HONEYWELL INTERNATIONAL INC Q2 2025 earnings call

Thank you. Good morning, and welcome to Honeywell's Second Quarter 2025 Earnings Conference Call. On the call with me today are Chairman and Chief Executive Officer Vimal 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 that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today, and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the second quarter, share our guidance for the third quarter, and provide an update on full year 2025.

As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO Vimal Kapur.

Thank you, Sean, and good morning, everyone. Honeywell again delivered solid results in the second quarter, meeting or exceeding all our financial commitments in a time of significant global economic change. Our organic sales and orders growth both accelerated during this quarter, as we are seeing the benefit of our consistent spending and execution on new product development across our businesses. Given the strong first-star performance, we are raising sales and earnings guidance for the full year while incorporating into our outlook all currently known tariffs and the uncertain business conditions going forward. Our proactive multi-prong mitigation efforts, coordinating closely with suppliers and customers on productivity and pricing initiatives, have been working as planned, and because of our systemic approach, we are in a position to deliver strong sales, profit, and cash flow growth in 2025.

As our business leaders have been solely focused on meeting and exceeding our financial commitment, management and the board have been fulfilling our promise to transform our portfolio ahead of our upcoming separation to best position each of the future independent companies for success. Throughout the comprehensive portfolio review I initiated shortly after becoming CEO, we have diligently analyzed how to further simplify and optimize Honeywell. Earlier this month, we entered the final stage of this process, announcing our intention to pursue strategic alternatives for our Productivity Solutions & Services and Warehouse & Workflow Solutions businesses. The results of this pursuit, whatever they may be, will clarify the standalone automation company's go-forward strategy and value proposition. With many changes in flight, our dedicated separation management office has kept us right on track to execute our spin-off transaction both on time and without commercial disruption.

Let's now turn to slide three for further update on our formation of three industry-leading public companies. We continue to make great progress along with the path to separate into three independent companies, which we believe will maximize long-term value for all Honeywell stakeholders. As independent entities with clear alignment and purpose, increased organization agility, and customized capital allocation priorities, each will be better positioned to accelerate future growth opportunities. Given the pace of our progress, we can now narrow the timing for the spin-off Solstice Advanced Materials to Honeywell shareholders to the fourth quarter of this year. Solstice shares will trade under the ticker SOLS on the NASDAQ Stock Exchange. A few weeks prior to the spin, the Solstice leadership team will host an Investor Day in New York.

They will lay out in detail the powerful investment case for this innovative market leader in the secularly growing advanced material market that will carry on Honeywell's legacy of operational excellence. We hope you will join CEO David Swell and his team at this event. We're also making great progress on Aerospace spin, which is planned for the second half of next year. Last month, Aerospace President Jim Courier and I presented an investor reception ahead of the Paris Air Show. Jim highlighted Aero's industry-leading position as a mission-critical supplier of systems across Aerospace verticals and platforms. In addition, he provided insights into drivers for our strong growth profile, underpinned by a broad Aerospace and defense upcycle, which we enhance with a powerful decoupled sales initiative, ongoing supply chain transformation effort, and robust research and development investments over time.

We look forward to providing you with more details on standalone Honeywell Aerospace in coming quarters. Yet, we are not waiting for the separation to reshape our portfolio for future growth. We continue to selectively deploy capital towards acquisition, announcing two new deals in the past couple of months. We are also looking to recycle capital, as I discussed earlier, by pursuing alternatives for businesses that do not fit our future. In combination, these actions will drive value creation as we await becoming separately publicly traded vehicles. If you turn to slide four, I will discuss our recent portfolio announcement in more detail. In June, we agreed to GBP 1.8 billion bolt-on purchase of Johnson Matthey's Catalyst Technologies business.

We have long identified our UOP process technology business as a natural owner of this highly complementary business because it gives us additional capabilities in sustainable methanol, sustainable aviation fuel, hydrogen, and ammonia to better serve our extensive customer base. It also brings attractive sales from catalysts, which fit very well with our existing offerings. The transaction is expected to close in the first half of 2026 and will enhance our growth and margin profile over time while providing a strong financial return. In early July, we also announced the technology tuck-in acquisition of Li-ion Tamer that enhances our building automation capability in high-growth energy storage and data center end markets. While such smaller deals do not often get much investor attention, in aggregate, they can accelerate our strategic roadmap and boost growth with a lower risk profile.

We recently announced our intent to evaluate strategic alternatives for our PSS and warehouse automation businesses. Just as we want to acquire businesses such as Catalyst Technologies and Li-ion Tamer, where we believe we are a natural owner, we must also acknowledge when the time comes that we better own our parts of our portfolio. We are looking to create a pure-play automation company with a consistent business model and focus on end markets in which we have durable competitive advantages. Both PSS and Integrated have strong customer bases, a long history of innovation, and best-in-class operation, and we will evaluate options for them from a position of strength. To avoid interfering with the review process, we will hold further updates until it is completed. I will now turn it over to Mike to provide more details on our excellent second quarter results.

