Honeywell International Inc.

Thank you for standing by and welcome to the Honeywell second quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll 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. Thank you. You may begin.

Thank you. Good morning. and welcome to Honeywell's second quarter 2025 earnings conference call. On the call with me today are Chairman and Chief Executive Officer Vimal Kapoor and Senior Vice President and Chief Financial Officer Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our investor relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements, that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the second quarter, share our guidance for the third quarter, and provide an update on full year 2025. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Zimul Kapoor.

Thank you, Sean, and good morning, everyone. Honeywell again delivered solid results in the second quarter, meeting or exceeding all our financial commitments in a time of significant global economic change. Our organic sales and orders growth both accelerated during this quarter as we are seeing the benefit of our consistent spending and execution on new product development across our businesses. Given the strong first-stop performance we are raising, sales, and earnings guidance for the full year while incorporating into our outlook all currently known tariffs and the uncertain business conditions going forward. Our proactive, multi-prong mitigation efforts, coordinating closely with suppliers and customers on productivity and pricing initiatives, have been working as planned. And because of our systemic approach, we are in a position to deliver strong sales, profit, and cash flow growth in 2025. As our business leaders have been solely focused on meeting and exceeding our financial commitment, management and the board have been fulfilling our promise to transform our portfolio ahead of our upcoming separation to best position each of the future independent companies for success. Throughout the comprehensive portfolio review I initiated shortly after becoming CEO, we have diligently analyzed how to further simplify and optimize Honeywell. Earlier this month, we entered the final stage of this process, announcing our intention to pursue strategic alternative for our productivity solution and services and warehouse and workflow solution businesses. The results of this pursuit, whatever they may be, will clarify the standalone automation company's go-forward strategy and value proposition. With many changes in flight, our dedicated separation management office have kept us right on track to execute our spin-off transaction, both on time and without commercial disruption. Let's now turn to slide three for further update on our formation of three industry-leading public companies. We continue to make great progress along with the path to separate into three independent companies, which we believe will maximize long-term value for all Honeywell stakeholders. As independent entities with clear alignment and purpose, increased organization agility, and customized capital allocation priorities, each will be better positioned to accelerate future growth opportunities. Given the pace of our progress, we can now narrow the timing for the spin-off of Solstice Advanced Materials to Honeywell shareholders to the fourth quarter of this year. Solstice Share will trade under the ticker SOLS on the Nasdaq Stock Exchange. A few weeks prior to the spin, the Solstice leadership team will host an investor day in New York. They will lay out in detail the powerful investment case for this innovative market leader and in secularly growing advanced material market that will carry on Honeywell's legacy of operational excellence. We hope you will join CEO David Swell and his team at this event. We're also making great progress on aerospace spin, which is planned for the second half of next year. Last month, aerospace president Jim Correa and I presented an investor reception ahead of Paris Airshow, Jim highlighted Aero's industry-leading position as a mission-critical supplier of systems across aerospace verticals and platforms. In addition, he provided insights into drivers for our strong growth profile, underpinned by a broad aerospace and defense upcycle, which we enhanced with a powerful decoupled sales initiative, ongoing supply chain transformation effort, and robust research and development investments over time. We look forward to providing you with more details on standalone Honeywell Aerospace in coming quarters. And yet, we are not waiting for the separation to reshape our portfolio for future growth. We continue to selectively deploy capital towards acquisition, announcing two new deals in the past couple of months. We are also looking to recycle capital, as I discussed earlier, by pursuing alternative or businesses that do not fit our future. In combination of these actions will drive value creation as we await becoming separately publicly traded vehicles. If you turn to slide four, I will discuss our recent portfolio announcement in more detail. In June, we agreed to 1.8 billion pounds bolt-on purchase of Johnson's Metis Catalyst Technology business. We have long identified our UOP process technology business as a natural owner of this highly complementary business because it gives us additional capabilities in sustainable methanol sustainable aviation fuel, hydrogen, and ammonia to better serve our extensive customer base. It also brings attractive sales from Catalyst, which fit very well with our existing offerings. The transaction is expected to close in the first half of 2026 and will enhance our growth and margin profile over time while providing a strong financial return. In early July, we also announced a technology tuck-in acquisition of Line Tamr, that enhances our building automation capability in high-growth energy storage and data center end markets. While such smaller Ds do not often get much investment attention, in aggregate, they can accelerate our strategic roadmap and boost growth with a lower risk profile. We recently announced our intent to evaluate strategic alternatives for our PSS and warehouse automation businesses. Just as we want to acquire businesses such as Catalyst Technologies and Lion Tamer, Where we believe we are natural owner, we must also acknowledge when the time comes, then we better owner of parts of our portfolio. We're looking to create a pure play automation company with a consistent business model and focus end of end markets in which we have durable competitive advantages. Both PSS and Integrated have strong customer basis, long history of innovation, and best-in-class operation, and we will evaluate options for them from a position of strength. To avoid interfering with the review process, we will hold further updates until it's completed. I will now turn it over to Mike to provide more details on our excellent second quarter results. Thank you, Vimal, and good morning, everyone.

