Honeywell International Inc.

Thank you for standing by, and welcome to the Honeywell fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Mecham, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Honeywell's Fourth Quarter 2024 Earnings and 2025 Outlook Conference Call. On the call with me today are Chairman and Chief Executive Officer of Dermot Kapoor, Senior Vice President and Chief Financial Officer Greg Lewis, and incoming CFO 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 are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the fourth quarter and full year 2024, discuss our outlook for the year, share our guidance for the first quarter and full year 2025, and provide an update on the comprehensive portfolio evaluation. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Then we'll go forward.

Thank you, Sean, and good morning to everyone joining us today. We finished 2024 on a positive note, exceeding or meeting the high end of our guidance for organic sales growth and adjusted earning growth in the fourth quarter while navigating an uneven operating environment. During 2024, we deployed over $14 billion of capital, including four closed acquisitions for approximately $9 billion in remaining on track to surpass our commitment to deploy at least $25 billion of capital through 2025. We also delivered on our promise to exit non-core lines of business with a planned spin of advanced material and the sale of our personal protective equipment business in the quarter. Turning to 2025, we're excited by our progress from our future shaping innovations to growing our global install base. That said, we are aware that evolving geopolitical situation Challenging global macroeconomic conditions and tempered demand expectation in some end markets may pressure our near-term momentum. As a result, we are offering a realistic baseline for 2025 performance based on current end market conditions and without assuming a recovery in short cycle demand. While the current operating environment presents some near-term challenges, we continue to believe in the strong through-cycle growth potential of our best-in-class businesses. Now let's zoom out from the near-term dynamics to discuss an important step in our journey to transform Honeywell. Following our year-long comprehensive business portfolio evaluation, we have decided to pursue a full separation of automation and aerospace technologies. We believe the results of our strategic assessment provide clear direction for the future of Honeywell. Let's turn to slide three to discuss today's portfolio announcement in more detail. As many of you know, Honeywell has performed portfolio evaluation systematically for many years, evaluating various ways to potentially unlock value as conditions evolve. About a year ago, I initiated a process to look even deeper at different structures, including full separation of our largest businesses. Following the completion of this in-depth internal portfolio review, I'm prepared to share with you today that the Honeywell Board of Directors has concluded that the separation of automation and aerospace is the best interest of Honeywell shareholders. This step, coupled with the previously announced plan to spin advanced materials, will result in three industry-leading public companies with tailored strategies and growth drivers. The formation of these three distinct companies will enable greater strategic focus, operational independence, and financial flexibility to pursue growth opportunities unlocking significant value for our stakeholders, including shareholders, customers, and employees. From a timeline perspective, we expect to complete the separation in the second half of 2026 and in a manner that is tax-free to Honeywell shareholders. In between, we remain very focused on delivering on our commitment and will continue to identify ways to further shape our portfolio and create shareholder value. Now let's turn to the next slide to discuss why we think this is the right time to separate into three publicly traded companies. The decisions built on the operational and digital foundation we have created over the past two decades and the series of strategic actions we have taken over the past year to dramatically simplify Honeywell. Our accelerator operating system is mature and will be a source of strength for each company. Looking ahead, we see increasing divergence strategic pathway for automation and aerospace. This is a logical next step to bring the portfolio to the next phase of transformation and unlock incremental value. With that, let's turn to slide five to talk about strategic rationale behind today's announcement. We believe the planned separation of automation, aerospace, and advanced materials will benefit all stakeholders and position all three standalone companies for long-term profitable growth. The path will enable three pure-play companies to pursue simplified go-forward strategies that are clearly aligned to the unique purpose of each business and to address the specific needs of their end markets. With this clarity of strategy and incentives and the enhanced financial flexibility that comes with being an independent public company, Honeywell Automation, Honeywell Aerospace, and advanced materials will be able to meaningfully drive innovation throughout investment cycles. The distinct investment profile of each company and an improved ability to customize capital allocation strategy will unleash the full potential of each company's strong balance sheet, creating the best path forward for enhanced commercial success, faster-paced technological innovation, and increased customer intimacy. Each business will be able to build on their existing powerful foundation and with a guidance of focused board of directors and management team that have deep domain expertise and clear vision for their future. We are committed to strong investment grade credit rating for both automation and aerospace, and a strong non-investment grade credit rating for advanced materials, positioning all three to successfully compete for capital among their respective PSX. Now let's turn to basics to talk about what it means for each of these three standalone companies. We are creating three scale pure play public companies that have leading position in their specific categories with a distinct competitive advantage and compelling long-term and market growth drivers. Each has a strong set of competitive advantages built and sustained over decades coupled with cohesive strategic direction and compelling secular growth drivers to support attractive top and bottom line growth. Honeywell Automation will be a pure-play automation leader driving digital transformation, energy security, and increased industrial autonomy globally. Honeywell Aerospace will be a diversified, premier aerospace technology and system provider to all forms of aircrafts with some of the most compelling financial metrics in all of the aerospace. Advanced Materials will be sustainability-focused specialty chemicals and materials pure-play with a strong IP portfolio and set of unique growth investment opportunities. Let's turn to the next page to talk through the value proposition of Honeywell Automation. Cutting-edge controls and automation technology have been the foundation for Honeywell for a century. We have been leading market position across process, industrial, energy, and building and markets that go back decades, creating a vast install base globally. Honeywell technology is used in over 10 million buildings, 17,000 process plants, providing a powerful platform to enable growth through our services and software. Honeywell automation brands are highly valued and well-recognized across the globe, and we have numerous long-lasting customer relationships. As a standalone $18 billion business, Honeywell automation global scale deep domain expertise and long-lasting technology leadership positions can tackle the world's most complex problem and power digital transformation on a global level. Honeywell Automation's current segment margin of 23% is supported by a track record of driving continuous improvement in operating efficiency to our accelerated operating system. We anticipate that the secular growth, such as chronic labor scarcity, increased funding for capital projects, both public and private, energy security, and supply chain resiliency will all stimulate further growth. The rapid advancement in automation technologies is enabling the manufacturing sector to unlock valuable new sources of efficiency through cloud, connectivity, and advanced analytics. These trends are compounding as we speak with the progression of industrial AI evolving from theory into reality, transforming automated facilities into autonomous facilities. In an automated facility, machines with pre-programmed instructions and deterministic outcomes govern the industrial process. But in an autonomous facility, systems or machines can analyze years of historical data and make recommendations and decisions that adapt to new conditions, changing environments, or unanticipated problems. We believe this momentum will only accelerate in coming years and continue to drive increased demand for high-quality sensors, controls, process and software technology, all of which are right in Honeywell's warehouse. In fact, our leading software-based Honeywell Forge IoT