Honeywell International Inc (HON) — Q2 2025 Earnings Call Transcript

Thank you. Good morning, and welcome to Honeywell's second quarter 2025 earnings conference call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties including the ones described in our SEC filings. This morning, we will review our financial results for the second quarter, share our guidance for the third quarter and provide an update on full year 2025. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Vimal Kapur.

Thank you, Sean, and good morning, everyone. Honeywell again delivered solid results in the second quarter, meeting or exceeding all our financial commitments in a time of significant global economic change. Our organic sales and orders growth both accelerated during this quarter as we are seeing the benefit of our consistent spending and execution on new product development across our businesses. Given the strong first half performance, we are raising sales and earnings guidance for the full year, while incorporating into our outlook all currently known tariffs and the uncertain business conditions going forward. Our proactive multi-pronged mitigation efforts, coordinating closely with suppliers and customers on productivity and pricing initiatives have been working as planned. And because of our systemic approach, we are in a position to deliver strong sales profit and cash flow growth in 2025. As our business leaders have been solely focused on meeting and exceeding our financial commitment, management and the Board have been fulfilling our promise to transform our portfolio ahead of our upcoming separation to best position each of the future independent company's success. Throughout the comprehensive portfolio review I initiated shortly after becoming CEO, we have diligently analyzed how to further simplify and optimize Honeywell. Earlier this month, we entered the final stage of this process, announcing our intention to pursue a strategic alternative for our productivity solutions and services, and Warehouse and Workflow Solutions businesses. The results of this pursuit, whatever they may be, will clarify the standalone automation company's go-forward strategy and value proposition. With many changes in flight, our dedicated separation management office has kept us right on track to execute our spin-off transaction, both on time and without commercial disruption. Let's now turn to Slide 3 for a further update on our formation of 3 industry-leading public companies. We continue to make great progress along the path to separate into 3 independent companies, which we believe will maximize long-term value for all Honeywell stakeholders. As independent entities with clear alignment and purpose, increased organizational agility, and customized capital allocation priorities, each will be better positioned to accelerate future growth opportunities. Given the pace of our progress, we cannot narrow the timing for the spin-off of this Advanced Materials to Honeywell shareholders to the fourth quarter of this year. Solstice shares will trade under the ticker SOLS on the NASDAQ Stock Exchange. A few weeks prior to the spin, the Solstice leadership team will host an Investor Day in New York. They will lay out in detail the powerful investment case for this innovative market leader in the secularly growing Advanced Materials market that will carry on Honeywell's legacy of operational excellence. We hope you will join CEO, David Sewell, and his team at this event. We're also making great progress on the Aerospace spin, which is planned for the second half of next year. Last month, Aerospace President, Jim Currier, and I presented an investor reception ahead of the Paris Air Show. Jim highlighted Aero's industry-leading position as a mission-critical supplier of systems across aerospace verticals and platforms. In addition, he provided insights into drivers for our strong growth profile, underpinned by a broad aerospace and defense upcycle, which we enhanced with a powerful decoupled sales initiative, ongoing supply chain transformation effort, and robust research and development investments over time. We look forward to providing you with more details on standalone Honeywell Aerospace in the coming quarters. And yet we are not waiting for the separation to reshape our portfolio for future growth. We continue to selectively deploy capital towards acquisitions, announcing 2 new deals in the past couple of months. We are also looking to recycle capital, as I discussed earlier, by pursuing alternatives for businesses that do not fit our future. In combination with these actions, we will drive value creation as we await becoming separately publicly traded vehicles. If you turn to Slide 4, I will discuss our recent portfolio announcement in more detail. In June, we agreed to a GBP 1.8 billion bolt-on purchase of Johnson Matthey's Catalyst Technologies business. We have long identified our UOP process technology business as a natural owner of this highly complementary business because it gives us additional capabilities in sustainable methanol, sustainable aviation fuel, hydrogen, and ammonia to better serve our extensive customer base. It also brings attractive sales from catalysts, which fit very well with our existing offerings. The transaction is expected to close in the first half of 2026 and will enhance our growth and margin profile over time, while providing a strong financial return. In early July, we also announced a technology tuck-in acquisition of Li-ion Tamer that enhances our building automation capability in high-growth energy storage and data center end markets. While such smaller deals do not often get much investor attention, in aggregate, they can accelerate our strategic roadmap and boost growth with a lower risk profile. We recently announced our intent to evaluate strategic alternatives for our PSS and warehouse automation businesses. Just as we want to acquire businesses such as Catalyst Technologies and Li-ion Tamer, where we believe we are a natural owner, we must also acknowledge when the time comes, they'll be a better owner for parts of our portfolio. We're looking to create a pure-play automation company with a consistent business model and focus on end markets in which we have durable competitive advantages. Both PSS and Intelligrated have strong customer bases, a long history of innovation, and best-in-class operations, and we will evaluate options for them from a position of strength. To avoid interfering with the review process, we will hold further updates until it's completed. I will now turn it over to Mike to provide more details on our excellent second quarter results.

