Honeywell International Inc (HON) — Q2 2021 Earnings Call Transcript

Thank you, Jake. Good morning, and welcome to Honeywell's second quarter 2021 earnings conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; and Senior Vice President and Chief Financial Officer, Greg Lewis. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note, that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. This morning, we will review our financial results for the second quarter of 2021, share our guidance for the third quarter and provide an update to our full year 2021 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Reena, and good morning, everyone. Let's begin on Slide 2. We delivered another outstanding quarter, that exceeded the high end of our second quarter organic sales growth, segment margin, and adjusted earnings per share guidance range, with top line growth and margin expansion in all four segments. We delivered organic sales growth of 15%, led by double digit growth in Safety and Productivity Solutions, Honeywell Building Technologies and Advanced Materials, and Performance Materials and Technologies. We also returned to growth in the commercial aerospace aftermarket and UOP, amid promising signs of recovery in all the oil and gas and Aerospace markets. Segment margin expanded 190 basis points to 20.4% driven by the impact of higher sales volumes. Adjusted earnings per share was $2.02, up 60% year-over-year and $0.06 above the high end of our guidance range. We delivered a strong second quarter and a first half of the year. I'm pleased with our performance and confident we will continue to execute and deliver through the ongoing recovery in our end markets. We're driving near-term growth in several areas of the portfolio, including warehouse automation, productivity solutions, building products and advanced materials. While the industries most affected by the pandemic will continue improving throughout the year and into 2022. Orders were up over 20% year-over-year organically, driven by strength in Aerospace, PMT, HBT, and Productivity Solutions, creating a strong setup for growth. As always, we continue to execute on our rigorous and proven operating system to drive outstanding shareholder value.

Thank you, Darius, and good morning everyone. As Darius highlighted, we had a very strong second quarter, with sales up 15% organically, to $8.8 billion. Segment margin expansion of 190 basis points to 20.4% and free cash flow of $1.5 billion. We over-delivered on our commitments again, building on the strong start we had in Q1. Let's take a minute to discuss how each of the segments contributed to that. Starting with Aerospace, second quarter sales were up 7% organically, as flight hours continue to improve, resulting in double-digit commercial aerospace aftermarket growth. That was partially offset by lower commercial original equipment and software defense volumes. Business aviation continues to be very robust, where flight hours have already returned to 2019 levels, as a portion of customers that previously traveled commercially have transitioned to business jets for health and safety reasons. We continue to expect the recovery in business travel to lag the leisure travel recovery; however, we do expect a pickup as we enter the second half of the year. As expected, air transport flight hours are recovering led by narrow body flight hours, while widebodies remain soft, as domestic travel recovers faster than international travel. As a result, our business aviation aftermarket sales were up 90% organically year-over-year, while our air transport aftermarket sales were up 32% year-over-year organically. Sequentially, overall commercial aftermarket sales were up 12% from 1Q '21, a promising sign that the recovery is gaining traction. Aerospace segment margin expanded 490 basis points to 25.7%. Turning to Building Technologies, sales were up 13% organically, driven by robust demand for building products and solutions. We are seeing broad-based strength across the Building Technologies portfolio and around the world as people return to schools, offices and transportation hubs. Building product sales and orders were both up double digits year-over-year, driven by demand for fire, security, and electrical products, as well as building management systems. Orders for Building Solutions projects and services were up over 25% year-over-year and the services backlog is up more than 30%, positioning the business for future growth. In addition, our portfolio of healthy building solutions maintains strong customer momentum, with approximately $90 million of orders booked in the second quarter for our total of approximately $150 million in the first half.