platform is already improving asset performance, enhancing labor productivity, and increasing cybersecurity for our customers, as well as driving valuable recurring revenue streams for Honeywell. Increasing energy demand, requirement to reduce emissions, and heightened energy security concerns are driving the need for significant investment in emerging energy verticals, infrastructure, as well as for fortifying traditional energy sources. Annual automation is uniquely positioned to help meet world's need on both fronts, with leading innovation from renewable fuels technology to LNG, building on largest installed base of process technology for the energy sector. As an independent automation pure play, Honeywell Automation will be able to anchor the direction of the company to build on a powerful foundation and focus capital allocation strategies on deepening presence in high growth verticals. We believe this will drive differentiated performance for both customers and shareholders. On the next page, we'll talk about Honeywell Aerospace in more detail. Moving to aerospace, Honeywell has a 100-plus year heritage as a crucial innovator in aerospace and defense. With a diverse portfolio of technology and systems, that spans nearly every major commercial, defense, and space platform worldwide. As a standalone business, Honeywell Aerospace will be one of the largest publicly traded pure-play aerospace supplier with a global scale and the highest value and most critical areas across the value chain. For example, Aerospace has delivered over 100,000 auxiliary power units, a technology we invented, and 72,000 engines since 1969, and is triggering 90% of global aircraft to use Honeywell Avionics. On its own, Aero will pursue tailored capital deployment priorities to position the business to continue driving growth, delivering reliability to customers, and positioning the business for the future of aviation through increasing electrification and autonomy of flight. With an annual sale of $15 billion and a streamlined cost structure yielding best-in-class segment margin of 26%, Honeywell Aerospace is a solid financial profile which can support continued growth and investment in new innovations while maintaining industry-leading profitability. Aerospace also has significant expanding high margin revenue stream from retrofits, modifications, and upgrades, or RMUs. These new value propositions are purpose-driven to serve customer needs within our install base and offer a source of growth that is decoupled from OEM build rates or flight hours, another key source of differentiated financial performance. Aerospace technology has deep end market penetration and global scale in aircraft propulsion, cockpit and navigation system, and auxiliary power units. With a robust Honeywell-funded R&D investment profile of approximately 4% of sales and a customer-funded R&D of approximately 7% of the sales, our business is well positioned to benefit from multiple years ahead of unprecedented demand within traditional aerospace and defense. Aging fleets with a lengthy backlog for replacement, increasing defense budget given geopolitical uncertainty, and higher flight activity in high-growth regions provide support for healthy commercial and defense OE investment upcycle alongside aftermarket strength. At the same time, the industry is in a dire need for new electrification and sustainability offering to meet steep global carbon reduction initiatives. Already now integrated electric propulsion systems combine motor, controller, power, and cooling system with Honeywell's unrivaled expertise in fly-by-wire avionics, including the next-generation Anthem flight deck, making the future of aviation safe, quiet, and efficient. Honeywell aerospace electrification and autonomous-driven technology is also leading innovation that will transform travel and delivery services, as well as how countries defend themselves. This is creating a significant new source of revenue for Aero in the decades ahead, as evidenced by over $10 billion in advanced air mobility wins. An independent aerospace company of this scale and global presence will benefit from a focused strategy, a well-capitalized public company structure, a dedicated board with a deep domain expertise, and targeted high-return investment, both organic and inorganic, to deliver the future of aviation. Let's turn to slide nine to talk about advanced materials. And finally, for advanced materials, as we discussed last October, we announced the SPIN We are very excited about the opportunity to create a leading sustainability-focused specialty chemicals and materials pure play. We believe that as a standalone specialty chemicals and materials business, the company will benefit from greater financial flexibility to pursue its own growth agenda and associated investment choices. This includes distinct opportunities in next-gen sustainable refrigerant, specialty electronic materials, and highly engineered solution for healthcare applications. The business generated approximately $4 billion of sales in 2024 with sector-leading EBITDA margins of about 25% on an estimated standalone cost basis. With over $1 billion invested over the past eight years, AM has built a robust economic mode with an efficient supply chain and a global customer base in a highly regulated vertical. AM's solid competitive positioning stems from a differentiated IP portfolio made up of over 5,000 active patents and applications created by a deep bench of more than 400 highly specialized technologists and engineers. A standalone AM will be able to continue to focus on developing new, more sustainable solutions through next-gen chemistry, and this pure-play business with a compelling investment profile is uniquely positioned to benefit from strong macro trends. Now let's turn to slide 10 to talk about progress on transforming our portfolio. In a little over a year, we have made tremendous progress on optimizing and simplifying the portfolio. In the fall of 2023, we announced plan to reorganize our business around three megatrends. During 2024, we announced a total of four strategic port and acquisition plus a handful of smaller but strategically important technology tuck-ins committing $10 billion of capital, and adding about $2 billion of run rate revenue growing at accretive rates. In addition to these ads, we also are executing on simplification of portfolio with the pending sale of PPE business. Today's announcement to separate automation and aerospace coupled with the planned spin of AM marks the beginning of the next phase of our transformation. We remain committed to and excited about the prospect of Continuum. Last week, SoftBank announced a partnership with Continuum to explore ways to unlock innovative quantum computing solutions that will overcome the limitation of classical AI and explore quantum data center business models, just the latest validation of our technical progress. Continuum continues to make great strides in both technical and commercial progression, and we look forward to an eventual IPO for this business. We will continue to make M&A a consistent part of our operational rhythm. seeking to acquire a creative bolt-on that further shapes the portfolio and enhance the value proposition of each business during the pendency of the separation process. We are confident that our dynamic capital deployment strategy, including acquisition, further share repurchases, and optimizing our operations will lead to an enhanced financial profile for Honeywell that is more attractive to investors. And finally, we are committed to reducing our share count by at least 1% this year, net of dilution, which equates to more than $3 billion of capital deployed over the next 12 months. This reflects our conviction in the future value creation of our strategic plan, near the momentum in the business performance, and what we believe to be a stock trading at an attractive valuation. Let's turn to slide 11 to talk about the next steps. In terms of path forward, we remain on track to complete the spin of advanced materials by end of 2025 and or in early 2026. The planned separation of automation and aerospace we announced today is expected to be achieved in a manner that is tax-free to Honeywell shareholders and targeted for completion in the second half of 2026. We will leverage the rigorous operating principles underpinning our accelerating operating system to prevent business disruption. and manage the one-time cost of $1.5 to $2 billion associated with the separation of both automation and aerospace, as well as advanced materials spins. This operating playbook is a deeply ingrained part of Honeywell culture and will carry on inside each of these powerful franchises. We will provide you with updates on process towards completing these separations. Importantly, we'll maintain a steadfast approach to executing on our commitment to our customers, shareholders, and employees as we enter this next phase of portfolio transformation. Now, before I turn it over to Greg on slide eight to discuss our fourth quarter and full year 2024 results in more detail, I want to thank him personally for his leadership and partnership in my first two years as CEO. Greg's tireless effort as CFO over the past seven years have been instrumental in transforming Honeywell. Greg, I wish you all the best in your next chapter.

