It's my great pleasure to welcome Honeywell. I can't think of a better way to start the conference than with Honeywell. It's my pleasure to welcome Mike Stepniak, CFO and SVP of Honeywell to stage. Mike, thank you for being here.
Thank you. Thank you for having us today.
Great.
Really appreciate it. Good morning, everybody. Maybe before we get to a Q&A, I'd just give you a quick update on what's going on in Honeywell, where we're at. As we announced, separation will take place on June 29th. That's the first day of the third quarter. We are in the final stages of separating, I would say all green lights as far as the goal. Aero Analyst Day, just once again, it will be in Phoenix on June 3rd. There'll be couple events on June 2nd as a prelude to that. The Analyst Day for RemainCo will be here in New York City on June 11th. Obviously everybody is welcome and we have great events lined up. Operationally, things are going well.
We'll talk about it today, but I would say obviously we're reconfirming our forecast for the year and the guide and, a lot of, I would say, positivity in the markets generally.
Great. Thanks, Mike. We're gonna spend today talking predominantly about Honeywell automation, I think. You mentioned all green lights for the spin. Any remaining hurdles to cross here, or are you pretty much good to go at this point?
We're clear to go. Well, there are obviously all the way to the end, there are some activities and, post-spin, you have some transitional services, TSAs, things like that. Operationally, we're ready.
Okay.
I don't foresee any issues as far as the 29th.
Great. That's good to know. It hasn't exactly been, you know, a huge amount of time since you reported results, but we are two months into the quarter. Anything to comment in terms of moving pieces around the portfolio? Particularly interested in this Middle East headwind that you're [crossing].
Sure Maybe I'll address that first. Middle East is resilient, and it's, I would actually say it's better than what we thought it was going to be. Customers are extremely active. We already sent our teams to the region, including, all three of our general managers been visiting customers. Works are on the way as far as repairs, et cetera. Underlying demand is still there. I think we said $100 million-$150 million pressure in the second quarter. That's looking much better. It's gonna be way up, $100 million. Customers from order activity, I see customers not only looking for repairs but also thinking about the future, expanding, et cetera. Really good demand, I would say, coming up in the midterm from the region.
Okay. Anything else to highlight across the portfolio?
Sure. Maybe I'll just go through all of our segments. Building Automation sees strength across the board. And as you know, they've been printing high single digits last six quarters. We're guiding them at mid-single digit plus. Based on everything I see in the second quarter, they'll have another outstanding quarter. That portfolio is performing extremely well. Industrial Automation for us has been a story of self-help, and with Peter Lau coming in and applying some of the knowledge transfer that he brought from Fire and some of his external pursuits, we're seeing a lot of improvement. We also see green shoots in terms of underlying market. I feel like the business stop losing share and starting to gain share and will be growing into the second half. A lot of positivity there.
Obviously, transformation of the portfolio is helping us a lot as well. On Process Automation & Technology, that's a business that has been facing pretty hard dynamics. In the second quarter, they're lapping pretty tough comps from last year. They're sitting on their record backlog, and they'll have another outstanding quarter from order standpoint. There is a significant inflection coming back into the second half that we talked about, and we have a strong visibility to that volume. Orders are extremely, I would say, are picking up both on the Catalyst side now, on the short cycle, and from the projects. Our LNG business is sold out now for 3.5 years. Really good, I would say, tailwind going to the second half.
I remind you though, second quarter is a tough quarter for the business, so that's not changing, but we're seeing a lot of inflection in the second half.
Okay. The backlog, does that give you confidence in that inflection? Do you have that visibility or is that more beyond this year?
It's the second half of next year. It's a very high quality backlog. What I mean by it, we see projects going to FID. When they go to FID, we start work. The teams are starting work because they have financing. We're having a lot of discussions now with customers on Catalyst, so that interest is going to lead to orders as well.
Okay. We talk about projects. Obviously, LNG is what we have in our minds most recently. What else beyond LNG are you seeing now?
Look, I mean, U.S. doesn't talk about ESG a lot. We were just last week in Europe. ESG in Europe is quite alive. There are lots going on, a lot of interest. Same with Latin America and Asia. I think, there's this disruption that happened here in Iran, reminded people how fragile the whole ecosystem is. That people are looking for energy security, and I'm confident these projects are starting to come back. We had a couple projects go FID in the second quarter, predominantly in Latin America, but we see ESG coming back.