Thank you, Greg. Current end market macro dynamics are creating the best set of circumstances that I've seen in the last 10 plus years that I've been with Honeywell. The commercial aerospace recovery in view, upcoming capital reinvestment in the energy sector, non-residential construction spending returning to 2019 levels and the exponential growth we continue to see in e-commerce provide an incredibly strong runway for medium-term growth. This macro setup, coupled with the strategies we have in place that focus on driving uniquely innovative and differentiated technologies that address the world's increasing demand for digital transformation, process technology, and sustainable solutions, gives me great confidence in our outlook for 2022 and beyond. Let me start by talking about the medium-term dynamics in some of our key end markets. In commercial aerospace, pent-up demand for leisure and business travel is expected to drive approximately 20% growth in flight hours over the next two to three years. Business in general aviation flight hours have already recovered to 2019 levels, and we expect air transport narrowbody and widebody flight hours to recover by 2024. We're seeing a slower defense business; we are absorbing that in our strong 2021 outlook, and our growth trajectory for the next two years should remain robust. The energy markets are gaining traction and stabilizing oil prices support an oncoming wave of capital reinvestment in this sector, with downstream customer CapEx expected to grow at a 6.5% compound annual growth rate over the next three years. As I said before, the investment cycle post-downturn is a consistent theme and we will be well-positioned to capture our unfair share of it. Acceleration in refining and petrochemical volumes will drive demand for our high-margin catalyst in new greenfield and brownfield projects, which will drive demand for licensing, engineering, and equipment, as well as our software and automation solutions. Our Building Technologies portfolio will continue to benefit from the ongoing global macro trends of sustainability, digitalization, and public safety. Building owners are looking for healthy building solutions to create safe public spaces while optimizing energy consumption and productivity. Non-residential construction is expected to grow by $230 billion to $2.5 trillion by 2024, with refurbishments for healthy buildings growing at a high single-digit compound annual growth rate over the next three years. We also expect tailwinds from sizable U.S. stimulus programs targeting airports, education, and healthcare, as well as potential government infrastructure plans, which will provide a favorable setup for our Building Technologies business. We remain very well positioned to address the rapid evolution we see in click and collect consumer buying behavior, creating complex fulfillment and delivery needs. In fact, e-commerce is expected to make up approximately 30% of total retail sales by 2024. To meet this growing demand, as well as to prepare for intensifying labor shortages, retailers are meaningfully stepping up investments in workflow technologies and automation, amplifying our already strong trajectory in this market, along with our growing installed base and ample runway for high margin aftermarket opportunities. So, you see, our macro setup is strong, and that has been a very long time. Now, let's turn to the next page. I want to highlight a few of our strategic vectors that will play into our growth algorithm. Let's start with urban air mobility or UAM, one space where we see significant growth opportunity. The total available market will be around $120 billion annually in 2030, of which we are positioned to address $30 billion. We have leading fly-by-wire systems for urban air mobility, avionics, and in-vehicle management systems, in addition to highly differentiated, high-assurance detect and avoid systems. We have already won $3.4 billion of content and have another $1.8 billion of wins pending. We have $7 billion in projected cumulative pipeline over the next five years, growing to $55 billion in cumulative pipeline out to 2030. So this is a really exciting business where we are already generating substantial wins with significant future potential. We're also generating growth through the Honeywell Connected Enterprise, which is underpinned by Honeywell Forge, our suite of SaaS applications that drive operational excellence and are essential to the day-to-day management of companies' complex operations. Honeywell Connected Enterprise delivered double-digit recurring revenue growth, and orders were up over 20% in the second quarter, which serves as an excellent proof point as we continue to focus on driving software growth. We also recently launched cloud-based connected building solutions, jointly developed through our SAP partnership. Our portfolio of connected solutions is demonstrating great momentum with 1 million instances of Tridium's Niagara deployed worldwide and over 5,000 Honeywell Forge OT cybersecurity projects delivered, to name a few examples. One of the newest additions to our portfolio, Sparta Systems, is also contributing to Honeywell's software growth, with orders up over 30% in the first half of 2021. The Sparta SaaS customer base has grown double digits since year-end 2020, and Sparta ended the second quarter with a backlog of over $100 million. Sparta Systems recently announced that a leading European specialty pharmaceutical company implemented TrackWise digital solution suite, that includes, in addition to complaints handling, supplier quality management, document management, and training management, to seamlessly integrate quality processes and data across its manufacturing operations and suppliers. So, the Sparta integration is progressing smoothly, and I'm pleased with the results thus far. Finally, we continue to see strong demand for our portfolio of healthy building solutions, which I mentioned earlier. We booked around $150 million of healthy building orders in the first half and have a global pipeline of over $2 billion. A few examples of our customer wins across major verticals include the Pittsburgh and San Diego International Airports, Syracuse University, and Wuhan Changfu Hospital. We anticipate the demand for healthy buildings will remain strong for the foreseeable future as building managers seek to support occupant safety and comfort for returning workers, students, travelers, and visitors. All four of the technologies we discussed are proof points for our strategy of focusing R&D and breakthrough initiatives around disruptive trends that will shape the global economy for years to come. We have many other equally exciting breakthroughs including quantum, sustainable technology solutions, and smart cities, as examples. These provide numerous growth vectors which will contribute to the recovery in our major end markets and underpin my confidence in what is to come. Now, let's wrap up on Slide 10. Overall, we are encouraged by the performance of the first half of 2021. Our second quarter results exceeded expectations and given our confidence in our businesses, we have meaningfully raised our full year sales, segment margin, adjusted EPS, and free cash flow guidance. The Honeywell value creation framework continues to set us apart, and we'll continue to deliver for all of our shareholders. With that, Reena, let's move to Q&A.

