Thank you for standing by, and welcome to the Honeywell Technologies 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 would now like to hand the call over to Mark Macaluso, Senior Vice President of Investor Relations. Please go ahead, sir.
Thank you. Good morning, and welcome to Honeywell Technologies third quarter 2026 earnings conference call. Joining me today are Honeywell Technologies Chairman and Chief Executive Officer, Vimal Kapur, 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 on the investor relations website that may be of interest or material to our investors. 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 certain risks and uncertainties, including those described in our recent SEC filings. This morning, we will review our financial results for the third quarter of 2026 and discuss our updated 2026 guidance. As always, we will leave time for your questions at the end.
With that, it is my pleasure to turn it forward to Vimal, who will begin on slide three.
Thank you, Mark, and good morning, everyone. Our first quarter as a standalone pure-play automation company was a clear demonstration of the value creation strategy we laid out during Investor Day in June with broad-based organic growth, strong margin expansion, and higher free cash flow conversion. I am very pleased with the result our teams delivered. This quarter showed the breadth and quality of new Honeywell Technologies portfolio with strong results across all segments. We delivered seven percent organic sales growth above the high end of the targets we unveiled at Investor Day in June. Demand across the portfolio was broad-based, which drove short-cycle orders growth of eight percent, excluding our divestitures, led by industrial and building automation. Additionally, the growth inflection we expected in Process Automation & Technology is occurring, with the business growing eight percent organically in third quarter.
As I will talk more about shortly, we believe PA&T is beginning a multi-year growth inflection fueled by robust project backlog and continued capital investment in energy sector, especially in Africa, Middle East, and U.S. On profitability, we expanded margins by 370 basis points to over 21% through strategic pricing, productivity actions, and the continued reduction in the stranded cost. Importantly, with accelerated progress this quarter, we now expect to eliminate all remaining stranded costs by end of 2026, just six months after the aerospace spin-off, demonstrating our strong execution capabilities. Together, this combination of profitable growth and the fixed cost productivity drove adjusted EPS of $2.27, up 34% year-over-year. To round out the story, the cash conversion accelerated to 95% for the quarter, and we expect to be above 100% conversion in the fourth quarter.
As a result of our strong execution this quarter and momentum heading into fourth quarter, we are raising our full year 2026 guide across all metrics. The growth inflection in PA&T and the turnaround in industrial automation are well underway, compounded by eight straight quarters of outperformance in building automation. Mike Stepniak will talk more about our stronger outlook for Q4 and the full year in a few minutes. Our transformation into a pure-play automation company is complete. As our third quarter results have demonstrated, we have strong position in growing end markets, differentiated offerings, and clear competitive advantage in higher growth verticals like LNG and data centers. We are instrumenting the business to outperform both in 2027 and over the long term with strong short-cycle demand, a backlog of nearly $19 billion, and momentum across the portfolio.
This gives me and the leadership team great confidence in delivering of our 2029 targets. Let's now turn to slide four to talk more about the order trends in the business. The key takeaway is that demand remains strong across most of our portfolio. We saw growth across our short-cycle businesses led by sensing and measurement in industrial automation and double-digit growth in building automation product businesses. Orders in data center vertical were up over 100%. In PA&T, we saw strong refining Catalyst Technologies demand consistent with our expectation for a second half recovery. On a regional basis, we saw strength in India, the Middle East, and Africa. In Process Automation & Technology, we are navigating tough prior year comparison due to the two strategic low carbon energy and LNG awards in third and fourth quarter of 2025, which were each $700 million.
From time to time, large awards like this do not always correlate with underlying market demand we are seeing, which is why we have elected to present a normalized view of the demand. Excluding the impact of Q3 award last year, total company orders are up three percent organically. Furthermore, book to bill in this quarter was 1.0, which drove ending backlog to nearly $19 billion, up seven percent excluding our divestitures. In PA&T specifically, the backlog was up double digits driven by these large project awards. We continue to believe that the ongoing transition to LNG and renewable as priority fuel increasing pipeline activity from refurbishment and rebuilds in Middle East and the refining build-out in Africa will drive a meaningful energy upcycle over the next several years.
Looking ahead to the fourth quarter, we expect orders to grow in the high single-digit range, excluding the large LNG award shown in the chart on Slide four. This will be driven by demand in Middle East, India, and Asia Pacific in process technology and building automation, continued short-cycle demand in building automation products, and sensing and utilities in industrial automation and momentum in our high-growth verticals. Let us now turn to Slide five to discuss the favorable dynamics we are seeing in the global energy value chain, reinforcing our growth outlook for Process Automation & Technology business. On a global basis, we continue to see activity increasing on large energy projects, including over $1 billion in process technology orders since quarter one of 2026. PA&T backlog is over 10% higher than a year ago, supported by wins across LNG, refining and petrochemicals, and low-carbon energy projects.