Thank you, Vimal, and good morning, everyone. Let's begin on Slide 5. In the second quarter, we built on a strong start to the year by exceeding our guidance for organic sales growth and adjusted earnings per share. Our results show the resilience of our accelerated operating system, which adapts quickly to changes in the environment and meets our financial commitments. We remain dedicated to investing in growth initiatives and are starting to see evidence of our progress. Second quarter sales grew 5% organically, with three of our four segments performing above this level. Defense and Space and UOP led the growth with double-digit performances. Segment profit increased 8% from the prior year, consistent with sales, and segment margin finished nearly flat and within our guidance range. Margin expansion in Building Automation and Industrial Automation, along with lower corporate costs, was slightly offset by margin pressure in Aerospace Technologies and Energy and Sustainability Solutions. An increase in research and development expense, rising 60 basis points as a percentage of sales from the previous year to 4.6%, reduced current period margin at the segment level but will foster growth in future periods. Earnings per share for the second quarter was $2.45, up 4% from the previous year, while adjusted earnings per share was $2.75, reflecting a 10% year-over-year increase. Organic and inorganic segment profit growth, coupled with a lower tax rate, more than compensated for challenges from higher interest expense and decreased pension income. You can find the details for adjusted earnings per share from the second quarter of '24 to the second quarter of '25 in the appendix of this presentation. Orders for the quarter amounted to $10.5 billion, a 6% year-over-year increase, excluding the effects of acquisitions and divestitures, boosted by a strong double-digit rise in Aerospace orders. Our backlog grew 10% organically compared to the prior year, reaching a new record of $36.6 billion. Free cash flow for the second quarter was $1 billion, down roughly $100 million from the previous year, due to tariff-induced cost inflation increasing inventory levels and planned capital project spending. We continue to allocate our excess cash flow and balance sheet capacity based on the best opportunities available in the market. During the second quarter, our capital deployment was well-balanced, with $2.2 billion for the successful acquisition of Sundyne and over $2.4 billion returned to shareholders through approximately $1.7 billion in share repurchases and $700 million in dividends. We also allocated $300 million for capital projects. Now let's turn to Slide 6 to review our second quarter performance by segment. I will provide a high-level overview of the results, with additional commentary on the right-hand side of the slide. In the second quarter, Aerospace Technologies experienced 6% organic growth, fueled by a strong performance in our Defense and Space and Commercial Aftermarket businesses. Segment margin decreased by 170 basis points to 25.5% as an 11% rise in output, commercial excellence, and productivity initiatives were outweighed by higher cost inflation and the effects of the CAES acquisition. Industrial Automation sales exceeded our guidance range, remaining flat on an organic basis. Segment margin increased by 20 basis points to 19.2%, supported by productivity actions and commercial excellence, which offset cost pressures. In May, we completed the sale of the PPE business, which will bolster organic growth and margins in the second half of the year. Building Automation delivered another outstanding quarter, with sales growing 8% organically year-over-year. Segment margin improved by 90 basis points compared to the previous year, driven by volume leverage and the full quarter benefit from Access Solutions. Energy and Sustainability Solutions saw 6% organic sales growth in the second quarter, surpassing our expectations, led by double-digit growth in UOP. However, segment margin fell by 110 basis points to 24.1% as volume leverage and