Thank you, Darius. Darius and Greg are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Jake, please open the line for Q&A.

Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning.

Good morning. I have several questions. Focusing on the quantum aspect, I found your comments intriguing, especially regarding the potential for $1 billion in commercialization revenues within two years. Could you explain the differences between the two-year and five-year projections? Are you anticipating a technical breakthrough to achieve this, or is it more about refining the business model and securing customers?

Yes. Well, I think, Jeff, more importantly, it's a toggle between focusing on progressing that technology versus focusing on commercialization. This business is generating revenue today for CQC and generating revenue today for Honeywell Quantum Systems. We could focus on our energy and continuing to drive commercialization, but we're trying to be balanced between driving some commercialization, securing some blue chip customers, but also continuing to advance the technology. I mean, this isn't necessarily an instant gratification kind of business because if we just over-function to commercialization, although we have a year or two lead on just about everybody else in the industry, that could get shortchanged if we don't continue to advance it. But, I think that's more than anything. So the two to four year kind of a number is based on both how we see the technology evolving and how we see really us focusing on technology progress versus commercialization. And I think we want to maintain both, and not necessarily just full toggle to commercialization because I think that could sacrifice progress on the technology.

Understood. Thanks a lot.

Thank you.

Hey, good morning guys.

Hey, Scott.

Good morning.

Good morning. You didn't fixate as much on supply chain and logistics as some of the other folks out there so far this quarter. But you did allude to it, potentially holding back growth. Did it in fact hold back some growth this quarter? Is there anything that you can kind of report measure on there?

Well, to be honest, the answer is yes. I mean, I think our results for Q3 would have easily been $100 million to $200 million higher than what we're saying because of supply chain constraints. So, it's a daily battle. Some of the areas that were particularly challenged are semiconductors and resins; those are probably our top two. But we're seeing some supply chain pressure across the board. Our orders are super strong, particularly in SPS, and we could easily do $100 million to $200 million more in revenue this quarter in Q3 if we didn't have those challenges. So what we projected is kind of our reasonable best estimate of the supply we're going to get, based on what our suppliers are committing. But it's a daily battle, and we've stood up a team on the supply side and stood up a team on the pricing side to really manage both those things because we're continuing to see inflation and we're actively managing price, which has actually been a good story as we are able to pass most of that through.

Okay. I'll stick to one question. Thank you. Good luck, Darius and Greg.

Thank you.

Thanks.

Hey guys, good morning.

Good morning.

Good morning.