Thank you for those kind words, Vimal. It's been a privilege to lead this iconic company alongside you and Darius. And good morning, everyone. Honeywell finished 2024 on a strong note, beating the high end of our organic growth and adjusted EPS guidance in the fourth quarter, despite a still challenging macroeconomic environment. Cashflow is also a positive. coming in at the high end of guidance in the fourth quarter. Importantly, during the quarter, we announced the landmark agreement with Bombardier, one of the largest business jet OEMs globally, to provide the next generation of technology for current and future aircraft in avionics, propulsion, and satellite communications. This includes the first deployment of our next-gen Anthem avionics at scale and comes with a lifetime value of the partnership of $17 billion. While the related investments lowered our reported performance in the fourth quarter, the long-term economics are compelling and there is no impact on 2025 performance. We're proud of the enhanced partnership we're building with Bombardier and excited for the opportunity to lead the industry into the future of aviation. Turning to the fourth quarter, we ended the year positively with sales and earnings per share exceeding our prior guidance range. Overall sales increased 2% organically or 6% excluding Bombardier, with year-over-year organic growth improving five points sequentially in both IA and BA from the third quarter. Segment margins declined 70 basis points from the previous year when excluding the Bombardier impact of 280 basis points. Adjusted earnings per share improved 9% excluding Bombardier, with segment profit growth more than offsetting higher below-the-line costs. Fourth quarter free cash flow declined 27%, mostly due to the cash contributions related to the Bombardier Agreement. Honeywell's backlog reached a record level of $35.3 billion in the quarter, growing 11% year-over-year. Excluding acquisitions, backlog was up 6% year-over-year and 1% sequentially, with particular strength in ESS. Fourth quarter orders increased 11% organically from the prior year, growing in all four segments. For more details on the drivers of our fourth quarter and 2024 results, including year-over-year bridges, please look in the appendix of today's presentation. To wrap 2024, Honeywell's full-year organic sales increased 3%, or 4% excluding the impact of the Bombardier Agreement, as double-digit organic growth in our longer-cycle aerospace and building solutions businesses more than offset softness in the products businesses in industrial and building automation. 2024 acquisitions contributed over $800 million to sales at accretive growth rates, while integration efforts are proceeding well. Full year segment profit grew 1% with margin contraction of 90 basis points in 2024. Excluding Bombardier, segment profit grew 6% with 20 basis points of margin contraction. Margin pressure in the year was driven by contraction in industrial automation, with Arrow roughly flat, excluding Bombardier, ESS roughly flat, and BA up. We believe our accelerator operating system will continue to enable us to expand margins over time, but the pace of expansion can be uneven, especially when coming off 150 basis points of combined improvement in 2022 and 2023. 2024 adjusted earnings per share grew 4%, or 9% excluding Bombardier. We also generated $4.9 billion of free cash flow, $5.5 billion excluding Bombardier at the high end of our most recent guidance range. We deployed $8.9 billion towards M&A, closing four acquisitions this year. In total, we allocated $14.6 billion of total capital, including $1.7 billion to repurchase 8 million shares, $1.2 billion to capital expenditures, and $2.9 billion to dividends, which we raised again for the 15th time in 14 years. So before I hand it off to Mike to discuss our Outlook for the Year, I want to thank Vimal, all of my fellow Honeywell future shapers, and my family for supporting me during the past seven years as CFO. I'm proud of the transformation Honeywell has undergone, optimizing our portfolio, and greatly increasing our digital capabilities. I also want to reaffirm my confidence in Mike as the next CFO of Honeywell. Working with him on this transition over the past five months has only confirmed the decision we made was a great one. He has all the skills and commitment needed to bring Honeywell into the next phase of growth, and I'm excited for the future. So, Mike, over to you.