Let's begin on slide five. In the second quarter, we build upon a strong start to the year as we again exceeded our guidance for organic sales growth and adjusted earnings per share. Our results demonstrate the resilience of our accelerator operating system to adapt to changes in the environment quickly and deliver on our financial commitments. At the same time, we remain committed not to compromise on our investment in growth initiatives, as we are beginning to see evidence of our progress. Second quarter sales grew 5% organically, with three out of our four segments above this level. Defense and Space and UOP led growth with double-digit performances. Segment profit expanded 8% from the prior year, in line with sales, and segment margin finished nearly flat and within our guidance range. Margin expansion in building automation and industrial automation and lower corporate costs were slightly more than offset by margin pressure in aerospace technologies and energy and sustainability solutions. An increase in research and development expense, up 60 basis points as percentage of sales from the previous year to 4.6%, pushed down current period margin at the segment level but will enhance future period growth. Earnings per share in the second quarter was $2.45 per share, up 4% from the prior year, while adjusted earnings per share was $2.75 per share, up 10% year over year. Organic and inorganic segment profit growth, as well as the lower tax rate, more than offset headwinds from higher interest expense and lower pension income. You can find a bridge for adjusted earnings per share from 2Q24 to 2Q25 in the appendix of this presentation. Orders were $10.5 billion in the quarter, up 6% year-over-year, excluding the effect of acquisitions and depositors, led by strong double-digit increase in aerospace orders. Backlog grew 10% organically from the prior year to a new record of $36.6 billion. Second quarter free cash flow was $1 billion, down roughly $100 million from the previous year, as tariff-related cost inflation pushed up, inventory levels, and capital projects spending expanded as planned. We continue to dynamically allocate our excess cash flow and balance sheet capacity based upon the best opportunities the market presents to us. During the second quarter, our capital deployment was well balanced, with $2.2 billion used to complete the accretive acquisition of Sundyne, and over $2.4 billion returned to shareholders, roughly $1.7 billion of share repurchases and $700 million of dividends. We also allocated $300 million for capital projects. Now let's turn to slide six to discuss our second quarter performance-wise segment. I will give a high-level view of results and with additional commentary provided on the right-hand side of the slide. In the second quarter, aerospace technologies grew 6% organically, highlighted by another strong quarter of our defense in space and commercial aftermarket businesses. Segment margin contracted 170 basis points to 25.5% as 11% output growth, commercial excellence, and productivity actions were more than offset by higher cost inflation and the impact of case acquisition. In industrial automation, sales were above our guidance range, coming in flat on an organic basis. Segment margin expanded 20 basis points to 19.2% driven by productivity actions and commercial excellence, which more than compensated for cost pressures. In May, we completed the sale of the PPE business, which will be accretive to organic growth and margins in the second half of the year. Building automation delivered another quarter that surpassed our expectations, with sales increasing 8% organically from the previous year. Second quarter margin expanded 90 basis points year-over-year, led by volume leverage and full quarter benefit from access solutions. Energy and sustainability solution sales grew 6% organically in the second quarter, exceeding our expectations, driven by double-digit growth in EOP. Segment margin contracted 110 basis points to 24.1%, as volume leverage and benefit from the margin accretive LNG acquisitions were more than offset by impact from a customer settlement, as well as cost inflation. Now move to slide seven to discuss our third quarter and four-year guidance. Our first half of performance has given us confidence to increase our outlook for the year, even as we remain cautious regarding the lagging effect on business demand from tariff announced in recent months. Despite this, our framework for the year remains largely unchanged. We're factoring in non-tariffs as they are written, assuming any moratorium means a later revision to higher rates, net of all of our mitigation options. Keeping in close communication with our customers and suppliers, We remain committed to fully offsetting the effect of these tariffs with a combination of productivity, pricing, and alternative sourcing as we balance protecting both margins and demand. We are raising the lower end of our full year organic sales growth guidance range by 200 basis points. Factoring in our first half performance and recent short cycle order trends, we now project growth of 4% to 5% for the year, or 3% to 4% when excluding the prior year impact from the Bombardier agreement. For a year to date, results have exceeded previous expectations while maintaining a pragmatic approach to the back half. We have increasingly seen large energy projects and catalyst spend, which can carry attractive incremental margins in our UOP and process solution business, pushed out into 2026 because of macronomic and legislative uncertainty. Four-year sales are projected to $40.8 billion to $41.3 billion, driven primarily higher by better organic growth, elements from foreign currency translation, and additional revenue from the Sunday acquisition in June. We expect year-over-year organic sales improvement to be similar in both the third and fourth quarter, when excluding the impact of the Bombardier Agreement in the fourth quarter of last year. We anticipate a third-quarter organic sales growth of 2% to 4%, which equates to $10 billion to $10.3 billion. For the full year, we now expect our overall segment margin to be up 40 to 60 basis points or be down 30 to 10 basis points ex bombardier. Reduced margin expectations from the prior guidance stem from the high decrementals of delayed energy project work and the lag effect of pricing relative to tariff-related cost pressures in our aerospace business. In the third quarter, segment margin is anticipated to be in the range of 22.7% to 23.1%, down 90 basis points to down 50 basis points from the prior year, with VA margins expanding, ESAS margin roughly flat, a year margin contracting modestly, and arrow margin similar to its second quarter level. We now expect full year earnings