Can you discuss your previously mentioned potential for mid-20s margins, especially since you've been performing well in terms of operating margins? You seem quite optimistic, even though the markets are not fully performing yet. Will there be a time when you officially update and provide a mid-term target number? Also, regarding growth, your current organic growth guidance is decent for the short term, but given your positive outlook on growth opportunities, shouldn't those expectations be higher? Again, when can we expect an update on your medium-term targets?

Yes, it's a fair question. I think we are tentatively planning an Investor Day in November, and that's probably a good time to really look at our targets. But as you hear, we are very, very optimistic about our markets here in the short to mid-terms. I mean, that we're going to have strong tailwinds; you're just now starting to see some of our higher margin long-cycle business, as you saw the very first evidence of that pickup in PMT. Aero is going to continue to improve. Widebody and narrowbody traffic are going to continue to improve. We absorbed some of the defense and space challenges this year, so that's already embedded, and we expect that to normalize. As we look into next year and the year after, we're looking at our growth and margin expansion algorithm. And don't forget, we still have plenty of firepower on the balance sheet, which we plan to deploy and the pipeline is good, and we plan to be using it a bit more aggressively as we move forward. So, I think the setup for Honeywell, and I mean this, I haven't seen it be any better since I've been at Honeywell, and that's for 13 years. So, I think I couldn't be more excited about what the future holds.

Yes. I mean, I guess, I would...

Go ahead. Sorry, Greg.

I was just going to say, Steve, I agree with all that. I mean, as you know, we're pretty close to our targets in HBT. We've already made really steady progress in Aerospace. SPS has a lot of room to run with rolling out all of the project business, Intelligrated, and all of the services and software that we expect to come behind it still to come. So, yes, I think we'll talk to you about that in the back half of this year, as we get closer to the year-end and our guidance for 2022.

Yes, I guess I'm just trying to reconcile a 3% to 5% growth outlook longer-term. It doesn't really jive with how bullish you sound on the top line opportunities, including quantum and these other things that are out there. So that's the genesis of the question.

Yes. Look forward to sharing more with you at our Investor Day and so on.

I think.

Go ahead, sorry. Got it. One last quick.

Go ahead.

One last quick one, just on the masks. Is there any difference in profitability on the PPE side with those masks that are beginning to roll down here? Are they particularly profitable or what's kind of the earnings contribution? Because I think you set those up in a hurry a year ago. Just curious as to what the profit impact is?

Yes. During the quarter, we had to shut down some of our production that we quickly established within 30 days when the pandemic began in April 2020. Our focus was on speed rather than cost efficiency, and this approach yielded lower margins. We made this decision because the country required it, not to maximize profit. Now that we've reduced production, we've cut back on less efficient, manual processes that were quickly implemented. In their place, we've introduced highly automated production, which will reduce our cost per mask by around 50%. Our business is well-positioned for the future, with internal rates of return exceeding 20%, assuming there isn't an increase in mask demand. While we're seeing some revenue from this production, it didn't contribute significantly to our margins. However, we are now in a stronger position with automated production, leading to a substantial decrease in our cost per mask.

Right. So actually accretive to incrementals as that kind of rolls down and your other stuff rolls on?

That's right.

Yes. Great. Okay. Thanks a lot.

That's correct.

Yes.

Thanks so much and good morning, Darius and Greg.

Good morning.

Hi, Sheila.

Since I'm the Aero person, I guess, I'll ask on defense, stellar growth over the last three years. Maybe can you talk about the decline you saw in the quarter? What drove it with the U.S. budget and internationally, kind of, how do you expect that trajectory to improve from here? And the impact on maybe profitability? Thank you.