Thank you for the support, Greg, and all your contributions to Honeywell. Let's turn to the next slide. Looking at our major end market exposures entering 2025, we see underlying long-term secular strength being met with near-term challenges in the microeconomic backdrop and heightened geopolitical tensions. In aerospace, commercial fleet growth and replenishment continue and defense investments remain elevated with some natural moderation from the double-digit growth rate seen for the past three years. We benefit from public and private spending on infrastructure projects and the ongoing push for more automation investment addressing chronic labor shortages and inflation but demand for short-cycle products remain muted in the near term. Energy investments in a number of verticals will continue to support our sustained backlog, while growing demand for digitalization of processes across many markets enables the potential for increasingly AI-enabled offerings to boost our customers' productivity. Breaking down our 2025 market view geographically, high-growth regions in the U.S. will be drivers for gunning growth. partially offset by weaker demand for automation products in Europe and China. The end market and regional views combined with the headwind from the strengthening US dollar temper our outlook for 2025. We are working to determine the magnitude of the pending impact on our business from new tariffs, which are not currently included in our guidance. Overall, Honeywell is well-positioned to navigate the near-term challenges, and our accelerated operating system will help alleviate margin pressures from business mix and integration costs. Now let's turn to the next slide to discuss specifics of the first quarter and full year 2025 guidance. For 2025, we anticipate sales of $39.6 to $40.6 billion, which represents organic growth of 2% to 5%, or 1% to 4% when excluding the prior year impact of the Bombardier Agreement. Our sales guide assumes a mid-year exit of our PPE business but does not include the spin of advanced materials, which we remain on track to complete by the end of 2025 or in early 2026. Our baseline outlook for 2025 assumes a continuation of current industrial demand environment throughout the year and does not assume a recovery in our end market. Aerospace will once again lead growth for the company, followed by BA and ESS. Our acquisitions from 2024 will contribute approximately $2 billion in sales this year, growing accretive rates and becoming part of the organic growth towards the end of the year. For the first quarter, we expect sales of $9.5 to $9.7 billion, flat to up 2% organically. In addition to the normal seasonal step down in revenue from 4Q to 1Q, we will see some headwind in product businesses from fewer comparable selling days. Segment margin for the year is expected to be up 60 to 100 basis points or down 10 to up 30 basis points, excluding Bombardier, as productivity actions and commercial excellence are partially offset by cost inflation business mix. The automation businesses will lead margin expansion for the year as BAC's volume leverage from recovery in building product sales and IA benefits from mid-year sales PPE. Aerospace margin declines primarily driven by the impact of the lower margin case acquisition and its integration will mostly offset improvements in other three segments. Excluding aero, the remaining portfolio will experience margin expansion in products, projects, and aftermarket services and software, but materially faster growth in projects will create a mixed headwind. We expect this dynamic to hold until we see a broader acceleration in higher margin, short cycle, product, and markets. For the first quarter, segment margin is anticipated to be in the range of 22.5 to 22.9%, down 10 to 50 basis points year over year. We assume a modest acceleration organic sales growth through the year as 2024 acquisitions reach their anniversary, aerospace supply improves to unlock additional sales, and the selling base pressure reverses in products. However, the quarterly progression will look similar to historical patterns, and growth rates are not expected to deviate materially from the full year range. Let's turn to the next slide to walk through our 2025 output by business. I will walk through our expectations by segment at high level. However, additional details by SBU are covered in the commentary section of our slide. Aerospace technologies remain the predominant top line driver for Honeywell in 2025 as supply chain outlook continues and we work through a robust backlog. We expect organic sales growth in the mid single digit to high single digit range for 2025 when excluding Bombardier. Our acquisition of CASE will drive accretive sales and segment profit growth, but generate margin headwinds due to integration in the full year of ownership. We expect core arrow margins to remain in their recent neighborhood around 27%, but a roughly 100 basis point decline in 2025 when excluding Bombardier to around 26% due to the impact of the CASE acquisition. In the first quarter, We expect to see mid single digit growth in sales year over year, as we continue to improve our output with particular strength in commercial aftermarket. In industrial automation, the 2025 sales output remains largely dependent on the timing of recovery in products and customer topics decisions, but we are seeing red shoots in some end markets. We expect IEA sales to be down low single digits compared to 2024. Bargains should expand as we benefit from commercial excellence and favorable mix impacts. including from our expected sell of PPE. First quarter sales will be down low single digits year over year, as growth in our core process and sensing business is offset by demand softness in safety, smart energy, and thermal solutions. For building automation, we expect to see growth led by our solutions business as we capitalize on strong project order rates in 2025, with particular strength in data center, airports, and hospitality. We expect overall BA sales growth in low-mid single digits on a year-over-year organic basis. We anticipate BA margins to continue to grow in 2025, driven by productivity actions and the benefit from our access solutions acquisition. In the first quarter, we expect sales growth to be up low single digits, with building solutions outpacing building products. In 2025, energy and sustainability solutions will be supported by a robust pipeline and strong global demand for energy projects. We expect ESS organic sales growth in a low single-digit range for the year. Margin will expand as improved volume leverage and meaningful accretion from the LNG acquisition offsets inflation. In the first quarter, we expect sales to be down low single digits as we work through challenging comms in fluorine products. However, we expect solid growth in UOPs supported by strength in equipment projects as well as conversion of our robust backlog in SPS. For the year, we expect earnings per share of $10.10 to $10.50, up 2% to 6%, or down 2% to up 2%, excluding Bombardier. We'll walk through the puts and takes for EPS in regular detail in a few minutes. Moving to free cash flow, we expect growth at least in line with earnings when excluding the impact of Bombardier. Capital expenditures anticipate to increase by roughly $100 million as we seek to invest in high-return projects, notably in advanced materials as it prepares to operate as a standalone company. This increase in spending will be funded by improvements in working capital efficiency with a strong focus on aerospace inventory. Putting all this together, free cash flow is expected to be between $5.4 and $5.8 billion, down 2% to up 5% ex-componier. You can find a 2025 free cash flow bridge in the findings of this presentation. In addition to CapEx and dividends, we'll continue to deploy additional capital in a manner that is both disciplined and dynamic in 2025, balancing a promising acquisition pipeline with our desire to repurchase our shares at attractive levels, with more than $3 billion planned to reduce our share count by at least 1%. In summary, we're setting a realistic outlook taking under consideration macroeconomic and geopolitical factors. Now let's turn to the next slide to walk through our EPS bridge to 2025. Starting from our adjusted EPS excluding Bombardier, 2025 has a number of puts and takes leading to EPS down slightly year over year at the midpoint of our guidance. Organic segment profit growth is expected to add 22 cents per share at the midpoint of guidance, driven by higher volumes and productivity net of inflation. We expect a segment profit from 2024 acquisitions to contribute roughly $0.33 per share in 2025. This benefit includes some integration expenses as we utilize our accelerator playbook to set a stage for future growth and margin expansion in these businesses. And we are pleased with their performance thus far. Our exit from PPE business will reduce 25 earnings by $0.05, assuming a June 30th closing date, while the divestiture will be accretive to growth and margins. The rise in the value of the US dollar versus global currencies in recent months is forecasted to reduce reported sales and adjusted earnings per share by approximately $400 million and 12 cents, respectively, utilizing year-end 2024 exchange rates. We anticipate below-the-line items, which are the differences between segment profit and income before tax, to create 52 cents of negative pressure on earnings versus the previous year at the midpoint of guidance. First, we expect pension income to be approximately $550 million in 2025, down approximately $50 million year over year because of a previously communicated one-time item in Europe. Next, we see repositioning expenses increasing to a range of $150 million. to $250 million as we return closer to our long-term target repositioning range after line 2024. Finally, our below-the-line expenses are expected to be between 1.325 to $1.375 billion, up $275 to $325 million year-over-year, primarily because of higher net interest expense. We expect our 2025 effective tax rate to be 20% in line with 2024, and our first quarter rate to be 22%. Average share outstanding anticipated to decline from 655 million to around 649 million, adding 10 cents to 2025 EPS. In the first quarter, we expect shares outstanding of approximately 654 million. Combining all the puts and takes, we anticipate the full year adjusted earnings per share to be between $10.10 and $10.50. up 2% to 6% year-over-year, or down 2% to up 2%, excluding Bombardier. Now I'll return the call back over to Vimal for closing thoughts.