Thank you, Vimal, and good morning, everyone. Let's begin on slide five. In the second quarter, we build upon a strong start to the year as we again exceeded our guidance for organic sales growth and adjusted earnings per share. Our results demonstrate the resilience of our accelerator operating system to adapt to changes in the environment quickly and deliver on our financial commitments. At the same time, we remain committed not to compromise on our investment and growth initiatives, as we are beginning to see evidence of our progress. Second quarter sales grew 5% organically, with three out of our four segments above this level. Defense and space and UOP led growth with double-digit performances. Segment profit expanded 8% from the prior year, in line with sales, and segment margin finished nearly flat and within our guidance range.

Margin expansion in building automation and industrial automation and lower corporate costs were slightly more than offset by margin pressure in Aerospace Technologies and Energy and sustainability solutions. An increase in research and development expense upped 60 basis points as a percentage of sales from the previous year to 4.6%, pushed down current period margin at the segment level, but will enhance future period growth. Earnings per share in the second quarter was $2.45 per share, up 4% from the prior year, while adjusted earnings per share was $2.75 per share, up 10% year over year. Organic and inorganic segment profit growth, as well as the lower tax rate, more than offset headwinds from higher interest expense and lower pension income. You can find a bridge for adjusted earnings per share from 2Q '24 to 2Q 25 in the appendix of this presentation.

Orders were $10.5 billion in the quarter, up 6% year over year, excluding the effect of acquisitions and divestitures, led by a strong double-digit increase in aerospace orders. Backlog grew 10% organically from the prior year to a new record of $36.6 billion. Second quarter free cash flow was $1 billion, down roughly $100 million from the previous year as tariff-related cost inflation pushed up inventory levels and capital project spending expanded as planned. We continue to dynamically allocate our excess cash flow and balance sheet capacity based upon the best opportunities the market presents to us. During the second quarter, our capital deployment was well-balanced, with $2.2 billion used to complete the accretive acquisition of Sundyne and over $2.4 billion returned to shareholders, roughly $1.7 billion of share repurchases and $700 million of dividends. We also allocated $300 million for capital projects.

Now let's turn to slide six to discuss our second quarter performance by segment. I will give a high-level view of results and with additional commentary provided on the right-hand side of the slide. In the second quarter, Aerospace Technologies grew 6% organically, highlighted by another strong quarter of our Defense and Space and Commercial Aftermarket businesses. Segment margin contracted 170 basis points to 25.5% as 11% output growth, commercial excellence, and productivity actions were more than offset by higher cost inflation and the impact of CAES acquisition. In Industrial Automation, sales were above our guidance range, coming in flat on an organic basis. Segment margin expanded 20 basis points to 19.2%, driven by productivity actions and commercial excellence, which more than compensated for cost pressures.

In May, we completed the sale of the PPE business, which will be accretive to organic growth and margins in the second half of the year. Building automation delivered another quarter that surpassed our expectations, with sales increasing 8% organically from the previous year. Second quarter margin expanded 90 basis points year-over-year, led by volume leverage and full quarter benefit from access solutions. Energy and sustainability solution sales grew 6% organically in the second quarter, exceeding our expectations, driven by double-digit growth in UOP. Segment margin contracted 110 basis points to 24.1% as volume leverage and benefit from the margin-accretive LNG acquisitions were more than offset by impact from a customer settlement, as well as cost inflation. Now move to slide seven to discuss our third quarter and full year guidance.

Our first half of performance has given us confidence to increase our outlook for the year, even as we remain cautious regarding the lagging effect on business demand from tariff announced in recent months. Despite this, our framework for the year remains largely unchanged. We're factoring in known tariffs as they are written, assuming any moratorium means a later revision to higher rates net of all of our mitigation actions. Keeping in close communication with our customers and suppliers, we remain committed to fully offsetting the effect of these tariffs with a combination of productivity, pricing, and alternative sourcing as we balance protecting both margins and demand. We're raising the lower end of our full year organic sales growth guidance range by 200 basis points.

Factoring in our first half performance and recent short cycle order trends, we now project growth of 4%-5% for the year, or 3%-4% when excluding the prior year impact from the Bombardier agreement. For year-to-date, results have exceeded previous expectations. We're maintaining a pragmatic approach to the back half. We have increasingly seen large energy projects and catalyst spend, which can carry attractive incremental margins in our UOP and process solution business, pushed out into 2026 because of macroeconomic and legislative uncertainty. Full year sales are now projected to $40.8 billion-$41.3 billion, driven primarily higher by better organic growth, tailwinds from foreign currency translation, and the additional revenue from the Sundyne acquisition in June. We expect year-over-year organic sales improvement to be similar in both the third and fourth quarter, when excluding the impact of the Bombardier agreement in the fourth quarter of last year.