Sure. So maybe I'll start. One is, obviously the defense and space segment is the one that's been a bit worse than we expected this year; it's the bad news. The good news is that we expect that to normalize in 2022 and 2023. So, we're kind of taking a little bit of what I'd say, hits this year. The narrowbody and the widebody flight hours, you see that in the deck; we expect it to continue to progress. The AT ROE after business is also going to continue to progress; we kind of see steady progress here in Q3, Q4 and so on. Business aviation has been strong, both on the aftermarket and the OE side, and that's going to continue to progress. So overall, we have a great deal of optimism for what we're going to see in Aerospace and the margin performance will be very commensurate with that because some of the widebody and narrowbody aftermarket revenue is still not kicking in, which, as you know, is going to be some of our highest margin profile. So, it feels like we're kind of taking a hit on defense and space this year; next year that looks to be much more normalized. We also expect to see a high level of growth in the commercial aerospace.

Okay. Thank you very much.

Thank you.

Yes. Good morning.

Good morning, Andrew.

Good morning.

Can you just talk, sort of big picture on what are you seeing on PMT? Very good to see your outlook improve. What are the big trends that made your customer base more positive? And what are the big sort of data points or trends we should be watching out for to gauge? And what are you trying to look at to gauge the direction of the industry into '22 and '23? Thank you.

Yes. Thank you, Andrew for the question. I mean, I think the first thing we always look at is UOP. UOP is a leading indicator of that business. HPS trails UOP orders by anywhere from 12 to 18 months. UOP orders for the quarter were nearly 30% up, just to give you a perspective. So that's probably the single best data point. For our overall total, every business was up just about double digits in terms of orders in PMT. Our backlog was up in PMT. So, all good signs. The other part that we're starting to see strong level of presence both for our Honeywell Process Solutions business as well as UOP in some of the renewable projects. You probably saw the Wabash Valley announcement around carbon capture that UOP won. Process solutions are winning in a lot of the wind farm projects, and solar farm projects. So we're shifting focus to where the future is while maintaining our presence in some of our traditional markets. And as we know and we saw this movie before in the '15 and '16 timeframe, you can only depress that downstream investment for so long. We saw that come back strong in '17 and '18. We anticipate the very same thing will happen in '22 and '23. And by the way, a lot of these petrochemical refining facilities are going to have to get reconfigured for the future of energy, which is going to be incremental growth; which we have yet to see. So, we're actually very, very bullish on that market, and it's being reflected today in some of our order-like rates.

Thank you very much.

Thank you, Andrew.

Hey, good morning guys.

Good morning, Joe.

Good morning.

As I think about your portfolio and then also your capital structure, it just seems like one of the biggest levers you have really to move the needle is putting your capital to work via M&A. And I know we've talked a lot about the organic growth opportunities. But I'm just curious how you think about prioritizing capital in the areas that you're looking to invest from an inorganic standpoint, like how are you thinking about the priority? I know you mentioned the pipeline looks good and any additional color there Darius would be great.

Certainly, let me address that, Joe. Our balance sheet, as we've mentioned throughout last year, is exceptionally strong. It truly is a world-class balance sheet, whether we consider our pension funding, cash position, and other factors. M&A is a key focus for us. As we've stated before, we won’t overpay or engage in imprudent spending. However, M&A is definitely a priority for us; you’ve seen that in the first half of the year with our activities involving Sparta and Fiplex. Additionally, the investment in quantum, which amounts to roughly $200 million to $300 million, can be regarded as an M&A deal as well, set to occur as we finalize that combination. We are very enthusiastic about leveraging our balance sheet for M&A and incorporating accretive businesses into our portfolio.

Yes. To add to that, our balance sheet is in the best shape it has ever been. Our pension funding is now around 120%, and our liabilities are either decreasing or backed by other instruments. This gives us a much stronger balance sheet compared to five years ago, allowing us to feel more comfortable with a higher level of leverage, which enhances our potential for capital deployment. I believe capital deployment is a significant lever for us. This ties back to my earlier point from the presentation; our markets are experiencing favorable conditions and our balance sheet has substantial capacity. This is a rare moment in Honeywell's history, where we have strong market tailwinds and effective strategies, alongside ample deployment capacity. I believe there has never been a better time for our position.

