HONEYWELL INTERNATIONAL INC Q4 2025 earnings call

Thank you. Good morning, and welcome to Honeywell's fourth quarter 2025 earnings and 2026 outlook 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, as well as Mark Macaluso, who will be leading Investor Relations for Honeywell going forward. 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 recent SEC filings.

This morning, we'll review our financial results for the fourth quarter and full year 2025 and discuss our guidance for the first quarter and full year 2026. As a reminder, we began reporting Advanced Materials as discontinued operations beginning in the fourth quarter of 2025, following the successful spin of Solstice Advanced Materials on October 30, 2025. The fourth quarter results we present today exclude Solstice. As always, we'll leave time for your questions at the end. With that, it's my pleasure to turn the call over to Vimal, who'll begin on slide three.

Thank you, Sean, and good morning, everyone. Honeywell delivered a strong fourth quarter to close 2025, exceeding our expectations for both adjusted sales and adjusted EPS, with orders up 23%, driving our backlog to over $37 billion. This performance reinforces the strength of our end market positions and execution. We exited the year with a sales growth of 6%, excluding the impact of 2024 Bombardier agreement, which demonstrates the outcome of our portfolio actions and our emerging focus on innovation stemming from continued investment in R&D. This gives us conviction in another year of meaningful top and bottom-line growth of 2026. Looking ahead, we expect to once again drive strong organic growth, fueled by conversion of our record backlog, disciplined price execution, and momentum in new product introductions.

The strong organic growth, coupled with productivity and an aggressive reduction in stranded costs related to the spins, will enable us to deliver 6%-9% earnings growth in 2026, along with accelerating cash generation. It was about a year ago that we announced our intention to spin off aerospace, which will result in creation of three leading pure-play independent public companies. We have made tremendous progress throughout the year with the advanced materials spin complete, and we now expect to complete the aerospace spin in the third quarter of 2026. Both aerospace and automation will host Investor Day in June, and I hope many of you can join us then. Our teams are working around the clock to ensure this gets done as quickly and judiciously as possible, and I want to thank all our employees for their commitment and dedication to this process.

We also remain very excited about the progress at Quantinuum on key technological and commercial milestones that position the business to lead the way in quantum computing. I will talk more about Quantinuum and its progress in a few minutes. 2026 will be exciting year as we move forward the final stages of our portfolio simplification. This positions each business with the right strategic focus, organizational agility, and tailored capital allocation strategies needed to grow faster and drive incremental value for our all stakeholders. Let's now turn to slide 3 to discuss the latest update on our portfolio transformation. As I mentioned, we are progressing faster than originally anticipated on our separation milestones. On October 30, Solstice began trading as independent public company, and we now expect the aero spins to occur in quarter three.

To that end, we announced the aerospace leadership team last week, comprised of tenured aerospace veterans, and made key board appointments to bring extensive operating experience to our teams. Jim Currier, who will serve as President and CEO of Honeywell Aerospace at the time of separation, will be joined by Josh Jepsen, who will serve as Chief Financial Officer. Additionally, we announced that Craig Arnold, the former Chairman and CEO of Eaton Corporation, will serve as Non-Executive Chair of Honeywell Aerospace Board of Directors. Craig brings more than two decades of experience in leadership roles at industrial and tech businesses, where he delivered transformational results through operational excellence and disciplined capital allocation. Together, Craig, Jim, and Josh bring the right mix of industry, company, and capital market experience to maximize the value for our customers, partners, employees, and our shareowners.

We're also excited to welcome Indra Nooyi, former Chair and CEO of PepsiCo, to Honeywell's Board of Directors, further strengthening our team with her proven track record of leading diverse global businesses and accelerating long-term growth. Beginning in 2026, we reorganized Honeywell segment into more simplified structure, focused on cohesive, synergetic business model.... Moving forward, we'll be reporting four segments: Aerospace Technologies, Building Automation, Process Automation and Technology, and Industrial Automation. The three automation reporting segments will be organized into six strategic business units, enabling us to better solve customer challenges and deliver in-house outcomes with Honeywell Forge platform. Finally, we concluded the strategic review of Productivity Solution and Services and Warehouse and Workflow Solutions, and have announced that we intend to pursue a sale of both businesses in first half of 2026.