We anticipate a third quarter organic sales growth of 2%-4%, which equates to $10 billion-$10.3 billion. For the full year, we now expect our overall segment margin to be up 40-60 basis points or be down 30-10 basis points ex-Bombardier. Reduced margin expectations from the prior guidance stem from the high decrementals of delayed energy project work and the lagged effect of pricing relative to tariff-related cost pressures in our aerospace business. In the third quarter, segment margin is anticipated to be in the range of 22.7%-23.1%. Down 90 basis points to down 50 basis points from the prior year, with VA margins expanding, ESS margin roughly flat, IR margin contracting modestly, and Aero margin similar to its second quarter level. We now expect full year earnings per share of $10.45-$10.65, up 6%-8%, or up 1%-3%, excluding the 2024 impact of the Bombardier agreement.

Earnings per share in the third quarter is anticipated to be $2.50-$2.60, down 3% to up 1% from the prior year. I will provide further details on changes to our full year EPS guidance later in the presentation. We continue to expect free cash flow for the year between $5.4 billion-$5.8 billion, down 2% to up 5% ex-Bombardier, which remains approximately in line with adjusted earnings per share growth. We'll give additional information on changes in free cash flow from the prior year in the appendix. Having deployed $7.8 billion in the first half of the year for share repurchases, acquisitions, dividends, and capital projects, we remain opportunistic in allocating additional capital beyond that already committed for the rest of the year. To summarize, our strong execution in the first half has raised the bar for the year, even as we prioritize setting prudent expectations in a highly dynamic environment.

Focusing on what we can control, our company remains poised for strong performance ahead of our pending separations. I'll now turn to slide eight to give a high-level overview of our outlook by segment, with further details by business unit provided in the commentary portion of the slide. In Aerospace Technologies, we continue to anticipate full year sales growth in the high single-digit range or mid-single digit to high single digit when excluding the impact of the 2024 Bombardier agreement. Supported by supply chain analog and elevated global demand amid geopolitical conflicts, our defense and space business should lead segment growth for the year. Commercial aftermarket growth remains consistent, with air transport currently stronger than business aviation. We still expect commercial OE sales to recover and grow in the back half of the year as customers work down existing inventories, allowing our sales to better align with OE build rates.

For the third quarter, organic sales are expected to be up mid-single digit to high single digits, led by defense and space, with continued solid growth in Commercial Aftermarket and Commercial OE no longer at draft. Margins for the third quarter should be consistent with the prior quarter. For the full year, margins are expected to approach 26% as volume leverage is more than offset by the impact of acquisitions and the tariff-driven cost inflation temporarily outpaces pricing. In industrial automation, we're increasing our 2025 sales outlook to down below single digits to down mid-single digits, given second quarter top-line results and short cycle orders holding up better to date than initially feared in April, though still down year-over-year. Order declines are not contained to IA short cycle businesses, given long cycle pressures from delayed energy customer CapEx decisions.

We expect full year IA margin to be roughly flat versus 2024, as incremental tariff-related cost inflation and volume deleverage are offset by commercial excellence, improved productivity, and second half accretion from the PPE sale. For the third quarter, we also anticipate a similar sales performance as full year, as growth in sensing, thermal solutions, and warehouse and workflow solutions is offset by muted demand in PSS and project timing delays in core process solutions. Margins are expected to contract modestly from the previous year, but increase sequentially. In building automation, we are raising our 2025 sales outlook for the second consecutive quarter, as 2Q sales exceeded expectations and second half prospects have improved from our view in April, given solid order trends. As a result, we now expect mid-single digit to high single digit organic sales growth.

Thank you, Mike. Honeywell performed admirably in the first half of 2025, with back-to-back quarters that delivered earnings above the high end of our target ranges. Our investment in innovation is gaining traction, driving improved sales growth, and yet another record quarter for our backlog.

On the back of this operational momentum, we are raising our organic sales growth and adjusted earnings per share guide for the year, while being mindful that we may not yet have felt the full impact of escalation of global tariff rates in recent months. Business demand has remained resilient in most sectors and geographic regions thus far, but we are well prepared for potential changes ahead in the macro, regulatory, and geopolitical environment, utilizing a playbook that has served us well over many cycles. As our businesses focus on delivering our financial targets, we have also made substantial progress in transforming our portfolio to maximize their value. Through separation, acquisition, and divestitures, we are simplifying Honeywell for investors, customers, and our future shapers. All our transactions are proceeding according to plan.

Even as the first chapter of my tenure as CEO comes closer to an end, with the conclusion of the comprehensive portfolio review, our dynamic approach to capital allocation and portfolio optimization remains evergreen. We are confident that the combination of our accelerating growth and high-return capital deployment will compound the value of Honeywell going forward. With that, Sean, let's take questions.

Thank you, Vimal. Vimal and Mike are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question and one related follow-up. Operator, please open the line for Q&A.