benefits from margin-accretive LNG acquisitions were offset by the impact from a customer settlement and cost inflation. Now we’ll move to Slide 7 to discuss our third quarter and full year guidance. Our first half outperformance has given us the confidence to raise our outlook for the year, although we remain cautious about the lagging effects on business demand due to recently announced tariffs. Despite this, our framework for the year remains largely unchanged. We are incorporating non-tariff considerations, assuming that any moratoria will likely lead to future revisions to higher rates, after accounting for all mitigation strategies. We maintain ongoing communication with our customers and suppliers and are committed to fully offsetting the impact of these tariffs through a combination of productivity, pricing, and alternative sourcing, balancing the protection of both margins and demand. We are raising the lower end of our full-year organic sales growth guidance by 200 basis points. Taking into account our first half performance and recent trends in short-cycle orders, we now project a growth rate of 4% to 5% for the year, or 3% to 4% when excluding the previous year's impact from the Bombardier agreement. Our year-to-date results have surpassed earlier expectations while keeping a realistic approach for the second half. We have noticed that many large energy projects and catalyst spending have been postponed to 2026 due to macroeconomic and legislative uncertainties. Full year sales are now anticipated to reach between $40.8 billion and $41.3 billion, primarily driven by better organic growth, favorable currency translation effects, and the additional revenue from the Sundyne acquisition in June. We expect organic sales improvements similar in both the third and fourth quarters when excluding the prior year's impact from the Bombardier agreement. Our anticipated third quarter organic sales growth is between 2% to 4%, totaling approximately $10 billion to $10.3 billion. For the full year, we now project an overall segment margin increase of 40 to 60 basis points or a decrease of 30 to 10 basis points excluding the Bombardier impact. The reduced margin expectations from prior guidance result from the significant decrementals of delayed energy project work and the lag effect of pricing concerning tariff-related cost pressures in our Aerospace business. For the third quarter, we expect segment margin to be between 22.7% to 23.1%, down 90 to 50 basis points from the prior year, with margins in Building Automation expanding, Energy and Sustainability Solutions remaining roughly flat, Industrial Automation margins contracting slightly, and Aerospace margins similar to those in the second quarter. We now foresee full year earnings per share in the range of $10.45 to $10.65, reflecting an increase of 6% to 8%, or 1% to 3% when excluding the 2024 impact of the Bombardier agreement. Anticipated earnings per share for the third quarter is between $2.50 to $2.60, reflecting a change of down to up 3% to up 1% compared to the prior year. I will provide further details on updates to our full year EPS guidance later in the presentation. We still expect free cash flow for the year to be between $5.4 billion and $5.8 billion, reflecting a change of down 2% to up 5% when excluding Bombardier, which remains roughly aligned with adjusted earnings per share growth. Additional information regarding changes in free cash flow compared to the previous year will be provided in the appendix. Having invested $7.8 billion in the first half of the year for share repurchases, acquisitions, dividends, and several projects, we will remain opportunistic in allocating any additional capital beyond the commitments already made for the remainder of the year. In summary, our strong execution in the first half has elevated expectations for the year ahead, while we strive to set prudent expectations in a highly dynamic environment. By concentrating on what we can control, our company is well-positioned for strong performance as we approach our anticipated separations.