2024 was a productive year for Honeywell as our portfolio optimization efforts kicked into high gear, and we kept our focus on executing on our commitment and delivering for our customers. While we may have come into last year with too much optimism for a recovery in our short cycle businesses, we have adapted, demonstrated resilience, and ended the year by delivering organic growth and adjusted EPS results above our targets. We'll continue to do so in 2025. Recognizing the uncertain macroeconomic and geopolitical backdrop in front of us, we will spur growth with innovation and relentless dedication to productivity. and we are focused on delivering on our commitments. While we face an uncertain operating environment, we have incorporated that into our outlook for 2025. Our guidance will serve as a prudent baseline for performance that we have a strong conviction we can achieve with potential upside if underlying demand improves. Further, with today's portfolio announcement, we believe the planned separation of automation, aerospace, and advanced materials will position all three standalone pure-play companies for long-term profitable growth and generate significant value for all stakeholders, including shareholders, customers, and employees. With that, Sean, let's move to Q&A.

Thank you, Vimal. Vimal, Greg, and Mike are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question and one related follow-up. Operator, please open the line for Q&A.

Thank you, if you'd like to ask a question, please press star one on your telephone keypad a confirmation tone will indicate your line is in the question queue. You may press star to if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Julian Mitchell with Barclays please proceed with your question.

Hi, good morning and congrats on getting the strategic review completed and thanks Greg for all the help and wish you well.

Thanks Julian.

Maybe just the first question around the separation news. If you could give us any help around the stranded and stand up costs that might be needed for aerospace and automation initially out of the gate. And also, if you could give us any help on the free cash flow conversion or margin profile of the pieces. We can see the segment margin color, but wondered if there was anything on the free cash flow differences.

Sure. So maybe I'll start with the free cash flow. So aerospace should... should be around 100% free cash flow conversion. The business should be operating at that level. And for our automation businesses, that free cash flow is also expected to be at around 100% free cash flow conversion. So that's what we're aiming for as far as going through this year and then next year.

And on your question, Julian, on the stranded costs and one-time costs, you've indicated one-time costs. $1.5 to $2 billion. Obviously, that's dependent upon the structuring we do, so it's our initial estimate. As we do work, as it gets more refined, we'll update you. The stranded cost, we're not going to offer a precise number at this point of time. We have to do more work, and that's why we have offered a second half 2026, because we want to have ample time to understand it and execute it.

Yeah, the only thing I would just add to that, Julian, is we expect to grow into that, you know, between the growth of the company and taking those stranded costs over time, you know, inside of probably two years, you know, that should certainly normalize itself. That's right.

And just based on our prior experience and everything that we see with advanced materials, that is quite doable. And we see those costs leaving us within 18 to 24 months post-finance.

Thanks a lot. And then just a second question would be around the operating or segment margin guidance. It's flattish this year. I think it was down slightly, 20 bps underlying in 2024. Wondered if that had made you think about maybe doing a more aggressive repositioning cost out program in 2025, and if not, kind of why?

Right. Julian, so I would say a couple of things. First of all, I think what we saw in the fourth quarter and the second half, we're quite encouraged by the margin projections and what we expect to see over the next 24 months. If I look at repositioning costs, we're expecting to add about $100 million of repositioning costs this year, year over year, which will help fund margin expansions. But the bigger point here is really if you look at our segments, three segments with exceptional aerospace will expand segment margins this year, which is quite encouraging. And acquisitions are helping with that, especially in the second half. With respect to aerospace, we're getting a lot of leverage from volume. And that's helping us expand margins. But in the short term, meaning 2025, The thing that puts Arrow on the back foot as far as margin expansions is really the case acquisition. In the case acquisition from a margin standpoint is dilutive. And this is the first year of acquisition. And we have a lot of integration calls that we have to absorb and move out. So really, it's a story of Arrow not expanding margins, but really staying flat on core and then case pressuring. And all other three segments will expand margins.

