HONEYWELL INTERNATIONAL INC Q3 2025 earnings call

Thank you. Good morning and welcome to Honeywell's Third 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 third quarter, share our guidance for the fourth quarter, and provide an update on full year 2025.

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

Thank you, Sean, and good morning, everyone. Honeywell continued its strong 2025 performance in the third quarter. Growth in organic sales took another step up and finished ahead of expectations, driven by our commitment to developing new solutions that solve our customers' most challenging problems. Better top-line results translated into earnings well above our guided range, while strong orders across the portfolio demonstrate early results of our focus on innovation. Our excellent third-quarter performance is powering another increase in our full-year guidance. We are raising our 2025 EPS guide for the third time this year, even as we incorporate the impact of impending spin-off of Solstice Advanced Materials. Barely a year since we announced our intent to separate Advanced Materials, today we are a week out from Solstice' first day of trading as an independent company.

Our swift progress to this point demonstrates our ability to diligently execute carefully crafted work plans with speed and efficacy. We have the right resources in place to deliver on both our portfolio transformation and our businesses' financial and operational targets. We will carry the learnings and momentum from Solstice to next year's separation of Aerospace. As we look to our future as three independent companies in 2026, we are proactively planning to realign the structure of our automation business at the beginning of next year to reflect how we will operate going forward. This move is another significant step in our simplification of Honeywell, which will provide the strategic focus, organizational agility, and tailored capital allocation to grow faster and drive value for all our stakeholders. Please turn to slide three for the latest update of our separation.

A couple of weeks ago, Solstice held a well-attended Investor Day in New York, where David Sewell and his new management team presented a compelling vision for the new specialty materials company and how its rich history and new independent strategy will unleash its growth potential and unlock long-term stakeholder value. A week from today, on October 30, Honeywell shareholders will receive new shares of Solstice, which will begin trading as a separate public company. I want to thank the teams that achieved this important milestone well ahead of the original schedule to complete by early 2026. I'm extremely excited for the opportunities in front of Solstice, and I will be cheering on the success in the years ahead.

As our planned separation of Aerospace in the second half of 2026 approaches, our Board has been intently focused on assembling a Honeywell Aerospace leadership team with the right mix of industry, company, and capital market experiences to maximize value for our customers, partners, employees, and our shareholders. We expect to make an Aerospace leadership and headquarter announcement later this year. The separation of Aerospace brings the opportunity to further simplify Honeywell Automation. As a result, we have proactively designed a new, simpler structure aligned to the future of the business, which I will discuss in more detail in the next slide. As we seek to better position the future independent Aerospace and Automation companies for success, we have opportunistically completed transactions to simplify the legacy liabilities left on our balance sheet.

During the third quarter, we entered into an agreement to divest all our Bendix asbestos liability on attractive terms for all parties. We also terminated an indemnification and reimbursement agreement with Resideo in exchange for $1.6 billion in cash. In combination, these transactions resulted in net cash inflow and will simplify and de-risk our balance sheet, providing the company with fewer administrative burdens and greater financial flexibility to focus on creating value for our core business. On our slide four, I will go over segment realignment in more detail. We announced yesterday that we are planning to reorganize the Honeywell Automation segments into a simplified structure focused on cohesive, synergetic business models. I'm pleased to take this next step in evolving Honeywell's streamlined portfolio with the aim of unlocking incremental value and driving long-term growth and margin expansion.

As such, effective beginning of the first quarter of 2026, we plan to report four business segments: Aerospace Technologies, Building Automation, Process Automation and Technology, and Industrial Automation. Ahead of upcoming Aerospace separation, this new structure serves as an elegant way to continue simplifying the remaining core portfolio and align our external segment to the way we are increasingly driving our operation through consistent business models. Our differentiated approach underscores our ability to grow our install base in two ways: by selling mission-critical products through channels and by delivering strategic projects for our customers. We then mine this install base by providing customers with high-value, outcome-based solutions with a combination of software and services.

The three remaining core reporting segments will be organized into six strategic business units, with each of our businesses aligned to our unified automation strategy, enabling us to solve enterprise-level challenges and help our customers achieve new levels of optimization with the Honeywell Forge platform. Aerospace reporting is unchanged ahead of separation in the second half of next year. The new structure will allow us to better prioritize R&D efforts, capital expenditure, and go-to-market strategy with a growth mindset. Building Automation will continue to be a leading provider of unified building automation solutions, delivering safer, more sustainable integrated buildings and infrastructure assets, and maintaining its products and solutions business unit structure. Process Automation and Technology is a combination of core Honeywell Process Solutions and UOP, the global leader in process technology.