The breadth of these orders is important, too. We are seeing investments across North America, the Middle East, Africa, and Asia, rather than a single region. LNG remains strong in U.S. and internationally, while refining and petrochemical orders include major projects in Africa and continued activity across Middle East and Asia. Low-carbon energy remains a small part of the business overall, but it is growing at a strong double-digit rate, with wins in areas such as sustainable aviation fuel and carbon capture. We continue to believe that longer term, this will be a growth driver. These orders expand our install base and create opportunities beyond the initial project win. As these facilities come online and operate at high utilization rate, they will drive future demand for catalyst, automation, digital modernization, and life cycle services.
Overall, the strength and global diversity of the orders give us confidence in the outlook for continued growth of PA&T segment as we enter 2027. In conclusion, we are seeing robust backlog growth and commercial momentum across our business, and we expect 2027 organic growth to be at or above our long-term growth algorithm. Let me now turn it to Mike to discuss the third quarter results and our 2026 outlook in more detail.
Thank you, Vimal, and good morning. In the third quarter, Honeywell Technologies delivered strong results that surpassed our expectations across most metrics. Sales grew seven percent organically with strength across all segments. Process Automation & Technology sales grew eight percent organically, led by double-digit growth in projects and return to growth in aftermarket, led by refining catalyst demand. Project sales grew 14% year-over-year, led by strong LNG and petrochemical backlog conversion. The momentum in Building Automation continued with eight percent organic growth, our eighth straight quarter of high single-digit growth, evidence that we continue to gain share in the market. This was principally driven by 11% organic growth in products, led by both the fire and security businesses, while solutions also grew four percent organically, driven by strength in services. On a regional basis, we saw double-digit growth in both India and Asia-Pacific, with continued strength in the Americas.
Finally, in industrial automation, organic sales were up four percent in the third quarter, led by double-digit growth in solutions, principally in industrial measurement and utilities. Product sales were roughly flat, with sensing and industrial measurement demand offset by industry-wide deferrals in meter deployments across the utility segment. On profitability, segment profit grew 23% and segment margin expanded 370 basis points to 21.3%, driven by productivity, accelerated stranded cost elimination, as well as strategic pricing actions and volume leverage. This more than offset rising inflation, headwinds from the mix of projects versus aftermarket, and the acquisition impact in Process Automation & Technology. By segment, in industrial automation, price and productivity actions in the core business drove 350 basis points of margin expansion, with the business firmly on path to deliver 22% segment margin in the fourth quarter.
In Building Automation, segment margin expanded another 30 basis points to 27%, driven by volume leverage and pricing actions that more than offset rising inflation. In Process Automation & Technology, margin contracted as expected, driven by mix headwinds stemming from higher project growth and dilution related to the acquisition of Johnson Matthey's Catalyst Technologies business. Adjusted EPS was up 34%, driven primarily by 23% segment profit growth and lower interest expense, which more than offset a higher adjusted tax rate in the quarter. Finally, free cash flow was up 15% to roughly $690 million, while our conversion increased to 95% in the quarter. We expect free cash flow conversion to be above 100% in the fourth quarter as we drive working capital improvements, including strong receivable collections. Let's now move to Slide seven to discuss the third quarter segment margin and adjusted EPS bridges.
Starting with margin, we're delivering stronger incremental margin in our short-cycle businesses, driving roughly 70 basis points of volume leverage. We're also continuing to effectively mitigate high inflation with strategic pricing actions, productivity, and a reduction in stranded costs. We expect inflation to remain at these levels at least into the first half of 2027. Our strong market positions, installed base-driven business model, and the mission-critical nature of our offerings give us confidence in our ability to successfully navigate this inflationary environment. On adjusted EPS, earnings growth in the fourth quarter was principally driven by a strong operational performance in all three segments, which allowed us to overcome the operating loss from our divestitures. Below segment profit, interest and other expenses declined year-over-year, while our tax rate was slightly higher. We're making good progress against commitments we outlined at the Investor Day in June.
Our focus on offsetting inflation, delivering productivity, and aggressively eliminating stranded costs for transformation is having a meaningful impact. This provides a strong foundation for 2027. Let's turn to Slide eight to provide an update on our leverage commitments. As I discussed at the Investor Day, we're committed to reducing our gross leverage to less than 3 x this year by lowering our gross debt balance from $18 billion in the second quarter to under $13 billion at the end of 2026. This will be enabled by the acceleration in free cash flow that we expect to continue in the fourth quarter. We expect our year-end cash balance to be approximately $3 billion, resulting in a net debt of around $10 billion. Importantly, the cash generation and continued reduction in our leverage will increase our capital allocation flexibility, including capacity to pursue disciplined M&A. Let's now turn to Slide nine.
As you can see here, we have made considerable progress reducing fixed costs related to the portfolio transformation, and we expect this to continue in 2027. We are implementing a cross-functional shared services model across the company with a simplified and more flexible corporate structure. More importantly, during this time, we continue to invest in our businesses to drive future growth. The progress on stranded cost reduction underscores the pace of execution across the organization and the progress we are making in building a simpler, more focused company. This will position the company for long-term profitable growth. Executing stranded cost takeout within six months of the aerospace spins demonstrates the strong operational execution capabilities of Honeywell Technologies. Let us turn to slide 10 to discuss our revised full-year outlook.