Now ESG is not quite dead yet?
I think it's going to be resurrected.
Right. You think so? Then going back to Building Automation, you mentioned another, I think the word was outstanding quarter from Building Automation.
Yes.
Maybe just take a step back. We're not seeing too many of your competitors growing at this level. M aybe just unpack what's driving that outgrowth.
We did several strategic shifts over the last couple of years in the Building Automation business. One, we moved many of our teams and the focus in region for region where we can be more intimate with our customers. Revamped very early our NPI machine and R&D. We talked about it last year. We reinvested into our R&D, and R&D was about 50 basis points of margin pressure for us last year. That's about $350 million across the company. Just last year alone, our Fire business had over 30 NPIs come to the market. And Forge is a big deal for us as far as Connected and driving the Connected offering. Billal and Suresh talked about it earlier in the year, but this is really taking off for us.
We see growth and in our verticals and and we're continuing to pivot to high-growth verticals for us, which is for us is life sciences, it's hospitality, hospitals, data center as well, although data center is still fairly small for us. We're seeing growth across the board.
If you had to rank order the NPI versus Forge as a driver of that growth. Enabler of that growth, would you say one's more important than the other?
Really, NPI is all about just installing your, creating installed base and growing your installed base. Where I see most Forge opportunities for us is moving really to autonomous operations, which for us a lot of it is in the aftermarket. If you think about technicians retiring, not having people to come to service buildings or whatever facility you have, that's where really Connected comes in, that's where Forge comes in, that's where Cognition comes in, where you can run and operate facilities remotely with fewer people. That's where we see the benefit of Forge coming in.
Okay. Now, Forge has been around for quite some time, but I think it's now starting to really reflect. I'm just wondering is, you know, AI starting to enable some tools that, you know, customers are now seeing real value?
Yeah. AI, I think is alive, obviously. I can tell you in Honeywell, we're deploying a lot AI on the cost side. For us, this is a really a productivity tool. You have to be able in order to be effective in it, you have to deploy it at scale. You need, you need really processes that are scalable and at scale in order to be applied those tools and be cost-effective for you. That's what we're doing from Honeywell standpoint inside the company. If you think about how we are creating NPI, how our engineers work, you know, a lot of the background processes use AI. On the commercial side, for our line of work, it's a little bit different.
You can't just come in and take AI from the street and apply it into a process plan that you have very strict, I would say, operating parameters, and you have 40, 50 years of domain expertise in terms of how we design these. Where we're deploying right now AI is really just through Forge and really focusing on our domain expertise and which is around controls and critical operations.
Okay. In terms of Honeywell, the way you operate Honeywell, you're not seeing big displacement of traditional roles by AI at this point?
No, we don't.
No. Okay. Okay. Aerospace. I do want to just touch on, maybe just going back to 1Q, the supply chain issues that you saw. Obviously, growth was well below what you expected.
That's right.
Just maybe just bring us up to speed. Well, maybe first of all, just maybe just run through where you're seeing the barriers on the supply chain, you know, what you're doing to overcome those and how we're tracking through the second quarter?
I would say, maybe first we'll talk about the second quarter. Jim guided mid-single digit to high single digit for the quarter, and I think I'll leave it at that. They'll have their analyst day in a couple of weeks. They can talk more about it. As you know, the quarters in that industry are very back-end loaded. It's really the last month of the quarter where you get majority of your output, and I think that's what the team is instrumenting. Everything I understand, April was encouraging.
Okay.
It's definitely will print better results than in the first quarter, but t hey still have some work to do. As far as the supply chain issues in Aerospace, specifically really to Honeywell, it's in on the mechanical side. On the mechanical side, I remind you the business produced 14 quarters in a row on double-digit output growth from factories. First quarter, I think was unusual, and the team got surprised with few late-stage decommits from the suppliers. They're working through that. The supply issues, I would say, continue. We've done a lot in terms of investing in our own supply chain. We've done a lot in terms of investing in our suppliers as far as tooling, testing, etc.
Right now, the capacity of the supply for us, it's about, you know, 10%- 12% year-over-year growth, and we really need something like 15%.
Okay. It seems like it's a lot of the smaller links in the supply chain that that's where the, the pressure points are.
That's right. That really comes to the nature of the mechanical supply chain. It's more fragmented. It's smaller players. Some of them are not well-capitalized, et cetera. You either have to assist them or you have to in-source it, et cetera. Team's kinda working through that.
