Sean Meakim:

Thank you. Good morning and welcome to Honeywell's second quarter 2024 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, Greg Lewis. 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 business 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 2024. 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.

Greg Lewis:

Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, starting in the second quarter, we began excluding the impact of amortization expense for acquisition-related intangible assets and certain acquisition-related costs, including the related tax effects from segment profit and adjusted earnings per share. We believe this change provides investors with a more meaningful measure of our performance period to period, aligns the measure to how we evaluate performance internally and makes it easier to compare our performance to peers. In addition, our second quarter building automation results incorporate approximately 1 month of impact from the acquisition of Access Solution. With that, let's discuss our results. We delivered another strong quarter in a dynamic macro environment, meeting the high end of our organic sales range, landing above the midpoint of our segment margin guidance and exceeding the high end of our adjusted earnings per share guidance. Second quarter organic sales were up 4% year-over-year, supported by 16% organic growth in Aerospace Technologies, driven by another quarter of double-digit growth in both commercial aerospace and defense and space in addition to double-digit growth in our Building Solutions business Honeywell grew volumes by 1% for the second time in the past 10 quarters, and we expect further volume acceleration in the second half. Segment profit grew 4% year-over-year and segment margin contracted by 10 basis points to 23% as expansion in energy and sustainability solutions was offset by mix pressures in our other three businesses. Earnings per share for the second quarter was $2.36, up 6% year-over-year and adjusted earnings per share was $2.49, up 8% year-over-year, driven primarily by segment profit growth. A bridge for adjusted EPS from 2Q '23 to 2Q '24 can be found in the appendix of this presentation. Orders grew 4% year-over-year with a book-to-bill of 1, led by growth in BA, ESS and IA, including pockets of short-cycle strength with advanced materials and building products growing both year-over-year and quarter-over-quarter. Orders growth supported a 5% year-over-year increase in backlog to maintain our record level of $32 billion. Free cash flow was approximately $1.1 billion, roughly flat year-over-year versus the second quarter of '23 as higher net income and improved working capital from reduced inventory levels were offset by the timing of higher cash taxes. We continue to expect working capital becoming a more meaningful tailwind in the coming quarters as we unwind the multiyear buildup of inventory. This quarter, we were able to effectively reduce our days of supply each month in all our businesses by utilizing our accelerator digitalization capabilities, improving demand planning and optimizing production materials management, which gives me confidence that we are starting to systematically bend the curve. As Vimal discussed earlier, we made significant progress on our capital deployment strategy this quarter, allocating $6.4 billion to M&A, dividends, share repurchases and capital expenditures, including closing our $5 billion acquisition of Access Solutions. When combined with the anticipated closing of CAES and Air Products LNG businesses later this year, we are on track to deploy a record $14 billion of capital in 2024. Now let's spend a few minutes on the second quarter performance by business. In Aerospace Technologies, sales for the second quarter were up 16% organically, with double-digit growth in both defense and space and commercial aerospace. This marks the 13th consecutive quarter of double-digit growth in commercial aviation enabled by sustained growth in global flight activity and increased shipset deliveries. Defense and space growth accelerated in the second quarter as we continue to see robust global demand coupled with supply chain improvements, enabling an incremental volume unlock. Aerospace supply chain improvements remain on track as output increased by 14% in the second quarter, the eighth consecutive quarter of double-digit output growth. Segment margin in Aerospace Technologies contracted 60 basis points year-over-year to 27.2%, driven by expected mix pressure within our original equipment business, partially offset by commercial excellence net of inflation. For Industrial Automation, sales fell 8% organically in the quarter, primarily due to lower volumes and warehouse and workflow solutions, but overall sales improved 1% sequentially. Process Solutions revenue grew 1% in the quarter as another quarter of double-digit growth in our aftermarket services business was partially offset by headwinds in Thermal Solutions and Smart Energy. Our Sensing and Safety Technologies business declined modestly year-over-year, but saw sequential growth in both orders and sales, a positive indicator going forward. In Productivity Solutions and Services, sales improved year-over-year when excluding the impact of the $45 million quarterly license and settlement payments that ended in the first quarter. Orders in PSS grew double digits for the third consecutive quarter, and overall IA orders grew high single digits, led by growth of over 20% in Warehouse and Workflow solutions, driving an overall book-to-bill of 1.1. Industrial Automation segment margin contracted 90 basis points to 19% due to lower volume leverage and the end of payments under the license and settlement agreement in Productivity Solutions and Services. Excluding the impact of that agreement, margins expanded in the second quarter. Moving to Building Automation. Sales were up 1% organically as another quarter of excellent performance in our long-cycle Building Solutions business led the way, while we continue to work through lower volumes in our Building Products portfolio. Solutions grew 14% in the quarter with 20% growth in projects as a result of strength in data centers, health care and energy. Sales grew double digits sequentially, including one month of benefit from the acquisition of our Access Solutions business, highlighted by strong execution and solutions and further progress in fire and building management systems within building products. Double-digit orders growth was a highlight for building automation in the quarter, growing both sequentially and year-over-year in both solutions and products, resulting in an overall book-to-bill ratio of 1.1. Segment margin contracted 60 basis points to 25.3% due to mix headwinds and cost inflation, partially offset by productivity actions and commercial excellence. In Energy & Sustainability Solutions, sales grew 3% organically in the second quarter. Advanced Materials increased 8% year-over-year due to continued strength in fluorine products. UOP sales declined 4% as previously noted, difficult year-over-year comps in gas processing equipment projects more than offset solid growth in refining catalysts and aftermarket services. Orders were a highlight in ESS as book-to-bill was 1.2 in the second quarter, the third consecutive quarter of a book-to-bill above 1.0 primarily on greater than 20% growth in advanced materials and more than 60% growth in sustainable technology solutions. Segment margins expanded 200 basis points on a year-over-year basis to 25.2%, primarily driven by productivity actions. We continue to execute on our proven value creation framework underpinned by our Accelerator Operating System. This, combined with ongoing benefits from our long cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current environment. Now let's turn to Slide 6 and talk about our third quarter and full year outlook. Our commercial and operational discipline have enabled us to deliver on our organic growth commitments, with continued long-cycle strength and modest sequential growth within certain of our short-cycle businesses, particularly in advanced materials, building products and sensing and safety technologies. While we are encouraged by our performance year-to-date and our robust backlog, the back half will remain influenced by the dynamic macroeconomic backdrop and varying levels of channel improvement across our portfolio. Given these dynamics and our recent acquisition announcements, we are increasing our 2024 top line expectations. We forecast sales to be in the range of $39.1 billion to $39.7 billion, which includes overall organic sales growth of 5% to 6% for the year, up from 4% to 6% previously, increasing the midpoint from our prior guidance. The sales forecast also includes the acquisition of CAES and Air Products LNG businesses, which we expect to close in the third quarter. Collectively, acquisitions are expected to add approximately $800 million to Honeywell sales in 2024. Sequential growth in the third and fourth quarters across most of the portfolio will be driven by continued progress in the aerospace supply chain, seasonal uplift from UOP in addition to other long-cycle businesses and areas of modest short-cycle improvement, which will vary depending on the end market exposures. For the third quarter, we anticipate sales in the range of $9.8 billion to $10 billion, up 4% to 6% organically with the benefit of roughly $300 million in acquisition-related revenue. Moving to segment margin as growth in our long-cycle businesses outpaces the short-cycle recovery, supporting the raise to our top line range, we expect to see a bit less favorable mix within some of our SPGs in the short term. However, from a long-term perspective, executing on robust demand for projects and original equipment sets our business up for a long tail of high-margin aftermarket revenue streams by expanding our vast installed base. When incorporating the impact of recently announced acquisitions, we now anticipate our overall segment margin to be in the range of 23.3% to 23.5%, flat to down 20 basis points year-over-year. Overall segment profit dollars will still grow significantly in 2024, between 6% and 9% as margins will continue to be supported by price cost discipline and productivity actions, including our focus on reducing raw material costs. From a segment perspective, Energy and Sustainability solutions and Building Automation will lead the group and margin expansion, followed by modest contraction for industrial automation as well as aerospace as a result of the CAES acquisition. For the third quarter, we anticipate overall segment margin in the range of 23.0% to 23.3% and down 30 to 60 basis points year-over-year and in line with the first two quarters of this year due to quarterly variability in aero mix, the anticipated close of CAES and normal seasonality within energy and sustainability solutions. Now let's spend a few minutes on our outlook by business. Looking ahead for Aerospace Technologies, we expect momentum from the first half to carry over into the second half as robust orders and increases in factory output will support growth. In commercial original equipment, we anticipate the second quarter to be our low point of the year for growth and some related supply chain challenges abate. We see strong sequential and year-over-year growth through the third and fourth quarters, particularly in air transport as build rate strength drives volume progression. In commercial aftermarket, we anticipate continued sales momentum, though growth rates will come down slightly in the back half as comps get more difficult. For defense and space, the global geopolitical backdrop, coupled with our robust order book and increased investments in our supply chain will provide support for sequential growth in the third and fourth quarters. As a result of these dynamics in a strong first half, we now forecast defense and space growth to be double digits for the year. We still expect Aerospace to lead Honeywell in 2024 with organic sales growth in the low double-digit range. For segment margin, the dynamics remain comparable to 2022 and 2023 as higher sales from lower margin products are partially offset by volume leverage. However, we now expect 2024 aero margins to decline modestly year-over-year due to the impact of the CAES acquisition. We anticipate the third quarter will be the low point in the year, reflecting the closing of CAES and less favorable quarterly mix. Industrial Automation, we're benefiting from solid orders momentum in most of our long-cycle businesses, while our short-cycle businesses are showing varying signs of sequential progress. In the third quarter, we expect modest sequential improvement in IA and a return to year-over-year growth in the back half. Second half sales growth will be led by Process Solutions, which will see further strength in our aftermarket services businesses and improvement in the Smart Energy and Thermal Solutions businesses that weighed on first half results. In Productivity Solutions and Services, sales will grow sequentially from here. Orders have grown double digits for three straight quarters in PSS, giving us confidence in our outlook for the second half and into 2025. Sensing and safety technologies will improve sequentially as we benefit from the fading effects of distributor destocking. Warehouse and workflow solutions will grow sequentially as we move through the trough in warehouse automation spending and should end the year around $1 billion in sales. As a result of these dynamics, we expect flattish organic sales growth in 2024. Margins will expand in the second half as we implement productivity actions and benefit from volume leverage through long-cycle seasonality and further short-cycle progress. Moving on to Building Automation. In the third quarter, we expect Building Solutions to outpace Building Product sales. In products, we anticipate sales to improve modestly sequentially in the third and the fourth quarters, supported by 2Q's favorable order trends. However, the magnitude remains dependent on the ongoing normalization of channel inventories. In Solutions, both projects and services orders grew over 20% in the second quarter, providing support for additional revenue growth in the back half and into 2025. Projects has been a standout, and we forecast double-digit growth for the year. As a reminder, the Access Solutions acquisition has now been incorporated into our guidance within Building Products. For the year, we continue to expect organic sales growth of low single digits. For segment margin, while we still anticipate expansion year-over-year, incremental shift in mix toward higher sales in our Building Solutions business will slow the pace of that expansion near term. Finally, in Energy and Sustainability Solutions, encouraging fundamentals in our end markets will drive a favorable growth outlook in the third quarter and the full year. In the third quarter, we expect sales to be roughly flat year-over-year and down slightly sequentially with typical seasonality in fluorine products as we exit the summer months, offsetting improvement in Electronic Materials and UOP. Notably, the second quarter marks the last of significant year-over-year unfavorable comps from large gas processing equipment projects in UOP. For the full year, sustained strength in catalysts in conjunction with an incremental back half recovery in electronic materials will support growth for ESS. Our confidence in our sustainable Technology Solutions business remains unchanged as a strong demand profile will drive robust growth for the year. Additionally, we expect the closing of our acquisition of Air Products LNG business to take place in the third quarter and have included this impact in our guidance. For the year, our organic growth outlook for ESS is low single digits. Margins should improve half over half, particularly in the fourth quarter as a result of typical catalyst reload seasonality, leading to full year margin expansion for ESS. Moving on to other key guidance metrics. Pension income will remain roughly flat to 2023 at approximately $550 million. As a result of the acquisitions and corresponding increase in interest expense, we now anticipate net below-the-line impact to be between negative $700 million and negative $800 million for the full year and between negative $185 million and negative $235 million in the third quarter. This guidance includes repositioning spend between $150 million and $225 million for the full year and between $30 million and $70 million in the third quarter as we invest further in high-return projects to support future growth and productivity. Adjusted effective tax rate will be around 21% for both the full year and the third quarter. We anticipate average share count to be approximately 655 million shares for both the full year and the third quarter as we have already achieved more than 1% share count reduction for the year, but we maintain balance sheet flexibility to deploy additional capital to achieve the highest shareholder returns. As a result of these inputs, we now anticipate full year adjusted earnings per share to be between $10.05 and $10.25, up 6% to 8% year-over-year. We expect third quarter earnings per share between $2.45 and $2.55 up 3% to 7% year-over-year. We expect free cash flow to benefit from progress on the multiyear unwind of working capital as we continue to extract more value from our digitization efforts through Accelerator. In addition, we'll continue to fund high CapEx projects, high-return CapEx projects focused on creating uniquely innovative, differentiated technologies. As a result, our free cash flow expectations are now in the $5.5 billion to $5.9 billion range, up 4% to 11%, excluding the impact of prior year settlements and commensurate with the revision to net income growth. So in summary, we delivered a strong first half of the year and anticipate continued top line acceleration in the second half as we benefit from strength in our long-cycle businesses. Our rigorous operating principles will enable us to execute through short-term mix pressure, and we remain confident in our long-term algorithm with a strong second half 2024 exit rate on revenue intact, giving us nice momentum into 2025. So with that, let me turn it back to Vimal on Slide 7.

Sean Meakim:

Thank you, Vimal. Vimal 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 and one related follow-up. Operator, please open the line for Q&A.

Stephen Tusa:

Hi, good morning.

Stephen Tusa:

Can you guys just help us parse out the moving parts here? I mean, the below-the-line costs are higher, obviously, on interest, quantinuum costs are higher and you raised organic, but you're also including the revenue from acquisitions and then you're, I think, cutting core profit. So I just really want to get down to like what the size of the segment core profit reduction is, if any? And then just help us with the acquisitions and how much they're influencing the segment profit numbers?

Stephen Tusa:

Sorry, what's the profit contribution from these acquisitions that are now in the numbers relative to what you guys had thought in early June? And what is the cut to the core segment profit ex quantinium, you know, dollar wise...

Stephen Tusa:

Okay. Okay. got it. Okay. Thank you.

Sean Meakim:

Thank you, Steve.

Julian Mitchell:

Hi, good morning. Maybe just wanted to follow up on a couple of points there. So the segment profit dollar guide has come down, I think, about $100 million to $150 million. So I just wanted to check, Greg, what you're saying is, and that's a full year number, I think. You're saying that around two thirds of that is core dilution just from more long cycle mix versus short cycle? And then a third of it is just the newer acquisitions closing in Q3. Those are sort of negative EBITDA [ph] if you like. I just wanted to check that. And then when we're looking at...

Vimal Kapur:

Julian, the point I will add there is the margin changes, not that something has gone shift in the businesses. It's the mix within the businesses, which is causing this margin changes. Like in case of aerospace, we continue to have OE versus aftermarket, market mix, in case of building automation, more solution, less products, similar dynamics in case of industrial automation. So I want to make it clear that underlying businesses remain strong. We are seeing margin expansion. We are seeing productivity. Our fixed cost remains very attractive. So it's mixed within the businesses. We are getting more longer-term long-cycle businesses, which in a way also solidifies our second half outlook. We are not factoring a significant uptake in the short cycle. We are factoring some but to which we have visibility. But majority of our outlook for second half is built upon long cycle businesses, continued growth in aerospace, sequentially quarter on quarter ramp up of UOP in the second of the year, specifically catalyst businesses, strong backlog and other solution businesses. So then all that comes together, it just makes the margin mix to what we have guided it to.

Vimal Kapur:

That's right because of the dynamics of longer cycle businesses growing way greater than shorter cycle, it -- the margin mix is unfavorable. But if you roll it up to 2025 that factor should play off because this is not an underlying business margin issue. That's the point I'm highlighting. It's not that we are dropping margins somewhere, we're having price cost issue, we are not getting productivity. Our fixed cost has gone up. None of that is true. We are, in fact, getting excellent productivity and margin expansion. It's purely driven by mix within the businesses.

Greg Lewis:

Just keep in mind, short -- in most cases, our short cycle margins, think about them as being 30 points higher than our long-cycle project solution-oriented margin. So that's really what you're seeing. Revenue in its totality organically, roughly the same, but carrying a lower margin rate along with it.

Greg Lewis:

Yes. I mean you should think that we're expecting closure of those deals in the third quarter, but likely to be mid- to late part of the third quarter. So there is some level of that step up. Remember, we always have a big step up in aero in Q4, and we expect that to also be true. We also have a lot of visibility into the ESS rev streams in Q4 as well. So catalyst reloads and so forth. So it is on the higher side of the revenue step-up for sure. But we feel good we've interrogated that quite deeply, and we feel good about the credibility around that outlook. Now the other thing I would just mention is, keep in mind, if you just take a step back for a minute on the M&A side. In the early days of these acquisitions, that's -- there's going to be some meaningful integration costs on the front end. But again, beyond 2024, these deals are nicely accretive as we get through that integration cost period. So again, good -- I think it's a very nice adder to the portfolio. And if you think about the work that was trying to do on improving the quality of the portfolio, this is all good news for '25 and beyond.