Thank you, Mike. Honeywell performed admirably in the first half of 2025, with back-to-back quarters that delivered earnings above the high end of our target ranges. Our investment in innovation is gaining traction, driving improved sales growth and yet another record quarter for our backlog. On the back of this operational momentum, we are raising our organic sales growth and adjusted earnings per share guidance for the year, while being mindful that we may not yet have felt the full impact of the escalation of global tariff rates in recent months. Business demand has remained resilient in more sectors and geographic regions thus far, but we are well prepared for potential changes ahead in the macro, regulatory, and geopolitical environment utilizing a playbook that has served us well over many cycles. As our businesses focus on delivering our financial targets, we have also made substantial progress in transforming our portfolio to maximize their value. Through separation, acquisition, and divestitures, we are simplifying Honeywell for investors, customers, and our future shapers. All our transactions are proceeding according to plan. Even as the first chapter of my tenure as CEO comes closer to an end, with the conclusion of the comprehensive portfolio review, our dynamic approach to capital allocation and portfolio optimization remains evergreen. We are confident that the combination of our accelerating growth and high-return capital deployment will compound the value of Honeywell going forward. With that, Sean, let's take questions.

Thank you, Vimal. Vimal and Mike are now available to answer your questions. Operator, please open the line for Q&A.

Just maybe wanted to start off with Aerospace to try and understand kind of the moving parts there. I suppose it sounded in Paris as if there was a bit more confidence around sort of supply chain issues and getting those resolved, and that might help the Commercial OE top line, but it seems something sort of moved the other way. So just trying to understand, is that BGA or large commercial? What's the pace at which Commercial OE sales improve? And on the margin front, should we think about this sort of 25% to 26% margin being the new sort of baseline for the next 12 or 18 months?

Orders in Aerospace are very strong across the board, including Defense and Space and Commercial OE. In the second quarter, we experienced some temporary destocking with one of our OEMs, but we expect our shipments to return to OE build rates in the second half. I am confident that you will see an improved OE profile from us then. We are optimistic about Aero performance for the year. From a margin perspective, integrating CAES has been a drag of about 100 basis points year-over-year, but that should start to normalize next year. CAES is growing its revenue this year at a high double-digit rate, outperforming our projections, which is encouraging. Additionally, we are investing about $200 million more in R&D in the Aerospace sector to support our new product introduction growth and new revenue next year. I believe that the margin profile for Aero will improve in the second half compared to this quarter, and I am quite confident in achieving high single-digit revenue growth for the remainder of the year.

Julian, I want to add that everything Mike mentioned pertains to transitional issues. If we look at our discussions about margins, the operational excellence mix is transitioning due to destocking. Our R&D investments are being evaluated to ensure we can perform well in the future, which suggests this will be the new standard. Additionally, the CAES acquisition is expected to provide future benefits. Therefore, to your other question, this does not establish a new baseline because these issues are temporary, and we are very confident in our projections for Aero margins.

Got it. And just following up on that, Vimal. So the sort of R&D hike, you think by the end of this year, kind of R&D to sales in Aero shouldn't be a headwind next year, and then CAES margins start to improve over the next year or so.

Yes. Both statements are true, and then the OE destocking issue also goes away because the rates will convert to the normal baseline. That's why I mentioned these are all transitionary issues. By the way, on the R&D spend, the R&D spend rise is not only in Aerospace. It's across all 4 segments of Honeywell. We feel continued confidence in our ability to accelerate organic growth through new products. We see part of that happening in Building Automation, pockets of Industrial Automation, Aerospace, we talked about wins. But overall, we have a meaningful acceleration of R&D spend for the right projects. And this is going to set up a new baseline for Honeywell for the future. So this is again a transitionary for the overall company. We don't expect that to repeat in the year ahead at the same level.

Can we just talk a little bit about UOP? And my question is very strong growth this quarter, but you're seemingly talking it down for the second half of the year. Can we just understand what verticals drove the upside? And what verticals are driving the downside if we could disaggregate it?

So I'll say, Andrew, for the second quarter, we had 2 favorable items. We had a big licensing agreement with a customer, which gave us strong growth. And also catalyst sales were much stronger in Q2. So some of the catalysts got pulled through from the second half to the first half. So that's more of a cycle of this long-cycle business. To the second part of your question, the impact we see is energy project spend is moving more to the right. Part of it is, I would say, economic uncertainty which got settled in and some of the regulatory items which got clarified with OB3 regulations. So we do believe they will settle. But clearly, we saw pressure on that for the rest of the year, which we have reflected in our guidance for ESS business and, to a certain degree, also on IA for process automation.

And I would just add that just looking at the OB3 and the IRA, that's mostly preserved for us. So it's not really a headwind for us into next year.

I got you. And then on Industrial Automation, just to follow up. So HPS, similar dynamics. So is it fair to say that when you say weakened demand and price cost deleverage in the second half in the slide that it mostly relates to HPS, and that's what's driving sort of slightly lower margin outlook there? Is that the key driver?

Yes. Primarily, I would say in case of HPS, the same energy projects, the projects part of the business will see a similar pressure. The services side remains strong. Mike, anything you want to add on the...

That's correct.

No, no. Absolutely right. I mean, in fact, we see much more balanced growth across the board. Now of course, the U.S. remains a leading growth, no doubt about it. But the headwinds we saw a couple of quarters last year, in particular on Europe and China, have subsided now. So the growth is more normalized across the globe, with the U.S. being the leading growth.

I just want to pick up on maybe the first couple of questions. Just on the energy project timing, I guess, is that mainly on the clean energy project? So is it just large process projects in general? And then maybe just the final point on Aero margins. It seems like tariff inflation should be better news today than it was back in April. So I'm just curious what additional inflationary pressures you see in Aero.