All of these actions position both aerospace and automation for a strong beginning as new industry-leading public companies in 2026. Let's turn to slide four to discuss the recent advancements of Quantinuum. Following the recent fundraising, in which Quantinuum raised approximately $840 million at a $10 billion pre-money valuation, the pace of both technological and commercial progress at Quantinuum is rapidly increasing. Close collaboration with shareholders such as Quantinuum, NVIDIA, J.P. Morgan, Amgen, and Mitsui have led to new commercial partnerships that are supporting the development of critical applications for improving drug discovery, cybersecurity, and encryption for large financial institutions.

In November, Quantinuum announced the launch of Helios, the world's most accurate commercial quantum computer, which nearly doubles the qubit count of its predecessor, H2, and we believe sets a new standard for quantum computing performance with the highest fidelity for quantum computing qubits ever released in the market. Helios' groundbreaking design and advanced software stack brings quantum programming closer to the ease and flexibility of classical computing, which we believe positions the company to accelerate quantum's commercial adoption. Quantinuum also announced a partnership to integrate Helios with NVIDIA's AI supercomputing technology to create powerful new architecture that can solve the world's most pressing challenges. This collaboration between Quantinuum and NVIDIA is creating a future where AI becomes more expansive through quantum computing, and quantum computing becomes more powerful through AI.

As Quantinuum achieves these important technological and commercial milestones, I am confident of the company's future, and the best is yet to come. Before Mike talks about 4Q results, let's move to slide five to discuss our recent growth acceleration. This chart demonstrates the recent acceleration in organic growth, stemming from a combination of strong end market demand, our portfolio simplification, and innovation. This drove a 300-400 basis point improvement in LTM average organic growth since the beginning of 2024. As I noted earlier, we see favorable end market dynamics across aerospace and defense, process and building automation. We are enabling this further with an intentional shift to higher growth verticals. Our performance simplification efforts are positioning the company toward less cyclical and less capital-intensive markets, where we can build our install base and leverage this to driv e software and services growth.

This is being compounded by recent acquisition in Access Solutions, LNG process technology, Compressor Controls, and defense technology. On innovation, we delivered 4% organic growth from our new product introduction in 2025, with majority coming from innovation in new markets and offering, as opposed to upgrade on existing core products. This is direct result of our meaningful step up in R&D investments in 2025, which continues at these level in 2026, as well as management's focus on growth through new products. On the people side, we have made concerted effort to enhance our talent pool to drive growth. We added approximately 600 engineers to our workforce in 2025, which has greatly bolstered our R&D capacity and have also allocated the overwhelming majority of R&D to new product development.

Additionally, our sales team incentives are now better aligned to our objective of prioritizing the commercialization of new products, further reinforcing our plan to drive growth through innovation while building stronger customer intimacy. With that, I will now turn the call over to Mike to go through our fourth quarter results, starting on slide six.

Thank you, Vimal, and good morning. We ended the year with robust fourth quarter results. Sales grew 11% organically, or 6%, excluding the impact of the 2024 Bombardier agreement, led by double-digit growth in aerospace and high single-digit growth in building automation. We also continued to drive price across the portfolio, as Vimal noted, which contributed roughly 4 percentage points to the top line. On a segment basis, aerospace sales grew 11% organically, excluding Bombardier, led by continued strength in both commercial aftermarket and defense and space. Commercial OE growth accelerated as expected from the third quarter, as shipments continued to recouple with customers' bill rates. Robust demand across all end markets led a third consecutive quarter of strong double-digit order growth and book-to-bill of 1.2.

Building automation grew 8% organically, supported by growth of 9% in solutions and 8% in products. Regionally, North America and Middle East led the overperformance, with Europe and up strong mid-single digits as well. Orders increased both year-over-year and sequentially, driven by ongoing momentum across both Building Solutions and products, and highlighted by strength in the projects and fire businesses. Industrial automation grew for a second consecutive quarter, with organic sales up 1%, led by Warehouse and Workforce Solutions and sensing, as well as a return to growth in Productivity Solutions and Services. Process solution sales were flat, as strength in aftermarket services was offset by lower volumes in measurement and controls products. Finally, organic sales in energy and sustainability solutions declined 7%, stemming from lower petrochemical catalyst shipments, coming in slightly below our expectations due to continued project deferrals.