And Julian, this is Sean. Just to remind you, we've said many times that the case acquisition, while diluted the margin profile in 25, is going to grow very nicely at accretive rates to aerospace and therefore will be accretive to segment profit growth in 25 and beyond.

Great. Thank you. Thank you.

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.

Hey, good morning, guys. Good morning. There's a lot of puts and takes here, but the first question, just to clean up by them, when are you thinking timing to name the management teams of the different pieces, and will there be an external search for aerospace, or will you fill that internally?

Scott, I would say that... we will announce the management teams as the time progresses, but we expect the current Honeywell leadership team to continue. We'll let the boards decide the leadership of Remainco Honeywell and Honeywell Aerospace. So more to come as we do more work here over the next 12 to 18 months. Okay.

All right. I'm just looking at slide 16. So you've got $0.52 of below-the-line items, and you've got $0.33 of profit contribution from M&A, that is, and I think your comment was most of that 52 cents is actually higher interest expenses. Am I, A, did I hear that right? I'm sorry, go ahead.

I can break it down for you. So if you look at the 52 cents, 33 cents of it is interest expense, which is predominantly driven by the M&A interest expense. We have $0.10 of incremental repositioning. And then we have a couple other items. One item which is really weighing on us in the first quarter is the reduced pension income, which relates to a curtailment of a pension plan in Europe that we communicated last year. And then we have about $0.04 of corporate costs that we're working our way through. So that's the $0.52.

OK. So the M&A is a net neutral in 2025 then, correct?

We talked about 1% to 2% increase for the businesses in 2025, and that still holds in this guidance.

Okay. Okay. Fair enough. Thank you, guys. Good luck. Pass it on. Thank you.

Thank you. Our next question comes from the line of Steve Tusa with J.P. Morgan. Please proceed with your question.

Hi. Good morning, and congrats. Echoing Julian's congrats to you all.

Thank you. Thank you. Appreciate it.

So I'm just doing the math on cash. I mean, this year, I think you have like $8.50 a share in free cash as per your guidance, I believe. And that's like 83% conversion. Can you just help me bridge to the 100% you just talked about for automation and aerospace? And then I'm just curious, which one of those is going to be the RemainCo?

I'll answer the main co-question. Look, at this point, the specific legal structuring, we haven't really determined. Both options exist legally, so we'll have to do more work to be more precise between the two. We're going to spend aerospace or automation, but they will be separate companies. That's a firm decision. Mike, you want to answer?

Sure. On cash, Steve, we're guiding 5.4 to 5.8, which is not going to be 100%. We're going to work ourselves to the 100% over the next 24 months. And the big, big unlock in our cash is really working capital. And that's predominantly driven by us being able to reduce and move our whip and finished goods inventory in aerospace. That's the biggest unlock for our cash as far as getting to 100% over the next 24 months. Yeah.

Got it. And then what happens to these below-the-line items like pension income? Does that kind of stay with whatever the RemainCo is and any of those other environmental liability costs, et cetera, et cetera? What happens particularly to pension income?

So we were walking our way through it. It's really too early to comment through it, but we obviously have advisors and working through those particularities, and we'll communicate that as we go through the process and are ready to share this news with you.

All right, great. Thanks for the color.

Thank you.

Thank you. Our next question comes from the line of Sheila Kayalu with Jefferies. Please proceed with your question.

Good morning, everyone, and congrats, Greg. Thank you. Whoever wants to take this, but two questions on Arrow. First, I guess, if you could provide some end market color, particularly on the aftermarket mid-teens aftermarket growth in 2024. Some of your peers have called out a deceleration to high single digits to low double digits in 25. How are you thinking about your OE versus aftermarket assumptions for commercial aero in 25?

Sure. Sheila, I would say, as you know, the hours have stabilized, and from an aftermarket standpoint, just expect similar profile as last year. It's going to be decelerating just because the hours stabilizing the supply chain is catching up. As far as OE mix to aftermarket mix, if we look at our backlog, and especially if we look at our positive backlog, we have a much higher positive backlog in OE. So we continue to essentially expand on our OE and installed base growth. So I would expect on the year basis the OE to grow after market. So I think not very different than our years.

And then maybe go back to the margin profile of aerospace. You mentioned better investment decisions post-spin or more refined ones, I guess. Lots of questions around Bombardier and the payment bear with $385 million in Q4. So how do we think about that? the return on that investment and any other margin moves we should be thinking about in terms of long-term investments within aerospace?

So, look, the Bombardier Agreement is a long-term agreement. It will show into our revenue streams, you know, four to five years from now, like any other of these long-term contracts. So we are super excited about this path-breaking win, both for avionics as well as for the engine. And investments on aero are going to continue. We are ramping up our investment in R&D because we see more opportunities and will remain active in the M&A market if opportunities are available. So you will not see any lack of momentum what we have demonstrated in 2024 in aerospace investments in the next 18 months ahead.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Nigel Koh with Wolf Research. Please proceed with your question.

Thanks. Good morning, everyone. Just wanted to have another crack at the margin question. So the 10 basis points at the midpoint expansion, so it looks like 100 base points of M&A dilution at aerospace and then maybe, I think, 80, 90 base points of expansion elsewhere in automation. Just want to make sure that math is correct and maybe just provide some just overall kind of qualitative kind of discussion on you know, which segments do you see above and below that bar? Thanks.

I would, so I would say this, your math is directionally correct, and a lot of it will depend just how our products, short cycle products grow this year. Right now we have a lot of projects mixed, but we also have the acquisitions coming in and helping expand margins in the second half. So we can follow up on that with you and give you more particulars on that, but I would say your math is directionally correct.