It's a favorable time for energy projects, and I’ll break it down into a few areas for you. LNG remains very robust. The business we acquired is performing exceptionally well, and we have a positive outlook on LNG. This will benefit our ESS division and process automation through our integrated strategy. Sustainable fuels projects have experienced the most delays, mainly due to policy uncertainties surrounding the IRA and its implications with OB3. However, recent clarifications in the last week should create positive momentum. In traditional refining and petrochemicals, we noticed increased spending on catalysts in Q2, with some projects accelerating, resulting in strong performance for that quarter. Despite this, we are observing a decline in demand as customers are being more cautious about making large catalyst investments in certain areas. Overall, we had the opportunity to participate in the recent OPEC meeting, and the outlook for the energy sector remains very optimistic across coal, gas, refining, and biomass-based products in the future. Thus, our overall outlook continues to be very positive. It feels like we’re just experiencing a normal cycle in the energy sector right now.

And then on the Aero question, what I would tell you is that if you look at tariffs, tariffs, when we incur tariffs, we pay them in 10 days. It's easy to pass tariffs as far as timing on short-cycle businesses. When it comes to Aerospace and our OE contracts, these matters take a longer time because you have to open the contract, and these contracts usually are set for 10 years and prescribed by sterner frameworks. So the team is working through it, and it will take them a little bit longer to get that price aligned with the cost, as we obviously keep in mind on how it will impact our customers.

And Mike, could you maybe just touch on the changes to the R&D tax expensing for tax purposes? You've got about $1 billion of deferred tax assets. It's on your balance sheet. So just how does that unwind over the next couple of years?

Yes, I would say it's definitely a net positive for us. Right now, we are evaluating it with our tax team, considering everything happening and how to best unwind the separation. I believe it will be a tailwind for us in 2026 and 2027. We will share more information as we move into next year. You are right, this is beneficial for us.

I am trying to understand the margin guidance for the year. You have provided some good details. I believe that to fall within the range, is the Building Automation segment expected to be close to 28% this year? Is that approximately correct?

I would say it really depends how you look at it and where you look at it. On the product side, obviously, the incrementals are extremely high for us right now. Projects are a bit lower, but I would say incrementals are quite high.

Yes. Steve, this is Sean. I would say, thinking about the full year, that's probably a little bit aggressive in terms of whether that business is capable of delivering a number like that. It has the capability of doing so.

It's fair to say, Steve, that BA will be the highest margin business in our portfolio in '25. So that will be a fair statement.

We have gained a lot of insights over the past three months. During our last discussion, we were actively assessing tariffs. Based on our recent guidance, I am quite confident we can meet those expectations. The third quarter is crucial for us. As we mentioned, some of the longer-term project timelines have shifted, and we've seen a slight decline in demand for catalysts. However, on a positive note, orders in Building Automation and IA short-cycle projects are performing better. Overall, we find ourselves in a position similar to where we were last quarter.

Guys, can we talk a little bit about Quantinuum? I mean, it looks like it's still bleeding a little bit of cash for you guys. But what are the hurdles? Specifically, what are you guys looking for to be able to get that to an IPO-ready situation?

Scott, we are committed to deconsolidate, and that plan remains unchanged. Currently, we are raising funds to capitalize the company ahead of the IPO. Specifically, we are seeking more commercial evidence to validate the revenue stream. Recently, we had a significant win in Qatar during the President's visit, where they announced an investment in Quantum infrastructure. Achievements like this enhance investor confidence in the revenue stream. I anticipate that the timeline for this is the end of 2027 at the latest, though there is a possibility we could move it forward. We are working with this timeline and have good visibility on our commercial progress leading up to that point. Additionally, we expect to reveal our plans for Quantinuum in the fourth quarter. We will keep our shareholders updated on our progress and share it more broadly.

That's helpful, Vimal. I want to address R&D spending. It's unusual for a company to increase R&D expenses before a breakup, so I'm curious if this indicates that the businesses feel they are lagging behind, or if it's just a coincidence. I'll leave it at that.