Julian Mitchell:

Very helpful. Thank you.

Operator:

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Greg Lewis:

Sure. So most of the cut is in IA, BA [ph] for sure. That is where the short-cycle, long-cycle mix changes is most pronounced for sure. And yes, we're getting incremental segment profit on these new acquisitions. As I mentioned, there's going to be some integration costs on them early on and then net of the interest cost that we're going to bear. That's where we talk about, I don't know, $0.04 to $0.05 roughly of degradation in the EPS guide associated with that.

Greg Lewis:

Yeah. Integration costs get incurred inside of segment profit unless there's a repositioning project associated, but there are...

Greg Lewis:

There are ongoing integration costs that go into the segment profit of the business that we're acquiring into that SPG.

Greg Lewis:

I don't think we're giving you a precise answer on that. There's a range around inside of what I was sharing. So I'm not going to give you like a point in precise number.

Operator:

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.

Greg Lewis:

Hi, Scott.

Vimal Kapur:

Yes, Scott, actually, one of the highlights for this earnings story is our orders performance in second quarter. Our orders grew double digit in Building Automation, high single in Industrial Automation and double-digit in Energy & Sustainability solution. So that has put our backlog now to $32 billion, up 5%. And that's really what is now flowing into our revenue of second half with a strong book-to-bill, which we did in second quarter. By the way, the forecast we have for the orders for the second half is also very strong. So essentially, we have pivoted towards our guide toward long cycle on the strength of the backlog and the forecast we are getting on the long-cycle businesses because it gives us more assurance and more visibility, and that's why we called out book-to-bill, which is nearly one. And we feel that this is standing on a very strong footing at this point of time.

Vimal Kapur:

Yes. No, I would say -- I will call out the two biggest regions for us, China and Middle East. I would say China, Honeywell continues to do well, thanks to aero and energy businesses we have here. We scored high single in last year. We are trending towards similar rates this year. Short cycle businesses are challenged there, too, like the economic cycle of China, as we all read. Middle East remains a counterpoint for us. It is growing very strongly, specifically Saudi Arabia, also UAE, we see a strong momentum. And in a way, we are counting on that reversion in the times ahead to the slowdown of China progressively every passing year. Europe, actually, we are seeing a recovery. We have seen good revenue progression for Honeywell in first half of the year. So probably bottom is behind us, and that's how we are looking at times ahead for Europe for us. So that's kind of for some high-level comments on geography.

Vimal Kapur:

Thank you.

Andrew Obin:

Yes, good morning.

Greg Lewis:

Hey, Andrew.

Vimal Kapur:

I mean I would say we absolutely are looking to make aero more of a longer cycle growth sector for Honeywell. Aero has always faced cycle, up cycle, down cycle, and we are really positioning it to grow high single for until next 5 to 7 years. And there's an organic growth work which is happening around it through new products. But equally importantly, the acquisitions which we made of Civitanavi and CAES e, both are targeted to defense segment. And defense segment, we are bullish on the growth occurring in defense. Our backlogs are growing very nicely there. So we're really pivoting towards higher growth segments within aerospace to maintain our growth rates there in the times ahead. And I remain very both bullish and optimistic on how aero business is going to perform in the next several years ahead.

Vimal Kapur:

I mean I think the macros are reality, Andrew, at the end of the day, that's something which I don't control. So long-cycle businesses are performing well because the segments we serve are attractive, energy transition, aerospace, and that's certainly helping us. I think short cycle businesses are reverting back. I'm not suggesting that they are contracting, but the reversion is more at the lower end of our initial estimate at start of the year versus at the mid or upper end of it. That's only subtle [ph] difference. And the swing between the mix of short and long is the difference in the margin because we are raising the low end of our guide of revenue, which shows our confidence in the overall business, organic growth, because my comment right from the day I started is organic growth is my highest priority and we are delivering on that. Our guide is 5 to 6. My goal will be, of course, to deliver on the upper end of it. And I would argue in the very first year of my inception in the job, that's not a bad outcome and we'll strive for that subsequent year. I don't leave any impression that short cycle is less important, long cycle is more important. I think it's just a derivative of how markets are performing and how we are performing in the markets at this point of time.

Vimal Kapur:

Thank you.

Deane Dray:

Thank you. Good morning, everyone.

Deane Dray:

I was hoping to get some commentary if you're seeing any of the election worries delaying customer decisions, and it's not really related, but any impact from the CrowdStrike fiasco early in the week, anything ripple through your businesses?

Deane Dray:

That's great to hear. And just a second question. I know we're still early in the deal integration, but where would you highlight some of the revenue synergy opportunities? What would be the biggest and potential timing?

Deane Dray:

Thank you.

Operator:

Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.

Vimal Kapur:

Good morning, Sheila.

Vimal Kapur:

Sheila, we are constantly calibrating our output with all the key OEMs on a 12 months earning frequency. That has been a process for a while now. I would say that based on the recent adjustment path, both Airbus and Boeing, we have calibrated our volumes aligned with them. It's not a major change. But there's some small change, specifically on the electronics side, where we don't have much past dues. But the change is not material to aerospace and not material to Honeywell. But our guide does factor changes, which have been signaled by both Airbus and Boeing recently.

Vimal Kapur:

This year, it's going to be up strong double digits...

Sheila Kahyaoglu:

Okay. And then just on the profitability, you have about 100 bps of contraction, I think, in the second half despite more typical selection credit dynamics. So how do we think about profitability in the second half and how that Cobham acquisition changes that?

Sheila Kahyaoglu:

Thank you.

Andy Kaplowitz:

Good morning, everyone.

Andy Kaplowitz:

Vimal or Greg, just maybe double-clicking on the short cycle businesses that are resulting in the lower expected organic margin in the second half. I think you said building products orders have been improving. Are they just improving more slower than you thought and you saw weaker-than-expected June? Is that one of the issues? And then maybe the same question on productivity solutions are sensing. What are you assuming for these businesses in terms of rate of recovery now?

Andy Kaplowitz:

Helpful, Greg. And then obviously, you stepped up M&A activity considerably. Do you see the recent rate of M&A continuing? Is the M&A market conducive to that? And then you've talked about divestitures or ramping that up. Can you offset dilution that you might eventually get from divestitures to still grow that 10% in terms of -- in line with your longer-term algorithm?

Andy Kaplowitz:

Appreciate it, guys.

Greg Lewis:

Thanks.

Joe Ritchie:

Hey, guys. Good morning.

Vimal Kapur:

Hey, Joe.

Vimal Kapur:

Yes. They're coming down versus what we had anticipated and again, mainly because of the back half margin performance expectations. But we still expect that on an overall basis, we will make progress in BA in particular. We ought to see a little bit of improvement. It's just not going to be as robust as we had thought in the beginning of the year. So think about that in 10s of basis points as opposed to 100 basis points. And on the IA side, similarly, we expect to make some progress in the year, but it's probably going to be in the 10s of basis points over all for the full year as opposed to 100 basis points type of range.

Vimal Kapur:

Keep in mind, inside of IA, we are overcoming the very accretive license payments relative to the PSS business that were a nice lift for us, and now we're going to experience three quarters of that loss this year and one quarter of it next year.

Vimal Kapur:

The pricing Joe is trending in the direction we have signaled. We are at a rate of about 3%, and we expect second half to be a little slightly stronger. The punchline is our price cost is just about neutral, and our productivity is very strong, which is giving us the margin expansion across our businesses. And what -- as I explained before, the margin rates at EPS level is just mix within the businesses itself. But pricing remains at the right level. And we do expect this 3% - I've spoken before that the era 1% price is over, so we always should expect something greater than that, and we are demonstrating that in 2023.

Vimal Kapur:

Electronics, I would say, remains hot. That's where we continue to see elevated level of pricing, but others are I would say - and labor. Labor is and will remain a high elevated inflation category for us.

Vimal Kapur:

Thank you very much.

Vimal Kapur:

I want to express my appreciation to our shareholders for your ongoing support and again to our Honeywell future shapers, who are driving differentiated performance for our customers. Our future is bright, and we look forward to sharing our progress with you as we continue executing on our commitment. Thank you for listening, and please stay safe and healthy.

Before I hand it over to Greg, let's turn to Slide 4 to review some of our exciting recent wins. Let me take this opportunity to highlight our recent commercial wins and strategic actions we are taking that demonstrate innovation across our portfolio and support alignment of 3 compelling megatrends:

automation, future of aviation and energy transition, all underpinned by robust digitalization capability and solutions.

Sean Meakim:

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

Scott Davis:

Guys, in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period?

Gregory Lewis:

Warehouse automation.

Scott Davis:

Warehouse. Sorry, Vimal, warehouse.

Vimal Kapur:

Scott, I would say it in two parts. I have committed that we will take action on about 10% of our portfolio, which doesn't fit with the 3 megatrends, and we are absolutely taking action on that. We will make progress one step at a time because that constitutes a few businesses and no one big thing.

Gregory Lewis:

Yes. And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Civitanavi announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10 billion this year with just what we know about, and we're not done.

C. Stephen Tusa:

Can you just talk about maybe just sequentially how you see the earnings trajectory in 3 and 4Q?

C. Stephen Tusa:

So I guess just normally, you guys are up, I think, a little bit 2Q to 3Q. You're up like, I think, I don't know, low to mid-singles from 1Q to 2Q. Should we think about like just to kind of frame this, the ramp because it is from a timing perspective, is it 2Q to 3Q? What do you think?

Operator:

Our next question comes from the line of Julian Mitchell with Barclays.

Gregory Lewis:

Yes. So thanks, Julian. I mean the ramp for the company actually is in IA and in BA, and then we'll get sort of a nice ramp in the fourth quarter in ESS as well. So it really does come back to all the products businesses inside of each of those portfolios.

Vimal Kapur:

Only thing I'll add, Julian there, is that in IA, the HPS continues to perform very well. It's going to mirror the performance it had in 2023. So similar growth rates. The bookings remain very strong. Aftermarket is performing extremely strong. And that's the biggest constituents of the newly framed IA business.

Julian Mitchell:

That's helpful. And then just my quick follow-up on the buildings division margins. So I think they're guided to be up maybe 100 bps or so for the year, above the firm-wide margin expansion. First quarter clearly starting down -- tricky down over 100 bps. So the slope of that, maybe help us understand kind of how do we think about the buildings margins in the second quarter? How quickly we start to see that flip to margin expansion in the rest of the year, please?

Andrew Obin:

Good to hear that short cycle is finally starting to move.

Andrew Obin:

Just a question on defense and space. That picked up very nicely, nice lever. Can you just talk specifically, and I know there are a lot of programs there. But what is driving that? And what's the outlook specifically for defense and space into the second half because this is a very, very impressive performance there.

Vimal Kapur:

So very bullish on UOP. I would say this business is headed for a great time ahead. The traditional projects continues to remain active while the new energy project on sustainability, a strong pipeline, and we see decisions now maturing. You saw in one of our exciting wins, we mentioned here new way to make SAF with the biomass now, which is a new technology we have launched.

Operator:

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Vimal Kapur:

Okay. So I think there are 3 questions there, Sheila, I'll try to pick up.

Vimal Kapur:

No, no problem. So the overall, we do expect commercial OE to grow double digits, both on the -- the commercial OE to grow double digits and aftermarket. So we'll maintain the strong growth trend as is indicated in our guide for the rest of the year.

Joseph Ritchie:

I just want to really focus my questions on margins. So just making sure that I understood some of the comments already. As you think about the rest of the year, I guess, how much of the margin expansion that you're expecting in both BA and IA is really dependent on short cycle accelerating?

Gregory Lewis:

Yes. Joe, I mean, as it relates to the mix, I'm not going to bore you with the details, but it's actually quite deep between the different OEs, the shipsets within each of them and so forth. So that is going to migrate up and down during the course of the year as it goes. So there's not one particular thing happening there.

Nigel Coe:

Sorry to bore you in another -- obviously, aero margins were great. What's the timing of Boeing shipments to customers affected there? Just curious if there's a timing issue there. But mainly my question is around 2Q margin dynamics. And thinking about that drop-off in the Zebra royalty income in the second quarter, are we looking at maybe margins, I don't know, down like 300 basis points year-over-year in the second quarter for IA? And therefore, the balance of the segment margin performance is actually probably more like on trend? So just any more color on the 2Q margins by segment would be helpful.

Nigel Coe:

Okay. And then any color on aero margins in second quarter?

Operator:

Our next question comes from the line of Andy Kaplowitz with Citi.

Vimal Kapur:

Yes. So I would say, if I go around the corner, we continue to see strength in our high-growth regions, specifically in India and Middle East. Those remain strong. China also did well for us. We grew high single digits on the strength of our aero and energy business. So net-net, we do see strong -- continued strong trend in emerging markets.

Andrew Kaplowitz:

Great. And I just want to follow up on the process business. I think you mentioned delays. Is it you're seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business. Maybe talk about it a little bit more.

Jeffrey Sprague:

Vimal, just back to kind of the ongoing portfolio review, and you said it could be many things, not one big thing. Can we take that? Or should we take that to mean as we look at kind of your revenue disaggregation, right, there's kind of 11 buckets we track and model to, that none of those entire sleeves would be gone at some point in time in your thought process?

Vimal Kapur:

So Quantinuum is in, I would say, exciting times. We completed a major event of pre-money. We got valuation in excess of $5 billion, got more people invested there. We talked about that in the last earnings call.

Operator:

Our next question comes from the line of Brett Linzey with Mizuho.

Gregory Lewis:

Sure. So in our clean energy business, we had been operating as in a trading manner, and we had shut down the major facility some number of years ago in that business, and we restarted it. And so as you can imagine, that restart has some fits in it as we go through the course of the year to get to stabilization. And that's really the -- if you look at ESS margins, I'm not going to give you precise numbers. But if you back out the impact of that, we would have been roughly flat, maybe slightly up on a margin rate basis year-on-year in the first quarter.

Brett Linzey:

All right. Got it. And then just one more on M&A. Just thinking about the velocity there. I know last May, you talked about the pipeline prioritization. I think you had 90 deals looking at within your markets, and that's still at the top 10. I guess how is that 90 compared today? I mean it sounds like the enthusiasm, it sounds a little bit more optimistic about some actionability. But maybe just talk about some of the pipeline and the movement there.

Sean Meakim:

Thank you, Jamila. Good morning, and welcome to Honeywell's Fourth Quarter 2023 Earnings and 2024 Outlook Conference Call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. 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 fourth quarter and full-year 2023, discuss our outlook for the year and share our guidance for the first-quarter and full-year 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapur.