Today, we are raising our full-year organic growth, adjusted earnings per share, and free cash flow guidance, as well as tightening our margin guidance around the previous high end. We now expect full-year organic growth of four percent-five percent, up from three percent -four percent previously, driven by our execution in the third quarter and stronger outlook in the fourth quarter. By business, in the fourth quarter, we expect to see continued strength in buildings across both products and solutions, high single-digit growth in Process Automation & Technology led by project backlog conversion and higher Catalyst Technologies volumes, and continued sensing and industrial measurement demand in Industrial Automation. As a result, we expect to deliver five percent-six percent organic growth. With the performance today, we expect to be at the high end of our full-year margin range at 20.5% and at approximately 22% for the fourth quarter.
This will continue to be driven by pricing, productivity, and volume leverage, overcoming higher inflation and anticipated mix headwinds in Process Automation & Technology, driven by higher project activity and dilution from the Catalyst Technologies acquisition. Industrial Automation should be at 22% margin in the fourth quarter, while Building Automation is expected to expand margins 70 - 90 basis points, and Process Automation & Technology will end the fourth quarter around 21.5%. We now expect full-year adjusted EPS in the range of $8.40-$8.45, which represents a $0.23 improvement at the midpoint. Notably, the low end of our guidance range is now above our previous high end. This results in full-year earnings growth of approximately 30%. Lastly, our free cash flow guidance is up $100 million to $2.1 billion, given the higher income conversion.
You can find additional information on our 2026 outlook in the appendix of our presentation, which includes estimates for corporate and below-the-line items. Thank you for your time today. Let me now turn the call back to Vimal to wrap up before the Q&A.
Thank you, Mike. We are proud of our results in the first quarter as a standalone company. We surpassed our expectations across most metrics, and we see encouraging demand signal in many key end markets. We believe PA&T is at the beginning of a multiyear growth inflection coinciding with an upcycle in global energy markets. We are also encouraged by the turnaround the team is driving in industrial automation, and building automation continues to execute on all fronts. We are also launching new offering on our Forge platform, both in building automation and process automation technology, creating a robust foundation for our future growth. With our performance this quarter and backlog of nearly $19 billion, we are confidently raising our 2026 outlook across all metrics, setting up for a strong start to 2027. Thank you for joining us today. Mark, let's now take some questions.
Vimal, Mike, and I are now available to answer your questions. We kindly ask that you please be mindful of others in the queue by asking one question and one related follow-up. Operator, please open the line for Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Oh, thanks. Good morning. Thanks for the question, guys.
Morning.
Good morning.
Good morning. I am curious, the confidence in 4Q order growth. We are still only one month into the quarter. I am assuming December is a pretty important month for bookings. I am just wondering what gives you the confidence that the pipeline converts into orders, and maybe just touch on what you have seen in October.
Yeah. So far, Nigel, the first three weeks of October has been trending on and above expectations. So that certainly is a good data point. We look at our statistical performance against pipeline, our win rates when we forecasted. We also provisioned for some adequate contingency for things which cannot happen as projected. So overall, our confidence to what we are stating on high single-digit orders growth in quarter four, less of the low-carbon energy or LNG order, I am sorry, which we booked last year, which was several hundred million dollars. We remain highly confident on that.
Okay. Mike, a quick one on stranded costs. Good news that you will be done by the end of this year. I think that is about six months earlier than expected. Does that change your perspective on your corporate expense for next year? I think that the guide was less than $600 million. How does that look right now?
Right. It is a little bit early yet, and we will talk about it in February. But for next year, just like we talked about, I think, before, we plan for our corporate cost to be about $400 million. Then we are instrumenting the teams, obviously, to productivity, margin expansion north of 60 bps, like we talked about. I feel we have a really good setup. Like you said, we are ahead, and that has implications as far as us having a really good momentum going to next year, and we will work with that.
Great. Of course, I meant less than $400 million. Thanks, Mike.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Julian Mitchell with JP Morgan. Please proceed with your question.
Hi. Good morning. Just wanted to start off with a question on the IA segment. It has had a rocky or uneven time for a few years for various reasons. Looks to be very well set today with a large sequential margin increase guided for the fourth quarter. I suppose maybe when we try and look a little bit further out, how confident are you in continued margin expansion at IA in the coming quarters? And given the macro backdrop is a bit choppy, anything concerning you have seen in the order rates of IA, the shorter cycle pieces?
Overall, Julian, for IA, we remain very confident on continued performance in both top line recovery and margin rate expansion. The reason for that is the basics are improving as we talked about it in Investor Day, very rapidly. Our own time delivery now is, it used to be just shy of 40%, is now 60%. Our past dues are down 18%. Our new product launches are being highly accepted by our channel partners and our OE customers. So those foundation has turned the business from a negative territory to now more low single digit. And we do expect that it will continue to progress and find its pathway to more mid-single digit growth as we lap from 2026 to 2027. So we remain very convicted. Same is true on the margin rate. We expect the year to end at 22%. Primarily, it is a higher quality business now.
From this baseline, as we continue to execute our pricing action, productivity action, we remain very confident on the margin expansion and also achieve 25% goal by 2029. So overall, sensing and measurement, building a unique segment in industrial automation, that is our pathway, and we remain highly convicted. This is a high-quality business as part of our portfolio.
