business growth year over year. Sparta Systems, Connected Safety, and Cyber all saw growth of greater than 25% year over year in the quarter. So for overall Honeywell, we exceeded our sales outlook, growing top line 4% organically. and we executed operationally to expand second quarter segment margins by 50 basis points to 20.9%, meeting the high end of our margin guidance range with expansion in PMT, HPT, and aerospace. This expansion is net of a 30 basis point year-over-year headwind associated with our investment in Quantinium. On EPS, we delivered second quarter gap earnings per share of $1.84 and adjusted earnings per share of $2.10. which was up $0.08 year over year, despite a $0.04 headwind from foreign exchange. A bridge for adjusted earnings per share from 2Q21 to 2Q22 can be found in the appendix of this presentation. Segment profit was an $0.08 tailwind, driven by strong commercial execution. Share count reduction drove a $0.05 year over year tailwind to earnings per share. We saw a $0.04 headwind from below the line items, primarily due to the lower pension income. a higher effective tax rate, 23.4% this year versus 23% last year, to have a one-set headwind. In response to winding down operations in Russia, we recorded an additional charge of $126 million, or a 19-cent impact to GAAP EPS. The company also took a $50 million non-cash charge in 2Q related to the potential comprehensive resolution of ongoing UOP matters. More information on this can be found in our form 10Q. Moving to cash, we generated over $800 million of free cash flow in the quarter, down 43% year on year, which was closely aligned to our expectations. We continue to invest in inventory to deliver for our customers, which is driving elevated working capital in recent quarters, including Q2. During the quarter, we also received the final payment to close out our agreement with Garrett. but still saw a year-over-year decline in GAERA payments due to an elevated $375 million payment in the second quarter last year. We remain on track to deliver our cash guidance range of $4.7 to $5.1 billion for the full year. Finally, as Darius mentioned earlier, we continue to leverage our strong balance sheet, deploying $2.3 billion in the quarter. Notably, we repurchased 7.5 million shares for $1.4 billion in the second quarter, bring our first half total to $2.4 billion as we execute on our updated commitment to buy back $4 billion in shares in 22. We also paid approximately $690 million in dividends and invested approximately $160 million in CapEx. So overall, another strong quarter in which we delivered results at or above our expectations, executed well through challenging economic conditions, and accelerated our capital deployment. Now let's turn to slide six to talk about our third quarter and full year guidance. While the environment continues to be volatile, our demand profile remains resilient. Our two key orders and our closing backlog of $29.5 billion, both grew 12% year over year, positioning us well for the quarters to come. Supply chain constraints, particularly related to semiconductors, improved slightly in the second quarter, and we expect modest sequential benefits to continue throughout the back half of the year, enabling us to unlock greater volumes. The aerospace supply chain has continued to face difficulties, but we're confident in the eventual recovery as Tier 3 and Tier 4 suppliers work to combat labor shortages. Once again, this quarter and throughout the rest of the year, we are staying ahead of the inflation curve with our strategic pricing action. As a result of rising interest rates and the strengthening of the US dollar, we are experiencing higher foreign currency impacts than we had and our prior guidance impacting sales and EPS that we are overcoming that operationally. With that as a backdrop, we expect third quarter sales to be in the range of $8.9 to $9.2 billion, up 7% to 11% on an organic basis, or up 8% to 12%, excluding the one-point impact of our lost Russian sales. We now expect full-year sales of $35.5 billion to $36.1 billion, which represents a decrease of $300 million on the high end from our prior guidance, incorporating higher foreign currency impact. However, we are raising the low end of our organic growth range now at 5% to 7%, increasing the midpoint versus our prior guidance and narrowing the overall range. That represents organic growth of 7% to 9%, excluding a one-point impact of lower COVID-related mass demand and a one-point impact of lost Russian sales. The difference between our reported and our organic sales growth guidance is two points, driven entirely by foreign currency translation. We expect our disciplined commercial actions will contribute approximately 8% to our sales growth in 2022, which is higher than we anticipated last quarter, as we remain vigilant in addressing price-cost dynamics given elevated inflation. Now let's take a moment to walk through the third quarter and full-year expectations by segment. An update on our 2022 end market outlook can be found in the appendix of this presentation. In aerospace, we see ongoing flight hour improvement leading to another quarter of robust growth in our aftermarket business, led by air transport aftermarket. In original equipment, build rates continue to ramp, driving growth in both air transport and business and general aviation. Defense in space grew sequentially in the second quarter, and we expect this trend to continue into the second half. We anticipate that business will return to year-over-year growth in the second half as comp Cs but it will be down slightly for the full year. As I mentioned earlier, the overall aerospace supply chain remains challenged and is partially offsetting strong end market demand. While our supplier decommit rate improved sequentially in the second quarter, the pace of improvement is slower than the higher end of our expectations. As a result, we now expect aerospace sales for the year to be up mid-single digits compared to 2021, lower than our previous outlook of high single digits. Original equipment mix headwinds were well telegraphed, but lower volume leverage will weigh on full year margins, which we now expect to be down modestly year over year. In building technologies where supply chain constraints, particularly around semiconductors, have improved slightly each quarter so far in 22, we expect sequentially improved volumes and pricing actions will support continued growth into the second half of the year. Energy efficiency and healthy building solutions remain a priority for our customers, enabling growth in our building solutions and healthy building business. We now expect full year organic growth in the double digits, trending better than our outlook at the end of the first quarter of high single digits to double digits. Our operational excellence and additional volume leverage should allow us to build upon our margin expansion from the first half and the third quarter and throughout the rest of 2022. In performance material and technologies, the favorable outlook in our end markets and two consecutive quarters of double digit orders growth provide solid footing for the future. In process solutions, we expect sequential improvement in the third quarter with continued strong demand for thermal solutions leading the year-over-year growth. We expect sequential growth in UOP throughout the remainder of the year, largely driven by increased refining catalyst shipment with a heavier margin benefit in the fourth quarter versus the third. As we discussed last quarter, Russia will be a headwind to year-over-year growth throughout 22, but we're optimistic about the potential capacity investments in the energy sector to offset Russian supply, especially in LNG, and