HONEYWELL INTERNATIONAL INC Q1 2026 earnings call

Thank you. Good morning and welcome to Honeywell's Q1 2026 Earnings and Outlook Conference call. On the call with me today are Honeywell Chairman and Chief Executive Officer, Vimal Kapur, Honeywell Aerospace Technologies President and Chief Executive Officer, Jim Currier, 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 this 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 Q1 of 2026, provide guidance for Q2, and discuss our full year outlook. As always, we'll leave time for your questions at the end with Vimal, Mike, and Jim. With that, it's my pleasure to turn it over to Vimal, who will begin on slide three.

Thank you, Mark, and good morning, everyone. Honeywell delivered strong results in Q1, building on the momentum from 2025, despite a complex geopolitical backdrop and temporary mechanical supply chain constraints in Aerospace. Orders grew 7% organically on the strength of our Building and Industrial Automation segment, as well as in petrochemical and refining verticals in Process segment. Including the orders growth in Aerospace, we drove backlog to over $38 billion with book-to-bill above 1.1. Sales growth was robust across electronics solutions in Aerospace, fire and aftermarket services in Building Automation, and gas and LNG in Process Automation and Technology, bolstered by our innovation and new product engine. We expanded margins by 90 basis points to over 23%, driven by pricing discipline, productivity, and accelerated stranded cost removal ahead of the Aerospace spin.

All of this drove 11% adjusted earnings growth in the quarter, demonstrating the strength and agility of the Honeywell operating system. We also made tremendous progress on the portfolio transformation that began in 2023. We announced the sale of our Productivity Solutions and Services and Warehouse and Workflow Solutions businesses respectively, which we expect to close in H2 of 2026. We are also excited to announce that now we expect to complete the Honeywell Aerospace spin-off in Q3 on June 29, marking the final step in our transformation. All of the acquisitions, divestitures, spin-off, and simplification effort over the past three years have positioned both aerospace and automation for a bright future as independent leading industrial companies. Despite the strong start of the year, we are taking a prudent approach to our guidance, given the uncertainty surrounding the conflict in the Middle East.

We remain confident in our ability to drive accelerating growth in H2 as our backlog supports a pickup in growth in Process Automation and Technology. We will continue to closely monitor the situation and provide any further updates if the situation changes materially. Before we get into the details, I want to thank all our employees for their focus, commitment, and dedication throughout our multi-year transformation. The future is bright as we set both businesses in gear to thrive with the right strategic focus and capital allocation priorities that will drive value for our customer, employees, and shareholders. Let me turn to slide three to discuss the progress on our portfolio transformation. As I mentioned, we are progressing on the final separation milestone with the Aerospace spin-off now expected to complete on June 29, just over two months away.

The leadership teams for both Honeywell and Honeywell Aerospace are in place and already executing for our customers today. In March, we successfully raised $20 billion of aerospace spin financing while delivering strong investment grade credit rating of A3, A-, and BBB+ with a positive outlook from Moody's, Fitch, and S&P respectively. Proceeds from the financing will be used primarily to redeem Honeywell debt, the majority of which has been completed as of quarter end, and to fund the cash to the Aero balance sheet. Aerospace also announced a groundbreaking supplier framework agreement with the U.S. Department of Defense to rapidly increase the production of critical defense technology through a $500 million commitment. Honeywell was among the first tier one supplier to sign an agreement of its kind, and we are honored to support the U.S. and allied forces with these increased production capabilities.

This agreement demonstrate the criticality of Honeywell Aerospace to national security interests and supports a multi-billion-dollar revenue opportunity. Turning to automation, we amended an agreement to acquire Johnson Matthey Catalyst Technologies business, which adjusts the total consideration and extends the date to close the deal to the end of July. We continue to believe the combination of the business with our capability in process technology will unlock future growth by broadening our portfolio, growing our install base, and creating a more integrated offering for our customers. As I mentioned, we announced we signed agreement to sell Productivity Solutions and Services to Brady Corporation and Warehouse and Workflow business to American Industrial Partners in two all-cash transactions. These businesses are well-positioned to grow profitably under highly capable new leadership with deep industry experience. For Honeywell, the sale allow us to further simplify our portfolio alongside the planned separation from Aerospace.

