Honeywell Aerospace Inc.

Thank you for standing by and welcome to the Honeywell Aerospace third quarter 2026 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'll now turn the call over to Sean Meakim, vice president of investor relations. Please go ahead.

Thank you. Good afternoon and welcome to Honeywell Aerospace's third quarter 2026 earnings call. On the call with me today are Chief Executive Officer Jim Currier and Chief Financial Officer Josh Jepsen. Some statements in today's presentation, including those regarding our outlook and expectations, are forward-looking in nature and our actual results may differ materially. Please see the cautionary statement on slide two and the risk factors in our Form 10-Q available on our investor relations website for more information on these factors. This webcast and the presentation materials, including non-GAAP reconciliations, are also available on our website. This afternoon, we will review our financial results for the third quarter, provide an update on full year 2026, and then open it up for questions. Now I'll turn the call over to our CEO, Jim Currier.

Thanks, Sean. Good afternoon, everyone. We appreciate your joining us today. We'll start our presentation on slide three. In Honeywell Aerospace's first quarter operating independently, we finished ahead of the expectations we shared with you in August. Sales increased 3% sequentially, led by commercial aftermarket, as our mechanical output improved from the second quarter. Accelerating output to better serve our customers and drive our organic growth remains my number one priority. Progress against our supply chain transformation initiatives continues to be the focus for our management team, and I'll provide a detailed supply chain progress report later in this presentation. We are dedicated to using our increased financial and operational flexibility to accelerate investments and to build stronger partnerships with all our suppliers. With an increasing number of Honeywell Aerospace employees present at supplier sites globally, we are sharing the core pillars of our operating system focused on driving productivity and output growth. I have personally visited facilities and met with the management teams of each of the 10 suppliers that are most essential to deliver against the robust demand we continue to see for our solutions. In the third quarter, we grew orders across all end markets compared to the prior year with defense in space and commercial aftermarket up double digits. Book to bill was 1.3 in the quarter and 1.1 over the last 12 months. Our priority and commitment to improve supply will unlock our ability to convert these orders into faster sales growth in 2027 and beyond. Consistent with the capital allocation framework we laid out at our June investor day, paying a competitive dividend is amongst our priorities. Today, we announced that Honeywell Aerospace's board has declared the company's first quarterly cash dividend of 40 cents per share, which will be payable in December, and we expect to increase that payment over time as the business grows. The dividend demonstrates our confidence in the path ahead. We expect to generate durable free cash flow based on our visibility into demand in the coming years, and we are executing on a supply chain transformation we believe to be largely within our control. In today's presentation, Josh and I will discuss our performance in the quarter, progress against strategic priorities, outlook for the fourth quarter, and initial thoughts on 2027. Let's turn to slide four to discuss how we're creating value through a consistent innovation-led growth strategy. Led by the same three strategic priorities in each of our segments and end markets, our organization is generating ongoing customer demand and progressing operational improvement initiatives. First, expand leadership in attractive end markets. We continuously develop new retrofit mods and upgrades, or RMUs, for our installed base around the world. At any given time, We are working on 40 or more solutions that provide added performance, efficiency, and safety to the global commercial and defense fleets. RMU sales rely primarily on our innovation flywheel's ability to deliver value to our customer base, rather than fleet growth or utilization. During the third quarter, Omni Taxi Aero, a leading offshore helicopter operator in Brazil, selected our industry-leading weather radar system for its entire AW139 base to improve both the reliability of its operations and the safety of its crews and passengers. The system gives pilots earlier, clearer warnings and operates automatically to reduce workload during high tempo operations. Feature updates are downloaded over the air without additional downtime, increasing aircraft availability and customer returns on investment. Second, invest in differentiated technology platforms. We are advancing our capabilities in resilient navigation and autonomy, both of which are increasingly necessary because of growing geographies in which satellite signals are degraded, jammed, or spoofed. In September, we successfully demonstrated our Kestrel navigation system designed specifically for unmanned drones. Military forces are relying more and more on these rapidly deployable platforms for a variety of missions. Forty percent smaller and lighter than Honeywell Aerospace's traditional military-grade navigation system, Kestrel delivers reliable navigation in challenging environments. The flight test of an off-the-shelf Group 2 drone validated the system's unique capabilities with initial deliveries planned for 2027. strengthened operational capabilities to unlock further growth. In order to build the resiliency and throughput in our supply base necessary to deliver more consistently for our customers, we are increasing investments in insourcing, multisourcing, and supplier tooling initiatives. 