these investments provide support for our long-term growth framework. We expect a typical seasonality in advanced materials as we exit the summer months, but pricing tailwinds and solid demand support continued year-over-year growth in the back half. For overall PMT, we now expect sales to be up high single digits for the year and upgrade from our outlook last quarter of up mid to high single digits. and we expect segment margin expansion in the second half versus the first. Looking ahead for SPS, we expect continued growth in advanced sensing technologies and gas detection as demand indicators have remained strong and these businesses are supported by a robust backlog. And we expect modest sequential improvement throughout the back half of the year. As we enter into the second half, we expect our personal protective equipment sales run rate to be relatively stable in the third and the fourth quarter, In Intelligrated, we are encouraged by the improvements we're making in our operational efficiency and strategic customer wins, which will enable greater profitability over the project lifecycle. That said, we're seeing capital spending plans of our warehouse automation customers pushed to the right, some of which has been broadly publicized. While we remain very confident in the median term growth rate, we expect 2022 SPS revenue to decline mid-single digits versus 2021 as deliveries slide to the right. As I mentioned earlier, segment margin in the second quarter was lowered by a one-time inventory write-down, so we expect significant sequential margin improvement in the third quarter and continued expansion in the fourth quarter through a combination of higher volume leverage, some cost reduction, and positive mix shifts. For overall Honeywell, we expect third quarter segment margins to be in the range of 20.9 to 21.2%. resulting in year-over-year margin contraction of 30 basis points to flat due to timing of high margin catalyst shipments in PMT and some mixed headwinds in aerospace. Excluding the 40 basis point headwind from continuum, we expect margins to expand 10 to 40 basis points. From a sequential perspective, our third quarter margin expectations are flat to up 30 basis points. Turning to our other core guided metrics, Third quarter 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 20 to positive $30 million with a range of repositioning between 50 and $90 million in the quarter as we continue to fund attractive restructuring projects. We expect the third quarter effective tax rate to be approximately 24% and the average share count to be approximately 679 million shares. As a result, We expect adjusted third quarter EPS between $2.10 and $2.20, up 4% to 9% year-over-year. Turning to the full year, we expect organic sales growth of 5% to 7%, up from 4% to 7% last quarter. We are upgrading our segment margin expectations by 20 basis points to 30 to 70 basis points of year-over-year expansion at a margin rate of 21.3% to 21.7%. This is supported by successful execution of our price-cost strategies, as well as our continued rigor on fixed-cost management. Excluding the 30 basis point headwind from Quantinium, we expect margins to expand 60 to 100 basis points in the year. We expect full-year net below-the-line impact to be in the range of negative $150 million to negative $50 million, including capacity for 350, to $425 million of repositioning. We expect a full year effective tax rate of approximately 22%, and we expect a weighted average share count to be in the range of 684 to 687 million shares for the year, reflecting our commitment to repurchase $4 billion of Honeywell shares in 22. As a result of all these inputs, we have raised the low end of our full year adjusted earnings per share expectations to $8.55 to $8.80, up 6% to 9% year over year, reflecting confidence in our ability to more than offset a $0.05 foreign exchange headwind versus our initial guide from February, as well as navigate evolving external risks. We still expect to see free cash flow in the range of $4.7 to $5.1 billion in 2022, or $4.9 to $5.3 billion, excluding the impact of Quantinium. The cash impact and timing of our Russia exit does remain uncertain, and we'll update you as that continues to develop as it is not contemplated in this guidance. So in total, we executed a strong Q2 despite supply chain, foreign currency, Russia, and inflation headwinds, and are raising the midpoint of our organic sales growth, adjusted EPS growth, and segment margin ranges while holding our cash range demonstrating our strong operational capabilities. Before turning it back to Darius, let's turn to the next page to discuss our ability to deliver in all economic cycles. During our investor day earlier this year, we talked about our track record of managing through the cycle. Our execution through multiple downturns highlights our ability to move quickly and decisively to protect margins, drive growth, ensure liquidity, and position ourselves for recovery. As we continue to maneuver through changing economic conditions, our favorable end market exposures, robust orders, and backlog positions, and diligent cost management will enable us to deliver differentiated results for our shareholders as we have proven in the past. We believe our end market exposures will help us remain resilient during times of short cycle demand softness. In fact, 65% of our sales address the commercial aviation, defense, energy, and non-residential end markets, which are all set up favorably to weather a potential recession. In commercial aviation, pent-up demand for leisure and business travel will continue to drive aftermarket demand, particularly as international travel resumes. Defense will remain relatively stable as international budgets are poised to increase, with restocking from NATO allies adding upward momentum to this end market. The energy markets are also gaining traction with higher, relatively stable oil prices supporting an expected wave of capital reinvestment and LNG capacity additions, which are required to replace Russian gas supply and power the energy transition. Infrastructure bills, both domestic and abroad, provide tailwinds for the non-residential sector, as does increased customer focus on sustainability and healthy buildings. As I mentioned earlier, although we're seeing some near-term softness in e-commerce, We still believe the median term growth is robust. As Darius mentioned earlier, we ended 2Q with a record high backlog of $29.5 billion, up 12% year-on-year. Approximately 60% of this backlog is long cycle, which grew 12% year-over-year, led by growth in commercial aviation, building projects and services, and process solutions projects. This gives us ample runway to support growth for quarters to come. Finally, our long track record of segment margin expansion through multiple downturns and recessionary periods indicates our superior ability to streamline our fixed cost base, simplify and automate operations with our integrated supply chain transformation efforts, and create efficiencies using Honeywell Digital capabilities to standardize business models and use data analytics to optimize productivity and growth. In fact, Honeywell Digital has proven very valuable over the last year. The tools we have built are helping us methodically and strategically implement pricing, enabling us to stay ahead of the inflation curve. This, coupled with our rigorous and proven Honeywell value creation framework, should provide investors with comfort that we will remain highly resilient, perform in all economic cycles, and consistently deliver superior shareholder returns. Now, let me turn it back to Darius to talk about how we are leveraging our resources and expertise to positively impact our communities.