Hey guys, that's super helpful. If I could just one quick follow-on there, because this has been brought up a few times around the balance sheet. You guys were referenced recently in a settlement with 3M, on PSOA and that is a concern in terms of their ability to deploy their capital in their balance sheet? Just, I guess, focused on typically think if you guys are being pried into those liabilities. And so any comments just around that settlement or potential liability?

Yes. The only comment I would make, Joe, is our environmental reserves cover everything that is, that we're working on. We've done a ton of work over the last, gosh, probably 15 years relative to all the environmental obligations that the company has had. We've done tremendous things to clean up the areas that we've had involvement in. I think those have been some of our greatest accomplishments from an ESG perspective. And so, this announcement that you're referring to is no big news for Honeywell and is captured in our financial position, as we have continued to report this data.

Yes. I would certainly not reiterate any new news or incremental or some new liability that is surfacing. I mean, it's a matter of fact, I think that there was a subset of reporting and actually a false thing to a close. So, I wouldn't read anything more into that.

Great. Thank you both.

Hi, good morning.

Good morning, John.

Wanted to ask, kind of a combo question here about pricing and also kind of the margin you're booking in backlog here at a couple of your longer cycle businesses Intelligrated, HBT, PMT, clearly strong demand, you have stimulus dollars flowing into these markets. We're not hearing, there is really much excess capacity. So, how should we think about the margin profile of the projects that are now coming into the backlog and the visibility that gives you going forward? Thank you.

Yes, yes. So maybe first on the pricing side, as Darius mentioned in some of his comments, that's something that we have always and continued to have a very strong eye on. And so, everywhere in our books of business that we can, we continue to pass through the inflation that’s being seen in materials and also in the labor because in the projects business, labor is also important as well. So, I would say as we're looking at our margin and backlog, we're not seeing any material challenges to them. It doesn't mean that, because we are being able to price these things in. So, I wouldn't call that a big change in our profile, but it's something we keep a very strong eye on. We talked about it, in Intelligrated, the project business, there is lower than the line average for the business overall. And that's part of the hypothesis for the business in general. Capture the volume and then follow that through with services and software, just as we had done in process solutions. So, I think what we're doing is, we're finding success in being able to price with the inflationary environment that we're seeing. And we're going to continue to manage through that quite well in all of our project businesses, but it is something to keep an eye on.

Yes, I was actually even coming at it from it could it actually be an unexpected tailwind, just given how tight some of these markets are, right. I mean, there is only a few players that can stand up an automated warehouse or do some of these really large performance contracting projects, that sounds like you're seeing a good pipeline of that develop, but I appreciate the color.

You got it.

Thanks. Good morning. Thanks for the question. Just want to go back to Steve's question on the medium-term margins. Greg, did you endorse the 25% medium-term margin, just has been to clarify that. My real question is, in terms of the cadence from here on. Number one, can you just confirm again, Greg, if the cost base is now fully loaded with the temporary costs? I think they meant to be all back in, in 2Q. But are there any big investment spending on the horizon? Doesn't feel like Aerospace has a big investment cycle ahead of it. But some of these breakthrough initiatives maybe quantum, might. So, maybe just talk about that. Thanks.

Yes. Yes. So the temporary cost, we still have the third quarter to go, because if you think about last year as an example, we furloughed in the second quarter and in the third quarter of 2020. And if you think about the return to things like travel and the cost that comes along with T&E, I mean, we're just now in the second quarter, starting to get the organization back out on the streets to see customers and to go visit our businesses. So, I would say you're still going to see another step up here in the third quarter, in terms of the return of those temporary costs. And then the majority of those will be gone; there will still be a little bit to trickle in 4Q, but the third quarter is still yet to come. We are investing in the business as though, and that's again part of the reason when we talk about the $1 billion net cost reduction and that $0.5 billion of increase, that is also absorbing some increase in R&D, which is happening in places like quantum, it's happening in places like Aerospace, it's happening in our Honeywell Connected Enterprise, just to name a few. And we continue as the environment strengthens commercially, we're going to invest back in the business in terms of sales resources and feet on the street and so on. So, we have a lot of confidence in being able to deliver the year with the net $0.5 billion increase that we talked about, and that is going to encompass both the temporary cost return and some additional investments.