Okay, okay. And then I know you, sorry, I know you addressed the question on R&D investment in aerospace, but I think, Demo, you've been talking about rising investment spending and R&D across the whole portfolio. So I'm just wondering, are we seeing that coming through In in 25 and and just just maybe just talk about the capital occasion during this process, you know through second off 26 You know, you've talked about the share buybacks in 25, but what's the appetite to really scale up capital occasion? You know, why are we going through this process?

Thanks So R&D investment, yeah, we did mention in some of our conversations that we expect that to go up to dollars and but they're actually maintained the percentages. But you will see that increase coming up as we publish the results of 2025. And it's a material increase. If it was a few million dollars, I wouldn't have mentioned it. And our goal is to prepare each business for growth in the future while maintaining our margins. And we are maintaining that careful balance. On capital allocation, as Mike mentioned in his comments, we do expect to do $3 billion of shared buybacks. to maintain our share count down by 1%. And we'll remain active in an M&A market across all segments. We have active deals in motion in automation, in aerospace, and energy. And like any other M&A deal, I can't commit to you when they will happen and if they will happen, but we are going to do hard work to do our best to get some deals done so that our portfolio is well positioned for growth in the times ahead. And The progress we have shown, the deeds we have done in 2024, all those deeds are working extremely well. We are on or above our goals there, and that gives us more and more conviction that our strategy of portfolio transformation is working, and we should continue on that while we execute on separation of aerospace and automation.

Thank you. I would just add that we still have a lot of capacity in our balance sheet on M&A, which we'll continue to be doing, and insurance. So we feel really good where we are at this point and obviously are not stopping everything that we've been doing thus far.

Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your question.

Thank you. Maybe Vimal, just kind of stepping back on the separation, clearly this is something that you've spent a lot of time thinking about over the last year. Is the primary driver of the decision of you that a separation will unlock some of the parts of value, or do you believe the businesses will perform better as standalone entities rather than within the Honeywell conglomerate?

Yeah, so I would, you know, Chris, I'm just going to go back a little bit to answer your question. You know, I started with October of 2023 to say Honeywell should be operated into three megatrends, future of aviation, automation, and energy transition. And we started doing the work to build strategy of each of the three pillars. Part of it was organic growth, but a big part of it was inorganic actions, as you saw for acquisitions last year, spin-off PPE business. But it was also clear to me that as we did work that, the strategies for aerospace and rest of Honeywell in automation were diverging. Aerospace required far more attention on capacity expansion, supply chain transformation, electrification, but automation business wants to focus really on AI, digital transformation, energy security. And that made us think and working with the board that we are better off to be a separate company so that we can drive growth in each portfolio. in a purposeful manner, invest the capital, have the focus strategies. So it's primarily driven by our conviction that there's a more growth momentum and more value to create as a separate company. Now, some of the part is a math. I'm not going to debate it. It's right or wrong. I mean, we are aiming here for higher value by earnings growth and by delivering more compelling propositions.

Thank you. And then maybe just kind of following up on that better growth. You know, we saw a pretty, you know, nice positive rate of change on some of the short cycle end markets, you know, that have weighed on the company the last couple of years, specifically industrial automation and building automation, you know, turning nicely positive in Q4. I guess, is there anything specific to kind of call out on that pickup and growth that you guys are seeing? I don't know if there's any, you know, maybe tariff pre-buy in those numbers because you know, the guide does call for, you know, both of those, both building automation and industrial automation to have worse growth in 25 than what we just saw in the Q4 exit rate. Thank you.

That's right. So we are quite encouraged by the fourth quarter, both on the order side and on revenue. The team delivered really outstanding results. Now going into the guide for this year, As I come in, I really want to give the guide that is, I would say, aligned with what we see and not really betting on end markets in the industrial products improving. And I think that's prudent to do, given with everything that's going on. Just like you said yourself, we don't know exactly whether it's pre-buy or is it trend, et cetera. So that's the one point of the guide and the solution in the first quarter specifically. Also in the first quarter, we are dealing with fewer days versus the fourth quarter, which it has impact for us in our short cycle product sales. And then there's a little bit of lumpiness in aerospace, especially in defensive space as we exit fourth quarter and go into the first quarter. So I think the guide is prudent, and we obviously are encouraged by what we're seeing. But I think for the first quarter, we need to be careful.

Appreciate that. Thank you.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Hey, guys. Good morning. Greg, thanks for all the help. Try not to miss us too much. Thanks, Joe. The first question, and look, I know you guys have a lot going on. Vimal, when you thought about breaking up the company into these three entities, How much thought did you give to potentially maybe even breaking things down further? Because you can make an argument that the automation business could be separate businesses as well. I'm just curious, like the thought process behind that.

Yeah. No, thanks, Joe. I mean, if you look at, you know, I've been quite focused on what doesn't fit into Honeywell portfolio. And the portfolio work, which we have done now, you know, spreading into three companies, aerospace, automation, and specialty chemicals. On automation, we believe there are multiple common threads. So I'm gonna give you a one minute answer and then we meet next time, I'll give you a 15 minute answer. The one minute answer is business model. All automation follows the business model of creating install base and mining that install base through services and software. Number two, the strategic priorities are very similar. We need to focus upon digitalization. uh, the bridge of AI and that means common thread between the businesses and technology and offerings are highly shared between these businesses. Uh, the amount of, uh, common products code we have as an example, our core product in building automation, we call it an EBI platform and in process automation called experience platform. They share the code of tens of millions of lines. We don't publicly share that earlier, but that's a fact because of high interdependency of technology. And more recently, IoT platform, or Forge, is a common across all businesses. So where we sit today, these common elements bind us together. And I'm not going to the territory of people and all that, because that could be a bit debatable. But I have worked in all businesses, another point, just because it's natural, given the similarity of these businesses, we do share a lot of talent across that. So there's a conviction that Remainco Honeywell has a strong binding force is extremely strong. And we are going to demonstrate of that value creation as we go ahead because of this conviction here.