Okay. When you say mechanical, is it mainly on APUs and engines, or is it a little less?
It's more engines. More engine pronounced. It's forgings, castings, blades, things like that.
Okay. Okay. Nuts and bolts, basically. Yeah.
Exactly.
Yeah. Okay. Maybe just before we move on to the separation, some of the separation items to consider. Industrial Automation, maybe just bring us up to speed in terms of the timing for the PSS and Warehouse, exits. Then maybe just remind us what's left in IA at this point. We know there's sensing, there's smart meters. Anything else to think about there?
Sure. The business will be post ELW exit, it will be about $3.5 billion. It's pure play now, measurement and instrumentation business. I'm quite excited about it. We have a lot of domain expertise. We have good positions. Much more focused, and that's why I'm so confident in the inflection of the business, both from a top-line standpoint, but also very important from margin expansion standpoint. The business right now is quite dilutive to Honeywell. Over the next two years, it's going to lead the margin expansion for the company, and you'll see that at the Investor Day. You'll see essentially impact immediately as we go through the second half. I'm quite excited about the inflection of that business.
Any help you can give us in terms of once we, you know, extract those two businesses, how the margins look for that business.
I would say the businesses are dilutive to overall Honeywell obviously, but also to IA. I would just ask you to be a little bit more patient with us, and we'll have that information on the 11th.
You think that these , again, this is probably a question for, you know, back in June, but, you know, do you think these are low to mid 20% type margin businesses? Because that's obviously where Honeywell is.
The business we're exiting?
No, the remaining IA business.
Yeah, Look, I mean, it's for the business to earn its keep in Honeywell portfolio will have to be north of 20%.
Yeah.
That's what we're working for.
Okay. Obviously, $3.5 billion makes it a little less scale than the other two segments. Is the intention to really focus acquisition activity within IA?
Sure. Maybe I'll talk about it. And we'll have a discussion at the investor event about how our acquisitions are doing. When you talk to Pete, then what you'll see is that within Industrial Automation, we have a lot of white space, and the industry itself is quite fragmented. There is a lot of opportunity there as far as do M&A, but we obviously will be careful to make sure the assets that we add and when we add them, they continue to be accretive for us, and we see a strong technology fit. I would just leave it at this. If you look at our portfolio, Process Automation Technologies are pretty well provisioned with acquisitions.
They have a lot to work with as far as organic growth and margin expansion, so i s Building Automation. The Access Solution business is doing extremely well. We'll be looking at maybe some bolt-ons down the road there. The focus is really on Industrial Automation at this stage.
Yep. Okay. We do still get questions about the possibility of a, you know, a big bang transformational acquisition within IA. It seems you've been indicating something a bit more maybe creative and maybe, I don't know, tangential is the word, but where do we stand on that?
That's probably a better question for Vimal, when we talk to him. Generally, I think where our head is we don't want to bet an enterprise on something big and transformative. We've seen companies that get in trouble with big acquisitions like that. What we find works for us the best is is bolt-on, which for us it's $2 billion-$4 billion to get the assets. We tend to know how to absorb them quickly and realize commercial synergies in the best way.
Okay. I'll take one or two more questions, and then I'll throw the Q&A open to the audience. Maybe just think about the Aero separation. You mentioned on track, you know, maybe some TSA agreements to, you know, dot I's and cross T's. Maybe just bring us up to speed on the stranded costs. You said $350 million-$400 million stranded costs.
That's right.
Turn into the low end of that range, I think, is what you said. Maybe just where do, where do you expect to be on day one?
Sure. We thought stranded cost was going to be around $400 million when we looked at it in January. We obviously went after stranded cost for a while now before Solstice. By the way, remind you, Solstice is up 70%.
It is. Yeah.
Yeah. I just wanna shout out to that team.
Yeah.
They're doing extremely well. We will show up in June with probably less than $300 million stranded cost, and majority of the stranded cost is already being addressed, so meaning it's related to repositioning, et cetera. And we've already provisioned for it as far as executing the stranded cost. By year-end, I'm assuming right now about $100 million of stranded cost. It's a really good story. Team really rallied around this, and given we're going through separation but we're also trying to grow the business, I think it's really strong focus from the team on getting the stranded costs in the box quickly.