Greg Lewis:

Thank you, Vimal. And good morning, everyone. Let me begin on Slide 6. As a reminder, we're reporting fourth quarter and full year 2023 results under our legacy segment breakdown and providing our 2024 outlook using the new segment structure which went into effect in January. With that, let's turn to the results. We had a strong finish to another challenging year delivering on our 2023 commitments. Despite a dynamic macro backdrop, Honeywell's disciplined execution and differentiated solutions enabled us to deliver on our full year organic sales, segment margin, earnings and free cash flow commitments. Full year organic sales were up 4% year-over-year, achieving the low end of our long-term financial growth algorithm and beating the midpoint of our initial guidance, despite a 5% drag from lower safety and productivity solutions sales. Segment profit grew 8% year-over-year with segment margin expansion of 100 basis points to 22.7% above our long-term annual expansion target of 40 basis points to 60 basis points and 10 basis points above the high end of our initial guidance. Adjusted earnings per share grew 5% or 11% when excluding the impact of lower non-cash pension income year-over-year. We generated free cash flow of $4.3 billion at the high end of our guidance range, or $5.3 billion excluding the after-tax impact of one-time settlements. We deployed $8.3 billion of capital, including $3.7 billion to share repurchases, $1 billion to CapEx, $700 million to M&A, and $2.9 billion to dividend payouts, which we increased for the 14th time in the past 13 years. Fourth quarter organic sales were up 2%, led by the 11th consecutive quarter of double digit growth in our commercial aerospace business. Segment margin expanded by 60 basis points to 23.5%, driven by expansion in performance materials and technologies and aerospace. Earnings per share for the fourth quarter was $1.91, up 26% year-over-year, and adjusted earnings per share was $2.60, up 3% year-over-year. An adjustment to our estimated future Bendix liability at the end of the year and our annual pension mark to market adjustment drove the difference between earnings per share and adjusted earnings per share. Excluding a $0.13 non-cash pension income headwind, adjusted earnings per share was up 8%. Bridges for adjusted EPS from both 4Q 2022 to 4Q 2023 and FY 2022 to FY 2023 can be found in the appendix of this presentation. Free cash flow was $2.6 billion with free cash flow margin of 27.4% versus 23.1% in 4Q, as working capital was a greater source of cash compared to the prior year. We deployed $2.6 billion of cash flow to share repurchases, dividends, high-return CapEx and M&A. The fourth quarter was another strong one for our backlog, which grew to a new record of $31.8 billion, up 8% year-over-year and 1% sequentially, due to strength in Aero, PMT, and HBT. Orders were up 1% in the quarter led by growth in commercial Aero, PMT, and HPT, including orders growth in building products. This setup gives us confidence in our 2024 outlook which I will discuss in a few minutes. As always we continue to execute on our proven value creation framework which is underpinned by our Accelerator operating system. I'm confident in the strength of our backlog, the tailwinds we're seeing across our long cycle end markets, and our ability to navigate a dynamic operating environment, which we have demonstrated year after year. Now, let's spend a few minutes on the fourth quarter performance by business. Aerospace for the fourth quarter was up 15% organically year-over-year, with 20% growth in commercial aviation. Our commercial original equipment business grew over 20% on increased deliveries to both air transport and business and general aviation customers. Commercial aftermarket had another double-digit growth quarter led by the strength in air transport market as increased flight hours continued to drive demand. Defense and space sales grew again in the fourth quarter as the ongoing global focus on national security continues to drive robust demand, while we continue to work through supply chain challenges which govern that growth. Aerospace book-to-bill of around 1 in the fourth quarter is more evidence that demand continues to outpace supply, an encouraging sign that as the supply chain unlocks we're well situated to capitalize on our advantageous position in the market. Segment margin expanded 20 basis points to 28% as a result of commercial excellence and volume leverage, which were partially offset by cost inflation and mixed pressure in our original equipment business. Performance material and technology sales grew 4% organically in the fourth quarter, advanced material was up 6%, returning to growth in the quarter, driven primarily by a double digit increase in fluorine products. In HPS, sales were up 4% organically as we saw continued strength in life cycle solutions and services and smart energy. UOP sales grew 1% organically as a result of robust seasonal demand in petrochemical catalyst shipments, partially offset by lower volumes in gas processing. Our sustainable technology solutions business finished the year with over 30% sales and orders growth in the fourth quarter. Orders for PMT grew across all three businesses. Segment margin expanded 200 basis points to 24% as a result of productivity actions, favorable business mix, and commercial excellence net of inflation. Safety and productivity solutions sales decreased 24% organically in the quarter, primarily as a result of lower volumes and warehouse and workflow solutions and productivity solutions and services. The projects portion of our Intelligrated business remains around trough levels as investments in warehouse automation continue to be subdued. However, our pipeline of new projects is robust and we are committed to delivering innovative solutions to a widening array of customers in this market, positioning Honeywell to win in an eventual recovery. In our productivity solutions and service business, we continue to work through the effects of distributor de-stocking, but over 30% orders growth in the quarter provides some confidence that we are near the end of that cycle. Sensing and Safety Solutions remains relatively resilient despite short cycle challenges in a few end markets. Segment margin in SPS contracted 290 basis points to 17.3%, driven by lower volume leverage and cost inflation, partially offset by productivity actions and commercial excellence. Building technology sales were down 1% organically as growth in our long-cycle building solutions business was offset by modest declines in short-cycle building products. Solutions grew 6% in the quarter, led by high single-digit growth in building services, driven by strong execution and past due backlog burndowns. Orders were strong across the board in the fourth quarter, as every business grew year-over-year. Segment margin contracted 90 basis points year-over-year to 23.9% due to cost inflation and mixed headwinds, partially offset by productivity actions and commercial excellence. Growth across our portfolio was supported by another quarter of double-digit sales growth in Honeywell Connected Enterprise, which remains accretive to overall Honeywell. Our offerings in connected industrial, cyber, connected buildings, life sciences and connected aircraft, all grew by more than 20% year-over-year in the quarter. For the full-year, HCE sales and profit [fall] (ph) through by double-digits, which is an indicator of the power of our strong software franchise. With 2023 now in the rear-view, we're excited about Honeywell's favorable setup to accelerate growth in 2024. Let's turn to Slide 7 to talk about our outlook for the year. We expect the environment to remain dynamic, but the power of our Accelerator operating system enables us to move quickly and decisively to drive growth, protect margins, ensure liquidity and position ourselves well to deliver on our commitments and I'm confident we'll do that again in 2024. Our end-market exposures across aerospace, automation and energy remain favorable with continued commercial aviation fleet growth, higher defense investment, heightened focus on automation, due to labor scarcity, intensifying energy demand and decarbonization goals and increased infrastructure spending. These compelling vertical tailwinds are underpinned by the ongoing demand for digitalization and our record level backlogs, which will support robust organic growth for the business. This outlook is somewhat tempered by the uncertain timing of an eventual recovery in the short-cycle as markets return to normalcy, which we see as the swing factor to our sales outcome for the year. But we're excited by the prospects of this re-acceleration in the coming quarters. Overall, we have a strong setup that will drive growth within our long-term financial framework for sales, margin, earnings and cash in 2024. Our robust balance sheet and strong cash generation will support accretive capital deployment. And while we're happy with our recently-announced transaction, we will continue to build-on our accretive M&A pipeline as we optimize the portfolio. Now let's turn to Slide 8 to discuss how these dynamics come together for our 2024 guidance. Given the backdrop, in total for 2024, we expect sales of $38.1 billion to $38.9 billion, which represents an overall organic sales growth range of 4% to 6% for the year with a greater balance between volume and price. Our guide anticipates some short-cycle recovery to begin in the second-half of the year, albeit likely at different rates for our various end-markets, creating a somewhat back-half weighted outlook. Additionally, we remain keenly focused on new product innovation, maintaining our leadership position in high-growth regions, monetizing our vast installed-base and strengthening our software franchise, which we expect to provide resiliency through the year. We also expect the Aero supply-chain to continue to improve gradually sequentially throughout the year as it did in 2023. For the first-quarter, we anticipate sales in the range of $8.9 billion to $9.2 billion, flat-to-up 3% organically. We expect our overall segment margin to expand 30 basis points to 60 basis points next year, supported by improving business mix, continued price-cost discipline and productivity actions, including our precision focus on reducing raw-material costs. Similar to last year, we expect building automation margins to expand the most as we benefit from productivity actions and build-on continued commercial excellence, followed by industrial automation and energy and sustainability solutions. For aerospace, volume leverage will cover continued investment in our innovation platforms and in the supply-chain to unlock volume. Keeping our margin rate within a tight band of our recent levels, while enabling us to deliver robust year-over-year profit growth. For the first-quarter, we expect overall segment margin in the range of 21.9% to 22.2%, down 10 basis points to up 20 basis points year-over-year. Importantly, our guidance for both the first quarter and the full-year for 2024 does not consider the planned acquisition of Carrier's Global Access Solutions business. We anticipate the closing of the deal by the end-of-the third quarter, and we'll update our guidance accordingly at that time. Now let's spend a few minutes on our outlook by business. In Aerospace Technologies, we expect that robust demand will remain throughout 2024 as our record level backlog provides a catalyst for growth. In commercial original equipment build rates continue to trend upwards, driving increase in chipset deliveries, primarily in air transport. On the commercial aftermarket side, we expect to see volume strength as flight hours continue to improve, particularly in wide-body as international travel normalizes further. In defense and space, supplies -- supply-chain constraints not demand will be the limiting factor on volume growth. However, our output growth of 18% in 2023 across Aero gives us confidence in our ability to execute and we anticipate modest sequential improvement throughout the year. For overall Aerospace, we expect organic growth in the low-double-digit range in 2024. While we again expect Aero to be our fastest top-line grower, margins will likely remain at comparable levels to 2022 and 2023, as higher sales of lower-margin products are mostly offset by increased volume leverage. In the first quarter, we expect to see low-teens organic growth year-over-year as the progress we've made on supply-chain throughout 2023, coupled with our record backlog will drive continued meaningful year-over-year output growth. For Industrial Automation, the timing of short-cycle recovery will play a key factor in 2024 results and are -- and will likely lead to a back-half weighted year. In Process Solutions, we expect to further build on the success we experienced in 2003 with another strong year of growth, particularly in our projects and aftermarket services business. Our sensing and safety technologies and Productivity Solutions and Service businesses will benefit as the effects of distributor destocking fade throughout the year. In warehouse and workflow solutions, we expect to move through the trough of the warehouse automation spending cycle, capitalizing on our robust pipeline and easier year-over-year comps as the year goes on. As a result of these dynamics, we expect IA sales to be flattish in 2024. Segment margins should expand, particularly in the second-half as short-cycle recovery leads to volume leverage benefits. In the first quarter IA will remains sequentially stable, while challenging comparisons in warehouse automation demand that is still near trough levels will weigh on year-over-year growth, leading to high single-digit to low-double-digit sales declines year-over-year. Turning to Building Automation, we see a -- we expect to see our long-cycle businesses again outpace our short-cycle portfolio, particularly early in 2024. Overall, the timing of the short-cycle recovery will be one of the key drivers of performance in the year and likely lead to stronger results in the second-half. Both projects and services will grow on the strength of existing backlog and tailwinds from aftermarket services. We are seeing encouraging signs in our core verticals, both in the US and internationally as institutional investment in developing regions will be an engine for growth in BA. We anticipate our short-cycle products businesses will benefit as inventory levels normalize. For Building Automation, we forecast full-year sales growth to be low-single digit year-on year. Despite this, we anticipate BA will be the segment with the largest margin expansion, primarily driven by productivity actions and commercial excellence net of inflation. In the first-quarter we expect sales growth to be similar to the fourth quarter as destocking reaches its late stages. In Energy and Sustainability Solutions, the macro-environment will provide puts and takes in 2024. UOP growth will be led by strength in our Catalysts and Services businesses, while our Process Technologies business, modular equipment growth will likely be offset by volume headwinds from challenging comps in LNG equipment. In Sustainable Technology Solutions robust demand will lead to another record year of growth. In Advanced Materials, strength in the broader fluorine products business, particularly in our [indiscernible] portfolio will be offset by expected volume decline in our legacy stationery products, due to well-telegraphed quota reductions from the US. Within the rest of Advanced Materials, improving short-cycle demand over the course of 2024, particularly from semiconductor fabs will support the top-line. Overall, we expect [VSS] (ph) sales to be flat-to-up low-single digits for the year compared to 2023. Margin should improve in 2024, though not as much as in our other segments, thanks to both commercial excellence and productivity actions. In the first-quarter, we expect sales to be down mid to-high single-digits year-over-year as we work-through challenging comps, particularly in our gas processing business and prepare for higher activity levels as the year progresses. Moving on to other key guidance metrics. Pension income will be roughly flat to 2023 at approximately $550 million, which is modestly more positive than compared to our outlook comments from the third quarter earnings call, as the interest-rate environment became slightly more favorable towards the year end. As a reminder, pension income is a non-cash item, given our overfunded pension status will ensure no incremental contributions are needed. This is a great position to be in for our employees, both former and current and our shareholders. We anticipate net below-the-line impact to be between negative $550 million and negative $700 million for the full-year and between negative $140 million and negative $190 million in the first-quarter. This guidance includes a slight improvement in year-over-year repositioning spend, which will be between $200 million and $300 million for the full-year and between $60 million and $100 million in the first-quarter, as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax-rate to be around 21% for the full-year and around 22% for the first-quarter due to timing of discrete payments. We anticipate average share count to be around 656 million shares for the full-year as we execute on our commitment to reduce share count by at least 1% per year through opportunistic buybacks. As a result of these inputs, we anticipate full-year adjusted earnings per share to be between $9.80 and $10.10, up 7% to 10% year-on year. We expect first-quarter earnings per share to be between $2.12 and $2.22, up 2% to 7% year-over-year. Included in the appendix is a bridge that walks the elements of 2024 adjusted earnings per share from 2023. You'll see the primary year-over-year drivers are higher volumes and increased productivity, with lower share count offsetting below-the-line changes, which are primarily from higher net interest expense. On free-cash flow, we expect to grow in-line with earnings, excluding the after tax impact of last year's one-time settlement from derisking our balance sheet. We will begin the multi-year unwind of working capital, where our digitalization capabilities through Accelerator are improving demand planning and optimizing production and materials management. In addition, we see several compelling growth-oriented capital investment opportunities and expand -- expect to fund high-return projects focused on creating uniquely innovative, differentiated technologies. As a result, we expect free-cash flow to be in the $5.6 billion to $6 billion range, up 6% to 13% excluding the impact of prior year settlements. Our 2024 free-cash flow bridge is in the appendix and summarizes the drivers of year-over-year growth with net income growth being the largest factor, followed by working capital improvements, partially offset by modestly higher-growth CapEx spend. Regarding capital deployment, while we are focused on executing our robust M&A pipeline, opportunistic share repurchase at highly-attractive valuations, which you saw in the second-half of 2003 as we accelerated our buyback in 3Q and again in 4Q remains an important part of our framework, a vote of confidence in Honeywell's performance and that will continue to be true in 2024. So in summary, while we're cautious on the macroeconomic backdrop, our leverage to the key macro trends of Aerospace, automation and the energy transition, underpinned by digitalization, which will be complemented by our record backlog and accelerated operating system, give us confidence in delivering another strong year in 2024. So with that, let me turn it back to Vimal on Slide 9.

Sean Meakim:

Thank you, Vimal. Vimal and Greg are now available to answer your questions. We ask you please be mindful of others in the queue by only asking one question and one related follow-up. Camilla, please open the line for Q&A.

Steve Tusa:

Hi, good morning.

Greg Lewis:

Good morning Steve.

Greg Lewis:

You're talking about for the full year?

Greg Lewis:

Sure. I mean, if you look at the guide we're giving for Q1, it's actually not that different from 2023. So, as we progress through the year, we're going to expect to see the short cycle revenue inflection more likely between 2Q and 3Q than 1Q and 2Q in terms of the level of -- that acceleration. And so, I think the EPS will follow along with that. I mean, the last two years, our EPS has been more back-end weighted in third and fourth quarter than our prior history. I think it's going to look fairly similar this year.

Vimal Kapur:

Yes, Steve. So we had a quarter 4 finish in which our buildings orders were grew across all segments, both in building products and in building solutions. So that puts us in a good setup for 2024. To your specific question, the setup we have allows us to see sequential progress in the short cycle as the year progresses, and the front end of the year will see more strength in our solution side of the business. Europe remains challenged, as it was, over the last several quarters. And in US, we are in the late innings of destocking of the distributor inventories. So that's the overall setting. What excites me about the business is the work we have done on new products, that's going to position us well, our strength in high growth regions, which is performing exceedingly well. So net-net, we remain pretty confident on growth in building solutions, building automation business in 2024, specifically margin expansion and are confident of delivering strong results there.

Julian Mitchell:

Hi, good morning. Maybe just wanted to try and think about the progress through the year from a segment margin standpoint. I guess you've had seven quarters in a row of good year-on-year expansion. Q1 is sort of flat and then the year is up close to that sort of 50-bips mark. So you're exiting the year in Q4 maybe with margins up 100-bips plus. So just trying to understand starting Q1 at zero, Q4 up 100, where does kind of the sharpest improvement come on a segment basis as you go through the year? And do we think about that margin year-on-year improvement firm wide as just being pretty steady as we go through 2024?

Vimal Kapur:

What I'll add, Julian is, if I look at the full year picture for the margin expansion, what we have committed 30 basis points to 60 basis points, there are three broad drivers. The pricing will remain of the order of 3%. Our price cost will not be a headwind. We remain very confident on our pricing execution. Second, we will see good productivity in 2024. Material productivity remains strong in Q4 and we expect that to roll up on a full year basis in 2024. We also have made good progress in executing AI in our operation, and that will be also a source of productivity in 2024. And finally, the short cycle recovery point, which Greg made, as that unpacks itself, the margin accretion we have on that is pretty substantial. So when you put it all together, we remain extremely confident on our margin expansion algorithm.

Greg Lewis:

Yeah, well, again, we don't guide that specifically, but you should expect that this exit rate diminishes as the year progresses, and as we get into the back half of the year, that turns to be something that is likely positive on productivity solutions and services and will be flattish on warehouse and workflow solutions. And perhaps up, we'll see how the year progresses on the project side. An important thing to keep in mind is inside of the warehouse business, in particular, we've got actually a very rich mix now on the aftermarket services business. So while the projects orders will really be the thing that will govern the top line progression overall, we see double digit growth continuing in the aftermarket bit, which of course is where we capture the value from the install base. So we feel very good about the progression of that as we go through the year.

Greg Lewis:

And Julian, if I could add just one last thing there. From a modeling perspective, keep in mind it's not just a dynamic embedded in our model for 2024, second half likely stronger than the first half. It's also that second half 2023 was weaker than first half 2023. So both of those will influence the year-over-year growth rate as you're talking about exiting 2023 versus exiting 2024.

Operator:

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Your line is now open.

Vimal Kapur:

Good morning.

Scott Davis:

Good morning. Guys, can we take a step backwards at least and just walk around the world a little bit on what you're assuming? I assume, Vimal, you probably have pretty good read on what's going on in China. It's been a tough region for a lot of your peers, but you don't need to really focus on Aerospace because it's a different dynamic. But for the other businesses, perhaps just a little bit of color on what you're expecting, any differences in 2024 geographically versus 2023. That'd be helpful. Thanks.

Scott Davis:

Okay, that's helpful. And then a little bit of a nuance here. Would you classify the Carrier deal as a bolt-on? It seems like a little larger than a bolt-on by my definition, but kind of curious how you think about it, because clearly in your slides you mentioned bolt-on deals being the focus and if we were to expect other kind of like billionish…

Greg Lewis:

And keep in mind, at $5 billion, it's something like 4% of our market cap. So reasonably, it's not a huge bet as it relates to that as well. Obviously, very different world than when our market cap was half that 10 years ago.

