Good morning, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense and Airlines Equity Research Team. Thank you so much for being here. We have Honeywell here. We have Mike Stepniak, who's CFO and executive SVP. Thanks, Mike, for being here-
Thank you
-and always supporting our conference. First one's up as always, so thank you, Sean Meakim, for allowing this to happen, Mike, I think you have a few prepared remarks, and then we'll go into Q&A.
Sure, but first of all, thank you for having us. Maybe before we get into Q&A, I'll just give you a quick business update and what's going on in Honeywell o bviously, a lot going on. I'll start maybe just with the separations update. So Solstice will list on Nasdaq as SOLS, and they'll be before year-end, and we're hosting Investor Day on October eighth at Nasdaq as well. With aerospace separation, it's progressing well, We'll have more to say about it in the fourth quarter and as we go into next year. But I would like to say that the separations are progressing on time and per budget, if you will.
With the business itself, we completed the assessment of the portfolio and largely completed our portfolio transformation, with a couple of deals in here announced, Catalyst Technologies, which dovetails very well to our ESS business, and then with a small tie-in in , which was essentially a technology buy that we thought was important for us a nd as you know, we're looking through strategic options for our PSS business and Intelligrated.
And then from just organic standpoint, I'm really pleased with the team's performance in the first half, vis-à-vis the beginning of the year and what we guided on organic sales, 2%-5%. We're today standing at 4-5%, and from the EPS standpoint, $10.10-$10.50, we're now at $10.45-$10.65, So I would say the team's done a really nice job progressing for the year. I'm really pleased with the orders and how they're coming in, and I'm optimistic about the second half, and I think we'll have a good second half as well s o that's about it on the business.
I know Honeywell is the hardest working team out there, but with the spins, the deals, you guys have a lot going on. So how do you think about resource allocation today and some of the major benefits post-breakup?
Sure. So what I would say is, obviously a lot going on, but the good thing about Honeywell, the team has a lot of capacity, and what we've done is, given the experience with priors, prior spins, what we did was essentially took a group of people, about 200 people from the businesses, and put them strictly on the separation, on their separation.
Rest of the team is focused 100% on running the business, like nothing is happening. And then from M&A, those M&As are aligned with specific segments s o each team reviews their capacity to absorb those M&As before we do them, We usually, our process from M&A standpoint takes any given deal we might be looking at for two, three years, so we're usually well prepared as far as how to absorb them s o, on the whole, I feel like we're well-resourced. We also brought in resources from outside. We obviously have advisors and help externally that helps us execute on all these transactions.
You're spinning Solstice in Q4, and you have the Analyst Day, October eighth, and have announced potential strategic alternatives for productivity solutions and warehouse workflow solutions, How does this contribute to how you view the automation business going forward, and what does automation look like post the spins?
Sure. So I'm really excited about automation prospects and the outlook i think the portfolio will be much cleaner, much easier to analyze and invest and unpack, so really happy about that b ut ultimately, what we're striving to be is pure-play automation company and global automation company, and that has cohesive portfolio in terms of alignment in controls, process software, and really excited about that. The way we will be structured, we obviously have building automation, industrial automation, and process technologies and automation s o three businesses, very clean, I think, way to run them.
Maybe if we could talk about the broader macro. It seems like a relatively slow summer, but we've seen some mixed reports since your Q2 and Honeywell's higher outlook for the year, but caution regarding lagging effect on business demand from tariff announcements, and I can't even keep up with some of them, to be quite honest. So where are areas you're seeing improvement, whether it's with orders, and where do you see some choppiness given the potential program pushouts or tariff uncertainty?
Yes, So like I said, we're pleased with the first half performance from the team's orders on the short cycle, predominantly holding. We had a little bit of slow, I would say, July, which gave us a little bit of pause, but nothing concerning as far as our updated guide.
If you look at the businesses and unpack them, the building automation has continued to perform on all cylinders. So it doesn't matter where you go globally, you look at, there is a lot of growth in building automation, both on the product side and both on the solution side. So really pleased with that. Aerospace is sold out and continues to have very strong demand, and our backlog continues to grow, and orders are coming in very strong.