Following these sales and spin, we will have a more cohesive portfolio focused on three principal end markets. Excited to share much more about our business with the investment community at our upcoming Investor Day for both Honeywell Aerospace and Automation business in June. Both companies have exciting future ahead. Before we get into the details, I want to discuss our outlook for Process Automation and Technology in light of the current Middle East conflict. Let's turn to slide four. In Q1, the Middle East conflict drove a roughly 0.5% impact to revenue for all of Honeywell, most notably in Process Automation and Technology, given the energy exposure and presence in the region. Clearly, the situation in the Middle East is evolving rapidly, and we hope for fast resolution to the conflict.

However, our guidance assumes the conflict persists through the end of the quarter, and the resulting logistics and shipment delays cost roughly 1% impact to revenue. We continue to effectively manage through this with the safety and well-being of our employees being the top priority. Despite the conflict, demand continues to be strong for differentiated process technology on a global scale. We have secured over $2 billion in project wins over the past three quarters, including for LNG, refining and petrochemicals, and sustainable aviation fuel across U.S., Brazil, Africa and Middle East. These will include both rebuilding of the impacted facility with the key customers, including QatarEnergy LNG, and new expansion projects helping further reinforce the growth outlook for PA&T, securing a long tail of high-margin services and software opportunities.

Notably, in November last year, Dangote Petroleum Refinery and Petrochemicals selected Honeywell to supply advanced technology, services, proprietary catalyst and equipment to help double production capacity at Africa's largest refinery in Nigeria. In addition, Dangote will license Honeywell's Oleflex technology, which converts propane to propylene, and Honeywell's petrochemical technology to produce linear alkyl benzene, or LAB, a key ingredient in detergents for household needs. With this agreement, the customer will nearly double its production of polypropylene, which supports the manufacturing of packaging materials, consumer goods and industrial products, and once at full production will operate one of the world's largest LAB plants. As a follow-up of this award, earlier in April, we announced that Dangote also selected Honeywell to provide connected services, advanced digital performance monitoring and operator training at the same refinery.

This will help customers like Dangote improve operational performance, increase asset reliability, and enhance their workforce, ultimately unlocking greater value for their facility. On LNG, we recently signed agreement to provide integrated liquefied natural gas pre-treatment and liquefaction solution for Commonwealth LNG plant export facility in Louisiana and NextDecade's Rio Grande LNG project in Texas through an agreement with Bechtel. We expect strength in our LNG vertical to continue given the additional projects we expect to be awarded in Q2. Longer term, we expect the favorable crack spreads in petrochemical and refining will generate incremental catalyst and services demand to maximize performance of our customer's plant, in addition to needed repairs and modification related to rebuild. Once the conflict stabilizes, we expect the industry will benefit from pent-up demand and more stable feedstock supply, enabling better plant utilization rates.

Despite the near-term disruption, process technology orders increased double-digit, driving a 22% increase in PA&T backlog. We remain on track on expected H2 ramp as LNG and large modular equipment deals convert to sales in the back half of the year, which will be followed by new catalyst demand in 2027. While we acknowledge the challenges the business faced over the last few quarters, we are encouraged by the resiliency of orders, growth and backlog, which will generate a strong runway as we progress through 2026 and into 2027. I look forward to sharing more with you during the June Investor Day. Let me now turn to slide five to talk more about Aerospace growth trajectory in 2026.

We continue to see strong aerospace demand across commercial OE, commercial aftermarket, and defense and space, which is driving sustained orders growth of 28% over the last 12 months, which drove a roughly $19 billion aerospace backlog, a 20% increase from the prior year and 1.1 book-to-bill in Q1. Against this backdrop, our mechanical supply chain over-delivered in the Q4 of 2025, enabling double-digit organic sales growth. However, certain critical suppliers experienced temporary constraints to start the year, which led to slowdown in January and February and lower output and sales growth. Output improved considerably in March, our highest revenue month for the quarter, making us confident that our supply chain efforts will produce better results moving forward.