This reflects a message I've been communicating since last year about Honeywell's organic growth and the focus on enhancing our fundamentals. Our two main areas of focus are improving our processes—ensuring we're investing wisely and have the right talent—and we decided last year to speed up our R&D investments where we see growth opportunities. Hiring in sectors like Aerospace and Energy involves long timelines, so decisions made in June won’t see results immediately. Generally, we're increasing our R&D investments across all areas, with Aerospace seeing a slightly higher acceleration. I strongly believe this positions Honeywell for future organic growth as we're making strategic investments in the right areas. We've already started to see evidence of this growth in some segments, with more expected as we progress. I see these investments and organic growth as separate but complementary efforts, and we're better preparing ourselves to be a driver of organic growth compared to our historical performance.

Scott, I believe this is beneficial for us, considering our goals for top line growth and transitioning to higher growth sectors. This investment is advantageous for us and is expected to yield a high return on investment in 2026.

I should have mentioned that we always maintain our R&D spending at the median level. As the year comes to a close, I believe this will push us closer to the upper quartile. I'm confident that you'll see the results reflected in the investments we've made for growth.

If I could ask 2 Aerospace questions, please. The first one on aftermarket, the 7% growth decelerating from 15% in Q1 and lagging some of the early reports from peers. How do we think about what weighed on that growth? Was it Air Transport, Business Aviation? And how are you thinking about the full year there?

I would say that the aftermarket is normalizing for us. The range we observed in the second quarter aligns with our expectations for the second half. As we catch up with demand, we view this as a more typical rate moving forward. The hours remain fairly stable for both ATR and Business, and we see this as our new normal going forward.

Okay. And then if I could maybe hone in on the Aerospace OE decline once again, if that's possible. Why the destocking now? And it seems like deliveries are actually increasing. Was it related to one specific platform? Or is it inventory across multiple platforms?

The impact is mainly from North American platforms on the OE side. Last year, we were shipping a lot into our OE inventories, and now they're working through those inventories. They have a better understanding of how much safety stock they need. We're preparing for this temporary situation, and I believe that based on what I know today, it will start to normalize in the third quarter, and we should return to normal by the fourth quarter.

And then, Sheila, I would just add the nuance is not everything is the same inside of OE. And so electromechanical where we've had the supply chain challenges and continue to work towards making sequential improvement, whereas electronic solutions have been caught up for quite a while. And so you can see a little bit of a difference in terms of what those needs look like for customers between those 2 businesses.

I wanted to ask about portfolio actions. Vimal, you guys have remained quite busy here in the first half of '25 after you announced the separation in Q4 of last year. So should we assume that everything of size has been completed or announced at this point? And then just on some of the strategic reviews, I think I understand why PSS doesn't fit the Aftermarket business. But Warehouse is both automation and aftermarket-driven. So it does fit the characteristics that Honeywell is looking for. Can you just talk about why that one doesn't fit in the future portfolio?

Yes, thanks, Chris. To answer the first part of your question, we have completed our portfolio review that I initiated two years ago. From now on, we do not anticipate any significant portfolio exits. While we are a large company and things can happen, we have fundamentally finished this process. The decisions regarding Intelligrated and PSS were based more on sector considerations and the end markets we are interested in. Automation is a massive market with a total addressable market of $500 billion, providing us with substantial opportunities. We have established three verticals: Industrial, Process, and Buildings, and we are making strategic choices within these areas. We aim to focus on higher growth verticals to deliver strong growth for our shareholders. We believe that engaging in logistics and warehouse transport offers excellent potential, but these segments have shown varying growth rates that may not align well with our future portfolio. So we are making selective additions and subtractions. Although Warehouse Automation does provide a robust aftermarket, our decisions are primarily driven by our choices regarding end market participation.

I appreciate that. I want to follow up on Building Automation. There's been a remarkable turnaround in that area over the past year. Can you discuss the company-specific actions that contributed to this growth turnaround? Additionally, are we seeing revenue synergies from the significant security acquisition you made last year?

I think there are 3 strategies that are, by the way, going to be the strategy for new Honeywell as we unveil that in late 2026. First is how we make our mix towards higher growth verticals. So in the case of buildings, we are focused on 3 or 4 markets, hospitals, hotels, data centers, airports in high-growth regions. So one is pivoting more towards that. Action 2 is mining the installed base. We have a large installed base, how we mine it higher and deliver high single-digit growth in services. That's certainly working in Building Automation. And finally, the new product acceleration, to the comment I mentioned to Scott's question, we have elevated R&D even in Building Automation, and they are the most ahead in delivering higher growth with new products. So when you pull all 3 things together, we are participating in high-growth markets. We are mining our installed base better. We are turning more new products. That's becoming the driver for higher growth. The final point there is we had some pressure in some geographies. Like there was a drag in China. There's a drag in Europe in some pockets. Those have normalized now. So the Building Automation growth is double digits in North America, but like low single to mid-single in other different parts of the world. So that also helps because we don't have any pullbacks from some other geographies, which normalize our results here.