Okay. Thank you very much.

Hey, good morning guys.

Hey, Josh.

To follow up on Nigel's questions, regarding the Aero sector and margins, if we review the past 18 months, we can see significant fluctuations. How do you anticipate this trend will develop over the next few quarters? I understand there could be implications related to the mix in the defense and space areas. Could you provide insights on what this progression might look like as the business stabilizes, without being constrained by the calendar year-end?

Yes. I would say, Josh, what you're going to see is that we talked about the fact that the first quarter was abnormally high. We had a $30 million one-time benefit that impacted the profit and loss statement. We were also still benefiting from some significant cost reductions we implemented last year. In the second quarter, we performed nearly as expected, in that high 25% range. I believe we recorded something like 25.7%, and I anticipate that number will gradually increase throughout the third and fourth quarters, as we move forward. Again, as more of the aftermarket business comes through the profit and loss statement.

Yes. I mean, the segments that we actually are looking forward to enjoying the benefits from a margin perspective more is just return the flight hours, particularly for widebodies and some more narrowbodies. We project that will slowly improve. I know it's going to be correlated to vaccination rates throughout the world. We're seeing traffic pick up; the consumer traffic is strong. Actually, there is a lot of pent-up traffic demand for international travel. As we look at the next two to three years, it's going to get gradually better and better. Probably if there was a drawback, we absorbed it this year in terms of the defense and space, and we expect that to normalize next year. So, that's probably the only segment that we had some concerns about, but that's already reflected in our 2021 guide. As I said, 2022 and beyond looks better.

Got it. That's helpful. Appreciate the question guys.

You bet. Thank you.

Yes. Thanks for squeezing me in guys.

Hey, Nicole.

Good morning.

Hi there. I have a follow-up regarding margins for SPS and PMT in the second half. Margins in both segments are generally quite affected by the mix, and there are many factors at play. Could you discuss your thoughts on SPS and PMT in the second half, similar to what you mentioned for Aerospace?

Yes. It's going to be a pretty similar theme again, as we think about the mix for SPS in particular. That's actually going to improve. I talked about the fact that we hit the peak for this year in terms of the project rollouts in Intelligrated. So, that's going to come down a little bit, which will provide a little bit of a mix benefit on the overall profile. So, I expect to see again sequential improvement in margins in the back half of the year in SPS. The same thing being true as we think about PMT ramping up and starting to see what we did here this quarter in terms of the catalyst shipments coming through, as Darius highlighted, our UOP backlog is very strong. That brings with it some nice margin accretion. We've always talked about the fact that you can't look at PMT margins in any one quarter as indicative; that moves around a bit with the mix around catalyst. But I do expect that to also improve in the back half of the year, as we continue to see that strengthening growth rate. So, again, that's why we feel very good about where we are right now as we exit the first half, and look forward to a very good second half of the year. A nice finish; that's why we upgraded our margin range on the low-end by the 10 basis points that we did. So, I think things are trending nicely across all other segments.

Yes. And I think maybe just something else to add which may go unnoticed, but if you look at sort of as deep as we were hit in 2020, with some of our end markets, we're now projecting for EPS range. We're basically going to be right back where we were in 2019. So, think about that as a one-year pause, for business that's better positioned with more tailwinds than it's ever had and a strong balance sheet. So, I think that from where we stand, things look quite strong.

Got it. Thanks, Darius and Greg.

You bet. Thank you.

I want to thank our shareholders for your ongoing support. We have delivered strong results in the first half of an uncertain year, and we're well positioned to capitalize on improving conditions in key end markets while driving near-term growth opportunities across our portfolio. I've never been more excited about Honeywell's future than I am today. Thank you for listening, please stay safe and healthy.