That's helpful. And then just a quick follow-up on PA&T. Margin pressure kind of year-on-year in the third quarter, that's continuing into the fourth. Should we assume that margins stay under that type of pressure until the Johnson Matthey acquisition anniversaries, or is there anything in the base business moving around that could help the margins sooner?
Yeah. So versus where the team finished at the 22.2%, I would say next quarter, 21.5%. And then in the first half, I would say probably something similar, but next year, PA&T is going to expand margins. What's happening there is, one, we have a Catalyst mix that's starting to mix up. That volume is going to grow. That's going to help. The project volume mix is going to abate. As you know, we obviously are integrating CT. So in the second half, we will be substantively past CT integration. We see a really good margin expansion into the second half of 2027. I just remind you, like we talked about, this is a multi-year cycle. In 2028, there is a significant margin pickup again as we counting on Catalyst volume. So, we have very good visibility to this cycle.
We have proven it cycle over cycle over multiple decades, and we're extremely confident on the progression of that business in that fashion.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Steve Tusa with Wells Fargo. Please proceed with your question.
Hi, good morning.
Morning, Steve.
Very helpful chart on the segment bridge. Can you just, I think teasing out core incrementals, putting everything else aside on volume, roughly 40%, is that right? Then, can you just discuss that inflation number, the 350 basis points? What was that in the first and second quarter, then what do you expect for that in the fourth?
Sure. So you are exactly right. I think on core, we are about 40% incrementals. Price to cost in the third quarter was about 30 bps net positive. So that 350 bps that you see on inflation is a little bit higher versus the first half, but also our price is higher. We are averaging about 3.5% price in the first half. We will average about 4.5% in the second half, four percent for the year.
That is going to be on the year basis, maybe 10-20 bps of, I would say, margin expansion from price cost. We see, obviously, inflation elevated. We expect that to continue into year-end then starting to abate in the first half. Everything we get from our teams as far as planning for next year, we see inflation coming down a bit. So the price will move with that, but it is still around that three percent -four percent .
Okay. Then just for the fourth quarter, my follow-up is, the margin went to the low end of the range, I guess, for the fourth quarter. Is that really just the price cost timing stepping up a little bit sequentially? Just curious as to that or just conservatism.
No, not at all. Pricing cost is as well. We manage price in the third quarter to account for year-end. It is really just mix. So revenue is coming up, like Vimal Kapur talked, the products are performing extremely well. We do not see anything changing on products. On the other hand, projects is doing better and CT outlook looks better, they are dilutive to our overall mix, that is what is dragging our margin to that 400 basis. Still, I would say at the high end of our guide for the year, 20.5%, it is about 300 bps margin expansion for the year. Really good setup for next year.
Yep. Thanks a lot. Appreciate it.
Thank you.
Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.
Thanks, operator. Good morning, Vimal, Mike, and Mark.
Good morning.
Appreciate the shorter comments today, too, to leave more time for Q&A. Guys, you've been seemingly gaining a meaningful amount of share in fire security, it seems, for a while now. That was always a pretty low-growth business, literally a one -two percent type growth business, but you seem to have made it something a little bit bigger. Can you just update us on what you're doing there and what's changed at the margin? What's driving that growth or at least the sustainability of that growth?
I think the fundamental is our higher cycle of new product introduction coupled with the mix change of the end markets. We continue to amplify our new product introduction and maintaining a very high vitality by which we then gain share from a competition. Forge is playing a very important role. Fire business was the first out of the door to build a connected solution by which you can configure our Fire Panels remotely. We introduced that almost three years back. What it does is, Scott, that while the software content is low, it pulls the core product. That value proposition is very compelling for our channel partners because they save significant commissioning time, inspection time, and improves their P&L. Also, we have had benefiting from data center growth.
We have some unique products in fire for data center growth, for early detection of fire in a very unique environment because you have a lot of electrical cables, a lot of servers. There's a unique way we detect fire there. We have differentiated product line. We also introduced some unique new products for detecting fire in batteries, as more and more lithium-ion batteries are being used. On the security side, we're benefiting from very premium position of LenelS2. They continue to perform and double-digit growth rates across the board. Honeywell added a lot of value in that business by globalizing it. We talked about that hypothesis when we acquired the business, and we clearly see growth of that business outside the U.S. with a lot of synergies we are bringing in.
All in all, I would say, we maintain the momentum in this business and we see no reason that we will not perform at this level in the foreseeable future.
Just to follow up on that, on Forge, that answer was complete, but how do you go to market with Forge then? Is it getting wrapped in as a standard offering with every install, or does it come in as kind of a sidecar, if you will, and priced separately? I mean, how do you guys go to market with it and get value for it? Or is it just more of a tool you use to, again, be able to gain share because you have got another kind of
No, very good question, Scott. There are three sales motions for Forge today. Our recurring revenue is now coming close to $1 billion in 2026, just shy of that.