per share of $10.45 to $10.65, up 6% to 8%, or up 1% to 3%, excluding the 2024 impact of the Bombardier Agreement. Earnings per share in the third quarter is anticipated to be $2.50 to $2.60, down 3% to up 1% from the prior year. I will provide further details on changes to our full year EPS guidance later in the presentation. We continue to expect free cash flow for the year between $5.4 billion to $5.8 billion, down 2% to up 5% ex-Bombardier, which remains approximately in line with adjusted earnings per share growth. We give additional information on changes in free cash flow from the prior year in the appendix. Having deployed $7.8 billion in the first half of the year for share repurchases, acquisitions, dividends, and capital projects, we remain opportunistic in allocating additional capital beyond that already committed for the rest of the year. To summarize, our strong execution in the first half has raised the bar for the year, even as we prioritize setting prudent expectations in a highly dynamic environment. Focusing on what we can control, our company remains poised for strong performance ahead of our pending separations. I'll now turn to slide eight to give high-level overview of our outlook by segment with further details by business unit provided in the commentary portion of the slide. In aerospace technologies, we continue to anticipate full-year sales growth in a high single-digit range or mid-single-digit to high single-digit when excluding the impact of the 2024 Bombardier Agreement. Supported by supply chain unlock and elevated global demand amid geopolitical conflicts, our defense and space business should lead segment growth for the year. Commercial aftermarket growth remains consistent with air transport currently stronger than business aviation. We still expect commercial OE sales to recover and grow in the back half of the year as customers work down existing inventories, allowing our sales to better align with OE build rates. For the third quarter, organic sales are expected to be up mid single digits to high single digits led by defense and space with continued solid growth in commercial aftermarket and commercial OE no longer at draft. Margins for the third quarter should be consistent with the prior quarter. For the full year, margins are expected to approach 26% as volume leverage is more than offset by the impact of acquisitions and as tariff-driven causing inflation temporarily outpaces pricing. In industrial automation, we're increasing our 2025 sales outlook to down low single digits to down mid single digits, given second quarter top-line results and short cycle orders holding up better to date than initially feared in April, though still down year over year. Order declines are not contained to IEA short cycle businesses given long cycle pressures from delayed energy customer CapEx decisions. We expect full year IEA margin to be roughly flat versus 2024. As incremental tariff related cost inflation and volume, the leverage are offset by commercial excellence, improved productivity, and second half accretion from the PPE cell. For the third quarter, we also anticipate a similar sales performance as full year. As growth in sensing, thermal solutions, and warehouse and workflow solutions is offset by muted demand in PSS and project timing delays in core process solutions. Margins are expected to contract modestly from the previous year, but increase sequentially. In building automation, we are raising our 2025 sales outlook for the second consecutive quarter. as 2Q sales exceeded expectations and second half prospects have improved from our view in April, given solid order trends. As a result, we now expect mid single-digit to high single-digit organic sales growth. Products and solutions should grow at similar rates through the second half, driven by software-led new product introductions, momentum in the U.S., and high growth regions, and customer wins in focus verticals. For the third quarter, we anticipate sales to be up mid-single digits as comps from the prior year become modestly more difficult in the back half. We expect building automation to expand margins meaningfully for the third quarter and for the year, supported by volume leverage and productivity options. In energy and sustainability solutions, we're slightly reducing our organic sales growth outlook to reflect a more cautious capital spending posture from UOP's energy customers. We now expect full-year sales to be flat to up slightly. Advanced materials should lead growth in the second half on improving demand tolerance and the uplift from easing priority comps in fluorine products. We anticipate full-year ESS margin to remain roughly flat as commercial excellence and uplift from the LNG acquisition are offset by less favorable mix from reduced high margin project and catalyst sell and cost inflation. In the third quarter, we expect ESS sales to decline low single digits with growth in advanced materials offset by lower EOP projects and a headwind from the timing of catalyst shipments shifting forward into the second quarter. Just as for the full year, margin is anticipated to be around flat to 2024. Now let's move to slide nine to walk through our 2025 EPS bridge. We see organic segment growth contributing an additional 13 cents per share for the full year, in line with our view in the prior quarter. While second quarter results finish above our guided range, the performance included a couple cents of benefit above the line from the Sunday acquisition and a few extra weeks of ONIC PPE. It also included some UOP catalyst shipments that were expected to occur later in the year. As a result, we are largely maintaining our outlook for the second half of the year, with some pluses and minuses under the surface. Organic sales should be better, both in building automation and industrial automation, which we do not anticipate being down as much as contemplated in April. However, segment margin will be pressured some in IEA because of negative mix from reduced demand for energy projects and in aerospace because of pricing increases and lagging behind tariff-related cost inflation. Acquisitions are now expected to add roughly 40 cents per share to 2025 EPS with Sundyne being added into the mix. The impact of FX quarterly tax rates and below the line items are fairly straightforward in the bridge. As the company focuses its transformational efforts on completing two spin-off transactions, repositioning projects have slowed. However, we anticipate more spending in the second half of the year and return to a normalized level post-separation. Additional details on these items are available in the appendix of this presentation. I'll now hand the call back over to Vimal to conclude our prepared remarks.