These businesses have developed powerful commercial synergies, enjoy a leading position in the process market globally with a vast install base, and share very similar business model characteristics. BNT will report projects and aftermarket business units. Industrial Automation's portfolio of products and solutions businesses includes mission-critical offerings with proven reliability and tenured channel relationships, positioning us to benefit from ongoing global reshoring thematics. With this realignment, following the separation of Aerospace next year, Honeywell will be a premier pure-play automation company, leading the future of automation through high ROI, outcome-based solutions for customers across a large addressable set of markets. As we continue our journey of transforming the portfolio, I would like to highlight another level of value creation with the recently announced Quantinuum capital raise on slide five. Four years ago, we formed the world's most advanced full-stack quantum computing company.

It has rapidly progressed quantum technology along the path to universal fault-tolerant computing, a more than two-decade pursuit that is soon to be realized. Technological progress has driven fundraising momentum. Less than two years after completing an equity capital raise at a $5 billion pre-money valuation, the company announced in September a second raise at double the prior valuation. As important as the capital contributions will be to advancing the development of quantum computing at scale, the collaboration with new shareholders such as Quantinuum and Nvidia, in addition to others like JPMorgan, Amgen, and Mitsui, may prove even more critical. Quantinuum's fundraising efforts have led to new partnerships that will support the development of critical applications for improving drug discovery, government and military Cyber Security, and encryption for large financial institutions.

While we are tremendously excited about the future of the business, we recognize we are not the best long-term owner, and it will eventually need its own capital structure to fully exploit its growth potential. As a result, Honeywell will seek to begin monetizing its stake in the company at the appropriate time in a manner that will create meaningful value for Honeywell shareholders. The most recent capital raise will sustain Quantinuum through that point in time. I will now turn the call over to Mike to go through our third-quarter results beginning on slide six.

Thank you, Vimal, and good morning to everyone joining us. Honeywell delivered exceptional third-quarter results, again exceeding the high end of organic growth and adjusted earnings per share guidance, as we have done each quarter this year. Organic sales accelerated to 6% year-over-year, led by return to double-digit growth in Aerospace and fourth straight quarter of high single-digit growth in building automation. Orders grew 22% organically from the previous year to $11.9 billion. While wins for long-cycle Aerospace and energy projects led the way, the increase was broad-based, with order growth accelerating in each of our four segments and an overall book-to-bill above one. The results are encouraging and an early demonstration of our focus on growth through innovative new products and the impact of our increased R&D investments. This impressive commercial performance pushed our backlog up to yet another record, which positions us well for future growth.

Segment profit increased 5% from the prior year, with segment margin meeting the high end of our guidance range, led by ongoing margin expansion in building automation. Earnings per share in the third quarter were $2.86, up 32% from the prior year. Adjusted earnings per share was $2.82, up 9% year-over-year, as strong segment profit growth and lower effective tax rate more than offset higher interest expense. You can find additional information on the year-over-year changes in the third quarter adjusted earnings per share in the appendix of our presentation. Third quarter free cash flow was $1.5 billion, down 16% from the prior year because of capital expenditures timing and modestly higher working capital to support our sales growth. We maintained our disciplined capital allocation approach in the quarter, returning $800 million to shareholders while committing $400 million to high-return capital projects and completing two technology bolt-on acquisitions.

Now, let's move to slide seven for a discussion on our third-quarter segment performance. I will provide a brief overview of results with additional commentary included on the right-hand side of the slide. Aerospace technologies grew 12% organically, led by strength in both commercial aftermarket and defense and space. Commercial OE returned to growth as expected, as our sales recoupled to the delivery rates of our large customers. Orders momentum continued with strong double-digit orders growth across all three end markets and a book-to-bill of 1.2. On a year-over-year basis, segment margin decreased 160 basis points to 26.1%, as commercial excellence and volume leverage were more than offset by cost inflation and acquisition-related headwinds. However, sequentially, margin improved 60 basis points on strong quarter-over-quarter volume, supported by improved supply chain performance.