The first sales motion is, Forge is sold along with our service contracts. We make our customers connect to Forge, change the pricing of our service contract because we are able to provide higher value outcome. That is sales motion one. Sales motion two is there are unique applications built in to make our existing offering better, like I gave an example of Fire Panel. They are now, even though we sell it as a standalone offering, but it goes hand in hand with our core products. Then the third is a standalone offering of Forge, which we launched, I would say 18 - 24 months back, first in buildings, where we can connect standalone buildings of even competitors, apart from Honeywell install base, to get better insight into customers, energy consumption, predictive maintenance, emissions. And we launched a similar offering for Process earlier this year.
In that scenario, it's sold as a standalone SaaS software. All three sales motion are in place. As we talked about in Investor Day, we expect our ARR to grow. Our aspiration is 15%. We want to have high aspiration. This year probably will be slightly shy of that, more like 12%-13%, but we'll continue to work our way through to get closer to 15% every year.
Very helpful. Best of luck. I'll pass it on. Thank you, guys.
Thanks, Scott.
Thank you.
Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.
Great. Thank you. Good morning, everybody. Maybe just starting with Process and just understanding the mid to long-term growth opportunity as these maybe comps normalize. Obviously, great to see the high single-digit growth as you expected. I know there's been a management change recently from Building to Process. I think Forge Cognition is maybe part of the growth story. Just talk about, beyond the first half of 2027 and into the second half and beyond, what we think the run rate, steady state growth opportunity is for Process.
So we see, Amit, the growth in Process Automation & Technology, both on the project side and on the aftermarket in services and catalyst side. The project side, if you see the chart we added into our prepared remarks, we see continued investments in LNG, so our backlog is very strong for LNG. We also see investments in Africa and Middle East and Asia on traditional refining, which is helping us a lot in our backlog. And finally, we also see activity in low carbon energy projects. Just as a reminder, we have licensed 100 projects so far in sustainable aviation fuel, and only about 20% of those have been built so far. So there's a lot of runway people coming back to us with FIDs, which then turn into a significant revenue stream. So project activity remains very robust and very diversified.
On the aftermarket side, we expect second half of 2026 catalyst growth to be double digit. It's double digit in Q3, it's going to be actually mid-teens growth in Q4. And given the higher margins our customers are making on the finished products, we expect catalyst demand to remain strong in 2027, more normalized year. And on the automation side, we see strength in our services portfolio, cybersecurity, our Forge offering, we call it Forge Cognition. So that offering is also getting strong customer reception. So across the board, as Mike laid out, we see this as a multi-year cycle in which the project strength will provide us a top-line growth and will maintain our margin with a high mix of catalyst and services and software, as we progress.
Got it. Okay, that's helpful. Maybe just as a follow-up, I know 2027 guidance is forthcoming, but I think, Vimal, you talked about sort of at or above the long-term algorithm. I think, Mike, maybe a couple of months ago, you sort of floated this idea of 15% EPS growth. If I just sort of compare the two, I would say bottom line EPS growth, maybe, I would've expected something a little bit higher, just given the margin opportunity. Maybe just unpack that a little bit for us. Maybe the IA margins headwind in the first half of next year, maybe that's what's driving it. Just to the extent that you can, just sort of fill in the color between what you've already commented on '27 between the algorithm versus the 15% EPS growth.
I would say, Amit, the setup for 2027 is very strong. First for starters, our midpoint of the guide for 2026 is up by $0.23. So we are starting at a higher baseline. On the top line, we remain very confident on performing at upper end of our four percent-six percent guide. Our backlog is very strong. Our short cycle momentum sustained itself, and we continue to maintain our share or gain share through new products, so that's going to continue. On the margin rate, we have done a good job to manage inflation through price cost. It's slightly positive. We expect to maintain that. We have maintained our fixed cost by elimination of stranded costs ahead of time. So when you see the setup here across the board, top line margin expansion and fixed cost, we expect a strong print in 2027.
I can't tell you specifics because I'll be giving you guide, which I think we'll have to wait for February when we plan to come back there. But final comment I'll make is directionally, we are on a road to deliver $12 or better, our long-term 2029 guide we set up in Investor Day. Great. Thank you very much.
Thanks, Amit.
Thank you.
Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.
Yeah, thanks. Good morning, guys.
Morning.
If we could just start with the Q4 outlook, I think you are embedding a little bit of a deceleration in organic growth, but backlog is obviously still strong. Short cycle order growth is still strong. Can you maybe talk through the expectations by segment? Like, what is driving the modest deceleration that you have embedded for Q4?
I would say probably this is just more of conservatism than anything else. Like we said, I think on the short cycle orders, they are extremely strong. On product side, both BA and IA booked in third quarter, high single digit, double-digit growth. We feel good about that. Projects are incrementally better. I think it is just more mix. Like we said, we will do four percent-five percent for the year and five percent-six perccent in the fourth quarter. As we stand today, we are probably on the higher end of the five percent. It is incremental. I would say we feel better about the fourth quarter.
I think it is fair to say, Nicole, we do not see any change quarter-on-quarter. I think the revenue mix can be different within a quarter for projects. Other than that, fundamentals of the business remains very strong quarter-over-quarter.
Okay, understood. Thank you. Then maybe just in IA, you guys referenced some deferrals in utility meter deployments. Can you just give some more color around what is going on there? If that is expected to continue into 4Q or into 2027, the timeline for that kind of rectifying. Thank you.