Thank you, Greg. Let's turn to slide eight and talk about the more aspirational approach we're taking to our ESG commitments. At Honeywell, our commitment to improving the world beyond our product portfolio begins with our four pillars of corporate social responsibility. Inclusion, diversity, employees in action, STEM education, and sustainability. We're embedding inclusion and diversity into all our systems and processes at Honeywell. from our enterprise-wide hiring protocols to our supplier diversity program. Our 9,000 employees belong to one of the eight diverse employee networks, and the number is growing every day, allowing us to provide opportunities for the education and allyship to all employees. We believe this approach is not only the right thing to do, but also a fundamental enabler of improved business results. Honeywell has set the guide rails for our culture of inclusion and diversity, and our employees consistently go beyond what is expected and improve that culture. When Honeywell set up the Ukraine Relief Fund to provide on-the-ground aid and employee support, the generosity of our employees helped us raise over $1 million. Our employees are active outside of work in their local communities as well, volunteering over 4,000 hours in 2021. Honeywell is also committed to improving our local communities through STEM education to shape the great minds of tomorrow. We're focusing on providing unserved students access to education that will drive innovation. Some of our initiatives include education and skill development programs in high growth regions, college scholarships for students in STEM pathways, and a refurbished laptop distribution program. Another way Honeywell improves local communities is through sustainability organizations that protect our environment and create a greener world. Through a partnership with the Swades Foundation and America Cares India Foundation, we've helped provide over 10,000 Indian homes with access to drinking water and solar electricity. These pillars allow Honeywell to use its resources to create a long-lasting positive impact in the lives of our employees and the communities they live in around the world. Now let's turn to slide nine for some closing thoughts before we move into Q&A. We continue to execute on our value creation framework, effectively managing through ongoing external difficulties and over delivering on our financial commitments. We remain optimistic about our future, including our ability to deliver differentiated results through the cycle. We raised the midpoint of our full year organic sales and adjusted earnings per share guidance, as well as increased our segment margin rate, fully absorbing higher than previously anticipated foreign exchange impact. I'm proud of everyone at Honeywell who's working hard to adapt and deliver in this challenging environment. While there is a heightened level of macro uncertainty at present, we continue to be confident in our ability to execute on the factors within our control. With that shown, let's move to Q&A.