I hear it's a good sector, by the way, so...
It's a great sector-
Yeah
... to be in these days.
Yes.
And then, from industrial automation and ESS, sensing is doing well, thermal solutions is doing well. On the other hand, Intelligrated and PSS, the scanning business, they're seeing a little bit of a, I would say, slowdown as far as big project, and Europe will continue being slow for us in PSS, specifically.
And then on the, for the ESS business, HPS business, we see a little bit of delays on the big deals, big orders, if you will w e don't see any cancellations, but where I can see the final investment decisions are getting pushed three, six months, which obviously has impact for us in the second half from revenue.
On the short cycle orders, in ESS business, specifically on catalyst, we also see delays, but those delays are short term because these units will have to be refilled with a catalyst i think that 2026 is gonna look much better, as things tend to stabilize here on tariffs and other various issues that we're going through in terms of the macros.
Whether it's Intelligrated or the catalyst business, any reason for those push outs? Is it just tariff-related uncertainty that you're seeing that?
But the feedback we're getting, it's predominantly just assessing the role for post tariffs, and I think everybody's just absorbing at this stage, the tariffs. Our customers are looking for, I would say, calmness in the macros, to be able to invest in all this swinging as far as tariffs and a few other things, it's causing them a pause as far as investing.
Maybe to touch upon UOP, seems a lot of runway with the recent acquisition, along with broader sustainability trends and catalysts. The offset, as you called out, some large energy projects, and catalysts pushed out into-
Mm
... 2026, as you mentioned. How much visibility do you have into that demand? You know, how does that uncertainty actually translate into orders and then actual revenues, and how do you think about next year shaping up?
Yeah. So I would say the business is quite, quite robust, and will continue to grow, I think this year we set low single digits, flat to up. We'll continue to see that, and we're seeing a little bit of slowdown in the, I would say, traditional UOP business b ut on the other hand, our acquisitions are performing well.
And they're being accretive to growth and continue to be accretive to grow a nd as we lap the first year of integration, they're becoming organic growth for us. So really, I'm really, I would say, excited about the what this business is going to do next year and in 2027, as UOP starting to recover and those big orders starting to come in.
Is it possible you give us a quick update on how the acquisitions are being integrated and where you're seeing success?
Yeah. So, so obviously on we're seeing success everywhere, All of our acquisitions, vis-a-vis the TVA, are performing better than when we anticipated on, on orders, on sales, and, and synergies. So across the board, and whether you're looking at aerospace business or looking at ESS and, or you're looking at the access solutions in, in building automation, they're all performing well. So kudos to the team for, for executing those, those transactions well and, and, and integrating them well.
Maybe to talk, again, going back to the Industrial Automation business, where's the outlook slightly better than you expected when you started the year and as you enter into the second half? And, you know, what verticals are tracking better?
So I would say, sensing is doing better than what we thought. Thermal solutions is doing better as well. On the other hand, like I said, PSS and Intelligrated is doing a little bit weaker than what we expected. Nothing that we know we'll not cover in our guide, but I think that's kind of where we're at right now.
Got it. Back, so let's talk a little bit about Building Automation i think another segment that's been exceeding your expectations. Can you talk about what the drivers have been? What's really driving that, where you're seeing the most demand, and what you're seeing, whether it's from a vertical basis or regionally?
Yeah. So, for building automation, like I said, in terms of geographies, Europe stopped being a drag for us i t's a tailwind, and start growing again. In Middle East, we have a lot of projects, and that's that's been growing the last couple of quarters, double digits for us.
And US is holding up strong. And I would say from a products portfolio, if you look at data warehouses, if you look at entertainment, hospitals, clean energy, all those verticals are doing quite well. So I would say there is, for our business, there is growth across all verticals. I also say that there's a lot of demand now for our connected offering, given labor shortages, et cetera s o connected is doing well, and we see a lot of growth in the aftermarket as well, in our services portfolio.
Any new... I remember that Atlanta Analyst Day. Any new products that you have within that? Sorry, I'm throwing a new one at you. That are driving some of that growth, since you mentioned the connected offering and the labor shortage and how that's coming through.