Greg Lewis:

Thank you.

Andrew Obin:

Yes, good morning.

Andrew Obin:

Hey, just looking at UOP, I was a little bit surprised by the growth in the quarter. I would have thought with STS being strong, and I know you sort of gave us, I think it was a gas product, but can you just tell us what kind of visibility do you have on this business accelerating into 2024? Because it is sort of, I guess, that's what you're guiding to, but just a little bit more granularity there. Thank you. Sure.

Greg Lewis:

Yes, and I would also just zoom out. I mean, we talk about some of the variability in this business, and PMT has always got some of the highest variability with UOP being a big part of that. Keep in mind, we grew sales in UOP for the year, something like 8%. Very, very healthy. And we've also grown orders somewhere in that same neighborhood, I think 2% for the year, but with 13% in the catalyst business. So we've come off some big comps with the large LNG projects. Overall, this is a very healthy business with a very healthy backlog. So -- and as you said, the STS business provides a really nice catalyst on that new aspect of it, but we feel very good about where UOP is at this stage.

Vimal Kapur:

Yes. Thanks, Andrew. Yes, we do see recovery in semis modestly increasing. Every month is becoming modestly better. So that's part of our forecast for 2024. We also saw in Q4 recovery in some segments of chemicals in short cycle. And we expect that to roll over in 2024. So the short cycle recovery on a broader Honeywell portfolio is not a one event. So it's going to happen in different portions. So chemicals happened late Q4 and we expect that to continue. So all-in-all, advanced material should have a better year in 2024 compared to what we had in 2023.

Vimal Kapur:

Thank you.

Nigel Coe:

Thanks. Good morning. Thanks for the question. And Vimal, congrats on the Chairman role. There's lots of modern questions, so here's a few more. Well, a couple more. Pricing, I'm not sure if you've caught up price, but maybe if you just talk about what you've [indiscernible] pricing in your revenue bill. But it seems that we're entering the year with two of the segments down pretty heavily. Maybe just talk about how you see that break back to growth for IA and ESS. Is that in the second quarter, is it more second half loaded? And perhaps maybe talk about what you've seeing in the order rates to maybe support the view that we are at the bottom in some of these markets?

Greg Lewis:

Yes, maybe just in the last point on pricing, we talked about 4% for 2023. That's exactly where it came in. And the more balanced view of price versus volume in our model for 2024 is really 3% pricing. And that's going to be, to Vimal's point, I think price cost neutral to maybe slightly positive for the year. So we feel very good about our ability to deliver on that. We've talked about that at length in the past. I think our capabilities in that area have been very strong and we continue to be confident going into next year.

Greg Lewis:

Yes. Well, first of all, it's not nearly home, as I'm sure you can appreciate. So we're not sitting here counting any chickens. To be honest, Nigel, I think we need to wait and see exactly how all the rules, first whether it happens and how they set the rules. As you can appreciate, all the specifics matter a lot in this area. So no, we're not guiding anything special about that. We'll wait and see exactly what happens and then interpret that and integrate it into our view when it becomes a real thing.

Operator:

Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Vimal Kapur:

Hey, Sheila.

Vimal Kapur:

Yes. So Sheila, we expect the overall low double-digit guide includes the continued high growth rate of OE, as we saw in 2023. That will repeat itself in 2024. Also expect double-digit growth in aftermarket. Defense, we perform at low single to mid-single digit in 2023, the supply chain constraint remains the biggest handle there. And as we make progress, we expect it to perform in that range in 2024 also. But the biggest unlock for us is supply chain. We have demonstrated a strong performance in 2023. We expect a good start of the year and we'll unpack the year as the things progress.

Sheila Kahyaoglu:

Okay, great. And then if I could ask 1 more. You've been asked every angle in terms of revenue growth acceleration. Outside of [indiscernible], what do you need to see in the other three segments to hit the high end of guidance? Is it just all based on short cycle recovery and the timing of that, or is it some additional price capture? If you could maybe talk about that.

Sheila Kahyaoglu:

Great. Thank you.

Andy Kaplowitz:

Good morning, everyone.

Andy Kaplowitz:

Vilma, I just wanted to follow up on a commentary that you're on track to exceed the $25 billion of capital deployment guidance from 2023-2025. Obviously, you announced the Carrier deal, but does that commentary suggest continued more aggressive capital deployment? Does your M&A pipeline support that? And then could you update us on the progress in divesting the 10% of the sales you talked about previously?

Greg Lewis:

Yes, maybe just to put numbers on Andy. As we showed in that slide, we've been doing $8-ish billion per year. The simple math for 2024 says just with Carrier, that number is 10 going in with just enough share repurchase to buy back the creep. So we're going to be sitting at 18 through two years towards the 25 plus number. So the high confidence that we're going to be above that level just with the math.

Vimal Kapur:

Look, I mean, there are -- there is a volume growth there, which will continue and the volume leverage gets offset by the OE mix, which I talked earlier, the OE mix remains strong. But we are also ending investing into aerospace. The volume growth is not coming accidentally. We have invested into our supply chain operations, supplier recovery, which is demonstrating the continuous volume growth occurred in 2023 and 2024. So when you put those facts together, that really drives the margin forecast for Aero at this point.

Vimal Kapur:

Thank you.

Peter Arment:

Thanks. Good morning, Vimal and Greg. Greg, just a quick one. You mentioned in just kind of the legacy segment SPS, you were talking about warehouse, the pipeline of kind of in the projects business, that there was some signs and there was some -- at least some improvement there. Maybe if you just give us a little color there just because it's -- obviously it's been a -- that that particular area has had a big downturn here.

Peter Arment:

Very helpful color. Thanks. I'll leave it at one.

Operator:

Thank you. And our next question will come from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Vimal Kapur:

Good morning, Joe.

Greg Lewis:

Yes. So, Aero is probably on the mid to lower end of that, just given all the contract nature of their business and the other businesses, the other three segments are going to be a bit higher than that overall. So that's really, without being too specific, that's sort of directionally or notionally, I just think about it.

Vimal Kapur:

No, as I mentioned before, we expect the front end of the year growth to be more driven by solutions side of the business. We are carrying forward meaningful backlog, both in projects and services. And as the year progresses, we expect short cycle recovery to be the key factor for growth as the year passes along. And net-net, we expect low single digit growth in building technologies, but strong margin expansion. Our commercial excellence actions are in place and we remain confident that we're going to have a meaningful progress in the year, both on growth and margin expansion.

Joe Ritchie:

Helpful. Thank you guys.

Vimal Kapur:

Thank you. I want to thank all our shareholders for your ongoing support and our Honeywell colleagues who continue to enable us to outperform in any environment. Our future is bright and we look forward to updating you on our progress as we execute on our commitments. Thank you very much for listening and please stay safe and healthy.

Sean Meakim:

Good morning, and welcome to Honeywell's third quarter 2023 earnings conference call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the third quarter, share our guidance for the fourth quarter and full year 2023 and provide some preliminary thoughts on 2024. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to our CEO, Vimal Kapur.

Greg Lewis:

Thank you, Vimal, and good morning, everyone. As Vimal outlined, we delivered another strong quarter in a dynamic macro environment. Third quarter sales grew 2% organically, led by double-digit organic sales growth in commercial aviation, defense and space, and process solutions. Commercial success in aerospace, which drove 18% year-over-year growth in the third quarter, was once again a bright spot for Honeywell. Our short-cycle businesses continued to show signs of stabilizing sequentially. Encouraging fundamentals persist across most of [PMT's] (ph) end markets, which led to another quarter of 3% year-over-year growth despite more challenging comps as we entered the second half. As expected, our long-cycle warehouse automation business remains around trough levels, which led to overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 6% across the portfolio. Our backlog remains at a record level, ending the third quarter at $31.4 billion, up 8% year-over-year, driven by double-digit orders growth across our long-cycle businesses. Sequential improvements in supply chain constraints led to past due backlog reductions in our short-cycle businesses, while demand continues to outpace output in Aero, a bullish signal of the underlying robustness of that business. An improving cost position and favorable business mix due to significant growth in our high-margin Aerospace business, among others, enabled us to expand segment margins by 80 basis points year-over-year to 22.6% and achieve the high end of our guidance. On cash, we generated $1.6 billion of free cash flow, down 18% year-over-year, due to the timing of cash tax payments and higher net working capital as strong Aerospace sales performance drove up our receivables balances year-over-year, so we improved collections on our past due balances. Throughout this quarter, we accelerated our share buyback program, more than doubling the amount of shares repurchased compared to the second quarter. We feel great about the future of Honeywell and believe in our next leg of transformation and we'll continue to opportunistically buy Honeywell shares at attractive valuations. Now, let's spend a few minutes on the third quarter performance by business. Aerospace sales for the third quarter were up 18% organically with double-digit growth in both commercial aviation and defense and space, the strongest growth quarter for Aero in over a decade. Commercial aviation growth was led by strength in the air transport aftermarket where increased flight activity globally continues to drive demand. Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers. Defense and space sales inflected in 3Q, growing 18% organically, and orders grew over 30% year-over-year for the second consecutive quarter as we see the impact of increased global focus on national security come through. While the aerospace supply chain remains constrained, we are continuing to see modest sequential improvements, which enabled us to increase our output and convert our record backlog into sales growth. For example, this was the third consecutive quarter with a 20% year-over-year increase in original equipment and spare shipments. While these gains in output are encouraging and leading to sales acceleration, demand continues to outpace supply. This is evidenced by our Aerospace book-to-bill of around 1.3 in the third quarter. Segment margins in Aero were flat year-over-year as increased volume leverage and commercial excellence offset cost inflation and mixed pressure in our original equipment, as expected. Performance Materials and Technologies sales grew 3% organically in the third quarter, led by HPS, which saw double-digit growth for the fourth consecutive quarter. Process solutions sales grew 11% organically, driven by continued strength in our projects business and lifecycle solutions and services. In UOP, sales grew 6% organically, led by gas processing solutions and petrochemical catalyst shipments. We continue to see robust demand in our sustainable technology solutions business within UOP as orders grew triple digits for the third consecutive quarter and sales grew at strong double-digit rates. In advanced materials, sales decreased 8% organically, driven primarily due to the continued expected macro-driven softness in our electronics, chemicals, and life science businesses and challenging year-over-year comps. Sequentially, segment margins expanded 40 basis points, while on a year-on-year basis, segment margins contracted 50 basis points to 22.1% as a result of lower volumes in advanced materials. Safety and Productivity Solutions sales decreased 25% organically in the quarter, primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services. The project's portion of our Intelligrated business is around trough levels in the current low-investment warehouse automation environment, but our pipeline remains robust, and successful execution of our sales strategies resulted in double-digit year-over-year growth and over 50% sequential growth in orders in the third quarter. Additionally, the aftermarket services portion of the business continues to deliver solid double-digit sales growth. In productivity solutions and services, we are working through the effects of distributor de-stocking, but believe we are nearing the end of that cycle. Sensing and safety technologies was also impacted by short-cycle softness, but this business continues to remain relatively resilient. Segment margin in SPS contracted 120 basis points to 14.5% as a result of volume de-leverage, partially offset by our continued operational improvements and commercial excellence. Turning to Honeywell Building Technologies, sales were flat year-over-year in the quarter. Our long-cycle building solutions business continues to outpace our short-cycle building products. Building solutions grew 4% organically, led by high-single-digit growth in building projects, driven by strong execution, particularly in energy projects. Orders for building projects were also substantial in the quarter, up nearly 20% year-over-year, and resulting in a book-to-bill ratio of approximately 1.2. On the product side, sales decreased modestly as a result of relatively soft demand for security products. Segment profit remained a bright spot for the business, continuing to grow as a result of productivity actions and commercial excellence. All in, HBT's segment margin expanded 110 basis points to 25.2%. Growth across the portfolio continues to be supported by accretive results in Honeywell Connected Enterprise, providing further evidence of Honeywell's strong software franchise across our businesses. Overall, organic growth of approximately 20% in the third quarter was supported by strength in connected industrial, connected buildings, cyber security, and connected aircraft. Orders growth above 20% in the quarter remains a powerful indicator of the continued robust demand for HCE offerings. In October, we held the latest installment of Honeywell Connect, where we conducted 29 technology demonstrations to a group of 200 customers. We launched three new products, featured several product enhancements, and showcased advanced intelligence solutions using AI and generative AI technology. One highlight from the event was the introduction of a suite of cybersecurity solutions, including Honeywell Forge Cybersecurity Plus, Cyber Insights, and Cyber Watch, supported by the acquisition of SCADAfence in August, leading to new sales opportunities in as early as the fourth quarter. Overall, this was a great result for Honeywell. Our operational execution enabled us to grow third quarter earnings per share to $2.27, up 1% year-over-year on an adjusted basis. Segment profit drove $0.15 of improvement in earnings per share, the main driver of our EPS growth. Excluding the $0.14 pension headwind, EPS was $2.41, up 7% year-over-year. A bridge for adjusted EPS from 3Q '22 to 3Q '23 can be found in the appendix of this presentation with all the details. Finally, as Vimal mentioned earlier, we continue to leverage our healthy balance sheet, deploying $2 billion in the quarter, bringing the year-to-date total to $5.7 billion as we execute on our capital deployment strategy. So, overall, Honeywell's operating playbook continues to deliver strong results, and our best-in-class Honeywell value creation framework will enable us to drive compelling growth in earnings and cash for quarters to come. Now, let's turn to Slide 5 to discuss our fourth quarter and full year guidance. At this stage in the year and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we're narrowing our full year guidance ranges for sales and EPS while increasing the midpoints of our segment margin expectations. Our demand profile remains healthy with record backlog and favorable orders performance. While we continue to monitor the timing of short-cycle recovery, we are confident in our ability to deliver on our commitments. For the fourth quarter, we anticipate sales to be between $9.6 billion and $9.9 billion, up 3% to 7% organically, driven by continued strength in commercial aviation, defense and space, process solutions, and UOP. We anticipate organic sales growth in Aero, PMT, and HBT in the fourth quarter. For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by $200 million for a new range of $36.8 billion to $37.1 billion, representing 4% to 5% organic growth for the year. This reflects continued solid execution in our long-cycle business, while we awaited demand acceleration in some of our short-cycle businesses. Turning to segment margin, we anticipate the fourth quarter to be between 22.9% and 23.2%, flat to up 30 basis points year-over-year and up sequentially as we continue to benefit from improving business mix and our productivity actions. For the full year, we are also raising the low end of our segment margin guidance by 10 basis points for a new range of 22.5% to 22.6%, representing 80 to 90 basis points of year-over-year expansion. This improvement is driven by HBT, SPS, and PMT, which are all expected to expand margin. Now, let me walk you through the expectations for each segment in a little bit more detail. Looking ahead for Aerospace, we're very pleased with the continued improvements in the aero supply chain that are allowing us to capitalize on our record backlog. In 4Q, we anticipate another quarter of strong sales growth, both year-over-year and sequentially, in commercial aviation and defense and space. In commercial aviation, we expect most of the sequential growth to come through increased original equipment volumes, though commercial aftermarket will also deliver healthy year-over-year growth with demand driven by continued improvement in air transport flight hours. In defense and space, we are coming off back-to-back quarters of 30%-plus orders growth, which has bolstered our already sizable backlog. And we see another quarter of double-digit growth to end the year. With our growth momentum from the third quarter tearing over into 4Q, we now expect Aerospace sales to be up mid-teens for the year. With much of the incremental sales in this upgrade coming from increased original equipment shipments, as we capture a greater installed base, we expect Aero margins to be flat to modestly down for the year. In Performance Materials and Technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth. For the fourth quarter, we expect our typical solid finish to the year, leading to year-over-year and sequential sales growth. Growth will be led by process solutions on strength in projects and aftermarket services. In UOP, our growth outlook is supported by robust demand for petrochemical and refining catalysts. The sustainability technology solutions business will continue to grow as we capitalize on legislation-backed demand. For advanced materials, we expect continued demand for fluorine products, a rebound in life sciences end markets, and an improvement in our electronics and chemicals business, supportive of sequential growth. For the full year, we continue to expect high-single-digit sales growth in PMT. Due to typical catalyst seasonality, we still expect meaningful sequential and year-over-year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PMT. In Safety and Productivity Solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor destocking. However, the impact on our financials is declining, creating stabilization and signs of potential return to growth in the coming quarters. For the fourth quarter, we expect these effects to lead to sales that are roughly flat sequentially, down organically, but to a lesser degree than earlier in the year. Orders will grow sequentially and year-over-year in the fourth quarter as we build on momentum from this quarter. While new warehouse investment remains challenged, customers continue to upgrade their existing infrastructure, which will lead to another quarter of double-digit growth for the aftermarket services portion of our Intelligrated business. For the full year, we now expect sales to be down approximately 20% as the SPS portfolio bounces along the bottom of the cycle. However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year. In Building Technologies, we were prudent with our posture at the start of the year as we faced unprecedented central bank tightening cycle and uncertain demand environment. While the operating backdrop remains difficult, we are encouraged by the sequential orders progression we saw each month throughout 3Q, including double-digit products orders growth in the month of September. For the fourth quarter, we expect modest sequential sales improvement from our 2Q and 3Q levels, with growth continuing to be led by our long-cycle building solutions business. The supply chain is improving each quarter, and we expect to make further progress on converting our past due backlog into sales. We're also encouraged by the resiliency we are seeing in verticals such as airports, government, and education, and expect institutional demand to provide support amid commercial softness. We project HBT sales to be up low-single digits for the year, with commercial and operational excellence enabling HBT to be our largest margin expander in 2023. Now, moving on to our other key guidance metrics. We anticipate net below the line impact to be between negative $105 million to negative $155 million in the fourth quarter, and between negative $525 million and negative $575 million for the full year. This guidance includes a range of repositioning between $45 million and $85 million in the fourth quarter and between $260 million and $300 million for the full year as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year, unchanged from our previous guidance. We anticipate average share count to be around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continue to reduce our share count through opportunistic buybacks. As a result of these inputs, we anticipate adjusted earnings per share to be between $2.53 and $2.63 for the fourth quarter, flat to up 4% year-over-year. Excluding pension headwinds, fourth quarter EPS growth would be up 6% to 10%. For the full year, we're nearing both ends of our EPS guidance ranges by $0.05 for a new range of $9.10 to $9.20, up 4% to 5% year-over-year, holding the midpoint of our prior guide. Excluding pension headwinds, EPS growth would be up 10% to 11% for the year. On cash, we continue to expect to meet our original free cash flow guidance of $3.9 billion to $4.3 billion in 2023, or $5.1 billion to $5.5 billion excluding the net impact of settlements, driven by stronger collections and inventory management. Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter giving us confidence in our full year guidance. So, to summarize, we're narrowing our full year guidance ranges for sales and EPS while raising the midpoint of our segment margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment. Before turning back to Vimal, let's turn to the next page and discuss our preliminary thoughts for 2024. While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments. We have a unique set of operating principles that enable us to move quickly and decisively to drive growth, protect margins, ensure liquidity, and position ourselves well to deliver in any environment. Our end market exposures remain favorable into 2024, particularly in aerospace and energy. We expect continued commercial aviation fleet growth and replenishment, increased domestic and international defense investment amid geopolitical uncertainty, heightened focus on automation due to labor scarcity, increased energy demands and intensifying decarbonization goals, accelerating the need for technologies enabling the energy transition and increased infrastructure spending. All of these compelling vertical tailwinds as well as ongoing customer demand to help enable digitalization give us confidence that all four of our reconstituted businesses will deliver growth next year. The timing of an eventual recovery in short cycle is less certain and will be a swing variable to our sales outcome. We have a strong setup that will drive growth in sales, margin, and earnings in 2024 within our long-term financial framework. We expect organic growth to be led by our long-cycle businesses due to record-level demand and backlog in 2023. Additionally, our focus on new product innovation is yielding benefits. We believe extending our success in delivering new solutions to our existing vast installed base, as well as the commercial efforts driving greater penetration of our current set of technologies to new markets to help enable robust organic growth. That, coupled with our ongoing leadership in high-growth regions and the strength of our software franchise, gives us confidence in the top-line. We also expect supply chains to continue to improve gradually in Aero throughout next year. For overall Honeywell, 2024 margins will benefit from improving business mix, continued benefits from price costs, and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production. We will continue our investments in R&D and growth-oriented capital expenditures and remain keenly focused on creating uniquely innovative, differentiated, recession-proof technologies to address the world's toughest automation, digitalization, and sustainability challenges. While we expect our spend on repositioning to be relatively stable year-over-year in '24, we also anticipate modestly higher interest expense and lower pension income next year, both driven by the acceleration in yields across the bond markets we have seen since this summer. That will lead to slightly higher net below the line expense. We will provide more information about the year-over-year magnitude of these changes at year-end when we snap the line on pension, but we anticipate there'll be more in line with normal historical changes, not last year's outsized impacts. As a reminder, pension income is a non-cash item, given our overfunded pension status, and will ensure no incremental contributions are needed. This is a great position to be in for our employees, both former and current, and our shareowners. We expect our cash to grow in line or above earnings next year with improvement assisted by the absence of the one-time settlement from de-risking our balance sheet earlier this year, which had an outsized effect on our cash performance. We're also embarking on a multi-year unwind of the last two years of working capital buildup. We will continue benefiting from improved demand planning and optimized production and materials management using our enhanced end-to-end process and digitalization capabilities through Accelerator. We see several compelling growth capital opportunities and expect to fund high-return projects through disciplined CapEx spending in the coming years. Our balance sheet strength will continue to give us meaningful capacity for M&A, and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment. Now, I'm going to pass the call over to Vimal to say a few words about the announcement we made earlier this month on our portfolio and strategic priorities. Over to you, Vimal.