Thank you, Mike. Honeywell performed admirably in the first half of 2025 with back-to-back quarters that delivered earnings above the high end of our target ranges. Our investment in innovation is gaining traction, driving improved sales growth, and yet another record quarter for our backlog. On the back of this operational momentum, we are raising our organic sales growth and adjusted earning per share guide for the year, while being mindful that we may not yet have felt the full impact of escalation of global tariff rates in recent months. Business demand has remained resilient in most sectors and geographic regions thus far, but we are well prepared for potential changes ahead in the macro, regulatory, and geopolitical environment, utilizing a playbook that has served us well over many cycles. As our businesses focus on delivering our financial targets, we have also made substantial progress in transforming our portfolio to maximize their value. Through separation, acquisition, and divestitures, we are simplifying Honeywell for investors, customers, and our future shapers. All our transactions are proceeding according to plan. Even as the first chapter of my tenure as CEO comes closer to an end, with the conclusion of the comprehensive portfolio review, our dynamic approach to capital allocation and portfolio optimization remains evergreen. We are confident that the combination of our accelerating growth and high return capital deployment will compound the value of Honeywell going forward. With that, Sean, let's take questions.

Thank you, Vimal. Vimal 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. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Julian Mitchell with Barclays Bank. Your line is now open.

Hi, good morning. Just maybe wanted to start off with aerospace to try and understand kind of the moving parts there. I suppose it sounded in Paris as if there was a bit more confidence around sort of supply chain issues and getting those resolved and that might help the commercial OE top line, but it seems something's sort of, you know, moved the other way. So just trying to understand is that BGA or large commercial, you know, what's the pace at which commercial OE sales improve? And on the margin front, you know, should we think about this sort of 25% to 26% margin being the new sort of baseline for the next 12 or 18 months?

Good morning, Julian. How are you? So I would say, first, orders in aerospace extremely strong, continue to be strong on all fronts, defense and space, commercial, OE, et cetera. What do we see in our commercial OE in the second quarter? It's really a transitory item, I would say. We experienced some destocking with one of our OEMs, and we expect our shipments to normalize to OE build rates in the second half. I feel very confident that you'll see better OE profile from us in the second half. But like I said, we feel quite bullish on aero performance for the year. From a margin standpoint, as we talked earlier, we were integrating case, and that's about 100 bps drag for us year over year. That's going to start to normalize in the next year. Case, by the way, is growing revenue this year at high double digits. So it's ahead of our pro forma, really encouraged by that. And we also year over year are putting about $200 million of incremental R&D into the aerospace business to help support our NPI growth and new revenue next year. So I think in the second half, margin profile for Aero will be better than what you've seen this quarter. And like I said, I'm quite confident about the high single-digit growth on revenue for the rest of the year.

The only thing, Julian, I'll add is everything what Mike said is all transitionary items. If you see the margin-related discussions we have, the OE mixes the transition because of the T-stocking. R&D is We evaluated to a level we can perform for the future, so that's going to become new normal. And then case acquisition is only going to become tailwind in the future. So these are not your other question, is it a new baseline? Answer is no, because these issues are transitionary, and we have very high confidence on the error margin projections we have laid out.

Got it, and just following up on that, Vimal, so the sort of R&D hike, you think by the end of this year, kind of R&D to sales in Aero shouldn't be a headwind next year, and then case margins start to improve over the next year or so?

Both statements are true, and then the OED stocking issue also goes away because the rates will converge to the normal baseline. That's why I mentioned these are all transitionary issues. By the way, on the R&D spend, The R&D spend rises not only in aerospace, it's across all four segments of Honeywell. We feel continued confidence on our ability to accelerate organic growth through new products. We see part of that happening in building automation, pockets of industrial automation, aerospace, we talked about VINs. But overall, we have a meaningful acceleration of R&D spend for the right projects. And this is going to set up a new baseline for Honeywell for the future. This is, again, a transitionary for the overall company. We don't expect that to repeat in the year ahead at the same level.

Great. Thank you.

Thank you.

Our next question is from Andrew Obin with Bank of America. Your line is now live.

Hi, guys. Good morning.

Good morning, Andrew.

Good morning. Yeah, can we just talk a little bit about UOP? You know, and my question is very strong growth this quarter, but you're seemingly talking it down for the second half of the year. Can we just understand what verticals drove the upside and what verticals are driving the downside, if we could just aggregate it? Thank you.

So let's say, Andrew, for the quarter two, we had two favorable items. We had a big licensing agreement with a customer which gave us long, strong growth. And also catalyst sales were much stronger in Q2. So some of the catalysts got pulled through from second half to first half. So that's more of a cycle of this long cycle business. So the second part of your question, the impact we see is energy project spend is moving more to the right. Part of it is, I would say, economic uncertainty which got settled in and some of the regulatory items which got clarified with OB3 regulations. So we do believe they will settle, but clearly we saw pressure on that for the rest of the year, which we have reflected in our guide for ESS business and to a certain degree also in IEA for process automation.

And I would just add that just looking at the OB3 and the IRA, it's mostly preserved for us, so it's not really a headwind for us into next year.

Gotcha. And then on industrial automation, just to follow up, so HBS, similar dynamics. So is it fair to say that when you say we can demand and price-cost the leverage in the second half of the slide that it mostly relates to HBS and that's what's driving sort of Slightly lower margin outlook there. Is that the key driver?

Yeah, primarily I would say in case of HPS, the same energy projects, the projects part of the business will see the similar pressure. The services side remains strong. Mike, anything you want to add on the?

I would just say, Ben, while I continue to be prudent about the second half, a lot of moving parts, I feel confident we'll be able to deliver on the guide that we put it from, but just continue to be prudent on the second half, especially around the short cycle orders.

But you don't have one specific industry vertical region to call out other than this big tariff uncertainty.