So a lot of our connected within connected, we have the most new offerings, and that's really obviously outcome-based services. And we're focusing essentially on our connection points and increasing them and providing the value services there. As far as the big NPIs, we run anywhere from 200- 300 different NPIs in any given year in the business, and a lot of that, the NPI dollars, is spent essentially on improving current offerings, not necessarily new NPIs, Our customers, too, don't want us to introduce new things too fast because it causes a lot of disruptions on their end.
... I might, actually, if I could ask about, before I transition to aerospace and get really into it, how you think about across the entire portfolio R&D spend and how much you spend on maintenance R&D, and obviously aerospace will be very different-
Yeah
... versus new product R&D?
I feel in pockets in building automation, I think we're well provisioned from R&D standpoint. In industrial automation, there are pockets of R&D where we've been increasing investment, and we've been doing that for about 18 months, and we're starting to see fruits of that labor, and that's why I think you'll continue to see incremental growth on that business. I feel vis-à-vis maybe peers and where we're at, we're quite well provisioned.
Maybe transitioning to aerospace, there's a lot to unpack and, where I feel more comfortable anyway. So it's been leading in terms of orders sold out. You'll let me know how long you're sold out through, but can we talk about what you're seeing in the backlog in the order book for aerospace? And we'll drill down on defense and space business a bit, but how do you think about the backlog coverage across the entire aerospace portfolio on the runway?
Yeah. So, backlog has been is the strongest backlog we've ever had and continues to grow. I would say, we also have about $2.3 billion still of past due backlog. A lot of the past due backlog is on the mechanical side and in defense and space, but we're working our way through it. Aftermarket orders are holding for us as well. So we continue to see strength across the portfolio.
On the back, on the mechanical 2.3, past due, how did it look like last quarter? And when it is mechanical, is that commercial aero, or is that defense?
It's both commercial aero and defense. We grew past due backlog, I think, last quarter by about $70 million, and we obviously had a hiccup there on, in terms of the growth that we're correcting. That was driven by just our supply chain issues as far as unlocking some of those mechanical components in, and that happened in June, but we're working our way through that.
Maybe if you could talk about the supply chain choke holds there within mechanical. If it is commercial, what drives it? Is it still the bearings business, and how do you think about multiple sourcing items, or is it something that you source?
I would tell you that we are fully recovered in electronics. We are on PO essentially on electronics o n mechanical components side, we still have a little bit of, I would say, blockages in machine parts, forgings, castings. Since 2021, we invested about $1 billion to our supply chain, vis-à-vis obviously incremental hiring, but also helping our suppliers as far as tooling, their hiring, et cetera.
We start seeing progress. Our supply chain is outputting now for, I think, 12 quarters in a row at 11% and plus percent. The recovery is not linear. It's a little bit choppy, so we'll continue to grow and ramp up, but quarter to quarter, sometimes we'll have a little bit of choppiness on the output.
Can we talk about, maybe the supply chain recovering? Do you see that, that 11% across all your suppliers or is there regional chokeholds, too?
It's not regional choke holds, We predominantly produce in the U.S., but I would say we might have suppliers where we still single sourced or small mechanical suppliers that they essentially cannot keep up with the ramp or have the issue with testing or tooling or people and essentially go backwards one quarter or another. So we're continuing to build the ramp. It's more predictable i think you'll see good outcomes from us in the second half in aerospace, but it's, We still have a little bit of work to do on the mechanical side.
And maybe if we could dig into the headcount, $1 billion of additional investment in incremental hiring, How much of that is at Honeywell Aero itself versus your suppliers? And if you could talk about the help with the tooling you're providing your supply chain.
Yeah, I wouldn't specifically comment just on the allocation i t's really case by case, and obviously, we're trying to treat our suppliers strategically. And so it really depends on the suppliers, on their size and where they have issues and where they're consistent issues, new issues, et cetera.
Okay, got it. Maybe going back to our backlog comment, you talked about aftermarket orders holding up well. What does that mean? How long is your aftermarket backlog? You know, how do we think about somebody ordering an aftermarket part-
Yeah
... and you shipping it?