Sean Meakim:

Vimal 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. Operator, please open the line for Q&A.

Julian Mitchell:

Hi, good morning.

Julian Mitchell:

Good morning. Maybe just wanted to start off with a question on the fourth quarter margin outlook. So, I think you're looking at about 40 bps of margin uplift sequentially, 30% operating leverage sequentially. It looks like PMT perhaps is the segment where you're expecting a very big margin uplift. So, just wondered if you could go into a little bit more detail around that. The margins have been down year-on-year, all year there. So, just maybe help us understand what's really changing a lot in the fourth quarter to get that moving. And then just as a very quick follow-up, HBT, cross-currents this year. You've got a low base as we think about '24, but the interest rate environment is negative. So, just confidence in HBT's growth ability looking out? Thank you.

Vimal Kapur:

So, Julian, on HBT, I would say, I'll spend a minute to kind of first go back to what our business model is before I kind of answer your question. I think there are three parts of our HBT business model. First, it is 60% product, 40% solution. And within 40% solution, more than half is aftermarket. So, by very mix, it's a short-cycle oriented business. The second point is the products we have, they are critical to the buildings and that's why they are higher margin. And that explains our constant margin improvement in the segment. And finally, our exposure in buildings is combination of real estate, but also infrastructure. And all that put together explains our results of 2022, where we grew double digits, and this year, we'll grow low-single digits. To your question of 2024, we remain confident HBT will grow per our guidance. Our backlog is growing in our solution business and, of course, the swing factor remains here the short-cycle position.

Sean Meakim:

[Lateef] (ph), can we have the next question, please?

Steve Tusa:

Hey, guys, good morning.

Vimal Kapur:

Good morning, Steve.

Vimal Kapur:

Steve, you're right, SPS is coming out of the bullwhip effect of COVID and clearly that reflects in our Q3 numbers. But as we mentioned in our earlier conversation, the SPS orders in Q3, we had a book-to-bill of 1 and we see similar trends continuing in Q4, which means we are in a recovery cycle in this business moving forward, starting Q4, and we'll see that in 2024. Margin expansion will certainly help there, because the volumes growth will help in margin expansion. We have re-baselined our cost base, aligned to the new revenue scale. So overall, we should see recovery from this point onwards.

Greg Lewis:

I think, Steve, overall top-line growth could be flattish next year, but as Vimal said, with particularly -- as the short-cycle accelerates, there's a lot of leverage in those short-cycle businesses, in particular. So, we absolutely will do that, expect to see that come through. And again, on the Intelligrated side, with the aftermarket growing far greater than the project business, we should see some nice mix in that business as well. So, the timing of that acceleration, as we've said, overall, still is something that we're waiting to see happen, but we've flattened out, bottomed out the orders rate, so it should be coming any time now. And when it does, a lot of leverage comes along with it.

Scott Davis:

Hey, good morning, guys, Vimal, Greg and Sean.

Vimal Kapur:

Good morning, Scott.

Vimal Kapur:

Okay, thanks, Scott. I would say you're absolutely right, Scott, there is a lot of variation how things are working in the world at this point. Let me start with China. We are going to have high-single-digit growth in China this year. It's primarily supported by growth in Aero, but also in some other businesses, too. We see China to be a similar trend, mid-single digit to high-single digit in 2024. We have enough backlog and strength in Aero to support that. In other parts of the world, I would say, we see a lot of strength in Asia, in particular, India and ASEAN countries. And Middle East also, given our strong position in energy, positions us pretty well. And then, Europe and U.S., probably, we all see the impact of high interest rate and challenging environment. So, probably we are experiencing the same here. So, it's the good balance of positive and negative. But one thing I'd like to add there is, as we see our backlog, which grew by 8%, we also see good orders position forecasted for quarter four, it's going to position us pretty well for 2024 ahead in spite of the challenging condition, because we do expect our long-cycle businesses are going to help to drive in our -- the forecasted range of revenue growth for 2024.

Operator:

Thank you. Our next question comes from the line of Nigel Coe of Wolfe Research. Nigel Coe, your line is open. Please proceed.

Greg Lewis:

Sure. Yes. So again, it's way too early for guidance. Of course, we'll do that specifically in 90 days or so when we announce our full year earnings. So the comments we've been giving is that we see things within that long-term framework. That's a reasonably good barometer for how we're seeing things at the moment. But again, 90 days from now, we'll know a lot more. In terms of the free cash flow, you're exactly right. We have $1.2 billion of settlements. That's obviously not going to happen again next year. So that's an immediate add back to the base. And then, from there, we expect to see free cash grow in line or maybe better with earnings. The maybe around that is really a matter of we expect to start seeing the liquidation of our working capital, but we also have a very robust set of growth projects on capital. And so, we're going to be going through our budgeting process here over the course of the fourth quarter, and we may have some good things to put forth from a CapEx standpoint next year. So -- but we feel really good about the progress that we're making in cash flow. Again, this quarter, very nice cash flow number, 100% conversion, 17% cash margin. So, we've made some nice progress. One other kind of good anecdotal point, we've started to see Aero bring their days of supply down in inventory. So, while the number in the aggregates gone up, they're obviously growing the business in the high teens, but we are starting to see the efficiency and inventory show up. So that's really how we're thinking about it at this stage for next year, but we'll know a lot more in 90 days and be a bit more precise. And then, on pension, could it be $50 million or $100 million worse. We'll see rates move around a lot, as you know. And as I mentioned in my comments, we snapped the line at the end of the year, but it's trending to be lower income next year, but obviously nowhere near the kind of shock that we had in the 2023 change.

Andrew Obin:

Yes, good morning.

Greg Lewis:

Good morning.

Vimal Kapur:

Yeah. Thanks, Andrew. Look, I would say, in AM, the fluorine products business, the [indiscernible] doing extremely well, continues to grow. As applications keeps growing, its geographic spread keeps growing. So that's very positive. Electronic materials have definitely bottomed out. We have seen signaling of recovery from the [Cree's] (ph) fab manufacturer. And part of that is seen in Q4. Not as good as we'd like it to see, but we are seeing signals of recovery in the electronics side. And there are parts of chemicals which are weak, which is affected in our overall revenue. And like any other short cycle, we expect it to recover aligned with economic conditions there. But I must say that our conviction in the business is very strong. We had outstanding years in 2021 and 2022. And this year should be seen in comps to the past two years.

Sheila Kahyaoglu:

Hey, good morning, everyone. Thank you.

Sheila Kahyaoglu:

Hi. I wanted to ask about Aerospace please, and specifically, defense and space, great growth in the quarter, up 18%. What are you seeing from a bookings perspective there, the sustainability of demand with everything going on? And how does defense factor into Aero margin mix? Thank you.

Sean Meakim:

Sheila, this is Sean. On Aerospace margins, as it relates to defense and space, it's not a material drag on our margins. So that growth there is going to be not materially different than the overall margin rate. So, we find that to be -- that growth to be quite nice to segment profit growth.

Jeff Sprague:

Hey, thank you. Good morning, everyone.

Jeff Sprague:

Good morning. Hey, not to get too tied up in arcane pension accounting, but did you guys change something in pension to mitigate the impact of interest rate changes? Certainly, nice to hear the headwind is that modest, but my rough math would have maybe suggested a bit more. And then, maybe just to add another part. Vimal, you touched on advanced materials a little bit in a previous answer. But can you give us a little bit of color on how you see the 410A, the 454B transition unfolding? What's happening to 410A prices and availability? And where you stand competitively as these OEMs are making the shift? Thank you.

Vimal Kapur:

Jeff, on advanced material, I would say, pretty fascinating to see how this changeover is happening between Solstice 410A and 454. We are working with all key OEMs for several years. This is not a new dimension for us. We have been on it for last several years, and we see the switchover happening from 410 to 454 in the times ahead, and we have secured our position with the key OEMs. So, I would say, for us is I would call it like business as usual because this is something which is part of our business, and we were ahead of the game here to look ahead and think about it simplification on us, and we are well covered on that.

Nicole DeBlase:

Yeah, thanks. Good morning, guys.

Vimal Kapur:

Nicole, good morning.

Vimal Kapur:

Nicole, we have -- I would say, the channel inventory is reflected in our orders rate. Our orders rate for both buildings and SPS had a book-to-bill of 1 last quarter. And the similar trends are persisting so far in October, which tells me that we are on a path of a slight recovery. And that's an indirect measure for me on channels are looking at stocking back again from the cycle. So -- and we expect a short cycle to slightly recover progressively every month moving forward, but not as fast as we'd like it to be at this point.

Deane Dray:

Thank you. Good morning, everyone.

Vimal Kapur:

Good morning.

Greg Lewis:

Yeah. Hey, Deane, we don't disclose our individual segment's price/cost. But if you recall, I mean, we've mentioned that we're going to retain our price/cost positivity, and we've done that inside of HBT throughout the course of the year. So, you see the numbers for total Honeywell, I think we're within our zone that we had guided. From a pricing perspective, it's probably going to be 4% for the year across the total portfolio. Maybe I'll pass it to Vimal on the other side.

Operator:

Thank you. Our next question comes from Joe Ritchie of Goldman Sachs.

Greg Lewis:

Hey, Joe.

Joe Ritchie:

Hey, guys. My one question is just on orders. So, nice to see the inflection versus what we -- what you had experienced last quarter. I think Aero is the only segment that grew last quarter. I didn't hear the commentary on PMT. So, if I missed it, my apologies. But what were orders like in PMT this quarter or maybe specifically for HPS and UOP?

Operator:

Thank you. Our next question comes from the line of Andrew Kaplowitz of Citigroup.

Vimal Kapur:

Good morning, Andrew.

Andrew Kaplowitz:

So, I know you're expecting a nice uptick in PMT margin in Q4, but as you've guided this year, it's tended -- PMT margins tended to be a bit muted for the year. So, maybe conviction level that it does jump in Q4? And then, I know you're moving HPS over, but pro forma, do you see PMT as one of the better margin performers in '24?

Operator:

Thank you. I would now like to turn the call back over to Vimal Kapur for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Sean Meakim:

Thank you, Liz. Good morning, and welcome to Honeywell's second quarter 2023 earnings conference call. On the call with me today are Chief Executive Officer, Vimal Kapur; Senior Vice President and Chief Financial Officer, Greg Lewis; and Senior Vice President and General Counsel Anne Madden. 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 other 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 to our full year 2023 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to CEO, Vimal Kapur.