Thank you, Darius. Darius, Greg, Ann, and Torsten are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Lateef, please open the line for Q&A.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steve Tusa of J.P. Morgan. Steve Tusa, your line is open.

Hey, guys. Good morning.

Good morning.

Just on the defense business, what are you hearing there, and what are you expecting for the second half and into next year?

Yeah, well, as you saw, the business was still down in Q2. But if you combine the long cycle and the long cycle bookings for the first half, it's actually been up year over year. So things are looking better. Obviously, as we look at the Ukraine situation and the focus of a lot of our NATO allies, we do anticipate some positive tailwinds in the next six to 12 months. So similar to what some of the other tier companies, particularly in defense, reported, we do expect that to be a tailwind as we head into 2023 and beyond. Well, obviously, it's been a headwind so far for us this year.

And then what's just a follow-up? What's going on at UOP? I mean, I would have expected maybe a little bit more growth there.

Yeah, well, UOP was, if you think about one business that got hit disproportionately hard by Russia, it was UOP. I mean, it was a substantial hit, and I think it was six points.

We were down one in UOP, and seven points of that is Russia, so it's plus six.

So that absorbed most of the Russia hit, and actually we had some very robust bookings

Russia which were canceled for you right okay all right thanks guys appreciate it thank you thank you our next question comes from the line of Julian Mitchell of Barclays Julian Mitchell your line hi good morning maybe

Hey, maybe just wanted to try and sort of understand the firm-wide sort of sales and margin construct. So I think sort of sequentially in Q3, you're looking at flattish sales and flattish segment margins. And then into Q4, you have a 300 or 400 million revenue uplift and a sort of 200 points segment margin uplift. So just trying to understand, you know, is it really sort of SPS that has that very big margin hockey stick at the end of the year? And also within aerospace, you did allude to some margin pressures and maybe help us sort of frame the scale of those and the factors behind them.

Sure, sure. So I think what you're going to see as we go through the remainder of the year is, you know, as you mentioned, 3Q is going to look a lot like 2Q, you know, broadly speaking. And as we get into Q4, we're going to get our normal sort of seasonal uplift in revenue and which brings along with that some nice fixed cost leverage. On top of that, we're going to get some mixed favorability. We expect UOP in particular to be very strong in Q4. You know that our PMT margins can be pretty lumpy with, you know, individual UOP catalyst shipments, you know, moving that needle. And we have a pretty strong Q4 plugged in there. And we are also taking some cost actions in SPS in particular, where we've talked to you about you know, the relative challenges and top lines. So, you know, that's how I would think about the setup as we go into the back house.