Yeah, So it's an interesting question, but essentially, you obviously, your aftermarket backlog, you want it to be as small as possible because you want to output it in the quarter. So we usually like to keep, When we're on PO, we have about 90 days of backlog in the aftermarket. As far as what's coming into the shops and how we transition, I would tell you that about 70% of our aftermarket is under long-term service agreement so, we have a pretty good predictability when these aircraft will come in for service, et cetera.
But my comment on the backlog is that essentially we see flight hours holding up, especially in business aviation, and we see continued demand both from an MSA standpoint, maintenance service agreements, as well as time and material.
So when you look at that aftermarket backlog, it's more of a parts comment rather than the 70% that's on long-term agreements. Got it, And then on the commercial backlog, several years of commercial backlog, and how do you input the commercial aerospace orders into your backlog? Is it once you win?
It's once we win so, there is, you know, there will obviously a framework agreement. For example, if you take 737, we won't put the whole skyline of 737 into backlog w e'll do it one year out.
Okay, and then last one, just to round it out on my backlog comments-
Yeah.
-for defense and space, what are you seeing there, whether it's domestically or internationally, and how is that backlog trending?
It's trending extremely well, and it's been very strong for us i think in second quarter, we grew sales again 13% on the sixth consecutive quarter of double-digit growth. About 25% of our defense and space business is international, so we'll see a lot of growth internationally, a lot of interest specifically in Europe. So really encouraged in that and we have a good visibility to continue to grow defense and space at this elevated levels for the next couple of years.
Maybe let's stick to that if you want.
Sure.
The 25% of the business that's international, can you talk to us about what you do there?
Yeah so, we do a lot of things, but predominantly, it's around precision navigation. We do a little bit of mechanical stuff as well. As you know, Leonardo is our big, big customer in Europe, for example. And, we recently acquired Civitanavi, which is based in Europe.
And, purpose of us doing this acquisition is really trying to become local, for local in the European market, and that's predominantly around electronics w e also have about a thousand engineers in Europe based in our engineering centers in Czech Republic, in Poland, which predominantly focus on the development of new products for Europe and the Asian markets.
What in terms of precision navigation, how do we think about that? Is that mainly missiles and munitions, or should we think about that on,
It's both
... fighters and aircraft?
It's both s o it's cockpit avionics as well as munitions.
Got it, and why has that been growing? I think at the Analyst Day in Paris, it was a 15% CAGR over the last decade and 15% projected, What's driving that growth, and how do you think about what countries specifically outside of Poland and Czech?
So Poland and Czech is predominantly our engineering-
... Okay.
It's engineering-
Got it
... Essentially, engineering but , the growth is, I think the catalyst for a lot of growth in Europe was the conflict in Ukraine. And, if you look at European Union, they're obviously trying to rearm and up the defenses, and a lot of growth is driven by that. Same in Asia and Australia. We have a lot of business in Australia, in Korea, in Japan. So I think just generally the world, where the world is today, it drives a lot of need for deterrence, if you will.
Are you seeing incremental new countries come in as customers? We were with a company yesterday that mentioned an order from Serbia that had never ordered from them before s o how do you think about some of the-
So we get a lot of interest from various countries, and, but we're trying to focus on the materiality, if you will, which and the bigger defense budgets, which is, once again, it's Japan, it's Korea, it's Germany, it's Italy, UK.
Maybe if we could talk about. Sorry, one last one on-
Sure
... International defense s orry, I'm digging into it, While I have you, I might as well. How do you sell internationally versus how you sell in the U.S.? Is there any change in fixed price programs? Is it through FMS? If you could talk about that.
So we try to, wherever we can, apply commercial terms. We predominantly sell through for U.S. government, but with acquisition of Civitanavi, et cetera, that allows us to do direct sales as well.
Civitanavi, which is hard to say, but how does that add to your portfolio? Do you think about it adding a footprint and a local sales force, or do you think about adding content to additional programs?
So it's predominantly content and manufacturing in the region, and a lot of, I would say, commercial synergies there.