That's correct. Absolutely right. I mean, in fact, we see much more balanced growth across the world now. Of course, U.S. remains the leading growth, no doubt about it. But the headwinds we saw a couple of quarters last year in particular on Europe and China have subsized now. So the growth is more normalized across the globe, with the U.S. being the leading growth.

Thank you very much. Thank you.

Our next question is from Nigel Coe with Wolf Research. Your line is now open.

Thanks. Good morning, everyone. I just want to pick up on maybe the first couple questions, just on the energy project. Is that mainly on the clean energy projects or is it just large process projects in general? And then maybe just a final point on aero margins. It seems like tariff inflation should be better news today than it was back in April. So I'm just curious what additional inflationary pressures you're seeing in aero.

So nine-level energy project, just to kind of dig into little details you're asking for, I'll provide into a couple of buckets. LNG remains very strong. The business we acquired is performing extremely well, and we remain very bullish on LNG. So that's going to benefit ESS. That's going to benefit process automation because our two-in-a-box strategy. Sustainable fuels projects are the ones which are most impacted, moving to the right. I think they were primarily policy around IRA, how will they fold out with OB3. Now things have got cleared up in the last 10 days. So we do believe that should bring up the positive momentum. On the traditional refining petrochemical side, I would say that we saw higher catalyst spend in Q2. In fact, few got accelerated, which led to strong performance for Q2. But we do see some weakening demand there. I think customers are more cautious on making large catalyst spend in certain segments. But overall, I think the performance, we had a chance to attend OPEC meeting a couple of days back, and the outlook for energy segment remains extremely bullish across the core gas refining, biomass-based products coming in the future. So our outlook remains extremely bullish. I think we're just going through a typical cycle in the energy right now.

And then on the aero question, what I would tell you is that if you look at tariffs, when we incur tariffs, we pay them in 10 days. It's easy to pass tariffs as far as timing on short cycle businesses. When it comes to aerospace and our OE contracts, these matters take a longer time because you have to open the contract and these contracts usually are set for 10 years and prescribed by certain frameworks. So the team is working through it and it will take them a little bit longer to get that price aligned with the cost as we obviously keep in mind how we impact our customers.

And Mike, could you maybe just touch on the changes to the R&D tax expensing for tax purposes? You've got about a billion dollars of deferred tax assets in your balance sheet. So just how does that unwind over the next couple of years?

Yeah, so I would say it's obviously net positive for us. And right now we're just evaluating it with our tax team, thinking through, given we have all those things going on and the separation on how to unwind in the best way, I would say it's a talent for us for 26 and 27. But we'll have more to say about it as we go into next year. But you are correct, this is a talent for us.

Okay, thank you.

Thank you.

Our next question comes from Steve Tusa with JP Morgan. Your line is now open.

Hi, good morning.

Good morning.

Just trying to like get to the margin guide for the year. You guys have given some good detail. I guess for I think to get into the range, is building automation like close to 28 this year? Is that roughly the right ballpark?

I would say it really depends how you look at it and where you look at it. On the product side, obviously the incrementals are extremely high for us right now. Projects is a bit lower, but I would say incrementals are quite high.

Yes, Steve, this is Sean. I would say thinking about the full year, that's probably a little bit aggressive, but in terms of is that business capable of delivering a number like that, it has the capability of doing so.

It's fair to say, Steve, that GA will be the highest margin business in our portfolio in 2025. So that will be a fair statement.

Okay. And then just one follow-up, just on the hedge, I guess the contingency you guys had put into place last quarter, what's kind of the status of the contingency? Obviously, I have better visibility now, but just curious as to where that went.

Yeah, so I would say we learned a lot over the nine months. last 90 days. When we were talking last time, we were evaluating terrorists' life. I think if you look at the guide that we just gave, I feel high level of confidence we can deliver that. Third quarter, obviously, is a very important quarter for us. Like we said earlier, some of the longer cycle project milestones have moved out on us. And then we had some of the demand on catalyst software to be softer. But on the other hand, building automation and IA short cycle orders are better. So I think that we're kind of in a very similar spot that we were last quarter.

Okay, great. Thanks a lot.

Thank you.

Our next question comes from Scott Davis with Milius Research. Your line is now open.

Hey, good morning, Vimal, and Mike and Sean.

Good morning.

Guys, can we talk a little bit about Quentinium? It looks like it's still bleeding a little bit of cash for you guys, but what are the hurdles specifically? What are you guys looking for to be able to get that to an IPO-ready situation?

Well, Scott, I would say the – In principle, we are committed to deconsolidate so that the plan is not changing. And actually, as we speak, we are doing the fundraise so that we could capitalize the company between now and the IPO time. To a specific question, I think we are looking at more commercial evidence which can prove the revenue stream for it. We had a big win in Qatar when President was visiting there. There was a big announcement that Qatar is going to invest for quantum infrastructure So wins like that gives investor confidence on the full revenue stream. And the way I see timeline today is end of 27 is, I would say, the outline at the most. Can we pull it forward by a couple of months or quarter? Yeah, that possibility always remains. So we're working with that kind of timeline. And we do have a good visibility on commercial progress between now and then to execute that. We also expect Scott to unveil the plans of Continuum in the Q4 timeframe, so we'll keep all our shareholders informed on some of the progress we are making, and we'll share that on a more broader basis.