However, orders momentum in UOP continued, with over 40% orders growth in refining and petrochemicals projects, which supports our confidence in a gradual 2026 recovery. In total, Honeywell orders grew 23% organically after 22% growth in the third quarter. Wins in long cycle aerospace, energy, and broad-based demand in building automation led the way, resulting in total book-to-bill above one and pushing backlog up 15% to a new record. On profitability, adjusted segment profit increased 23% or 2%, excluding Bombardier, with segment margin of 22.8%, led by ongoing margin expansion in building automation, partially offset by the timing of high-margin catalyst shipments in ESS and a headwind from a step-up in R&D.

In aerospace, adjusted segment margin expanded 40 basis points sequentially to 26.5%, as we again delivered stronger volumes enabled by supply chain improvements, while in BA, margins expanded 20 basis points year over year to 27%, driven by commercial excellence and volume leverage. This was partially offset by declines in IA and ESS, driven principally by unfavorable mix from lower catalyst volumes and cost inflation. As a reminder, ESS fourth quarter and full year 2025 results include only the UOP business unit following the fourth quarter reclassification of advanced materials to discontinued operations, and this will be the last quarter we present results for ESS.

Adjusted earnings per share of $2.59 was up 17% and down 3%, excluding the impact of the Bombardier agreement, driven primarily by higher segment profit and a lower share count, overcoming a 24-cent year-over-year headwind from the timing of taxes. You can find additional information on the fourth quarter adjusted EPS bridge in the appendix of our presentation. Finally, free cash flow of $2.5 billion was up 48% or up 13%, excluding the impact of prior year Bombardier agreement. Growth in free cash flow was driven by higher operational income and collections, offset by higher cash taxes and interest payments. On capital deployment, we returned $900 million to shareholders in the quarter through dividends and share repurchases while funding $300 million in high return capital projects.

We also repaid $2.3 billion of debt in fourth quarter. For the full year, sales increased 7% organically, or 6%, excluding the impact of the Bombardier agreement, exceeding the high end of original full-year guidance by 2 points. Adjusted segment profit grew 11% or 6%, excluding Bombardier, with adjusted segment margin expansion of 40 basis points, or contraction of 40 basis points, excluding Bombardier, to 22.5%. Adjusted earnings per share was $9.78, up 12% year-over-year, or up 7% excluding Bombardier. Finally, free cash flow was $5.1 billion, up 20% or up 7%, excluding the impact of the Bombardier agreement, presenting 14% margin.

We deployed $10 billion to capital in 2025, including $3.8 billion to repurchase 18 million shares, $2.2 billion to acquisitions, $1 billion to capital expenditures, and $3 billion to dividends. We also repaid $3.8 billion of debt to lower interest expense. All in all, a very strong performance to end the year, with plenty of momentum heading into 2026. With that, let's turn to slide 8 to discuss our 2026 segment outlook. In aerospace, we expect top-line growth in the high single-digit range organically. We anticipate continued end market strength, supported by resilient supply chain that continues to grow its output. Commercial OE growth should accelerate in 2026 as we move past customer destocking and ramp our shipments alongside increasing production rates, particularly in commercial air transport.

Defense and space should maintain its momentum as higher global spending drives substantial orders growth and record backlog. Steady increases in flight hours in air transport and business jet underpin ongoing commercial aftermarket strength, though we expect modest normalization in growth rates from the prior year. Segment margin should expand modestly as volume leverage, better pricing alignment with tariff costs, and tapering acquisition integration costs more than offset mixed pressure from stronger growth in defense and space and commercial OE. For building automation, we expect full-year sales growth above mid-single digits, highlighted by strength in growing data center and healthcare end markets. We expect growth to be led by North America and acceleration in Europe on increased investments in healthcare and decarbonization infrastructure buildup. For the year, both products and solutions will grow at similar rates.

We anticipate BA margin to expand over 50 basis points, driven by volume leverage, pricing, and productivity actions. Process automation technology sales are expected to be roughly flat organically year-over-year. Slower first-half growth in petrochemicals and refining should be offset by robust demand in global projects, particularly in life sciences and cybersecurity solutions. We expect margin to be roughly flat, with pricing and productivity offsetting material cost inflation. Finally, in industrial automation, we expect sales to be down low single digits to roughly flat, with stable growth industrial solutions offset by headwinds from a challenging prior year compression in products. Within this framework, we're not assuming any rebound on underlying end market demand. We expect IA to lead margin expansion across all segments in 2026 through meaningful productivity actions and fixed cost reduction.