Got it and, then domestically, what are you seeing? I've actually heard a lot of positive momentum over the past day on programs like Golden Dome and some of the other initiatives the Trump administration has s o how are you seeing the domestic environment shape up?
The domestic orders are strong as well. We had several inquiries as far as increasing output, refreshing our commitment in terms of volume, and then even customers coming to us and asking about what it would take for us to increase significantly our output. There is a lot of demand there. From Golden Dome, too, we're really excited about just the possibility there as far as depending on how the technology develops and which technologies win w e have a lot of great, great technologies in RF, in deterrence, especially in our business, so quite excited about the opportunity there.
When we think about Golden Dome for Honeywell, I guess where would the RF and deterrence play? So would you partner with somebody? Is that how you would bid on contracts?
We usually partner as a subcontractor.
Okay. And are you on any of the major missile programs that I might not be aware of, or do we think about it more as like a software system you would provide?
We are on missile programs as well.
Cool. Maybe if we could switch over to commercial, and then we could come back to defense.
Sure.
Commercial OE. I think we've seen from a few folks in our coverage outside of Boeing, you know, we saw some softness in commercial OE, but we do have production aligning to delivery rates going forward-
Mm-hmm
... at least for Boeing in the second half. So how do we think about the destocking for Honeywell specifically?
So it was, I would say, a first-half issue for us. We will do better in the Q3 and, vis-à-vis the first half, and we should be fully coupled in the Q4 as far as being aligned with Boeing on production, so what happened with Boeing, we essentially overproduced and over-delivered last year as they were going through their complexities, and as they're clear this year, we're aligning.
Would you say it was the same for mechanical parts, given the past two backlog, or it was mostly on the electrical and avionics?
It's mostly on electrical and avionics.
And on both the 737 and the 787? How do we think about that?
Yes.
Okay.
Yeah.
Last one on the destocking.
Sure.
How do we think about the impact to profitability, given you didn't have the same volume absorption, and I would assume your avionics business is higher profitability?
Yeah s o it definitely shows up in the mix, and you saw it in the rate. We'll continue to work our rate up, but mix will continue to be a drive for us for the foreseeable future, as OE continues to lead the growth for Aero.
Maybe just taking a step back, Can you remind folks of some of the good content you have on the commercial OE platforms for both Boeing and Airbus?
Yeah. So I mean, we have obviously very good content on APUs, very good content on controls, and avionics n ot any given platform bearing, if you look at our, we're nose to tail provider, and if you look at our platforms, no platform is bigger for us than 6% of revenue.
Which one's that? You know, one of the questions that I get often from investors is, GE really worked post-spin so , how do we think about Honeywell post-spin? And it was a lot of, you know, your high market share on APUs and avionics. How do we think about that maintenance cycle? So, I guess, how do you think about it internally?
The way we model our business ten years out. If I model that business ten years out, with looking at what platforms are coming in and what platforms are coming out, I'm very confident about the Aero business becoming a $30 billion business. With that happening, what the Aero team needs to do is really think through how we structure our supply chain and how we grow, how we enable that growth to the $30 billion business.
If you look at our portfolio, we're very diversified. We're diversified around ATR, business aviation, defense, and space so , none of the business is more than 40% of the overall portfolio, and I think that gives the aerospace business a lot of resiliency as far as not being just reliant on commercial and OE, and I think that I'm really positive about the cycle. And then we've invested a lot of money in over the last decade or so in eVTOL and electrification, and we'll see, we see wins, and I think electrification is really a big play for us going forward.
Sticking to the commercial OE portfolio, how do we think about some of the growth drivers, whether it's commercial, Boeing or Airbus, or the biz, ATR and business aviation, driving the growth to get to that $30 billion?
There is obviously it's based on the skyline and demand and the hours w e also have a big portfolio. 10% of our business is coming from RMUs, retrofits, mods, upgrades, and that's the, I would say, a very good aftermarket business for us, which we've been nurturing for almost a decade now. It continues to grow at double-digit, and it's quicker to market and essentially focuses on our installed base, and getting service and aftermarket revenue from the installed base by providing upgrades, better software solutions, productivity to our customers.