Yeah, so, Julian, just kind of in summary, it's probably three primary things. Number one is PMP mix, particularly in UOP, which is favorable, and we know it pretty well because it's a long cycle business. Number two is some leverage and some cost action, particularly in SPS, which will provide us margin favorability. need a bit more volume leverage also in q4 because as you kind of look through the year the equation will will shift from more sort of price gains the more volume leverage as we get to q4 so that's why um q4 looks a bit more bit higher in terms of margin profile it's it's this is very much in line with our original model so there's nothing really dramatically different than what we expected

And just as the follow-up, sort of any color on the arrow margin pressure you mentioned?

Yeah, I would just say, you know, we printed something in the 26-ish range in Q2, and I would expect that to stay in that neighborhood through the remainder of the year, you know, kind of directionally. We'll probably get, again, a little bit of a lift in Q4 with some extra volume. But, you know, previously we had thought that would be a little bit more robust with a higher revenue profile. But as I discussed earlier – You know, that's where we're probably on the lower end of our range of expectations of supply chain healing and output. And so just a little bit of volume leverage loss, you know, relative to the high end of what we had.

And due to primarily very robust OE demand, you know, which obviously is, from a mixed perspective, is negative. But really nothing there that's different than our expectations.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Scott Davis of Milius Research.

Good morning, guys.

Hey, Scott. Good morning, Scott.

You're one of the few companies I think we're going to see this quarter with gross margins up. I think they're up 60 bps. Would you characterize that because you're ahead of the curve on price-cost or is it some mixed help and benefit? I know that you've keep fixed costs down, and that's helpful, certainly when you have unit volumes. But I would imagine net of price or unit volumes this quarter weren't very positive. So can you help?

Yeah, sure, absolutely. Let me help unpack that. You know, certainly we're trying to stay ahead of inflation. That's been a playbook. You know, we're trying to get, you know, price where we can. And, you know, we have pretty good metrics and visibility in exactly where inflation is. how it's broken down by business unit, how we're seeing it. And now we've embedded that into our operating system such that we can identify it, act. And, you know, we do that in multiple ways. I mean, you know, obviously price is one lever, managing the mix, the things that we know we can sell that are higher margin profile. We've done some redesigns, which are also net helpful, also generate some cost benefit. But the thing I'm particularly pleased about is I can tell you, well, full transparency nine months ago, that was not part of our playbook. I think we've stumbled a little bit nine months ago, and I'm really thrilled because now it's part of our operating system. We know what to do. It's underpinned by the fact we have great data visibility, great analytics, one source of truth, which really enables us to take much more precise management actions to manage the headwinds we see in inflation.

I will pass it on, stick to my one question. Thank you, and good luck.

Thanks, Scott.

Thank you. Our next question comes from the line of Sheila Kayalu of Jefferies. Sheila Kayalu, your line is open.

Thank you, guys. Good morning, Darius and Greg. Thank you. Maybe on, I think I stole my aerospace question, so maybe on integrated and warehouse, you know, that was down sharply in the quarter, as you expected, but you called out greater profitability over the cycle. Can you talk about some of the puts and takes and, you know, how you're envisioning that business improve?

Yeah, I mean, you know, I think, you know, some of the warehouse kind of overcapacity in the market has been pretty well publicized, so I'm not going to dwell on that. I mean, obviously, we're seeing that, too, and You know, frankly, you know, we forget that that business grew at 50% 2021 and at a similar rate in 2020. So, you know, I think that frankly, what needs to happen is that some of the capacity needs to be absorbed. We're very, very excited about the future of warehouse automation. You know, so this is a bit of a blip for the next, you know, few quarters. But midterm, we think that this is going to be still a very good business. And you're right, from a mixed perspective, although You know, there is obviously, to the top line, there is an impact. You know, from a margin mix perspective, this will be net helpful because our LSS business is growing. Some of our projects that we are securing are at higher margin rates. So net-net, you know, this is not something we're particularly that worried about. I mean, we wish the business was there from a top-line perspective. But overall, I think that this is a storm that we're definitely going to weather, and we still love that. the segment that we're in, in warehouse automation.

Great. Thank you very much.

Thank you. Our next question comes from the line of Andrew Obin of Bank of America.

Andrew, your line is open. Hey, Andrew.

Hey, good morning, Andrew.

Hey, how are you? Just a question on the new COO role. And, you know, could you just give us more of your thought process there? And specifically, you know, historically we've been getting questions on Honeywell and M&A. Does that mean that there is usually going to spend more time on strategic alternatives? And does the world look any different to you now, you know, post the market corrections and what's been happening there? Thanks.