Greg Lewis:

Thank you, Vimal, and good morning, everyone. We delivered another strong quarter in a very challenging operating environment. Second quarter sales grew 3% organically led by double-digit organic sales growth in commercial aerospace, process solution and UOP, where demand strength continues to support Honeywell's short-term and long-term outlook. PMT grew at a robust 7% pace after four consecutive quarters of double-digit growth. Our long cycle warehouse automation business is around trough levels as expected, which led to overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 5% across the remainder of the portfolio. Our backlog remains at a record level ending the second quarter at $30.5 billion, up 4% year-over-year driven by strength in Aero and PMT. Supply chain constraints continue to moderate our overall growth rate. However, we continue to record sequential improvements in Aero output as expected and are reducing our past due backlog across our short cycle businesses. Our investments in Honeywell’s Digital have continued to yield commercial and operating benefits through surgical pricing actions enabling us to expand segment margin by 150 basis points year-over-year to 22.4% and exceed the high-end of our guidance by 20 basis points. Three out of four segments expanded margins in the quarter each by more than 100 basis points with SPS leading the way as expected. On cash, we generated $1.1 billion of free cash flow, up 34% year-over-year. This increase was driven by stronger net income as well as improved working capital performance, with higher collections and good progress on inventory where we have improved our demand planning, and optimize our production and materials management, using our improved end-to-end process and digitalization capabilities. Now let's spend a few minutes on the second quarter performance by business. Aerospace sales for the second quarter were up 16% organically led by over 20% growth in Commercial Aviation. This marks the fourth consecutive quarter of double-digit Aerospace organic sales growth and over two years of double-digit growth for Commercial Aviation, supported by strong recovery in both flight hours and higher shipset deliveries. Growth remained strongest in Commercial Aviation aftermarket, up over 25% led by over 30% growth in air transport as increased flight hours resulted in higher spare shipments and repaired overall activity. Commercial original equipment sales also increased double-digits driven by increased build rates. Defense and Space grew for the second consecutive quarter as we were able to execute on our strong backlog and increase our sales volumes. The Aero supply chain continued to make progressive improvements as better material availability enabled 20% year-over-year growth in original equipment and spare shipments again in Q2. Historically, high past-due backlog increased again in the quarter as orders growth outpaced our backlog burn down. Segment margin in Aerospace expanded a 120 basis points year-over-year to 27.7% due to commercial excellence and higher volume leverage partially offset by cost inflation. Performance Materials and Technology sales grew 7% organically in the second quarter with double-digit growth for the third consecutive quarter in both HPS and UOP. Process Solution sales grew 11% organically driven by strength in our projects business and in lifecycle solutions and services. In UOP, sales also grew 11% organically led by gas processing and refining catalyst shipments. Sustainable Technology Solutions within UOP had another standout quarter in Q2, with strong triple-digit orders growth and over 30% sales growth. In Advanced Materials, continued demand for fluorine products portfolio was offset by expected macro driven softness in our Electronics and Chemicals business, leading to flat organic growth despite challenging year-over-year comps. Segment margin contracted 60 basis points to 21.7% as favorable price cost was more than offset by challenges in Advanced Materials including lower volumes and the previously communicated disruption in one of our plants. Safety and Productivity Solutions sales decreased 21% organically in the quarter. Sales declines are primarily driven by warehouse and workflow solutions and productivity solutions and services. While the project portion of our Intelligrated business is around trough levels and the current low investment warehouse automation environment. The aftermarket services portion of the business continues to deliver solid double-digit growth. Sensing and Safety Technologies was flattish in the quarter, with ongoing strength in our industrial sensing product portfolio offset by modestly lower volumes in safety. Segment margin performance for SPS once again led Honeywell expanding 410 basis points to 16.7% as a result of productivity actions and commercial excellence partially offset by lower volume leverage and cost inflation. Honeywell Building Technology sales were flat year-over-year on an organic basis in the second quarter. Building Solutions sales grew 2% organically despite expected year-over-year order softness as we continue to execute on our robust backlog, with organic growth in our services business and no change year-over-year in projects. Turning to our products portfolio, we continue to see sequential improvements and the supply chain environment, and we're burning down our past-due backlog as expected. Building product sales decreased 1% organically as continued growth in our world-class fire products business was offset by declines in security and building management systems. Our continued commercial excellence and productivity actions have allowed us to once again mitigate the effects of elevated inflation, expanding HBT segment margin by 200 basis points to 25.5%. Honeywell Connected Enterprises strong software franchise continues to be accretive to overall Honeywell and a powerful differentiator. Overall double-digit organic growth was supported by strength in cyber, industrial, aircraft and buildings. Double-digit orders growth in the quarter is supportive of continued strong performance for HCE. Overall this was a great result for Honeywell. Our operational efforts enabled us to grow second quarter GAAP earnings per share 21% year-over-year to $2.22 and adjusted earnings per share 6% year-over-year to $2.23, despite a $0.15 headwind from lower non-cash income from our overfunded pension. From a year-over-year perspective, segment profit drove $0.21 of the improvement in earnings, the main driver of our EPS growth. A lower adjusted effective tax rate contributed $0.06 of improvement and reduced share count added an additional $0.05. Excluding the pension headwind, below the line and other created a $0.04 year-over-year headwind due to higher net interest expense for a total EPS excluding the pension impact of $2.38, up 13% year-over-year. A bridge for adjusted EPS from 2Q ‘22 to 2Q ‘23 can be found in the appendix of this presentation. Finally, as Vimal mentioned earlier, we continue to leverage our strong balance sheet deploying $2.1 billion in the quarter, bringing the year-to-date total to $3.7 billion as we execute on our capital deployment strategy with meaningful portfolio updates. So overall, disciplined adherence to our best-in-class Honeywell value creation framework provided us with the operational agility to meet or exceed our guided financial metrics. Now let's turn to slide six, to discuss our third quarter and full year outlook. While a number of challenges persists in the current environment, our rigorous operating principles enable us to increase our guided metrics for the full year. Our demand profile remains robust with record backlog levels, particularly in Aerospace and PMT, and stabilized sequential short-cycle order rates across much of the portfolio. For our Q3 sales guidance, we expect to be in the range of $9.1 billion to $9.3 billion up 1% to 4% on an organic basis. We now expect full year sales of $36.7 billion to $37.3 billion which represents an increase of $200 million on the low-end incorporating our strong second quarter results. We're raising the low-end of our organic growth range now 4% to 6%, and we continue to expect a greater balance of price and volume versus last year. We've upgraded our full year expectations in PMT while softening our outlook for SPS to reflect our latest views on the end market speech. Moving to our segment margin guidance, we expect the third quarter to be in the range of 22.3% to 22.6%, resulting in year-over-year margin expansion of 50 to 80 basis points due to commercial excellence and productivity actions. For full year 2023, we are upgrading our segment margin expectations by 10 basis points on the low-end to a new range of 22.4% to 22.6% or 70 to 90 basis points of year-over-year expansion driven by improvement in HBT, SPS and PMT. Now let's take a moment to walk through the third quarter and full year expectations by business. Looking ahead for Aerospace, we continue to be excited about demand across our end markets and expect sequential sales growth throughout the second half supported by ongoing sequential factory output increases and strong orders. Commercial aftermarket particularly in air transport should lead growth in the Aero portfolio as flight hours continue to recover and we see further recovery in the wide-body market from increased international travel. On the commercial original equipment side, we expect build rate strength to drive volume progression in the second half. In Defense and Space, we expect sequential and year-over-year growth in the second half and continue to work through our robust backlog. As a result, we expect Defense and Space to grow at a mid-single digit rate for the full year 2023. We continue to expect modest sequential improvement in the Aerospace supply chain as growing commitments from our suppliers year-to-date coupled with the second consecutive quarter up 20% output increases give us continued confidence in our outlook. Given these factors, we still expect Aero organic sales growth in the low-double-digit range. For segment margin, we still expect Aero to be flattish for the year as we see modest mix pressure within our OE business offsetting overall volume leverage. In Performance Materials and Technologies, encouraging fundamentals persist across our end markets driving favorable growth. For the third quarter, we expect sales to increase year-over-year and sequentially coupled with a seasonally strong fourth quarter. Growth will be led by smart energy, projects and lifecycle solutions and services within Process Solutions as the strength of these businesses saw in the first half continues into the second half. In UOP, our growth outlook for the year is supported by robust demand for petrochemical and refining catalysts. The sustainability technology solutions business within UOP will also provide growth as we capitalize on legislation backed demand. For Advanced Materials we see ongoing demand for fluorine products combined with improvements in electronic materials supportive of sequential growth in the first half. Despite more challenging comps in the second half these favorable markets and conditions and our strong execution give us confidence to upgrade our full year sales growth expectations for PMT to high-single-digits compared to mid-single digits last quarter. For segment margin, we expect sequential improvement throughout the year including robust expansion in the fourth quarter resulting in modest year-over-year improvement for overall 2023. Looking ahead for Safety and Productivity Solutions, our outlook continues to be impacted by the decline in CapEx for new warehouse capacity. However our short-cycle businesses appear to be stabilizing as we awaited demand acceleration in the coming quarters. For the third quarter, we expect this to lead to organic sales declines similar to Q2. However, we anticipate another quarter of strong growth in the aftermarket services portion of our Intelligrated business and sensing and safety technologies should return to growth. With the SPS portfolio bouncing along the bottom of the cycle we now expect full year sales to be down low-double-digits in 2023. However, segment margin continues to be a bright spot for SPS, as we implement productivity actions and drive operational improvements and we still expect strong margin expansion for the full year. In Building Technologies, the macroeconomic environment remains challenging, our team continues to execute well and burn down our past due backlog. For the third quarter, we expect sales to be relatively flat year-over-year as we continue to see more challenging comps and the timing of short-cycle recovery remains uncertain. For the year, we still expect sales in our long-cycle building solutions business to outgrow the more short-cycle building products. Our institutional verticals such as airports and education will remain strong, as we continue to see stimulus spend come through. The business is well aligned to energy efficiency and sustainability megatrends. Given these dynamics we still expect HBT sales for the year to grow low-single-digit organically and we see potential for growth acceleration as we exit ‘23. For segment margins we now expect HBT to lead Honeywell margin expansion as result of strong inflation management and productivity actions. Turning to our other core guided metrics, net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of negative $120 million to negative $170 million in the third quarter and negative $500 million to negative $625 million for the full year. This guidance includes a range of repositioning between $40 million $85 million in the quarter and $225 million to $325 million for the year, as we continue to fund attractive restructuring projects and properly position Honeywell for the future. We expect the adjusted effective tax rate to be roughly 23% in the third quarter, two points higher than our full year guide of 21%, and two points higher than 2Q, which is unchanged from our previous guidance. That implies a lower 4Q rate due to the timing of discrete items. Importantly, this higher tax rate in Q3 reflects an approximately $0.06 headwind to EPS, will be offset by a commensurate tailwind in 4Q, leaving the full year unchanged. We expect average share count be around 669 million shares in Q3 and 670 million shares for the full year. As a result of these inputs, our adjusted EPS guidance range is now between $2.15 to $2.25 for the third quarter which would be down 4% to flat year-over-year. Excluding the pension headwinds, third quarter EPS growth would be up 2% to up 6%. For full year EPS, we are increasing the midpoint of our guide upgrading the low-end of the range by $0.05 for a new range of $9.05 to $9.25, up 3% to 6% reflecting our continued confidence that 2023 will be a solid growth year for Honeywell despite the year-over-year pension headwinds. Excluding these headwinds, EPS growth would be 10% to 12% for the year. After a strong first half and continued progress on inventory and receivables management, we expect to meet our original free cash flow guidance of $3.9 billion to $4.3 billion in 2023 or $5.1 billion to $5.5 billion excluding the net impact of settlements. So to wrap up, our original thesis for ‘23 remains intact. Robust backlog of $30 billion underpins our strength our growth though the timing of the short-cycle recovery remains uncertain. We're encouraged by the strength of our portfolio and continue to execute on our rigorous operating playbook through a challenging backdrop to deliver outstanding results. Now let's turn to slide seven, and I'll hand the call back to Vimal, for some long-term comments.

Sean Meakim:

Thank you, Vimal. Vimal, Greg and Anne are now available to answer your questions. [Operator Instructions] Liz, please open the line for Q&A.

Andrew Obin:

Yes. Can you hear him?

Andrew Obin:

Yes. Good morning. Just a question on Advanced Materials. It's a good return business. When should we expect this business to return to growth? And also, you know, do you guys need to add capacity to grow this business, how strong the structural demand is? Thank you.

Andrew Obin:

Thank you.

Steve Tusa :

Hi, good morning, guys.

Steve Tusa :

The underlying -- I guess on the positive side, very strong margin in Aerospace, tough to kind of like cut through the OE incentives. Was there anything unusual there, like where the OE incentives, we just under the quarterly timing of those. I mean, I'm kind of getting to an underlying incremental of around like 40% for that business if we adjust for some of these OE incentives. Can you just maybe talk about some of the moving parts there and whether I'm roughly right on the math?

Steve Tusa :

Okay. And then just one last one on HBT. That business just perhaps should be growing better in this environment even Building Solutions was kind of like weak. So if there's really not a function -- that's really can't be a function of destocking. So maybe what are the moving parts there and why are you guys not keeping up with the other non-res players out there? Thanks.

Steve Tusa :

Great. Thanks a lot.

Sheila Kahyaoglu :

Good morning, guys and thank you. I want to ask on Aerospace specific one, if that's okay. Last quarter, you raised your Aerospace guide to up low-double-digits. And I think the bulk of the raise had come from the OE side, which you guys are doing well in. But there's been a bunch of moving pieces this quarter with the MAX officially go into 38 per month yesterday. And then, of course, engine issues could force, like a build new build versus spares issue at Airbus on the A320. So kind of how are you thinking about the puts and takes for Aerospace to OE as we get into the second half following 15% growth in the first half?

Greg Lewis:

And the recent events have not changed their expectations of us to this stage.

Operator:

Our next question comes from the line of Julian Mitchell with Barclays.

Greg Lewis:

Sure. So I would say if we take IGS first, our order rates are down meaningfully as we've talked about as -- but when we look at overall pipeline, we're starting to see the pipeline are build back to a little bit better levels. That may not occur immediately, but we see if there is a chance that we've maybe growing again in 2024 that will really be dictated by how the back half orders really come in. But we are starting to see a little bit more strength in the pipeline, which I think is a positive. As it relates to the short-cycle businesses, what we talk about, it's down year-on-year because the first half of the year was particularly high, but we're seeing stabilization in the last two to three quarters have been either going up sequentially or staying roughly flat. So, I think we've reached this stabilization point on a short-cycle. And as and when some of those markets begin to recover then we'll see some growth. So as we think about SPS overall, I would expect it's going to grow in 2024. It's probably not going to be at the high-end of our growth rate for our SPGs, but that's how we see it with the data that's coming through right now.

Vimal Kapur:

Yes.

Scott Davis :

Hi, good morning, everybody, and welcome, Vimal.

Scott Davis :

Vimal, couple of small things here. One, I mean, you guys are spending a couple of $100 million a year on quantum. Vimal, do you have a kind of an evolved vision of where this business goes and how you can monetize it, when you can monetize it, if is it can the cash flow bleed go down a little bit over time or some kind of positive endgame that you see here?

Scott Davis :

Okay. Fair enough. And just quickly, just following up on Steve's question, I mean, I would have thought Forge for buildings would have given you a little bit of a lift given the timing of when you rolled that out. I understand project selectivity, but I would have thought they would have given you a little bit more of a tailwind into the quarter, timing issues there and that those orders haven't really kicked in yet, and we'll see that later in the year or is there other competitive dynamics?

Scott Davis :

Okay, fair enough. Best of luck, Vimal.

Operator:

Our next question comes from Nigel Coe with Wolfe Research.

Vimal Kapur:

So I'll start with HBT, turn to Greg for respond to SPS question. I think HBT from a geographic perspective, Europe continues to be where we want have better outcome. I think that's a bit of a drag at this point. The strength is in high growth regions. We see strength in Middle East, India and China in buildings and North America is more of, I would say, sequentially no change within the business. So that's kind of our overall dynamic. On the channel side, I mean, the channel demand will be determined by the end market demand. So we -- it's a very short-cycle business. So we don't see any dynamics of channels having less or more inventory at the in the HBT business. Maybe Greg, do you want to respond to SPS question.

Nigel Coe :

Great. Thanks.

Vimal Kapur:

Thank you.

Jeffrey Sprague :

Hi, thank you. Good morning, everyone.

Jeffrey Sprague :

I was going to ask a near-term question, but given your response about margins in HBT, I wonder if we could maybe just zoom out and just kind of think philosophically about kind of the trade-off between growth and margins, right? We have seen situations in the past where companies with high margins get, like, a lack of a better term, a little bit trapped and wanting to maintain grow the margins, right, and growth ends up suffering as a result. So could you address this to some degree, obviously, when we're together in New York. But could you maybe elaborate a little bit more on your philosophy relative to managing those two metrics? And how you make sure you don't hinder growth by overly focusing on margins.

Jeffrey Sprague :

Yes, thank you. I sort of meant the question on a total Honeywell basis also though.

Jeffrey Sprague :

Thank you for the perspective.

Josh Pokrzywinski :

Hi, good morning.

Josh Pokrzywinski :

Hi, so just want to maybe flip around the HBT question from the other perspective on PMT. I mean, you're seeing some of the bulk chemical guys go through destocking. I think traditional oil spending has been okay, but maybe not as strong as what you guys are seeing in some of the other process guys are seeing. I guess just how much are we getting away from kind of traditional oil versus either some of these mega projects or energy transition, like is this business really transcending its roots of even kind of five, six, seven years ago?

Josh Pokrzywinski :

Understood.

Joe Ritchie :

Thanks. Good morning, guys.

Joe Ritchie :

And, so just real two quick ones. I guess just on SPS we've talked a little bit about the growth dynamics for the year. I'm just curious how the reduction in the short-cycle businesses is perhaps impacting margins for the second half of the year? And then the other question is really around the Defense business. It's nice to see the inflection there. I'm just curious at what point do you really start to see an acceleration in Defense growth just given what you know about your production schedules?

Greg Lewis:

Yes. And I would just say, Joe, we have -- the teams have resized their costs envelope to the current reality, and as and when the short-cycle businesses reaccelerate, you can imagine those are very high margin at the BCM level and that will create a lot of acceleration from a margin rate standpoint. So the margin rates that we’re going to be printing now or going to be within a higher band until we see that acceleration come, but their business is poised for it. And we'll see, is that going to be Q4, is it going to be Q1, remains to be seen, but we've sized the business properly and there's going to be a fairly substantial leverage opportunity when that acceleration happens.

Vimal Kapur:

Yes. So in Defense, our bookings remain very, very strong. So, we are working our supply chain constraints there, and we do expect our delivery performance to be better in second half versus first half. So we had low-single-digits in the first half of the year. We expect the year to finish more in the mid-single digits for the Defense business.

Vimal Kapur:

Yes.

Vimal Kapur:

And also, I should also mention we see longer term for the defense business, pretty strong demand outside United States. As you can all imagine, the recent war in Ukraine, has created more higher budgets by different comments. And we clearly see those signals coming to us in terms of demand from NATO Countries, other friendly countries, and that will play out even more stronger for the Defense business in the times to come.

Operator:

Our next question comes from the line of Deane Dray with RBC Capital Markets.

Greg Lewis:

Hi, Deane.

Deane Dray:

Hi, just want to circle back on SPS if we could, on warehouse automation, what are you seeing in the pipeline that suggests a bottoming? And then a related question is, can you give us any sense of when you'll hit this targeted critical mass of installations that will drive that flywheel of attractive aftermarket. How close are you to that? What kind of timeframe?