Industrial Automation sales returned to growth in the third quarter, increasing 1% organically and exceeding our guidance range, led by continued strength in our sensing business. Segment margin in Industrial Automation declined 150 basis points from the prior year to 18.8%, as commercial excellence and productivity benefits were more than offset by inflationary pressures. Building automation again delivered high single-digit growth for the quarter. Organic sales increased 7% from the previous year, driven by strength in both building solutions and building products. Regionally, North America and the Middle East led, while Europe grew organically for a fourth consecutive quarter. Margin expanded 80 basis points year-over-year, as we leverage our strong volume performance. Energy and sustainability solutions performed in line with expectations in the third quarter, down 2% organically. Strong refrigerants' performance in advanced materials was offset by licensing and catalyst delivery delays in UOP.

Segment margin was flat versus the prior year at 24.5%, as one time of government reimbursement for past legal costs and the lift from margin and creative acquisition offset cost and volume headwinds. Let's turn now to slide eight to discuss our updated outlook for the year. Our guidance for the year now incorporates the impact of Solstice Advanced Materials' separation from Honeywell at the end of October. The spin is expected to reduce 2025 sales by $700 million, adjusted EPS by approximately $0.21, and free cash flow by $200 million. Even with this impact, we're again raising our 2025 organic sales and adjusted EPS guidance as we fully pass through our strong third-quarter segment profit and net income growth into our improved outlook. On a like-for-like basis, our free cash flow expectations for the year remain unchanged.

Now I'll turn to slide nine to provide more details on fourth quarter and full-year guidance. We're taking up full-year organic sales growth guidance by 150 basis points from the midpoint of our previous range. We now expect growth of approximately 6% for the year, or 5% when excluding the prior year impact from the Bombardier agreement. This new outlook builds upon our strong sales momentum in recent quarters while maintaining a pragmatic approach in the face of elevated geopolitical tensions and macro uncertainty. Full-year sales are now projected to be $40.7 billion to $40.9 billion. We anticipate a fourth quarter organic sales growth of 8% to 10%, or 4% to 6% excluding Bombardier, which translates to sales of $10.1 billion to $10.3 billion.

For the full year, we now expect our company's segment margin to be up 30 to 40 basis points or to be down 40 to 30 basis points excluding Bombardier. We're anticipating modestly lower margins versus prior guidance, a result of reduced expectations for project licensing, catalyst shipments, and certain short-cycle Industrial Automation products, which carry high incremental margins. We are offsetting most of these headwinds by leveraging our strong volume growth and utilizing our accelerated operating model to implement productivity actions. In the fourth quarter, we expect segment margin to be in the range of 22.5% to 22.8%, up 160 to 190 basis points, or down 120 to 90 basis points excluding Bombardier. We now anticipate full-year earnings per share of $10.60 to $10.70, up 7% to 8%, or up 5% to 6% excluding the impact of both the 2024 Bombardier agreement and the impending Solstice spin-off.

Earnings per share in the fourth quarter are expected to be $2.52 to $2.62, up 2% to 6% from the prior year, or down 6% to 3% excluding the effects of Bombardier and Solstice. I will give additional details on changes to the full-year EPS guidance later in my prepared remarks. We expect free cash flow between $5.2 billion and $5.6 billion, down 2% to up 5% excluding the effects of Bombardier and Solstice. We provide additional information on the changes in the year-over-year free cash flow in the appendix of the presentation. For the first three quarters of the year, we have deployed $9 billion for share repurchases, acquisitions, dividends, and capital projects. Going forward, we will continue to be opportunistic in allocating additional capital beyond debt already committed to the highest return opportunities. Please turn to slide 10 for details on our segment-level outlook for the year.

In Aerospace technologies, we are raising our expectations for full-year sales growth to be below double-digit range or high single digit when excluding the impact of the 2024 Bombardier agreement. We expect robust defense and space growth to continue as our supply chain is improving and our global demand is benefiting from ramping national defense budgets. Commercial aftermarket sales should expand at a healthy rate with air transport growth outpacing business aviation. We anticipate commercial OE sales growth to accelerate for the remainder of the year as our shipments progressively realign to build schedules. For the fourth quarter, we expect aero-organic sales to be up double digits or high single digits excluding Bombardier, led by defense and space. Commercial aftermarket growth should moderate from third quarter levels towards the longer-term trend. Excluding the year-over-year impact of Bombardier, commercial OE should grow faster than the prior quarter.