Given the significant amount of demand we see in aerospace portfolio, Honeywell has invested more than $1 billion over the past three years into expanding the capacity and resiliency of our supply chain. Our 2026 guidance incorporates the continuation of this elevated level of spending focused on onboarding new suppliers, developing internal capabilities, and assisting our supply partner with engineering and operation. The strategy drove double-digit output growth for 14 straight quarters prior to Q1, and we are confident on getting back to this trajectory in near term. Given the progress exiting Q1, our history of recovering from supply chain constraints, and continued positive demand trends, we are maintaining our aerospace guidance of high single-digit organic sales growth for the year. As you can see on this page, the outlook is consistent with historical linearity in the business, as we typically experience a sequential ramp throughout the year.

Thank you, Vimal, and good morning. In Q1, we successfully navigated the difficult geopolitical and macroeconomic environment while exceeding expectations for both segment margin and adjusted EPS. Sales grew 2% organically, led by growth in Building Automation and Aerospace Technologies. Pricing execution remained strong across the portfolio, fueled by new product introductions. On a segment basis, Building Automation surpassed our expectation once again in Q1, with sales up 8% organically across both solutions and products. Sales growth was led by strong demand for the new products and momentum across the high-growth data center healthcare verticals. On a regional basis, sales in the Middle East and India were both up double digits. Building Automation also delivered strong orders growth, up 9% with double-digit growth in projects, services, and fire products.

Aerospace sales grew 3% organically with commercial demand and increasing global defense needs supporting growth in commercial OE, commercial aftermarket, and defense and space. Underlying demand remains robust. As we discussed on the previous slide, Q1 results were adversely impacted by temporary supply chain headwinds in mechanical products. On profitability, aerospace segment margin expanded 20 basis points from the prior year to 26.5%, aided by pricing, productivity, and favorable mix. In industrial automation, sales were up 1% organically in the quarter. Solutions grew 7%, led by robust services demand in measurement and strong performance in warehouse and workflow solutions. Products declined slightly, primarily in Productivity Solutions and Services, but was partially offset by continued strength in sensing. Notably, industrial automation orders were up to 10%, highlighted by strength in China and recovery in Europe. Finally, Process Automation and Technology sales were down 6% organically in Q1.

This was driven principally by timing delays in refining catalyst reloads and automation service upgrades, including impacts related to the conflict in the Middle East. Project sales were flat as elevated demand in LNG was offset by delays in process automation. However, the orders momentum continued in process automation technology with double-digit growth in process technology in Q1, following very strong order growth in the Q4 of 2025. In total, Honeywell orders grew 7% organically, with broad-based demand resulting in book-to-bill above 1.1 and 15% increase in backlog. On profitability, segment profit increased 6%, while segment margin expanded 90 basis points to 23.3%, with margin expansion in all four segments.

This was principally led by industrial automation, which expanded 260 basis points, and process automation technology, which expanded 200 basis points from pricing and productivity actions, a strong result in process automation technology despite the top-line volatility. Adjusted earnings per share of $2.45 was up 11%, driven primarily by higher segment profit and lower share count. Foreign currency provided a modest benefit, and below the line items were favorable primarily due to higher pension income. You'll find additional information on Q1 adjusted EPS bridge in appendix of our presentation. Rounding out the results, we ended the quarter with nearly $100 million of free cash flow, down from $200 million last year. The benefit of higher operational income was offset by timing of collections in the Middle East and inventory headwinds in aerospace, given the mechanical supply chain dynamics.