Okay, that's helpful, Bimal. And just to switch to the R&D, and we don't have to make a big deal out of this, but the timing, I don't think I've ever seen a company prior to a breakup, increased R&D spend. So I'm just kind of curious, is that a message coming from the businesses that they felt like they were behind? Or is there just a, is it just happened to be a little bit of just a, you know, is what it is? You know, I'll just stop there. I don't want to make.

This is part of the message I've been saying since last year, that Honeywell organic growth with the strength of improving our fundamentals, So the two fundamentals we were focused on, improving our processes, are we investing at the right spot? Do we have the right talent, the basics? And then we made decision sometime in last year to accelerate R&D where we think we have opportunity to grow. And you can imagine hiring people in the domains we play like aerospace energy is very, very long cycle. So I can't make a decision in June and people show up in July. This is much, much longer than that. So principally across the board, We are investing R&D acceleration. It's higher in Aero compared to others, but we are also growing R&D spend across the board. And my strong conviction is that it's really preparing Honeywell for the future for the better organic growth because we are putting bets in the right spots. Some evidences are already seen in some segments with our acceleration of organic growth, but more to come as we go along. So it's really not linked to Spain, I would say. I treat those two as two separate events, but we are just getting better prepared as an organic growth driver company compared to what it was historically.

Scott, I see it as a good thing for us, given where we want to go from a top line growth standpoint, migration to higher growth verticals, this investment is good for us and has a high ROI for us in 2026.

And it actually puts Scott, I mean, Should I mention to you, we are always at the median R&D spend. So I think this is going to push us more towards upper quartile now as the year closes. And I'm sure as you observe the number, we'll start differentiating ourselves on the money we invest for growth. Okay. Thank you. Thank you. Thank you.

Our next question comes from Sheila Caillou with Jefferies Group. Your line is now open.

Good morning, guys, and thank you. If I could ask two aerospace questions, please. The first one on aftermarket, you know, the 7% growth decelerating from 15% in Q1 and lagging some of the early reports from peers. You know, how do we think about what weighed on that growth? Was it air transport, business aviation, and how are you thinking about the full year there?

I would say, Sheila, that the aftermarket is normalizing for us. And I think you should, the range they receive in the second quarter, that's kind of the range we're expecting in the second half. We see, as we're catching up with demand, et cetera, we see this as a kind of more normal go forward rate for us. As you see, the hours are fairly stable, both on ATR and business. And I think that's a, That's kind of a new normal for us going forward.

Okay. And then if I could maybe hone in on the aerospace OE decline once again, if that's possible. Why the destocking now when it seems like deliveries are actually increasing? Was it related to one specific platform or is it inventory across multiple platforms?

It's presumably has an impact from North America platforms. on our side, and if you think about last year, et cetera, we were shipping a lot into our OEs inventories, and now they're depleting these inventories. They have better visibility in terms of how much safety stock they need, so we're working ourselves through this blip, and I think that's going, at least based on everything I know today, it's going to normalize some in the third quarter, and then we should be back to normal in the fourth quarter.

And then Sheila, I would just add the nuance is not everything is the same inside of OE. And so electromechanical is where we've had the supply chain challenges and continue to work towards making sequential improvements, whereas electronic solutions have been caught up for quite a while. And so you can see a little bit of a difference in terms of what those needs look like for customers between those two businesses.

Got it. Thank you.

Our next question comes from Chris Snyder with Morgan Stanley. Your line is now open.

Thank you. I wanted to ask about portfolio actions. You know, Vimal, you guys have remained quite busy here in the first S to 25 after you announced the separation in Q4 of last year. Should we assume that everything of size has been completed or announced at this point? And then just on some of the, you know, strategic reviews, I think I understand why PFS doesn't fit as an aftermarket business, but warehouses, is both automation and aftermarket driven. So it does fit, you know, the characteristics that Honeywell is looking for. Can you just talk about why that one doesn't fit in the future portfolio?

Yeah, thanks, Chris. I'm going to say the first part of your question. Yeah, we are complete on the portfolio review, what I started two years back. So from this point onward, we do not expect any major portfolio, you know, exits, if I can use the word, normal way could we do things. I mean, we are a large company, so there could be something's always happening, but fundamental, we have completed the process. The decision on Intelligrated and PSS was more of a sectorial decision to look at the end markets we want to participate. And one of the, you know, automation is a very large market, you know, it's a $500 billion TAM. So we have a very large opportunity in those swim lanes. of the three verticals we have now built for ourselves, industrial, process, and buildings. So within that, now we are making choices. And we obviously want to bias towards verticals which are higher growth so that we could deliver high growth to our shareholders. And our belief playing in this segment of logistics and warehouse and transport, these are very good segments, but they also have demonstrated certain rates of growth and lumpiness which we believe are lesser fit into our portfolio in the future. So it's choices to be made. We are making some additions, some subtraction. The warehouse automation does bring very strong aftermarket, but I think it's more of the in-market participation choices we are making, and that was the driver of the decision.

Thank you. I appreciate that. And then I just want to follow up on building automation. It's just been a really impressive turnaround here over the last year. So can you, and it seems like the global non-risk backdrop has not been too accommodative. So can you just maybe talk to company specific actions that is driving the turnaround in growth? And are we seeing revenue synergies from the big security acquisition you guys did last year? Thank you.