2026 marks a significant milestone in our multisourcing journey that began in earnest when I assumed leadership of this business just over three years ago. At that time, less than 15% of our annual material spend had more than one active source. Reducing dependence on sole source suppliers reduces risk of disruptions while also adding to our overall capacity as our growing demand dictates. By year end, we expect to have doubled the percentage of multi-source spend from 2023 to north of 30%. We're not only adding qualifying new suppliers in constrained mechanical components, we're also adding suppliers in advance of increasing demand for electrical components such as semiconductors and printed wire boards. We expect growing investments over the next couple of years will take multi-sourcing to more than half of our material spend by the end of the decade. On slide five, I'll provide a broader update on our supply chain transformation. Last month, we presented a scorecard for our supply base to outline where we have significant bottlenecks, their root causes, and the actions we are taking to alleviate them. We promised to regularly share our progress with you, and today I'll provide an overview of our supplier performance in the third quarter. I would like to remind you that the vast majority of our more than 3,000 suppliers are delivering to us on plan. Only about 70 Critical and constrained suppliers have not been consistently meeting our needs, and we have designated that group to receive additional management attention and individualized action plans. Of that group, around 10 have been most responsible for pacing output growth. Our roughly 70 watch list suppliers are concentrated into four mechanical component categories, complex machining, castings, forgings, and bearings. We are tracking each on a number of KPIs with a couple of most critical being supplier output gap to need and supplier output growth. Driving improvements in these KPIs will unlock our output to customers and accelerate sales. On the left-hand side of the page, you can see that our suppliers produced more of what we needed from them across the four combined categories compared to last quarter, shrinking their output gap to our need. On the right hand side of this page, you'll see that this improvement has not yet moved up our color coded ratings, but we are clearly moving in the right direction. In complex machining, we have deployed our own labor force into supplier facilities and also supported hiring, which drove higher year over year growth compared to the prior quarter. We grew a key suppliers workforce by over 20% from the middle of the third quarter to the beginning of the fourth. which led to record weekly shipments beginning in October. In castings, our current suppliers are increasing their deliveries to us as we qualify new sources. Though their growth slowed a little from the prior quarter due to production scheduling pushing us barely into yellow territory in 3Q, nothing has fundamentally changed and we are encouraged by recent actions. In forgings, year-to-date output is up double digits with those suppliers making significant strides towards producing at the level we need. We also secured additional forging supply for years to come. Finally, in bearings, which has been the most difficult category for us this year, a second source supplier ramped this production considerably quarter over quarter after difficulty starting up its manufacturing lines. We now have line of sight to this supplier eliminating its past dues to us by early 2027. While we are making progress against our supply chain transformation plans, we know that we need to move faster to fulfill our commitments to our customers. We are exploring every avenue for doing so and look forward to sharing developments with you in the coming quarters. Now let's turn to slide six to discuss our strong commercial momentum that's creating The ongoing need for more supply. Since we reported our second quarter results in early August, our business has generated over $5 billion in incremental customer lifetime wins, bringing our year-to-date total to more than $20 billion, on top of the more than $90 billion from the prior four years. We are seeing success through our commercial and defense portfolios across all of our business segments. focusing on our core innovation pillars of electrification, autonomy, and safety. Our defense solutions are poised to drive significant content growth in advanced combat platforms such as the Collaborative Combat Aircraft, or CCA. In September, we announced that the U.S. Air Force down-selected our SkyShot 1600 engine for its autonomous collaborative platform program. This small thrust engine is designed to meet all of the mission-critical needs of the CCA and unmanned aircraft systems while also offering the low-cost modular design necessary to produce, install, and maintain a fleet at the scale and speed demanded by today's militaries. Its versatile and flexible architecture can serve multiple platform classes, demonstrating the efficiency of our Develop Once, Deploy Everywhere approach to technology development. During the quarter, our defense business also secured new awards exceeding $2 billion in lifetime value for multiple missiles and munitions platforms. The supplier framework agreement we signed with the Department of War in March and growing global demand are leading to firm contracts with more expected to come. Lastly, our aftermarket team continues to advance commercial opportunities for our SURF-A surface alert solution, which sends real-time alerts using GPS data, existing equipment, and advanced software analytics to prevent runway collisions. We have entered into a new agreement with our hometown Phoenix Aviation Department to explore taking our technology beyond the cockpit where it supports pilots to ground vehicle operators. This represents a new frontier in runway safety that would further reduce the risk of runway incursions and accidents. At the same time, we are expecting FAA certification of SURF-A for certain Boeing aircraft this quarter. following the announced Aeromexico agreement to install the solution across more than 100 of its aircraft. To service our increasing number of wins and those to come, we are committed to investing in growing our supply and manufacturing base. Please turn to slide seven for an overview of a project set to benefit our Control Systems customers. For decades, Arizona has been the hub of our innovation and manufacturing capabilities. Today, we announced a major expansion of our existing Tempe campus with state-of-the-art new facility that reinforces our commitment to our customers around the world who depend on Honeywell Aerospace solutions every day. The $500 million, 300,000 square foot space is set to open in late 2028 and will allow us to serve current production and future demand for control systems technologies. Our next-generation products, including Assure Advanced Actuation and Attuned Vapor Cycle Cooling, with over $15 billion of customer wins to date, require new capacity for both contracted business and the pursuit of new commercial and defense platforms, such as next-generation narrowbodies and sixth-generation fighter jets. The cutting-edge facility will set the standard for future Honeywell Aerospace manufacturing capabilities. It will include modular robotics, automated inspection, AI-enabled production optimization, digital twins, and other productivity-enhancing technologies. The extra capacity will add supply chain resiliency, supporting increased production, and providing room for more vertically integrated operations. Thanks, Jim. Honeywell Aerospace Inc.