Okay. Just to make sure I understand that. Less than $300 million of stranded costs on day one of the separation.
On June 29th. That's correct.
Wow, okay. That's really impressive. Okay. The restructuring actions to accomplish that would be part of the acquisition one-timers, I assume.
Most of it is one-time cost, correct.
Yeah. Okay. Then, pension.
Yes
Can we talk about pension? Were there any decisions on pension income?
For people who don't follow our pension discussion, I just remind you, our pension is 40%+ overfunded, more like 46% overfunded. We did and we're doing natural split on the pension between Aerospace and Honeywell. What I mean by that is, we're essentially dividing a pension based on where the employees were, and overfunding goes proportionally with that. Aerospace where we get about 55% of the pension assets, RemainCo will be left with the rest. With that said, we're still having discussions with our board on what's the best treatment for the pension. There are two schools of thought. One is obviously you get implicit value for the pension because it is an asset.
The second school of thought is it's quite volatile. It affects your free cash flow metrics. It skews your quality of earnings, et cetera. We're finalizing the discussion. Obviously, we'll have more to say on the 11th.
Okay.
Do you have a thought on it?
Just my free advice, and it's free because of what it's worth, is I do think that free cash flow is the key.
That's correct.
I think the pension just adds noise personally.
Yep.
I'd advocate just going clean on the earnings.
Got it.
Not to say it's not clean, but maybe just going back to the pension, the pension surplus. You know, you've sort of referenced the possibility of monetizing the surplus. Any thoughts on that?
Look, there are two different ways you can do it, and I don't wanna take a lot of time today on that, and people can read it. If you look at what IBM did or what Kodak did or what Nokia's doing, I mean, those are several different options. You can structure it in a way where you open and you define benefit plans. You can straight up exit it or sell it, but it's very tax inefficient. There was actually in the One Big, Beautiful Bill, there was some legislation proposed where you could fund some of your employee benefits from the, I would say, from the overfunding. That didn't pass, nonetheless it's being discussed.
Okay.
Maybe we'll see more about it in the future.
Great, thanks, Mike. Enough pension, otherwise we'll send everyone to sleep. Any questions from the audience? Any questions, put your hand up. Otherwise, I'll keep going. Nope, everyone likes to just listen to me talk and ask questions. Thinking about Quantinuum, I know there's an S-1 for Quantinuum. I know that you're restricted in what, in terms of what you can say, but maybe you tell us what can you say about this, about the IPO?
I can't say a lot.
Okay.
I would leave it at that. What I would say is that there'll be a few announcements coming up soon as the team is working through various steps of its strategic journey as well as commercial journey. I'm extremely excited about the commercial progress the team has made on maturation of their technology, and they have very strong pipeline as far as orders that's going over to revenue, which we're excited about. You know, I think right now is the right time for them as they're maturing, growing, et cetera. It's a good time to stand up the company.
Okay. You've said publicly, you know, the $250 million of investment spend or losses, that's now, right now in corporate expenses, that deconsolidates. Is that still the case?
That's right. Right now we're fully consolidate. At some point, we will not fully consolidate. We will only, I would say from EPS standpoint, it won't change anything. From a segment margin standpoint, it will be tailwind for us because we will only put above the line the portion of the company that we own.
Yeah.
It'll be sub 50%, and today it's 100%. Simple math, today it's $250 million that goes above the line, tomorrow it's $125 million.
Okay. Got it. Thank you. It seems to me that when we think about the $250 million from Quantinuum, you know, going below the line, you got the $150 million of royalty income from Aero. You've got the $300 million coming in. It seems that net-net corporate expenses come down on day one. Is that fair?
That's right. I mean, structurally, we have a lot of margin expansion, look, the Aero trademark license is helping us with some of the inefficiencies we'll have as far as simplifying residual taxes, et cetera. That's temporary too, 'cause I think that cash flow continues for about five years.
Yep.
Yeah, generally, I think the corporate expenses will be much better, and more importantly, will be cleaner.
Yep
We're trying to have a cleaner income statement. Hopefully you noticed we also removed our asbestos liabilities last year, which was a big drag for us, and a tailwind going forward.
Yep. That's great. Thanks, Mike. My remaining questions are really, you're probably gonna tell me, come back in June for the Investor Day.
Sure.
You know, you've got standing targets for 4%- 7% for Honeywell today. The RemainCo Automation Business, is that still a decent framework for organic growth going forward?