I think there are three strategies, which are by the way, going to be the strategy for new Honeywell as we unveiled that in late 2026. First is how we, make our mix towards higher growth verticals. So in case of buildings, we are focused on three or four markets, hospitals, hotels, data centers, airports in high growth regions. So one is pivoting more towards that. That's action one. Action two is, mining install base. We have large install base, how we mine it higher and deliver high single digit growth in services. That's certainly working in building automation. And finally, the new product acceleration, the comment I mentioned to the Scott's question, we have elevated R&D even in building automation, and they are the most ahead in delivering higher growth with new products. So when you pull the all three things together, we are participating in high growth markets, we are mining our install base better, we are turning more new products, That's becoming the driver for, you know, high growth. The final point there is we had some pressure in some geographies, like there was a drag in China, there was a drag in Europe in some pockets. Those have normalized now. So the building automation growth is double-digit in North America, but, like, low single, diminished single in other different parts of the world. So that also helps because we don't have any pullbacks from some other geographies, which normalizes our results here. Thank you, Vimal. Appreciate that.

Our next question comes from Andy Kaplowitz with Citigroup. Your line is now open.

Hey, good morning, everyone.

Good morning, Andy. Good morning.

Nemo, can you give a little more color into what you're seeing in defense and space as it continues to accelerate here? I think the growth you've talked about in the past has been pretty balanced between the U.S. and international, but I think international defense is just starting to accelerate. So could you talk a little bit more about what you're seeing?

Yeah, I think the defense in space growth is driven by both on the supply chain healing because it was last to heal. We have much more mechanical content in defense in space compared to commercial. So that's certainly seen as part of our results. And on the demand side, the orders remain very strong, both domestically and international defense, which is our strength. Is growing double-digit and it will remain so for many years to come we see strength in Europe We see strength in parts of Asia like, you know, Korea, etc so I think it's a combination of accelerated demand with the geopolitical circumstances in the world and The supply chain healing which is giving us a performance in defense and space as we are demonstrating Then I want to ask you about a couple other initiatives.

You've been working on direct material productivity and harnessing AI and You seem to mention quite a bit today, cost inflation you're facing across the portfolio, but I imagine a lot of that should have been expected. So update us on your ability to offset that with your initiative here around direct material savings, and then maybe how sticky have your price increases been that you've made here this year?

I think the pricing initiative has been quite sticky. I think we have been very thoughtful to build a strategy now which protects our earnings, but also protects our volume. That's within a playbook we have been doing for 2025. And it's a tough balance because you don't want to raise the price to a point that you destroy demand. And we have been able to execute that with a minor exception of the aerospace OE, which Mike mentioned earlier, because there's a lag on given the nature of the contract. But across Honeywell, we have been able to execute our pricing quite successfully. What's also helping is productivity is very meaningful which is also giving us more optionality or to what extent we want to go pricing in a certain segment and versus the margins, we can drive margins through productivity. Value engineering in particular is performing extremely well, and that's where AI is playing a role. We have been deploying use of AI to self-determine design of the boards versus engineers taking months and months to figure out that they want to do this design or some other design. So that gains you time. So something which was used to take two or three months now take a week. So that accelerates the net saving we can drive in a given year. And what gives me and my confidence is that value engineering is becoming a meaningful lever for Honeywell now. We can count on it. We can financially plan it. And that can become a lever for us to think about price versus volume, not only for 2025, but in the years to come.

And Andy, from a financial framework, and we talked a little bit about it before in terms of looking at our six quarters, rolling forecast, et cetera. What I'm really focused with the team is on demonstrating growth over longer period of time, consistent growth. And like Bimo said, really focusing on the top line growth and then on the bottom line growth. And then within that, whether it's price volume mix, teams have a little bit more leeway in terms of managing based on the verticals they're in, customer set, et cetera. But really just setting the framework on delivering over a longer period of time on a consistent basis.

Appreciate the call, guys.

Thank you.

Thank you.

Our next question comes from Deanne Ray with RBC Capital Markets. Your line is now open.

Thank you. Good morning, everyone.

Good morning. Good morning.

It was open to get some color on free cash flow. So you boosted the EPS guide, but kept free cash flow guidance the same. Just are there any puts and takes related to free cash flow for the second half you'd like to highlight?

Sure. So we have a pretty broad range on cash flow, the $5.4 to $5.8 billion. If you look at the moving pieces, I would say our Inventory got a little bit worse just because of what we are facing right now in Arrow. That hopefully will normalize in the second half. On the other hand, we have a little bit of tailwind from stronger collections and higher sales and pricing. So net-net, we're the same. We're really focusing on moving towards that 90-plus percent conversion in 2026.

Great. And then just a related question. Anything in the second half on price cost that you'd particularly want to highlight here?

So I think generally, if you think about our guide, our price probably vis-a-vis the last time we talked, we probably 100 bps better. So if you thought about price of 1 to 2, now it's 2 to 3. Volume is probably going to be 1. 1% to 2%. And then from a cost price standpoint, short cycle businesses will offset. And then Arrow, like I said earlier, is still working through their OE contracts. And that should normalize going towards year end and early half of next year.

Great. Thank you.

Thank you, Dean.

Our next question comes from Joe Ritchie with Goldman Sachs. Your line is now open.