Greg Lewis:

Yes. I mean that business was around $200 million of the total in [‘18] (ph) by 2022, it doubled to roughly $400 million. As Vimal said, this year is going to be over $500 million.

Greg Lewis:

So that aftermarket is happening.

Greg Lewis:

Welcome.

Nicole DeBlase :

Yes, thanks guys. Good morning.

Nicole DeBlase :

Just maybe on PMT, if you guys could talk a little bit more about the order activity you saw within UOP and HPS in the quarter? And then on the margins, you talked about the challenges in Advanced Materials. I guess, how does that kind of phase through the second half of the year? Thank you.

Greg Lewis:

Yes, Nicole, if you think about this year, we're literally going to progress each and every quarter sequentially a little bit better we picked up about 110 basis points sequentially from 1Q to 2Q. We expect some additional sequential improvement in Q3 and then again in Q4. So I think as we get to the end of the year, it'll look like modest year-over-year for the full year, but it's going to be a nice sequential step up quarter-to-quarter.

Greg Lewis:

Welcome.

Operator:

This question comes from the line of Andrew Kaplowitz with Citigroup.

Greg Lewis:

Hi, Andrew.

Vimal Kapur:

Look Andrew, the pipeline remains extremely strong. We are actively working more outbound activities in M&A and remain very optimistic if we can get the deals done at the right price. Because one thing we're not going to compromise is our deal metrics. We want to stay disciplined to create shareholder value, but at the same time our number of opportunities in the play are at the much higher elevated level compared to this time in the past. So, Anne if you want to add any comment from your perspective,

Andrew Kaplowitz:

Thank you.

Operator:

Thank you. I'd now like to turn the call back over to Vimal Kapur for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Sean Meakim:

Thank you, Liz. Good morning, and welcome to Honeywell's first quarter 2023 earnings conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur; and Senior Vice President and General Counsel, Anne Madden. 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 other 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 first quarter, share our guidance for the second quarter and provide our update to our full year 2023 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.

Vimal Kapur:

Thank you, Darius, and good morning, everyone. Let's turn to slide 4. In February, we announced that ExxonMobil will deploy Honeywell's carbon capture technology as its integrated complex in Baytown, Texas. The plant is expected to be the largest low-carbon hydrogen project in the world at planned startup and projected to produce around one billion cubic feet of low carbon hydrogen per day. Honeywell technology will enable the facility to capture more than 98% of the associated CO2 emission, which will be sequestered and permanently stored by ExxonMobil. In addition, Honeywell recently launched a European Clean Aviation project to develop a new generation of Aerospace-qualified megawatt-class fuel cells powered by hydrogen. Green hydrogen is an extremely clean power source that can be used to propel future aircraft, which makes it particularly appealing to the aerospace sector as we work to reduce carbon emissions. Work on this project will be performed at Honeywell Technology Solutions Research & Development Center in Brno, Czech Republic and at all other Honeywell and Project partner sites across Europe. Finally, this week, we announced a $40 million-plus win in our Connected Enterprise business with Globalworth, a leading real estate investor in Central and Eastern Europe. Globalworth is using Honeywell's Forge for building technology to help monitor energy consumption down to a device or asset level across their commercial office buildings in Romania and Poland, while maintaining occupant comfort and productivity. Our solution will help reduce operating costs and lower energy consumption, key outcome for Europe's overreaching climate objectives. These existing technology, provide us with a new growth sectors, while reinforcing Honeywell's sustainability message demonstrating how we are helping the world solve its toughest challenge across all our end markets. Now, let's turn to slide 5 to discuss an exciting new acquisition we just announced this week. On Wednesday, we announced an agreement to acquire Compressor Controls Corporation, in short, CCC, a leading provider of the machinery control and optimization solutions, including controlled hardware, software and services, for $670 million in all cash transactions. CCC technologies primarily serve the LNG gas processing, refining and petrochemical segment and will bolster Honeywell's high-growth sustainability portfolio with new carbon-capture control solutions, where the same turbo machinery is used to achieve effective removal of CO2 from the process plant emission. This acquisition will be integrated into Honeywell's Process Solutions business and strengthen Honeywell's leadership in industrial control, automation and process solutions, enabling customers to accelerate their energy transition. CCC's EBITDA margins are accretive to Honeywell, and we expect to achieve a cash basis return on investment of more than 15% by fifth year that CCC is part of Honeywell. The transaction represents 15 times 2023 expected EBITDA on a tax-adjusted basis and 13 times EBITDA, assuming $8 million of annualized cost synergies. I'm excited about the new technologies and adjacencies we have unlocked through this latest transaction. We've said before that we have an active M&A pipeline, and this is further evidenced that we are continuously enhancing our automation portfolio by investing in new opportunities. Now let's turn to slide 6 to discuss the first quarter results in more detail. As Darius mentioned, we delivered a strong first quarter results despite a dynamic economic backdrop. Our operational agility enabled us to exceed our financial commitments. First quarter sales grew 8% organically with double-digit growth in PMT and Aero, where we generated continued volume improvement on a strong demand and an improving supply chain. In fact, volume grew 2% for overall Honeywell in the first quarter, despite an impact of traffic activity levels in our long-cycle warehouse automation business. Excluding SPS, volumes were up 7% for first quarter. Our backlog grew 6% year-over-year and 2% sequentially, and our orders grew 1% organically and 8% sequentially, driven by long-cycle strength in Aero and PMT. Supply chain remains a constraint on our overall growth. However, Aero saw further output improvement, and we saw positive backlog reduction across all of our short-cycle businesses. In addition to strong organic growth, we expanded segment margins by 90 basis points year-over-year to 22%. We continue to reap benefits from our investment in Honeywell Digital that have enabled us to stay ahead of the inflation curve through the strategic pricing action, despite the topline headwinds, SPS led the other SBGs with the largest segment margin expansion as the benefit from the right-sized cost base. Now, let's spend a few minutes on the first quarter performance by business. Aerospace sales for the first quarter were up 14% organically, led by 20% growth in Commercial Aviation, the fifth straight quarter of at least 20% organic growth and eighth straight quarter of double-digit growth. Sales growth was strongest in commercial aviation aftermarket, where continued flight hour recovery resulted in increased spare shipments and repair and overhaul sales, particularly in air transport. Commercial original equipment sales were also increased double-digit, driven by higher business and general aviation sales. Defense and Space returned to growth in the first quarter as we were able to convert our strong 2022 orders book increased sales volume. Book-to-bill in defense and space remained greater than 1 in the quarter. As expected, the Aero supply chain continued to make modest progress sequentially. Improvements in material availability from the lower supplier de-commitment rates enabled us to increase our original equipment and spare shipment by 20% year-over-year in first quarter. Our positive backlog remains historically high level, as expected, with plenty of volume yet to be unlocked. Segment margin in Aerospace contracted 80 basis points year-over-year to 26.6%, driven by higher sales of lower-margin original equipment products, partially offset by our commercial excellence effort and volume leverage. Performance Materials and Technologies orders grew organically across all three businesses, ahead of our expectations, led by over 20% growth in UOP. We remain particularly excited about traction in our Sustainable Technology Solutions business, where orders doubled year-over-year. For sales, PMT grew 15% organically in the quarter with double-digit growth in all three segments of the PMT portfolio. This was the fourth consecutive quarter of double-digit organic growth in PMT. UOP grew 19% organically in the quarter, led by refining catalyst shipments and gas processing, partially offset by lower refining and pet-chem equipment volumes. Process Solutions grew 16% organically, driven by strength in projects and Smart Energy. In Advanced Materials, sales grew 12% in the quarter as we saw another quarter of robust demand in fluorine products that more than offset some softness in our Electronic Materials business. Segment margin contracted 20 basis points year-over-year to 20.6% as a result of cost inflation, higher sales of lower-margin products and a previously communicated disruption in one of our PMT plants that caused some unplanned downtime, partially offset by commercial excellence and volume leverage. Safety and Productivity Solutions sales decreased 11% organically in the quarter. Sales decline were led by warehouse and Workflow Solutions and productivity solutions and services. The aftermarket services portion of our Intelligrated business continues to perform well as expected, with sales growing greater than 20% in the quarter at accretive margins. And the Sensing portion of our Sensing and Safety Technologies business remains a bright spot in the portfolio. Continuing on the trend from last year, segment margin for SPS was once again a standout in the quarter, expanding 270 basis points to 17.2% as a result of productivity actions and commercial excellence, partially offset by lower volume leverage and inflation. In Building Technologies, sales increased 9% organically in the quarter, with growth in both Building Products and Building Solutions. Project sales were up double-digits for the fourth consecutive quarter as we continue to convert our strong backlog. Services volumes also increased in the quarter, resulting in 13% organic sales growth in Building Solutions. Turning to our product portfolio, the supply chain is improving as expected. Building Products grew 7% organically year-over-year to continued strength in our world-class fire franchise. HBT orders were stronger than expected in first quarter, although down mid-single digits year-over-year organically as we lap outsized 2022 comps from the height of supply chain challenges. While inflation remains elevated, and our strong building solution sales presented as mix headwind, our commercial excellence and productivity effort allow us to mitigate these challenges and expand HBT segment margins, by 170 basis points to 25.2%. Growth across our portfolio continues to be supported by accretive results in Honeywell Connected Enterprises, an ongoing indicator of the power of strong software franchise. Robust overall growth was driven by double-digit growth in cyber, industrial, aerospace and connected building. The future outlook is also strong due to double-digit growth in orders. Overall, this was a great result for Honeywell. Adjusted earnings per share in the fourth quarter grew 8% to $2.07, $0.11 above the high end of our first quarter guidance and up 16%, excluding pension headwinds. Segment profits drove $0.21 of year-over-year improvement in earnings per share, the main driver of our EPS growth. Excluding the pension headwinds, below the line and other added $0.03 year-over-year, a lower adjusted effective tax rate contributed $0.02 of improvement and reduced share count added an additional $0.05 for total EPS, excluding the pension impact of $2.22. This was offset by a $0.15 headwind from a lower pension income. A bridge from adjusted EPS from 1Q 2022 to 1Q 2023 can be found in the appendix of this presentation. We made good progress on cash for Q1. Reported cash flow for the quarter was negative $1 billion due to payment of settlements signed in fourth quarter of 2022, which we signaled in our guidance call. Excluding the net impact of these settlements, we generated $300 million of free cash flow up from $50 million in the first quarter of last year. This increase was driven by improved working capital, including more favorable payables and inventory balances. As we discussed, our inventory planning focus will be a major contributor to our cash performance in 2023, and we are off to a promising start. So overall, Honeywell operating playbook continues to deliver strong results. And that, combined with our differentiated portfolio of solutions, will enable us to drive compelling growth in earnings and cash for the quarters to come. Now let me turn it over to Greg, as we move to Slide 7 to discuss our second quarter and full year guidance.

Darius Adamczyk:

Thank you, Greg. In summary, we're off to a strong start to 2023, over delivering across the board versus our guidance, allowing us to meaningfully raise our full year guidance for organic growth, segment margin and earnings per share. Our value-creation framework is working. The macro economy remains uncertain, but we continue to grow our record backlog, and executing at it provides significant runway in the near term. Honeywell remains well positioned to outperform in any environment. Thank you to all of our Honeywell colleagues who continue to drive differentiated performance for our customers and shareholders. With that, Sean, let's move to Q&A.

Operator:

Our first question comes from the line of Steve Tusa at JPMorgan.

Vimal Kapur:

Good morning.

Vimal Kapur:

Thanks.

Vimal Kapur:

Yes. So sequentially, as Greg gave you the full year view, we do expect the growth momentum to continue even though at a slightly different rate. Part of it is, we had a pretty strong quarter in PMT and HPT prior year, so we are dealing with the tough comps. So there is certainly going to be some revenue comparison issues there. Aero will be very strong. And SPS, as we guided, will be moderated performance over the rest of the year. So but overall, we remain confident on our new guide of 3% to 6% organic growth rate, and we'll work hard to perform on that. Greg, if you want to add anything?

Steve Tusa:

Sorry. So what's the sequential performance for EPS? Should we think about that as kind of in line with normal seasonality, or…

Steve Tusa:

…like how do we think about the phasing of EPS for the rest of the year?

Steve Tusa:

What is the norm? Can you just remind us because it's been a couple of years of abnormal.

Steve Tusa:

EPS. EPS. EPS.

Steve Tusa:

Okay, great. Thanks a lot for the color.

Julian Mitchell:

Hi, good morning.

Julian Mitchell:

Good morning. Maybe I just wanted to try and understand, dialing in on the second quarter for a second. So you've got a smaller than maybe normal sequential sales increase. It doesn't sound like that's anything macro or demand-related. It's maybe more on supply, so any extra color on that? And also, it looks like you're guiding for sales to be up sequentially in Q2 firm-wide somewhat at flat margins. So is that just something around maybe Aero OE mix? Just any thoughts on that, please?

Greg Lewis:

Yeah. No, I mean, we've grown anywhere from 4% to 7% quarter-to-quarter sequentially. This guide has us right in like the 3% to 4% range. Last year, we had a really big step-up in PMT. It's a little bit less in Q2 this year. But again, very much within historical parameters. And from a margin perspective, again, last year, we went down in margin rates from Q1 to Q2. So our guide is solidly within our Q1 performance. I think at the top end, we're up 20 basis points. At the bottom end, we're down 20. So it's frankly right in the norm. So I wouldn't read too much into it.

Darius Adamczyk:

Yeah. So I mean, let's take this piece by piece. And in terms of PSS, I mean, we've actually seeing sequential improvement off of Q4. So we think that, that business is back on the rise, and we saw that sequentially. So I think that, that's very much consistent with our assumptions and is very much in line of our expectations. When it comes to IGS, that was -- that's still -- that market continues to be relatively soft. But having said that, our quote activity and our opportunity activity is significantly increasing for Q2, Q3 and Q4. Because as we look forward in the pipeline, that continues to get better and better. So we're cautiously optimistic that we're going to see much better order trends as we head into the last three quarters of the year.

Operator:

Our next question comes from Nigel Coe with Wolfe Research.

Greg Lewis:

Sure. Let me take that. So if you think about our guidance 90 days ago, we talked about really three specific risks that we were watching. One was China with Chinese New Year and concerns about whether everyone was going to go home and then come back and wind up with lockdowns in China. It didn't happen. Things turned out quite well. There was really no disruption in China at all. Second one was really, again, Aerospace and where we're going to get a substantial sequential improvement in output, and we did. We were up 20% in our output in Aerospace year-over-year, which was above the high-end of our guidance and was quite strong. And then the third one is PMT. And we talked about the fact that, in December, we had some challenges with the freeze in the Louisiana area with some of our factories there, and we had an outage early January, which we needed to shut down a plant and bring it back up again, and it came up quite well and in fact, on time. And after the plant was restored, it was operating at levels that were greater than before the outage even occurred. And so that's why what you're seeing is essentially PMT and Aerospace, in particular, drove probably over $100 million each, on the top-end of our own guide in terms of the revenue outlook. So those are things that we were conscious of and we're watching and managing where we could, and things turned out quite well. So that was really good. And then again, as you mentioned, accounts receivable goes up. As you recall, 50% of our revenues in any quarter in the last month of the quarter, we had a really strong revenue performance. ARR goes up, and we've got a lot of receivables here to collect in April, and I'm sure that will bode well for strong cash here in Q2.

Greg Lewis:

Yeah.

Scott Davis:

Hey. Good morning guys.

Darius Adamczyk:

Good morning.

Vimal Kapur:

Yeah.

Greg Lewis:

Hey Scott, real quick, just what you saw with the $10 billion authorization, that is like what we always do. We work our authorization down to about a $2 billion range. And then we, frankly, almost as a matter, of course, re-up it to $8 billion or $10 billion. And so you should view that as us just doing our normal re-staffing of our buyback authorization to give us the flexibility that we always have. So there was nothing abnormal in that at all in terms of the cycle of the way we operate. But I'm sure Darius will talk about the capital allocation aspect.

Scott Davis:

All right. Darius, just a natural follow-up. Would -- it's like quite a statement, never seen a better time to be a buyer. I don't think I've ever heard you say anything in that context or that bullish in your tenure. And then, would you consider going up in size? You just said bolt-ons, but perhaps something a little bit more larger in the pipe?

Scott Davis:

Very encouraging. Thank you. I’ll pass it on, guys. Good luck.

Operator:

Our next question comes from Sheila Kahyaoglu with Jefferies.

Darius Adamczyk:

Yes. I mean, I think, you saw kind of a 6:2 [ph] mix as we move forward. I think, frankly, we're still projecting to be about a 4% price impact for the year. So, obviously, pricing is going to become a bit tougher in the second half of the year as we kind of lap some of those comps. But, overall, pricing is going to continue to be a significant value driver for our results, given the differentiation and the technologies that we have within our portfolio. So that's kind of how we see the setup, obviously, coming off of 6% and projecting 4% for the year if we expect something a bit lower in the second half. But that's all very much move in the algorithm that we expected for the year and actually gain confidence in that algorithm given our -- we raised both in the bottom and top end of our ranges. I don't know. And Greg, if you want to --

Sheila Kahyaoglu:

Great. Thank you.

Jeff Sprague:

Thank you. Good morning, everyone.