Yeah. Well, I mean, I think, you know, let me kind of talk a little bit about the CEO role and a bit more specifically, I mean, you know, as you can imagine, we do, you know, a lot of the operational outputs that we get don't happen by accident. It takes a lot of hard work and attention to detail and data and so on. And I kind of found myself maybe more in the middle of that than maybe I want it to be. Maybe that's good and bad. You know, and frankly, some of these other aspects and M&A and BD is certainly one of those, is an area that I probably should be spending a little bit more time in. But I would add to that customer outreach and people development strategy and some of the other brand building things that frankly I should be doing. And to be very transparent, I've talked about that openly to my own staff multiple times. And I think that the best way to kind of solve that is to really partner with Vimal to be the COO. I mean, he's got a great track record at Honeywell. been extraordinarily successful in running HPT. He's run HPF. He's run PMT. He's got 33 years worth of experience. There aren't too many mysteries to Vimal that he doesn't know at Honeywell with that kind of multi-business experience and multi-continent experience because he's lived in Asia, Europe, and North America. He's going to be a great partner for us to do things. I think this is going to be a net positive for Honeywell because it will allow me to do some other things that are going to be very beneficial. And yes, BD and M&A is going to be one of those things.

I got you. And just a follow-up question on strength and advanced materials came in a little bit stronger than I would have thought. Can you just comment what's specifically going on there and how sustainable it is? Thanks a lot.

Yeah, no, we love our advanced materials business. I mean, you're seeing a lot of things. You're seeing the strength of our Solstice business really picking up. We kind of forget that we have an electronic materials business, probably the only electronic materials and chemicals business based in the US, so you can imagine what kind of future that has. And the business is very robust. We've invested in capacity expansion. Those capacity expansions are not even yet shown in our results and will come to fruition in 2023. So not only are we excited about how the business is performing in 22, things could get even better for 23. So we're very thrilled with the performance of advanced materials.

Great to hear, and congrats to Vimal.

Thank you.

Thank you. Our next question comes from the line of Nigel Koh of Wolf Research.

And congratulations to Vimal. Actually, I was going to ask about the CEO role, but that's been asked already. But maybe just clarify, Darius, is Zimmel going to continue to be the leader of PMT, or is that going to transition over time? But my real question is around the consumer. Obviously, Resideo and Garrett took a lot of the direct consumer exposure away from Honeywell. But in terms of your second-half framework, just given the way that lot of the consumer facing stocks are just blowing up and we're starting to see june july starting to see that impact to what extent have you dialed in you know weaker trends within i don't know refrigerants electronics handhelds with an sps any any kind of concerns you see in there thanks yeah yeah so let me kind of unpack because there's really two questions let me very quickly open the pm the pmt question so no we don't envision um vim holding on to both roles but

What we wanted to do is to make sure that it became clear that the PMT role is open, because as always, when we have big roles like that open, we want to consider internal and external candidates. And frankly, it's much tougher to recruit when a role isn't vacated. So he's going to serve in both roles. As you can imagine, early on, he's going to pay a lot of attention to PMT, but as we fill that role, he's going to take over more of the COO role. So that's the first part. Yeah, we've seen some of the same outputs on the consumer, and you're right. We don't have a lot of consumer exposure. I mean, most of that consumer exposure went away with the two spins, so that's spot on as well. You know, we see it a little bit indirectly. I talked about it in the Intelligrated play because, you know, sort of there was some level of assumption that sort of this consumer demand would keep on going. It's kind of slowed down, and consumers have a little bit of a different behavior, so we see it there. You know, but I would just say this, you know, if you go back to 2020, right after the pandemic hit us, we probably had one of the most unfavorable pandemic portfolio you could have out there, right? I mean, our two biggest businesses were aerospace and energy. And frankly, other than maybe hospitality, those got hit about as hard as anything else. Well, I think we're kind of entering a little bit of a different cycle. And I actually think that no matter what you count in terms of the recession period, I don't see a substantial reduction in, you know, Oh, we build rates for aerospace air travel. There's a lot of pent up demand and you see it, you see it more on the consumer side. And my bet is you're going to see it more and more on the business side. There's still a lot of pent up demand to travel. And let's be honest, the wide body, at least international travel, is nowhere near where it was in 2019. So I think we're entering a cycle here, which is actually going to have a very favorable market mix, market conditions. Obviously, that's underpinned by the kind of backlog position we have. So we're cautiously optimistic that even in a recessionary environment, which may happen, I think we're still going to do quite well.