Yep. I think that is more of an upside opportunity for us in 2027. We have introduced some very new technology, both for gas meters and water meters. Gas meters, unlike electricity meters, have not been upgraded at a large scale by utilities over the last decade. Our technology being new is it is being tested by multiple utilities, and each utility done their testing by themselves, rather than this being a common testing protocol, which just adds time. We are in the process of working with our testing of our new gas meter with several utilities. Once they complete that cycle, which could be six - nine months, we expect them to turn into a major roll-outs 2027 onwards for several years. Actually, the low growth in our metering business is actually already factored in in 2026 and potentially in 2027.
But looking ahead, it is going to turn into a tailwind when these adoption rates will take up in the period ahead.
Thanks, Vimal. I will pass it on.
Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.
Yes, thanks so much. Can you hear me?
Yep.
Very well.
Go ahead, Andrew.
Excellent. Just a question, a little bit on Process Automation & Technology on the aftermarket services. I think you highlighted some good tailwinds on Catalyst, but if I look at sort of year-over-year comps, the comps has gotten quite a bit easier versus last quarter. I would've expected more of a pickup sequential in organic growth. What are the headwinds that the business is facing? Because clearly the Catalyst business is accelerating, but what are the headwinds?
I mean, I won't call it headwinds. When you grow at eight percent and then you grow subsequent quarter probably at seven percent, I may not call it headwinds. I would simply call it the cycle of the projects. I can't control the milestone when they have to be achieved, so they come at a certain timing. I would say, broadly speaking, the PA&T revenue profile on organic growth basis is very similar between Q3 and Q4. Q3 was slightly higher versus Q4, but not substantially different. You are talking a narrow range here. Catalyst demand is very strong in Q4, sequentially better than Q3. We were double digit, and we're going to go towards mid-teens growth in Catalyst. For example, in Q3, our refining Catalyst growth was up 80%. So we expect to maintain high rates there.
Services growth also remains strong in automation, more like low to mid-single digits. Fundamentals are very robust in this business. I think the change you see is just the sequencing of the projects within a quarter.
Okay. Just maybe another question on industrial automation, on the products. What would it take for the products to start growing faster? Because I think you guys sort of talked about initiatives to get deliveries on time, delivery improved, so that would sort of lead to a lot of good things happening. What would it take for that growth in that business to inflect materially positive, or are we waiting for the new product introduction, as you alluded in the prior answer? Thank you.
I think directionally speaking, Andrew, if you observe, we have been turning this business to slow growth. Now we are at low single digit territory right now. I would also like this to go to mid-single digit territory, and we expect that to occur in 2027, moving forward. I think the drivers are fundamentals are the same. I talked about improving customer service, better delivery, improved past due rates. That's certainly already happening. New product launches and its penetration takes time. I think that's the only variable. As some of them gets more penetration, we expect to continue to perform better in this segment. So there's no doubt in my mind I think it's just the timing as we go from low single digit to mid-single digit in this portfolio, in this business in 2027.
Andrew, I would just add that the third quarter orders for industrial automation core were up 15%. So this is business that's going to the next year, probably with the best backlog it has seen in over five years. We're quite confident about finishing-
We expect fourth quarter orders to be up high single digit. There is a lot of momentum here. It is just the cycling of the business going from one phase to another phase.
Greatly appreciate the color. Thanks.
Thank you.
Thank you. Our next question comes from the line of Andrew Kaplowitz with Citigroup. Please proceed with your question.
Hey, good morning, everyone.
Andrew.
Good morning.
Vimal, I think we know your data center business overall is still a relatively small part of Honeywell, but last quarter, I think you mentioned your offerings in power generation were beginning to help your process business in data centers in addition to Building Automation. How do we think about that data center, call it ecosystem, and how it might help you in 2027 and beyond?
Certainly, we always talked about data center as mid-single digit business for BA, Building Automation. We are now turning to a point with the change in demand of the customer. We continue to see this can become actually, at some point, mid-single digit of Honeywell. Because now we see the demand in Process Automation. We saw year to date orders growth of more than 100%. Based upon the pipeline visibility we have, we expect very high growth in 2027 also. It will be mixing up not only the Building Automation, but even some Process Automation order for power island, for controls, for energy storage. That solution is being mixed up. One interesting thing which is occurring, in addition to this, for the last, I would say six months, is liquid cooling. As liquid cooling will take more penetration, we expect our share of spend to further go up.
We are working with customers for sensing for liquid cooling from our sensors business, and our Sundyne pumps are a premium solution to circulate those liquid cooling. As we can imagine, those are going to scale in future. Probably it is more post 2027. What I then see is something we started with a very modest content in building automation. Now we added process automation, and now we are adding even our content from process technology and industrial automation. It is truly becoming a pan Honeywell strategy, and we continue to improve our content. Last comment I will make is, as data center growth is happening outside U.S., in Europe and in Asia, particularly in Korea and India, we expect to continue to do well because of our global presence and global execution capabilities.