Let's now turn to slide 9 to double-click on process automation and technology dynamics in 2026. During the second half of 2025, we saw 17% organic orders growth in the new P&T segment, which led a corresponding 16% rise in the opening backlog. This continues to be a significant part of our long cycle order strength, particularly in LNG and refining, both in the U.S. and internationally. The backlog growth gives us confidence in an expected second half ramp, especially when measured against our historical backlog conversion rates. Winds in LNG and a num ber of large module equipment deals are expected to convert to sales in the back half of the year.

In addition, we're encouraged by our pipeline in P&T, which grew high single digits year over year, signaling that the strength of long cycle orders is expected to persist, contingent on the pace of final investment decisions from our customers. We're diligently tracking the slower-than-expected aftermarket order rates for catalysts, particularly within petrochemicals, which has been influenced by overcapacity in the market. Catalyst shipments can be temporarily delayed in the short term, but are ultimately necessary for our customers to maintain yields, and those can only be deferred for a period of time. So while we acknowledge the challenges this business face in 2025, we're encouraged by orders growth and backlog, as well as pent-up catalyst demand that should eventually fuel strong growth as we progress through 2026 and into 2027.

Let's move to slide 10 to talk further about our expected segment margin expansion for 2026. In 2026, we anticipate the demand for our differentiated high-value solutions and continued pricing that is outpacing inflation will drive further margin expansion. On a segment basis, we expect improved volume leverage, principally in our Building Automation, Aerospace Technologies businesses, which will drive solid incremental margins, while P&T margins will be roughly flat in 2026 due to the impact of stronger projects growth in the second half. Our focus on productivity action and rigorous fixed cost management will continue in 2026. We're working diligently to rightsize our cost structure ahead of the planned aerospace spin and expect to eliminate the stranded costs in 12 to 18 months after the spin.

We have already neutralized the impact of Solstice stranded costs in 2025 through productivity and fixed cost reduction in the rest of the business. Finally, Quantinuum investments in R&D and technology will be a modest headwind to margin in 2026. As Vimal noted, Quantinuum is making significant commercial R&D investment to maintain its leadership position in quantum computing. With that as the backdrop, let's move to slide 11 to go through the details of our full year 2026 guidance. Before we get into the specifics, I want to point out that our 2026 guidance includes full year outlooks for aerospace, Productivity Solutions and Services, and warehouse and workflow solutions, and does not incorporate the pending acquisition of Johnson Matthey's Catalyst Technologies business. We intend to update our outlook when these transactions are complete.

Thank you, Mike. We are pleased with our strong finish to 2025, with adjusted sales and adjusted earnings per share exceeding the high end of our guidance range. This performance underscores the resilience of our business model approach and highlights the growing demand for our innovative solution. Looking ahead, our guidance for 2026 is underpinned by continued strength in our orders growth, price execution, and record beginning backlog. As always, our guidance serves as a prudent baseline for performance that we have a strong conviction we can achieve. Moreover, we continue to progress our separation milestone, which we are tracking ahead of plan, paving a clear path for both aerospace and automation to emerge as industry-leading companies in 2026.

We look forward to sharing more about our strategy and long-term growth at the upcoming Honeywell Aerospace Investor Day on June second and third in Phoenix, followed by Honeywell Automation Investor Day on June eleventh in New York City. These events will provide an excellent opportunity for us to engage with our investors and showcase the strength of our portfolio. Before turning to Q&A, I want to take a moment to acknowledge our Head of Investor Relations, Sean Meakim, for all his contribution over the past four years. As you know, Sean will be moving to Aerospace with a spin-off to establish another world-class investor relations function, as he did in Honeywell. He will be an incredible asset to Craig, Jim, and Josh as they begin their journey as a standalone entity.

Sean effectively communicated the vision and value of Honeywell's strategy with credibility and conviction, laying the framework with investors for our emergence post-separation. On behalf of the leadership team and shareholders, I want to thank Sean for your dedication and commitment, and say that I could not be happier to have you lead the IR function at Honeywell Aerospace. Congratulations, and with that, Sean, let's take the questions.

Thanks for the kind words, Vimal. I'm very grateful for the opportunity to lead IR and be part of this team. It's been a great learning experience, and I'm really excited about what's ahead for both Aerospace and Honeywell. 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.