That's great. Thanks, Darius.

Thank you. Our next question comes from the line of Joe Richie of Goldman Sachs. So Richie, your line is open.

Thanks. Good morning everyone. And congrats to, to everybody on their promotions. My, my, my question is really just around, around pricing. So I think last quarter you guys talked about, you know, five points of price coming through for the year. I'm curious, what's the expectation now? And then also, you know, clearly like you guys are building up a pretty, pretty good war chest here. Backlogs almost $30 billion. Just want to understand how you guys are thinking about, you know, the pricing that's in that backlog and with commodities deflating right now, you know, could you see a nice little boost in 2023 as you start to deliver some of that backlog?

Sure. So you're right. We talked about 5% for the year a quarter ago. We now see that as being more like an 8% number for 2022. So, you know, nice progress for the first, you know, two quarters and that kind of carrying through. Pricing our backlog has been something that's been very important to us. Obviously, that's got a lot more challenges to it than, you know, new orders coming in. But we have been successful in doing that in certain areas of the portfolio. So, you know, we expect to be able to retain a good bit of that pricing. I think we found that our pricing has been very sticky over time.

And maybe Greg, just answering that question on like the, on commodities deflating, like how, how does that, does that impact your business at all this year? Is that more of like a 2023 event? It's like, if we continue to see base metal prices, you know, stay at current levels, which has been on a downward trajectory for the last several weeks.

Yeah, I would say, you know, when we look at it, you know, there are some commodities that are seeing some, you know, of that deflation. But overall, for our total portfolio of direct materials, you know, that's sort of cherry picking. And overall, we still see a net increase.

But overall, I mean, your theory is right, that as some of these commodities come down, you know, we may have an opportunity as we get into 23. for some margin expansion. You know, it obviously varies by commodity. Some of them are indexed. Some of them are not. So, but directionally, I think your assertion is correct.

Great. Thank you. Thank you.

Thank you. Our next question comes from the line of Andy Kaplowitz of Citigroup. Andy Kaplowitz. Good morning, guys. Good morning, Andy.

So you raised HPT expected growth from high single digits to double digits. Are the primary markets in HPT growing that fast, or are these share gains that HPT continues to achieve? Maybe this is a big uptick you're seeing in high growth markets, and how are you thinking about HPT's European exposure?

I think it's a little bit of both. I mean, certainly the business is growing. I think What I'm particularly excited about is that HPT has the kind of solutions that our customers are seeking both in terms of energy conservation, in terms of healthy buildings, healthy environments, clean air, visibility to their energy usage, visibility to their carbon emissions. All of these are solutions that we currently have in our portfolio. And there isn't a customer out there that's not interested. And, you know, that's reflected in their booking rates. I mean, their booking rates were pretty much double digits almost across the board for every one of their businesses. So it's the right portfolio, right solutions, and the business is doing very, very well.

And just there's HPT's European exposure and general European exposure. Are you seeing anything there?

No, not yet. I mean, frankly, our business in Germany, which is obviously the biggest economy, was actually up significantly in Q2, so we're not kind of seeing any signs yet of any kind of a hiccup. We're watching this as much as everybody else. We are as concerned as everybody else around sort of the energy profile as Europe heads into the winter. But so far, so good in terms of what we saw here in Q2.

Appreciate it.

Thank you. Our next question comes from the line of Josh Prokowinski of Morgan Stanley. Josh Prokowinski, your line is open.

Hi, good morning, guys. Hey, Josh. So just want to follow up on PMT. I guess a couple unique drivers this cycle maybe versus what we've seen in the past. I guess, you know, on one hand, you've had refining margins blow out to the upside here pretty quickly and maybe some, you know, snap responses by those customers to drive spending this year, but it's still kind of a long cycle business, hard to get too much going inside of a six or 12-month period. As much as it's good this year, are you guys pulling things forward potentially from 23? Is it still building momentum here? How do you see kind of the unique aspects of this environment, kind of driving momentum or duration versus other cycles in that business?