We anticipate the second quarter marked the low point of Aerospace margins, and fourth quarter margins will be comparable to the third. For the full year, margins are expected to be approximately 26% as volume leverage is more than offset by transitory integration headwinds from the CAES acquisition and cost inflation from tariff pressures temporarily outpacing pricing. In 2026, as pricing aligns with tariff costs, OE shipments of electronic solutions recouple with build rates and integration costs from the CAES acquisition subside, Aerospace margins are well-positioned to increase from 2025 levels. For Industrial Automation, third-quarter outperformance is compelling us to raise our full-year top-line expectations for a second consecutive quarter from down low to mid-single digits to down only low single digits.

Positive order growth in the third quarter was encouraging, though it was uneven within both long and short-cycle businesses, such that it would not yet be prudent to confirm a sustainable upward trend. As a result of these mixed dynamics and a more challenging prior year comparison, we expect fourth quarter sales to be down low single digits. Continued momentum in Smart Energy and steady performance in Sensing and Warehouse Automation should offset modest demand headwinds in productivity solutions and services and short-term project push-outs in core process solutions. We now expect to see margin contraction in Industrial Automation for the full year on an increasingly unfavorable mix, with similar margin performance in the fourth quarter.

In building automation, we continue to anticipate full-year organic sales growth in the mid-single digit to high single digit range, supported by strength in the U.S., Middle East, and India, and highlighted by robust demand in data centers, healthcare, and hospitality. For the fourth quarter, we expect sales to be up mid-single digits with momentum from strong orders across both products and solutions. We anticipate a fifth consecutive quarter of organic growth for products to be broad-based across fire, BMS, and security. Solutions should continue to drive solid year-over-year growth in both projects and services. We expect margins for the full year and the fourth quarter to expand meaningfully as tailwinds from volume leverage and productivity actions continue. In energy and sustainability solutions, we will limit our guidance commentary on advanced materials given its pending separation as an independent company.

Thanks, Mike. Honeywell again exceeded its financial commitment in the third quarter as Aerospace execution returned that business to double-digit year-over-year growth. With orders increasing in each of our four segments, we are getting good returns from dedicating the right level of resources to creating new solutions to sell into our large global customer base. As just one example of our recent commercial success, Gulfstream recently announced that Honeywell's engines and avionics will power its new super mid-size G300 business jet platform, which will offer superior range, efficiency, and safety to current comparable aircraft. This win is a testament to our abilities to stay at the forefront of leading-edge technologies that matter most to our customers.

We are going into the final quarter of 2025 from a position of strength, with operating momentum leading us to raise our guidance for the third time this year, even as a shifting microenvironment requires a high level of agility to deliver these results. We are pleased by the performance of our acquisitions since 2023, which continue to help us shape our portfolio and deliver higher growth and margins. Our commercial and operational momentum are building into 2026, which will be a historic one for Honeywell. At the same time, we are operating with the same commitment to operational excellence that has defined Honeywell for decades. While 2025 was affected by a number of headwinds, including heightened economic uncertainty, incremental tariffs, and significant cost inflation, we have already begun taking action to position our Aerospace and automation businesses to return to underlying margin expansion in 2026.

As we prepare Aerospace to begin its journey as a leading independent company next year, we expect to begin 2026 operating under a new structure that aligns to how we will deliver the future of automation, giving us a running start post-separation. Increasingly, customers across end markets face similar structural challenges such as skilled labor shortages, aging infrastructure, operational inefficiencies, and elevated energy and maintenance. As value creation shifts towards harnessing the power of data to solve enterprise-scale challenges and achieve new levels of transformation, we are streamlining our business units centered around a cohesive business model for addressing these issues. This segment realignment exemplifies our effort to simplify our whole organization to focus on actions that create the highest value for our stakeholders.

Reducing distraction from legacy liabilities, reviewing strategic alternatives for parts of our portfolio that do not fit our business model, and acquiring complementary technology through bolt-on and tuck-in acquisitions all demonstrate our commitment to optimizing our business for future growth and value creation. Quantinuum's recent capital raise and technological leap forward, delivering the promise of quantum computing, which the company will demonstrate in coming weeks, move Honeywell closer to realizing the value of its pioneering investment in the space. 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 asking only one question and one related follow-up. Operator, please open the line for Q&A.