Got it, Vimal. That's helpful. Yeah, I look forward to the longer version as well. But my quick question on the fundamentals, look, I know that you guys had a tough comp in ESS from a margin standpoint this past quarter. But I'm trying to just maybe get a little bit more understanding on what drove the margins down this quarter and fully recognize that there was the refrigerant transition. And so I'm guessing it had something to do with that. But just any color on what happened this quarter on ESS margins.

You mean sequentially year over year or sequentially?

Yeah, just year over year was down, and it was a little bit below, the performance was a little bit below what we were expecting for the quarter, so I'm just trying to understand what the delta was.

Yeah, so the first one is really the catalyst cells in our ESS business. That's a big driver, and that will actually reverse itself in the second half. This project is, you know, tend to be lumpy and when they happen, they're quite, I would say, material. So that's the biggest driver. And then other than that, like we talked about, there's a little bit of deceleration going on. And we just still don't have the confidence in our industrial products recovery business, which is short cycle. And we're going to need to monitor it. And when it happens, it's going to be just massively accretive, I would say, to the performance. And then from the below the line standpoint, there are a couple of things happening. Tax rate, even though for the year it's 20%, in the first quarter is a pressure of about 13 cents. And then, like I talked about, we have a little bit of pressure from pension and containment. That's about 9 cents. And those are the big drivers for the reason why you see that. EPS the way you do in the first quarter.

Yeah, Joe, Mike is spot on on that. And remember, we've talked about this over the years, even when it was PMT, not to really get too excited in any one quarter about the margins, just given the magnitude that individual catalyst shipments can have in a given quarter. And so I would say now ESF is smaller than PMT. That was true for $10 billion PMT. Now for $6 billion ESS, that amplitude is even larger. So to Mike's point, I wouldn't get too anchored on any one quarter. Okay. Thanks, guys. Thank you.

Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.

Good morning, everyone. Greg, thanks for all your help. Just focusing on it. Just focusing on price versus cost, you mentioned prices normalizing in 25, and it seems like you mentioned cost inflation a lot, really, at all of your segments when describing the margin impact in Q4, maybe except for building automation. So could you give us a little more color into what exactly happened? I don't think material costs spiked in Q4. How are you thinking about price versus cost in 25, especially considering tariffs may impact the business?

So I would say we had a good year on price last year. Let's just start with that. And what I see for this year and what we're guiding on the enterprise level will be above 2% on price. Now the price strategy for us will differ depending on what's going on in each of the businesses. What I see this year and what we've been working for the last 12 months is really on having more optionality and more levers on our cost side. and that will be invoking an additional price. So I think price costs will be positive overall, but unlike maybe last few years, this year we just have much more opportunity to work on material productivity, direct material productivity, and the cost side as well. So we'll be balanced on price, but it will be above 2% for the year.

So Andy, the goal here is for us to do margin expansion, doing the balance between price cost and productivity. And unlike when there was a high inflation in 21, 22, we had a single lever price. Now we have an equally big lever of productivity. We have done extremely well on productivity in 2024. And therefore, to Mike's point, we are very conscious on how to dial the two levers because we want to get price. At the same time, we want to get volume. And it will vary by business because some business, we have more opportunity. We could dial A versus B, et cetera. So overall, My summary will be 25 looks more like 24, very similar pricing, maybe productivity is slightly higher, and that's the basis of our guide at this point.

It's helpful, guys. And then, Vimal, maybe just a little more color how you're thinking about revenue growth by geography in 25. I know you mentioned some headwinds in Europe and China. Should China still be a growth market for you in 25? And you've talked in the past about enduring growth tailwinds in regions such as Middle East, India. So what are you seeing overall?

Overall, I would say the dynamics have been very stable over the last 18 months. You know, if I look at aerospace business, it's growing globally, you know, given how much of past use we have and the drivers of flight hours. So is the energy business because the growth is less driven by region and more driven by the timing of the demand of catalyst and new projects. I think in automation business, we see growth in U.S., growth in India, growth in Middle East. Those are the regions which have tailwinds. And we continue to see more pressure both in Europe as well as China. That's one of the reasons in industrial automation business, we have guided low single digit downward progression because that business has most exposure to China and Europe in Honeywell portfolio. So I would say our current guide is assuming more of the same. We are not counting on any European recovery. We are not counting on any China recovery in context of automation businesses. So that's how I'll summarize.

Appreciate all the color.

Thank you. Our next question comes from the line of Dean Dre with RBC Capital Markets. Please proceed with your questions.

Thank you. Good morning, everyone. And my congratulations. I appreciate it. Thanks, Steve. I wanted to just revisit the credit ratings and leverage targets. For Automation Arrow, you're saying look for strong investment grade ratings. Just kind of tack on a leverage range you'd expect. And then just clarify on the below investment grade for advanced materials. That's not surprising. But just kind of frame for us what you're expecting there.

Sure. So let me first answer investment period. It will be very high below the investment grade level. So that's kind of where we're going towards. And honestly, I cannot comment more right now as far as the remaining two entities. We're going through it. But given where the business is today, they will be high investment grade. And we'll have competitive and compelling equity stories. So I can leave it at this at this stage.

Yeah, thank you. And just no tariffs got mentioned earlier, but is there anything specific that you have baked in or specifically not baking in for the 25 guide?

Yeah, so there are no tariffs in the guide. Now, looking at tariffs, if we look at China and Canada, they're not material for us, given just local for local and how our business are positioned. And we're working through Mexico, trying to understand what the tariffs mean, and like everybody else, just thinking through it. But it's something that's definitely manageable.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Kapoor for any final comments.

I want to thank our shareholders for your ongoing support and our Honeywell colleagues who continue to enable us to outperform in any environment and our many customers that work with us to help shape a better world. Our future is bright and we look forward to updating you on our progress as we execute through our commitment. Thank you for listening and please stay safe and healthy.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.