Yeah, so we are certainly not pulling anything from 23. So let's just be very clear about that. There's no pull-ins. We don't need to do pull-ins because the business is robust. What we're excited about is the LNG cycle. I mean, you know, you see that investment taking place. You see it in the Middle East. You see it in the U.S. We were participating in it. UOP's participating. We had some very robust bookings that you saw in Q2. year, we actually expect more robust bookings in the second half of the year. And we're very much part of that LNG cycle. You know, another really important data point, which is, I don't know if this is well publicized, but we are also the leading player in renewable fuels or green fuels. And the solutions there just this year, our expectation is that the bookings in that segment would be up 3x versus what they were in 2021. So We are very excited. We're kind of playing on the both ends of the barbell when it comes to the energy infrastructure, and I think this is exactly where you want to be. The world needs energy right now, and it's most likely going to come from natural gas, and there's got to be a build-out. There's got to be infrastructure build-out. There's got to be ENT that takes place to supply the world with natural gas. You see that particularly pronounced in Europe. We're playing in that. We're also playing on sustainability and renewables and renewable fuels. And I just gave you the very specific data point on green sustainable fuels where we're really a leader in that space. We're having more and more wins in plastics recycling. We have a pilot going on in battery storage. So just about every relevant, I talked a little bit earlier on the earnings call about partnership in carbon capture. So just about anything you want to do in sustainability and renewable economy of the future, we also do. So we're going to benefit from both sides of this energy transition. And, you know, you see it in the bookings, right, this quarter.

Great, Collin. Thanks.

Best of luck, guys.

Lateef, we have time for one more, please.

Yes, sir. And our final question comes from the line of Dean Dre of RBC Capital Markets. Dean Dre, your line is open.

Thank you. Good morning, everyone.

Good morning.

Hey, just a couple of cleanup questions for Darius. Good to hear that the semiconductor situation seems to be bottoming. Just some color on decommits and your expectations for the second half. Is it going to be a linear improvement? Do you expect it to be choppy? And then for Greg, anything on Russia in terms of other write downs that I know they're excluded, but just, you know, The wind down of Russia, is that complete yet? Thank you.

Yeah, so maybe let me take the first one. Yeah, I mean, I think in terms of recovery on our supply chain broadly, it's going to be very, very gradual. There is no sort of a magic unlock that's going to happen in one quarter and all of a sudden everything will now sort of get flushed through our backlogs and so on. I think it's been very gradual. You know, sort of the decommits you're probably referring to, because I gave some specific numbers on that, and last quarter round aerospace, and just to give you a little bit of an update on that, Q1 was at 22 and a half, 23 in that range. Q2 was better, but it wasn't as good as we had hoped. It came in at just a shade over 21% on the decommit, so better than Q1, but we were kind of hoping something around the 19 to 20 range. But we saw improvement. We expect that improvement to continue gradually. We also saw about a 3% improvement in output Q over Q. So overall, some level of progress, but it's going to be gradual. And that's kind of what we're penciling in for the next few quarters, which is gradual level of improvement, both in the semi-space as well as some of the aerospace supply chain. That's kind of what our standard case is. We hope for the better. We've deployed a small army into the supply chain, particularly in the aerospace segment. to help our suppliers get up to rate. But it's challenging because it's not, you know, sort of just the suppliers that are kind of, let's call them tier three suppliers that really feed us. It's the tier four and even tier five suppliers that are struggling. And, you know, this problem will be solved. I have no doubt it will be solved. But there is no instant gratification.

Yeah, and then on the Russia side, Dean, I mean, I'd say we have taken the bulk of the write-downs associated with You know, our balance sheet as it relates to Russia in the first quarter, that was really around around our unbilled receivables in the second quarter. We took down, you know, essentially all of our PPE and any other related assets down to essentially zero at this point. What we're really working through now is just the cash implications of all of that. And it's going to be a legal matter that will probably take quarters and, you know, well into 2023. as all of the, you know, aspects of sanctions and export control compliance comes into play. So, it's just not going to be a simple wind down. But from a write down perspective, I would say the bulk of it has happened at this point.

Thank you.

Yeah. And Dean, as you know, we've absorbed sort of the FX impact as well into our guidance range, which was, a nickel on the EPS range. And on a year-over-year basis, it's actually a 14-cent headwind.

That's helpful. Thank you.

Okay. I just want to thank all of our shareholders for your ongoing support. We delivered strong second quarter results. In typical Honeywell fashion, we have and we will continue to overcome the numerous external factors we face with operational rigor, and agility in order to drive superior shareholder returns. Thank you all for listening, and please stay safe and healthy.

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