It is helpful. Vimal, I think you or Mike mentioned that you are getting that leverage down under 2.25 by the end of the year. I think you also mentioned at that point you could pursue, I think you said disciplined M&A. How do you characterize the environment right now? Obviously, it is the new company or the new Honeywell technology. Any sort of repriorities that you have as you move forward here toward the end of the year?
Our highest priority is first to get our leverage ratio three or below, and continue to work it way down. As we get into 2027, generate more cash, we want our leverage to further improve. I think from an M&A perspective, it is an optionality. As you know, our 2029 $12 commitment is all organic. We have no compulsion, we have no need to wake up and think about an M&A to meet our organic earnings commitment. Having said that, we are looking at options three ways, highest priority being industrial automation, how we look at adding more content in measurement and sensing. That is the highest priority. Second area we are looking at it is higher growth verticals. How can we add more content to further top grade our portfolio? Finally, we never overlook some of the frontier technologies.
There are always tuck-ins which can change the profile of our businesses, and we look at these mid-size small businesses in addition to that. All said, I think near term, you will see us staying very disciplined on our debt paydown, and we will work our pipeline for M&A for 2027 onwards.
Appreciate all the color.
Thank you.
Thank you. Our next question comes from the line of Joe O'Dea with Vertical Research Partners. Please proceed with your question.
Hi, good morning. Thanks for taking my question.
Hey, Joe.
Can you talk a little bit about the self-help opportunities moving forward? What you're most excited about heading into next year? I'm not sure if you've perhaps touched on this with Johnson Matthey and Catalyst Technologies, but just on the heels of the speed with which you did the stranded cost takeout, kind of thinking about other parts of the organization and where you see kind of the biggest self-help opportunities.
I would say, just quickly, maybe two or three which stand out the most, and that's obviously a focus for us as a company. One is we're moving more into lighter headquarters, and more of adoption of shared services across the company, which obviously will help us continue to focus on productivity, which is value engineering, component engineering. That's more from a supply chain standpoint and how we think about NPI. That's a significant opportunity for us. And finally, we're obviously working through adoption of AI. All of our teams are either already trained or being trained on AI. Everybody has access to the models we're using across the company, and that's really opportunity for us in terms of manage OEF, and it's not as far as reduction OEF, but manage the OEF growth. We're staying flat on OEF while we obviously grow mid to high single digits operation.
Two points I'll add to what Mike said, on the self-help side. First is on the Catalyst Technologies business. As we integrate the business, we are seeing higher cost synergies than we had forecasted. So that should certainly help us in our 2027 planning. We're also working on sales synergies, building pipeline, but that you can imagine, that takes time to convert into a real revenue. So we do expect CT business to overdrive from cost synergy standpoint. Final point I would say is, cross-sell between different parts of Honeywell. I gave an example of data center, just in my remarks a couple of minutes before, and how something which was centered around just one segment, we are doing it cross-segment. We are doing that in other verticals too. For example, in life sciences, how we cross-sell between building and process automation.
Or in semiconductor, where we have a very strong position in gas detection, how we also accelerate our participation in fire detection, which comes from Building Automation. So that's also a self-help. It's leveraging our sales channels to the fullest potential, and certainly we are maximizing our efforts on that.
On Building Automation and demand visibility, clearly strength within the data center side of things, but maybe talking about end markets, ex data center. Obviously, the growth rates over the past couple of years are tougher comps, but what the product innovation pipeline looks like, what that means in terms of the growth visibility you have heading into next year in the non-data center parts of Building Automation.
I think the Building Automation business, the content of higher growth verticals, and in high growth verticals, we count three: data centers, healthcare, and hospitality is 20%. 80% of the business come from core or base business, and that's growing at mid-single digit. That's on the strength of great customer service and new products. To your question on new products, we have several big launches coming up. Ahead, really right now, we have a new version of our security system launched, which is cloud-based. That's going to play in the mid-segment. A lot of our new offerings are actually going into the mid-segment as a broader theme. A new version of our fire system going into our mid-segment. We're also looking at similar offering in building management system. We are refreshing our EBI platform with a newer version.
Across the board, we have learned that as we continue to accelerate our vitality and innovate, we will perform at this level of mid-single digit plus. The pipeline is very full, and I'm extremely confident on performance of results by this business.
Thank you.
Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Thank you. Good morning, guys.
Hey, Joe.
Good morning.
I think I'm going to focus both of my questions on PA&T. On the project side of the business with Brent now sitting above $110, typically that stimulates investments from your customers. I don't know if you can maybe just give us a little bit of background on what your customer conversations are like today, whether the pipeline has materially increased over the past year. I thought that slide number five was very helpful, but any color you can give us on that would be great.
As we said in the chart, Joe, we see investment certainly in diversity of fuels and energy security. What I mean by that is Africa was not seen as a destination of investments by refining petrochemicals. Dangote Refinery, if you recall during Investor Day, he was up there and talking about partnership with Honeywell. They're not only expanding their existing refinery by 100%, which is the largest refinery in the world, they are doubling it. They're also putting additional refinery in Kenya. These are all firm projects. If you look at their cash flows, billions of dollars in a quarter, these are high certainty projects. There are additional investments happening in Africa on petrochemical site too, so we can clearly see that as a trend. One thing which we highlighted is also low carbon energy projects are finally taking shape, from a low base.