Hey, good morning, guys. Good morning. I just want to make sure I understand the relationship between the tariffs and the demand contingency. And so it seems like the moratorium is you kind of kept the kind of tariff rates at a higher rate. And if the moratorium were to become permanent, I'd assume that maybe, you know, the demand contingency gets released to some degree. Just trying to make sure that I understand that correctly. And are there any specific segments that you could see benefiting in the second half of the year if, in fact, you know, tariffs come in at lower rates permanently?

Sure. The way I look at the second half, if you think about the short cycle businesses, they're managing through it quite well. We haven't seen any pre-buy or demand destruction there, so building automation is doing well. IA is doing better than what we thought it was going to do. It's really about our energy business and these orders and how they convert into revenue because we're at the point now of the year where if we get an order on an energy project, it takes a while to engineer it, so revenue might fall out of the year. We're just managing that piece, looking at the first half of next year, and then also monitoring our catalyst orders, which have been a little bit softer from a forecast standpoint, vis-a-vis what we expected. And that's really just a behavior that our customers can exhibit when they have sometimes a choice, they might delay those catalyst orders for a quarter or two and still operate their refineries and their facilities with just the lower output.

Got it, Mike. That's helpful. And then maybe just my quick follow-on on the, you know, strategic alternative announcement on TSS and warehouse. You know, it kind of looks like the demand environment there is getting a little bit worse again. So, you know, kind of bouncing along the bottom. I guess, Vimal, I know that we can't bank on any, you know, on any outcome here, but I guess how are you thinking about the timeline for a decision to be made on that piece of the business?

So we'll kick off the process, Joe, just last week now after we made the announcement. I think we'll get a better clarity by end of the year on the strategic options which are available. As you can imagine, there are multiple choices. So we do expect to have the first part of it that what choice we're going to execute it. So time is hard to put a timeline here. If it was, then we would have stated in more certainty. That's why we are putting strategic options. But I I would say before end of the year, we should be able to provide more clarity on the specific timeline. Now, my desired list, if I want to talk, yeah, we want to have as clean portfolio when the spin gets completed. That's one of the reasons we initiated the strategic review now so that we could somehow converge the timing. But as you can imagine, these processes are, you know, you can't put a certain certainty of timeline around it at this point. Okay. Thank you, guys.

Our next question comes from Nicole DeBlaise with Deutsche Bank. Your line is now open.

Yeah, thanks. Good morning, guys.

Good morning, honey.

Maybe just starting with some of the order trends that you guys saw throughout the quarter, how would you say that orders progressed each month and then into July? It sounds like maybe energy was the only area where you saw a discernible difference. But if you talk a little bit about IABI more on the short cycle side through the quarter, that would be helpful.

Sure. So I would tell you overall orders, 6% up. Really pleased with that. Better orders than in the first quarter. Arrow led the orders grow for us. Once again, very strong orders on both on defense and space and commercial. Building automation was low single digits, but it's had tougher comps so we didn't see anything there and then for ia and ess i would say we saw strong um strong first two months and june was a little bit softer uh going into july uh on the other hand orders are continuing to be strong so um june might have been kind of a false positive in general i feel like orders are are sticking and uh second quarter was better than than the first quarter, and in terms of what the team has just showed us for the third quarter in the forecast, we don't see a lot of concern in our order rate slowing down.

Okay, got it. Thanks, Mike. That's really helpful. And then there's a lot of discussion around what you guys are doing from a portfolio perspective, but I don't think we talked much about future M&A plans, and you guys have clearly been a lot more active recently. How does the M&A pipeline look today, and what is your appetite for doing more deals before the spin happens?

So, Nicole, we absolutely are building our pipeline. We are going to be slightly slowing down given the activity we have or the spins in motion and some acquisition integration work we are doing. But we are not slowing down on building the pipeline. The pipeline remains strong and will execute opportunities as they become available. I think what gives me more confidence is that we're getting much more comfortable not only doing the normal deal, but also acting like a sponsor to do carve-out deals. We have demonstrated that capability repeatably now over the last two years. And that additional skill increases our optionality now because we are willing to go to other partner, suggest an optionality for them to create value for both sides. And that gives me confidence that we can remain active in the portfolio side in the years ahead. So more to come. you know, we'll continue to build our portfolio as a higher priority item, you know, under my leadership.

Thanks, Vimal. I'll pass it on. We have reached the end of the question and answer session. I would now like to turn the call back over to Vimal Kapoor for closing remarks.

Thank you. I want to gain one thanks, express my deep appreciation to our shareholders, our Honeywell team, and our customers for the continued support during the transition time for the company. And we are excited for the future and look forward to sharing more of our progress as we deliver on our commitment. Before we close out today's call, I want to take a moment to remember a pivotal former leader of Honeywell that we lost this week, Larry Bossidy. Larry was the chairman and CEO of Alight Signal and led the company's acquisition of Honeywell in 1999. He was a forefather of of operational excellence that Honeywell is known for today and served as combined company's chairman and CEO until his planned retirement in 2000. He then came out of the retirement briefly to offer his leadership again as chairman and CEO during a challenging period of our company. And under Zeri's leadership, the board hired Dave Cody as Honeywell's new CEO and setting up the company for the next two decades of tremendous value creation. He was a remarkable leader, a committed family man, and our thoughts are with his family and friends at this point of time. So thank you again, everyone, for listening, and please stay safe and healthy.

This concludes today's conference call. We thank you for your participation. You may now disconnect from the conference. Thank you.