Vimal, can you give a little more color into what you're seeing in Defense and Space as it continues to accelerate here? I think the growth you've talked about in the past has been pretty balanced between the U.S. and international. But I think international defense spending is just starting to accelerate. So could you talk a little bit more about what you're seeing?

Yes. I think the Defense and Space growth is driven by both on the supply chain healing. Because it was last to heal, we have much more mechanical content in Defense and Space compared to Commercial. So that's certainly seen as part of our results. And on the demand side, the orders remain very strong, both domestically and international defense, which is our strength, is growing double digits, and it will remain so for many years to come. We see strength in Europe. We see strength in parts of Asia, like Korea, et cetera. So I think it's a combination of accelerated demand with the geopolitical circumstances in the world and the supply chain healing, which is giving us the performance in Defense and Space as we are demonstrating.

And then, Vimal, I want to ask you about a couple of other initiatives. You've been working on direct material productivity and harnessing AI. You seem to mention quite a bit today cost inflation you're facing across the portfolio. But I imagine a lot of that should have been expected. So update us on your ability to offset that with your initiative here around direct material savings and then maybe how sticky have your price increases been that you've made here this year.

I believe our pricing initiatives have proven to be quite effective. We have thoughtfully developed a strategy that safeguards our earnings while also maintaining volume, which aligns with our plans for 2025. It's a challenging balance, as we want to avoid raising prices to a level that would harm demand. Overall, we have successfully implemented our pricing strategy, with a minor exception in Aerospace OE due to the timing of contracts. Across Honeywell, our pricing execution has been strong. Additionally, our productivity improvements are significant, providing us with greater flexibility in pricing strategies while maintaining margins through productivity gains. Value engineering, especially with the integration of AI, is performing exceptionally well. We are using AI to streamline the design process, reducing what used to take months down to just a week, thus accelerating our savings for the year. I am confident that value engineering has become an important asset for Honeywell. We can rely on it for financial planning, allowing us to weigh pricing against volume not just for 2025, but in future years as well.

From a financial perspective, I am emphasizing with the team the importance of demonstrating consistent growth over a longer duration, as we discussed regarding our rolling forecast for six quarters. As Vimal mentioned, our primary focus is on both top line and bottom line growth. Teams are gaining better insights into managing factors such as price, volume, and mix, depending on their specific verticals and customer bases. Ultimately, we aim to establish a framework for delivering consistent results over time.

I was hoping to get some color on free cash flow. So you boosted the EPS guide, but cap free cash flow guidance, the same. Just are there any puts and takes related to free cash flow for the second half you'd like to highlight?

Sure. So we have a pretty broad range on cash flow, the $5.4 billion to $5.8 billion. If you look at the moving pieces, I would say our inventory got a little bit worse just because of what we are facing right now in Aero. That hopefully will normalize in the second half. On the other hand, we have a little bit of tailwind from stronger collections and higher sales and pricing. So net-net, we're the same. We're really focusing on moving towards that 90-plus percent conversion in 2026.

Great. And then just a related question. Anything in the second half on price cost that you'd particularly want to highlight here?

So I think, generally, if you think about our guidance, our price probably, vis-a-vis the last time we talked, we're probably 100 bps better. So if thought about price of 1% to 2%, now it's 2% to 3%. Volume is probably going to be 1% to 2%. And then from a cost price standpoint, short-cycle businesses will offset. And then Aero, like I said earlier, it is still working through their OE contracts, and that should normalize going towards year-end and early half of next year.

I just want to make sure I understand the relationship between the tariffs and the demand contingency. And so it seems like the moratorium is you kind of kept the kind of tariff rates at a higher rate. And if the moratorium were to become permanent, I'd assume that maybe the demand contingency gets released to some degree. Just trying to make sure that I understand that correctly. And are there any specific segments that you could see benefiting in the second half of the year if, in fact, tariffs come in at lower rates permanently?