Collections have improved meaningfully in April, and we remain confident in our full-year outlook. On capital deployment, we returned $1.8 billion to shareholders through roughly $1 billion of share repurchases and $800 million of dividends while funding over $220 million in CapEx to drive future growth. Let's now turn to slide seven to discuss our Q2 guidance. We anticipate Q2 organic sales growth of 2%-4%. Aerospace should improve sequentially from Q1, driven by ramping OE production rates and higher defense spend, supported by incremental improvements in the supply chain, while Process Automation Technology will be slightly weaker than Q1 due to incremental pressure stemming from the Middle East conflict. Both Building Automation and Industrial expect to be roughly in line with their full-year outlook for these businesses.

We expect segment margin to be in the range of 22.2%-22.5%, down 10 to up 20 basis points, led by pricing and productivity actions that we expect will largely offset rising inflation and unfavorable mix in Process Automation and Technology due to timing of high-margin catalyst shipments and the impact from the Middle East. We are also seeing an acceleration in the stranded cost takeout ahead of the Aerospace spin. On the segment level, we expect the strongest margin expansion in Building Automation, while Aerospace margin will be roughly flat. Adjusted EPS is expected to be $2.40 at the midpoint, reflecting a higher effective tax rate in the quarter, amounting to about $0.16 headwind. On a normalized tax basis, EPS in Q2 would be roughly $2.55 at the midpoint of our guidance, driven by higher segment profit and higher expected pension income.

Slide eight provides a look at Q2 dynamics I just described. We expect growth from roughly $0.06 of higher segment profit, while lower below-the-line expenses will drive a similar benefit of $0.04-$0.07 due to higher pension income, partially offset by increased repositioning costs. The main item to note is the $0.16 headwind from a higher tax rate of approximately 21% versus 16% in Q2 of 2025. Nevertheless, we still expect our full-year tax rate to be approximately 19%. The impact from the share count reduction and foreign exchange translation will be roughly $0.01 each. Additional below-the-line details are available in the appendix of the presentation. With that as the backdrop for Q2, let's turn to slide nine to discuss our full-year outlook.

We're maintaining our organic growth outlook of 3%-6% despite the temporary headwinds we encountered in Q1. We expect strength to continue in building automation, while industrial automation will continue to recover in Europe and China. Process automation technology should be roughly flat for the year as order visibility and robust backlog levels deliver a strong H2. Finally, in aerospace, as I mentioned earlier, our full-year guide of high single-digit growth remains intact, driven by improvement in our supply chain observed in March. We expect to continue to deliver strong operational execution driven by pricing discipline, productivity actions, and earlier than expected stranded cost take up. In Q1, this allowed us to deliver strong margin performance while navigating near-term volatility related to material cost inflation, mechanical supply chain headwinds in aerospace, and impact from the Middle East conflict.

While we outperformed our expectations in Q1, the ongoing geopolitical situation warrants prudence, and we are therefore maintaining our full-year segment margin guidance of 22.7%-23.1%. Our guidance continues to include the results of PSS and WWS until the transaction close. It also assumes a continued ramp in Quantinuum investments, and while we expect to consolidate the results of Quantinuum in Q2, we are not adjusting our segment margin or adjusted EPS guidance at this time to reflect this. There is also no change to our free cash flow guidance for the year. Let me now turn the call back over to Vimal to wrap up before Q&A.

Thanks, Mike. We are pleased with our Q1 results with segment margin and adjusted earnings per share exceeding expectations. Looking ahead, we are successfully navigating an uncertain geopolitical backdrop with the strength of our resilient business model approach and rigor of our Honeywell Accelerator operating system. We are tracking ahead of schedule on our separation milestone with the aerospace spin-off now expected to be completed on June 29. I'm very excited to be on the precipice of this formation of two leading pure-play public companies and witness the long runway of value creation both businesses will deliver. We look forward to hosting investors at our upcoming Honeywell Aerospace Investor Day on June 2nd and 3rd in Phoenix, and our Honeywell Investor Day on June 11th in New York City. These events will provide an excellent opportunity to share our strategy and long-term growth expectation.

With that, Mark, let's take the questions.

Vimal, Mike, and Jim 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.