We had two big wins on carbon capture-related projects in quarter three, and we have some robust pipeline for quarter four ahead for us. There are some investments happening, and the driver for that is European Union continues to hold its mandate for SAF adoption. To fulfill that demand is more capacity, which is required. Finally, we do see capacity addition for petrochemicals. Our licensing activity and automation business in petrochemicals continues to remain strong. When you add it all together, it's less linked to the oil price. It's more linked to the drivers, which are more broader energy security, resiliency, low carbon fuels, or the broader demand of petrochemicals. That's why we believe it's a multiyear cycle. It's less linked to the price. It's more linked to other drivers. That's why it gives us more conviction.
Yeah, super helpful, Vimal. I guess maybe just to ask Andrew's question slightly differently from before. On the refining side of the business, are you seeing any deferral just given where crack spreads are, refiners may be running out harder a little bit, given profitability looks really, really good right now. Are you seeing any of that business maybe pushing out into next year, or has that remained very healthy for you?
I would say what we all read, deferrals or higher uptime by U.S. refiner is factually correct. Which essentially means that some of the activity which requires a shutdown cannot be performed. We look at our services business, aftermarket business in two buckets. A lot of it can be done online, so a lot of our automation offerings do not require a plant shutdown. If you want to harden your control system for cybersecurity, or you want to migrate to the current version, it can be done online. So those businesses get protected even though customers are running at a higher rate. But there are things which you need to replace, like a Sundyne pump has to be replaced, you need a shutdown, or if you want to refurbish a catalyst. So to me, there's some demand moving right, but it's not a lost demand.
It's kind of pent-up demand, which will eventually show up. But when you look at the global view, the overall services and catalyst demand is very stable. As I mentioned before, we see the catalyst demand to be in teens, high teens in quarter four. Next year, we see overall catalysts to be very stable with single-digit growth. Services growth remains very stable. So yeah, absolutely, this is a trend of high utilization and no shutdowns, but it doesn't change the overall dynamics of the business for us in the near term.
Thank you. Very helpful.
Thanks, Joe.
Thank you. Our next question comes from the line of Varun Govindaraj with Bernstein. Please proceed with your question.
Good morning, everyone. Thanks for the question.
Sure. Good morning.
Question on PA&T. When you are looking at projects and their delivery times, have they been in line with historical norms? I think there has been a concern that we are short labor in North America, and that might lead to some of this just getting stretched. Are you seeing any of that in your numbers, or is that not really a concern right now?
Not a concern because large part of our backlog is actually not in North America. LNG backlog is in North America. Everything else is in rest of the world. In case of LNG, we build our own equipment in our own factory, and we have enough capacity to fulfill all our backlogs, so we do not have any concern on that. On a broader basis, yeah, the construction labor or labor shortages is a trend, but that is not driving any impact on our revenue execution on a visible basis.
Yeah, appreciate it. Thank you. Just as a side note, on industrial automation, big sequential jump from 18.4% to 22%. How much of that is coming from the spins of WWS and PSS, and how much of that is more productivity? Feels at this point everyone is very confident about the number, but just any color on that split.
Yes, I would say that organically, if you will, the business is probably expanding 150-plus bps just by operation getting better. Rest of it is related to the WWS separation.
Gotcha. Perfect. Thank you so much.
Thank you.
Thanks, Varun.
Thank you. Our final question this morning comes from the line of Dan DiCicco with BMO Capital Markets. Please proceed with your question.
Great. Thank you for fitting me in here. On the inflation topic, 4.5% price in H2. Just what businesses are you having to push the hardest on price? Is there anywhere in the portfolio where this might be proving to be a little bit more challenging? Thank you.
I mean, the pricing is, I won't say there's a large deviation between the segment. Pricing is a factor of inflation in a segment, and inflation drivers vary from semiconductor to electronics to metals like copper and brass. I would say that our overall pricing is a narrow range. It doesn't vary from business one from one percent and some businesses 10. It's not in that wide range. You can have a range from 3.5% - 4.5%, so it's a very narrow range for us. The pricing attainment doesn't require only the action of pricing, but it requires good customer service, good customer communication, a good pipeline of new product. I think that comprehensive 360-degree view is what we have really adopted to attain the price and keep the price cost positive.
Great. Thank you.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Kapur for final comments.
Thank you. I would like to thank our share owners, our customers, and all Honeywell Technologies future shapers around the world for the strong third quarter results you delivered. Today marks another important milestone in our journey as the new Honeywell Technologies. Our first quarter as a standalone pure-play automation company demonstrated progress on all three elements for our investment case: broad-based organic growth, strong margin expansion, and a higher free cash flow conversion. PA&T is converting its backlog into organic growth, IA is driving meaningful turnaround, and BA continues to deliver. With nearly $19 billion in our backlog and a strong 2026 outlook, we enter the fourth quarter with strong momentum and increased confidence in our ability to deliver the commitments we outlined at Investor Day. Thank you all for joining us today, and we hope you have a great rest of your day.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.