Sure. The way I look at the second half, if you think about the short-cycle businesses, they're managing through it quite well. We haven't seen any pre-buy or demand disruption there. So Building Automation is doing well. IA is doing better than what we thought it was going to do. It's really about our energy business and these orders and how they convert into revenue because we're at the point now of the year where we get an order on an energy project, it takes a while to engineer it. So revenue might fall out of the year. So we're just managing that piece, looking in the first half of next year and then also monitoring our catalyst orders, which have been a little bit softer from a forecast standpoint, vis-a-vis what we expected. And that's really just a behavior that our customers can exhibit. When they have sometimes a choice, they might delay those catalyst orders for a quarter or 2 and still operate their refineries and their facilities with just at the lower output.

Got it, Mike. That's helpful. And then maybe just my quick follow-on on the strategic alternative announcement on PSS and warehouse. Kind of looks like the demand environment there is getting a little bit worse again, so kind of bouncing along the bottom. I guess, Vimal, I know that we can't bank on any outcome here. But I guess, how are you thinking about the timeline for a decision to be made on that piece of the business?

We started the process just last week after our announcement. By the end of the year, we should have a clearer understanding of the strategic options available to us. There are several possibilities to consider, and we expect to choose the direction we will take soon. It’s difficult to provide a specific timeline at this stage, which is why we're referring to strategic options. However, I believe we will offer more clarity on the timeline before the year concludes. My wish is to have a streamlined portfolio when the spin is finalized, which is one reason we initiated this strategic review now to align the timing. Nevertheless, as you can understand, these processes do not allow for precise timelines at this moment.

Maybe just starting with some of the order trends that you guys saw throughout the quarter. How would you say that orders progressed each month and then into July? It sounds like maybe energy was the only area where you saw a discernible difference. But if you talk a little bit about IA, BA more on the short cycle side through the quarter, that would be helpful.

Overall orders increased by 6%, which is encouraging as it outperformed the first quarter. Aero drove the growth in orders, particularly in Defense, Space, and Commercial sectors. Building Automation saw low single-digit growth due to tougher comparisons, and we didn't observe significant changes there. For Industrial Automation and Energy Storage Solutions, we experienced strong demand in the first two months, although June was somewhat weaker. However, entering July, orders are still strong, suggesting June may have been an anomaly. Overall, I believe the order momentum is stable, and the second quarter has shown improvement over the first. Based on our team's projections for the third quarter, we do not foresee any significant concerns regarding a slowdown in order rates.

Okay. Got it. That's really helpful. And then there's a lot of discussion around what you guys are doing from a portfolio perspective, but I don't think we talked much about future M&A plans. And you guys have clearly been a lot more active recently. How does the M&A pipeline look today? And what is your appetite for doing more deals before the spin happens?

So Nicole, we absolutely are building our pipeline. We are going to be slightly slowing down given the activity we have or the spins in motion and some acquisition integration work we are doing. But we are not slowing down on building the pipeline. The pipeline remains strong, and we'll execute opportunities as they become available. I think what gives me more confidence is that we're getting much more comfortable not only doing the normal deal but also acting like a sponsor to do carve-out deals. We have demonstrated that capability repetitively now over the last 2 years. And that additional skill increases our optionality now because we are willing to go to other partner, suggest an optionality for them to create value for both sides. And that gives me confidence that we can remain active on the portfolio side in the years ahead. So more to come. We'll continue to build our portfolio as a higher priority item under my leadership.

Thank you. I want to again once express my deep appreciation to our shareholders, our Honeybee team, and our customers for their continued support during the transition time for the company. And we are excited for the future and look forward to sharing more of our progress as we deliver on our commitment. Before we close out today's call, I want to take a moment to remember our pivotal former leader of Honeywell that we lost this week, Larry Bossidy. Larry was the Chairman and CEO of AlliedSignal and led the company's acquisition of Honeywell in 1999. He was a forefather of operational excellence that Honeywell is known for today and served as the combined company's Chairman and CEO until his planned retirement in 2000. He then came out of retirement briefly to offer his leadership again as Chairman and CEO during a challenging period of our company. And under his very deep leadership, the Board hired Dave Cote as Honeywell's new CEO, and setting up the company for the next 2 decades of tremendous value creation. He was a remarkable leader, a committed family man. And our thoughts are with his family and friends at this point in time. So thank you again, everyone, for listening, and please stay safe and healthy.