That's right. I would say it's mid-single digit.
Yeah.
I think that's how I would position it. I think, you'll see us growing more consistently on the go-forward basis. We've cleaned up the portfolio. We have diversified. Like I said, we restarted our NPI wheel machine, reinvest into R&D, moving purposely to high growth verticals. Software and services revenue is growing faster than the rest of the business. It gives us stability in the top line as well. I think what I'm most excited about is the margin expansion story for Honeywell over the next two years, and we'll talk about it a lot during the Investor Day.
Okay. That's exciting, actually, margin expansion. That would be the Process, marginalization, IA.
IA is going to lead.
Yeah.
Process is going to get better mechanically, just where they are in their cycle. Then Building Automation is continues to innovate and introduce really compelling NPI, which allows it to have better mix, better leverage on volume, obviously stronger pricing.
Okay. See, I'm gonna be a genius to figure out that you're gonna be pitching double-digit EPS growth for the next two or three years.
Look, you'll see on the 11th.
Okay.
Yeah.
Yeah. Yeah.
But, uh.
I know, but I've got questions here. I need to ask these questions.
What I will say with this is that our growth will be front-loaded. I think that's kind of what the setup for us is. I know people discount the year three usually, but what I'm excited about is we're instrumenting the company to perform this year and next year.
I think a really important part of the story is the way that, you know, you and Vimal have retooled the incentive structure to incentivize investment spending. Maybe just touch on that quickly, 'cause I think that's really important.
Yes. Vimal is passionate in terms of linking pay to performance, and we're actually looking at our plans right now for 2027. He really wants to focus the team on customer obsession and NPI. NPI obviously is also a function of customer obsession. We're working on KPIs which we will put into our performance plans for the management team that are focused on metrics that our customers care about, and obviously the street cares about from a growth standpoint. There's more to come to it. Generally in the past last few years, we pivoted as far as incentivizing more on revenue growth, and we incentivize certain teams within our engineering offering, et cetera, around cross-sell, around NPIs they do, around offering.
We're taking a step further to put more of the organization under those plans.
Okay. That wasn't the case before?
That wasn't the case, no.
No. Okay. I think one of the key changes under Vimal has been much more M&A, much more, I don't know if aggressive is the word, but certainly deploying more capital into M&A. The balance sheet for automation is in good shape with the dividend. Is that still the case going forward to be more cohesive and maybe less buybacks?
I would say this. We'll continue to have a prudent capital allocation framework. What I mean by it is that what we see investing in growth CapEx, but generally business is CapEx lighter, I would say, versus it used to be. Second is, we'll maintain our dividend ratio, if you will, in line with our peers.
Yeah.
We've talked about that. We'll maintain our I would say share count and offset dilution at a minimum. If our free cash flow generation allows and we need to, I would like to get the outstanding shares lower, maybe 1%. That said, all that said is in the short term, we're focusing on debt repayment. You will see us this year paying down a lot of debt and getting our leverage ratios down, to about 3x on the gross leverage at the year-end. As far as M&A, we'll continue to do M&A. Like I said, I think for us, better is bolt-on and tuck-in.
If you look at our cash profile, we should be able to comfortably do one, maybe two M&As, a year.
Okay. Okay. Of course, we've got the Catalyst acquisition still pending.
That's right. That should hopefully close in the third quarter. We're quite excited about that business. Has great market positioning with everything going on in the world. I think this technology has a lot of future, we're quite excited about it.
You managed to negotiate down the price as well.
We did. I mean, the business just wasn't worth what we thought last year, given where the market is. We're able to renegotiate. We're just waiting to close it.
It's not always the case. Sometimes you buy a company and you realize it's not quite worth what you thought it was worth. You don't get the lower price, so that's actually well done.
Yeah.
I think that's that covers it. I'm not gonna touch on tariffs. I wanna spend a little time talking about tariffs as possible. Mike, I think we'll draw a line there unless there's any last questions from the audience.
Well, we're around today, so I'm sure there'll be questions.
I'm sure there'll be. Any closing remarks, Mike?
No. Once again, thank you for coming today. We're really excited about Honeywell, both businesses, and we have some exciting news at the respective investor days coming up. Both companies have a really good setup and I think are entering the second half from a position of strength.
Thanks, Mike, and good luck with the separation.
Appreciate it.
Thank you.
Thank you.