Can you talk about your aftermarket portfolio? Maybe break it down for us and how you think about it, whether it's RMUs, mods, software, how you sell as a service.
Yeah s o I would say, yes, like I said, anytime we install the kit on the OE, we try to capture it in the long-term service into a long-term service agreement t hat allows us, obviously, I would say, for better penetration, more predictable cash flow, if you will, and the revenue stream, and I think it's also a better option for the customer, and it gives them predictive pricing and us as well.
And then the rest of the business is time and material, and then, like I said, about $1.5 billion of incremental growth in the aftermarket comes to us from RMUs. So we're striving for our aftermarket business to be about 50-60% of the overall business.
What is it today?
It varies. Right now, it's 50/50, I think.
Okay. And how do we think about the long-term agreements? What proportion of the business is on long-term contracts? And something we don't hear often from Honeywell is pricing complaints, Pricing has generally been good. So how do you ensure that you get that inflation into the pricing accurately?
Yeah. So like I said, about 70% of our aftermarket, we try to get into long-term service agreements a nd within long-term service agreements, the pricing is much more predictable and based on indices and inflation indices. As far as OE pricing, we've been slow on getting the OE pricing just because we're under long-term contracts and we'll get more price coming in, But that's really, I would say, for us, a 2027 event as some of these contracts are expiring, and we'll be renewing our contracts with OEMs.
Got it. Anything you would comment on business aviation, how you're seeing that business progress?
There's a lot of demand. We try to focus our business on super mid-size, which we like, obviously, just given our technology and the customer base there and i would say on OE, demand is there, and the hours have been stable. Post-COVID, there was a peak in the flight hours, and we see them stabilizing, so I think low to mid-single-digit growth in hours foreseen for the future.
Maybe, just to close on aerospace, how do you think about profitability going forward? You have the CAS impact with margins, Just how do you think about the margin trajectory and investments needed, you need to make?
Sure s o CAS is going to lap here in the Q4 , and will be less of a drag. The business is accretive from a growth standpoint to overall Honeywell and obviously aerospace, and then, it's dilutive from a margin standpoint, so the team will continue to improve the margins, but will be largely by year-end completed with the integration.
And then from a margin standpoint, like I said, for us, it's really about, one, the mix, and second is about getting more productivity out of supply chain s o as we stabilize our supply chain, you will see our margin rates growing again to that 27% and beyond that. I'm confident the team will get to that-
Oh, I have no doubt that-
beyond the 27%
... hits margin targets.
Yeah.
How about, how do we think about overall margins across the remaining segments as we think about the tariff impacts, productivity?
Sure so , I would tell you from a tariff impact, we should be, by year-end, largely caught up on pricing across the automation portfolio. And that's been progressing quite well, From aerospace standpoint, there's still a little bit of time l ike I said, I think that is going to recover more in twenty twenty-seven. From a productivity standpoint, we'll still see a lot of productivity in Honeywell, especially as we separate the businesses. We discover a lot of opportunity for us to capture more productivity so, I'm actually quite excited about what we'll be doing on the margin side from automation aero standpoint.
I wanna ask two more questions, and-
Sure
So maybe how do we think about... You said no more deals, but that doesn't mean people can't invest in your business, So I think NVIDIA's...
Yeah
Venture capital arm is investing in Quantinuum, valuing the company's business at $10 billion.
Yeah.
So how do you think about that? Can you elaborate on how that came about?
There should be an announcement coming out in the press, I think today, on us, on our raise, and I'll let everybody read that, and we can talk about it as we go through for the day. We obviously partner with the best companies out there, We have really great technology in Quantinuum, which we're commercializing, and I think it just tells you that-
It just hit, so you could talk about it now.
Okay, just hit, Great. So we just completed the raise. I think it's $600 million, and NVIDIA and a few others are part of that raise a nd we obviously are commercializing our product w e'll have a customer event here in the fall as well, and I'm excited about commercializing this business a nd ultimately, I think this raise gets us through for IPO because our intent is to IPO this business.
Great, well thanks, Mike, so much, and thanks, everybody-
Thank you very much.