Jeff Sprague:

Hey, good morning. And just a two-parter on kind of Aero OE. I mean it looks like you're making pretty good progress, as you stated and you acknowledged some supply chain issues. But I was a little surprised, one of your customers called you out by name yesterday. Just wondering if there's something Honeywell-specific that's hung up from a delivery standpoint, or you would just kind of point your finger further down the line to your suppliers as just kind of part one, if you could add any color there. And then just also one OE kind of incentive payments and the like, where do we stand for 2023 now? Is this still kind of a peak year for headwinds, or does some of that maybe move into 2024, if deliveries aren't quite what you thought they might be?

Greg Lewis:

Yeah, on the incentive side, we're not making any adjustment to our expectations as far as that is concerned. It's still very early in the year. As far as we know, OE deliveries are still going to be roughly in the range of what we had anticipated as we opened the year. And like you said, we expect this year is probably the peak. And then it's going to flatten out or come down slightly next year but still be relatively high. Should that shift left to right a little bit, we'll see. But at this moment, we're keeping our expectations as they were.

Jeff Sprague:

Great. Thanks for that color. Appreciate it.

Joe Ritchie:

Thanks. Good morning. So just want to understand Aero for my one question. I guess, as you think about the margins for the year, you guys talked about flat margins, but that started the year off down. And what's expected to improve as the year progresses? Is there a friction associated with the supply chain that's impacting the margin today? Because your aftermarket business is growing faster than OE. So just any color on like the -- what gets better in Aero from a margin standpoint as the year progresses?

Joe Ritchie:

Okay. Great. Good enough. Thanks.

Deane Dray:

Thank you. Good morning, everyone. Darius, since this is your last call, I just want to say congratulations on your run as CEO. And look, all CEOs want to go out on a strong note, leaving the company in good hands. And I think this quarter speaks to that. So congrats.

Deane Dray:

For my one question, on Intelligrated aftermarket, there was always this high growth in installations, and we are waiting to get that critical mass in the installed base to start to get to the aftermarket. Have you reached that point? And what's that mix going forward between OE and aftermarket? Thanks.

Deane Dray:

Great. Thank you.

Chris Snyder:

Thank you. So the guidance, at least at the midpoint, seems to suggest slightly better organic growth in the back half relative to Q2 and comes despite tough comps and maybe some macro concerns out there. So could you just maybe provide some more color on the subsegments or business lines where you think you could see better organic growth relative to Q2? And also, does this dynamic maybe reflect some Q2 conservatism? The prior commentary kind of said that Q2 seasonality is coming in below normalized levels? Thank you.

Darius Adamczyk:

Yes. And the other factor is that we're gaining more and more confidence in output out of Aerospace. I mean we're continuing to grow. It's the work that we've done in terms of mending the supply chain is producing results. I quoted some of the year-over-year numbers earlier. And we expect that progress to continue and even accelerate, particularly as we get into the back half of the year. So we're very confident in our outlook for the growth that we have and looking forward for signs and especially order rates for HPT to see what that looks like. Because obviously, our Q1 results there were also better than expectations, both in terms of revenue as well as orders. So we'll see how Q2 goes, and that may offer some further upside.

Operator:

Thank you. I would now like to turn the call back over to Darius Adamczyk for closing remarks.

Vimal Kapur:

Thank you.

Sean Meakim:

Thank you, Crystal. Good morning and welcome to Honeywell's fourth quarter 2022 earnings and 2023 outlook conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur; and Senior Vice President, General Counsel, Anne Madden. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Honeywell also uses our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcasts and social media. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of the 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 fourth quarter and full year 2022 and discuss our 2023 outlook, including sharing our guidance for the first quarter of 2023 and full year 2023. 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.

Vimal Kapur:

Thank you, Darius, and good morning, everyone. Let's turn to slide 4. As Darius mentioned, we continue to deliver on our financial commitments, despite a very challenging operating environment. In the fourth quarter, sales grew 10% organically with double-digit growth in three of our four SBGs

Darius Adamczyk:

2022 was another year of both challenges and progress for Honeywell. Despite another host of macroeconomic and geopolitical difficulties, we attacked the challenges we faced head on, we over-delivered on our financial commitments. While 2023 brings new -- including potential recession scenarios, leading to uncertain demand in short cycle with a record $30 billion backlog, a robust balance sheet and one that has been further derisked due to the NARCO settlement and the ability to deploy capital organically and inorganically, I remain optimistic about the future of Honeywell and believe the company is well positioned to drive innovation to solve some of the world's most challenging problems. One last item before we move to Q&A. I'm pleased to announce that our 2023 Investor Day will be held on May 11 in New York City. At this Investor Day, I, along with our other members of the senior management team, will provide an update on Honeywell's business strategy, exciting new growth opportunities and our long-term growth algorithm. We look forward to sharing more about Honeywell's future data. With that, Sean, let's move to Q&A.

Operator:

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question will come from Julian Mitchell from Barclays. Your line is open.

Darius Adamczyk:

Good morning.

Greg Lewis:

Thanks, Julian. First off, we don't guide orders, so we're not really going to comment on that specifically. As it relates to the margin outlook you highlighted, I think you're in the right neighborhood. Again, we don't guide our individual margin rates for each of the segments. But to expect that Aero might be down in 1Q is probably a reasonable expectation. And as I highlighted, SPS is going to be on the top end of our margin expansion all year long, frankly, given all the work that, that team has done, adjusting their cost structure for the realities of the sales environment that they've been in as well as, as we talked about before, the reductions in Intelligrated sales are actually not painful from a margin standpoint. They actually help given the margin profile of that business. So, I think your instincts are right, but we're not going to be specific on that guide.

Operator:

Thank you. And our next question will come from Steve Tusa from JPMorgan. Your line is open.

Darius Adamczyk:

Good morning.

Darius Adamczyk:

Yes, I mean we absolutely are. I think that we're very committed to that number. As we look at the outlook for this year, we're very much within our operating algorithm that we provided last Investor Day, sort of -- if you just take the midpoint, we're sort of at the lower end on revenue, but we're above our margin profile. But in terms of our commitments to our long-term gains, it's very much on track. The OEM credits are significant as a headwind. And Greg?

Darius Adamczyk:

Yes. And maybe just some closing two points, we do expect modest margin expansion in Aero. And we're very committed to the goal we gave you at the last Investor Day.

Scott Davis:

Good morning guys and Anne.

Scott Davis:

I was wondering if you guys could walk through a little bit of what your cost inflation assumptions are and maybe a little color around kind of that -- the price/cost environment. Just in context, are we kind of done with the inflation part of the cycle? Are your suppliers still raising prices on you guys? And are you still raising prices on your side? And just a little bit of color per segment, I think, would be helpful. Thanks. And I'll pass it on after that.

Greg Lewis:

Yeah. I mean all I would say is that means rather than double-digit price increases, we're planning on mid single-digits, maybe low single-digits this year with inflation in that same neighborhood.

Operator:

Thank you. One moment for our next question. And our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

Darius Adamczyk:

Good morning.

Darius Adamczyk:

Yeah. Let me kind of -- there's sort of not one way to describe it, but I'll give you a few metrics which indicate sort of the direction. I mean, I think the punchline, the summary punchline, it is improving, and we saw that. I mean we saw a reduction in our past two and three out of the four SBGs. The only one the past dues went up in Q4 was Aero. But we also saw very robust demand in Aero. So I think you have to offset that. Is that an issue? Is that an opportunity? And I would tell you that our Aero output on a year-over-year basis was up around 15%. So that's actually a pretty good outcome, which also tells you that we're migrating in the right direction and given that the past due is reduced and the other one. So let me kind of split the discussion on two segments. One, for semiconductors, it is definitely getting better. It is improving, and we see that sort of really moderating towards a normal state before the end of this year. That's sort of what we saw. We saw some clearing of the past dues. We still have some left, and that's how we see it. In Aero, it's also improving. The pace is likely going to be slower than what it was in semiconductors. Our level of decommits in Q4 was below 20%, which was a low for the year. Every year -- every quarter prior to Q4, the level of decommits from our supply base was over 20%, actually, under 20%, which is also a good sign. So we see a slow and steady improvement as we move throughout the year. That's sort of our expectation for the supply chain.

Nigel Coe:

Thanks. Good morning, everyone. Just wanted to --

Nigel Coe:

Hi. Good morning. Just wanted to dive into SPS a bit more. So if we think about -- maybe, first of all, can we just dive in a bit deeper into what happened with the PPS. I know there's been some channel headwinds there, but that's a big change from what we saw last quarter. And then, when we think about the 2023 outlook, it looks like Intelligrated down 15%, 20%. Is that representative of the market, or are you being more selective in terms of the projects that you've been accepting and therefore converting? And then on top of that, I know that's only one question, but it looks like margins this year is high teens, maybe 20% range. When we normalize the mix beyond this year, are we going to be above 20%? Any color there would be helpful.

Nigel Coe:

Yes. The last part of the one question is, when we normalize the mix to Intelligrated PPS in 2024, 2025, are we at 20 and above margins?

Vimal Kapur:

So, IGS, I think, I just want to add a comment on IGS. I think top line challenge will be there in 2023. But we are focused on margin in this business. Our aftermarket service business is growing double digits for last several years. That trend will continue in 2023. In fact, we want to do everything possible to continue to drive that at a higher rate and other margin improvement opportunity. But better operating efficiency, executing projects better and faster is going to be another focus area. So while the volumes are down, we are constantly looking at margin expansion strategy in Intelligrated business.

Andrew Obin:

Hi. Yes. Good morning.

Andrew Obin:

Just a couple of questions on PMT. So first, on decarbonization, I mean, clearly a big revenue driver. But are you seeing any delays in process and fund disbursement at the federal level because we, sort of, heard about just shortage of staffing there? So that's question one. And second, if you could just talk about visibility on advanced material strength because that seems to be just get better and better every quarter? Thank you.

Darius Adamczyk:

Yes. Maybe just to add a couple of things and a couple of specific numbers. I mean our orders in Q4, particularly in our flooring business, were very, very strong, I think, double-digit strong. Our LST business is strong. UOP is well-positioned for the year. Sparta business was extraordinarily strong on the acquisition we made in 2021. So all-in-all, I think it was a very strong orders quarter. As we pointed out on our track, if you remember, some of the very, very unusual cold weather that we faced around the Christmas time caused us some challenges in some of our process operations because, frankly, they're just not built to operate in 5-degree weather. That's not what you typically see in Louisiana in December. So all-in-all, I think that this is -- our AM and PMT business is well positioned. Good orders growth and strong performance should be expected.

Jeffrey Sprague:

Hi. Thanks. Good morning, everyone. Just a follow-up on Aero margins from me, if I could. Appreciate the color on the OEM incentives. Just trying to think about the next couple of years also, if you can give us some directional help, right? It's not hard to imagine those incentives -- continue to escalate the next couple of years as Boeing delivers more, but I think you might be getting some help going the other way in business jet or other parts of Aero. So can you just give us a sense of, is 2023, kind of, peak headwind for incentives?

Jeffrey Sprague:

How it might play out in 2024 and 2025?

Darius Adamczyk:

Yeah. I think that's exactly right. I think that, this is probably an unusual 2023 headwind. But even the headwind, we expect to modestly expand margins. But I think the most important thing that's missing here is, we're very excited about the future of Aerospace. I mean, the orders are up, backlog is way up. I mean, we think the next three years will be very exciting for Aero.

Darius Adamczyk:

Supply chain is getting better. Our ISC teams have really demonstrated unlock of a lot of capacity. And I think there's nothing other than to be excited for the next three years in Aerospace. It's – I'm very confident in the backlog position, and it's going to be a really nice period for that business.

Andrew Kaplowitz:

Good morning, everyone.

Andrew Kaplowitz:

So you mentioned capital deployment in line with three year $25 billion plan for 2023, I think, which would mean another year somewhat similar to 2022. You deployed almost $8 billion of cash. Obviously, out there, you've got National Instruments conducting a strategic review, as I'm sure you know. If Honeywell were to consider to be quite a bit larger than you've done in the past there – so we know you have the financial capacity to do it, but you've been disciplined when you've done M&A and really stuck to more bolt-ons. Can you remind us of your return hurdles to do a larger acquisition? And what, if any, strategic requirements you have to make a larger acquisition?

Operator:

Thank you. One moment for our next question, please. And our next question will come from Josh Pokrzywinski from Morgan Stanley. Your line is open.

Darius Adamczyk:

Good morning.

Darius Adamczyk:

Yeah. Maybe I'll start and I'll turn it over to Vimal. So first of all, we feel very good about the backlog, because if you look at the backlog where we are in totality, it's about $3 billion to $4 billion more than what I call a normal state. If you go back two, three years, if -- we can debate whether it's in that $3 billion to $5 billion more than normal. So the backlog position is very strong. From a long-cycle perspective, Aero, especially PMT, very strong position. Even in the short-cycle businesses, which are predominantly HBT and SPS, we've got strong backlog through at least the first half of this year. We do expect an uptick as we go into the second half of this year in terms of some of those businesses because we have some unusual pull-forward order activity in the first half. So especially as we get into the second half of this year, we don't know this yet, but we're cautiously optimistic it can actually be one of those unique periods where the short cycle and long cycle are turning at a really good pace. We have much more confidence in the first half based on the strength of the long cycle, and we expect an uptick in the second half in the short cycles too. Vimal?

Operator:

Thank you. One moment for our next question please. And our next question comes from Joe Ritchie from Goldman Sachs. Your line is open.

Darius Adamczyk:

Yeah. I mean, I think -- first of all, let me -- there's a couple of questions. And the first one is why is the guidance wider than normal, because I think we would probably admit that in terms of the economic scenarios this year are probably a bit wider than most people guess. And you have anything ranging from a soft landing out there to a deep recession, and I've heard opinions anywhere in that range. So I just think from a highway perspective, and this is, I think, consistent of how we guide every year is -- and probably this year more than ever. We try to have a little bit of a wider range, which is indicative of the uncertainty around the economic conditions. And I would say if I were compared to this year versus 2022 or 2021, it's probably more uncertainty rather than us. So that's the reason for the wide range. In terms of the range, it's out, sure. At the lower end – at the lower end, it's probably -- it probably means that tougher economic conditions. The second half is the economic conditions turn worse, the short cycle is worse than we expect at the top end. It's a bit more of what we hope is the expectation, which is some of the order activity turns. Short cycle becomes more robust in the second half and China returns to growth. I mean we -- Q1 -- we actually think Q1 in China could be challenging because of the lifting of the COVID restrictions, Chinese New Year and so on. And we embedded that in our guide. But we actually think that second half in China could actually be quite strong. And if that comes to fruition, that sort of points to the upper end of our guide. So that's where we kind of have a bit of a wider range. And by the way, we did guide a wider range like this historically it could. Since it's not that much wider and 2022 was a little bit narrower. But I think it's just -- it's as simple as it's indicative of the economic uncertainty that I think many of us are facing. And there's a wide range of educated guess as to...

Operator:

Thank you. One moment for our next question, please. And our next question comes from Deane Dray from RBC Capital Markets. Your line is open.

Anne Madden:

Thank you, Deane.

Darius Adamczyk:

Maybe I'll start and Vimal will add any further commentary. I would say, no major surprises, I mean, in terms of how we ended up. I mean, Europe was softer, particularly the UK was really soft in Q4. That probably stood out for us in Europe. But then as we looked at December, the exit rates weren't actually bad. So November and October were a bit weaker, December exit rates were better. In terms of the overall business performance, I mean, it was actually incredibly consistent with what we guided. I mean, we guided -- we came in roughly at the middle of our range, a little bit better on operating margin. I mean we guide for a reason, and that's sort of where we ended. And by the way, thank you for acknowledging the NARCO. I mean, I think as you kind of read the articles and some of the other companies out there, I can't understate how important or overstate how important it is to eliminate liabilities from your balance sheet. And when you can do that permanently with confidence, it substantially derisks the future of the company. I think maybe just didn't get as much offense as I think it should have because it was a huge deal. It hit up a lot of bandwidth. But I am thrilled to have this liability reduced off the balance sheet. Vimal, if you…

Operator:

Thank you. That does conclude our question-and-answer session. I would now like to turn the conference back over to Darius Adamczyk for any closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Sean Meakim:

Thank you, Liz. Good morning, and welcome to Honeywell's Third Quarter 2022 Earnings Conference Call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; and President and Chief Operating Officer, Vimal Kapur. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Honeywell also use our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcasts and social media. Note that elements of this presentation contain forward-looking statements, which 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 you to 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 third quarter of 2022, share our guidance for the fourth quarter and full year 2022 and provide some preliminary thoughts on 2023. 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.

Vimal Kapur:

Thank you, Darius, and good morning, everyone. As Darius highlighted, we delivered strong third quarter results despite a tough operating environment. Disciplined adherence to our best-in-class Honeywell value creation framework provided us with operational agility to meet or exceed our guided financial metrics. Third quarter sales grew by 9% organically or 10%, excluding the wind down of our operations in Russia. The performance was driven by double-digit organic growth in HBT, PMT and Aerospace. Demand trend remains strong with backlog near record levels. However, ongoing supply chain constraints continue to temper overall volume growth. We did see modest sequential improvement in volume causing our positive backlog to decrease in SPS, HBT and PMT as we benefit from our reengineering effort to qualify alternative parts and our proactive partnering with distributors and alternative suppliers to ensure priority sourcing. Our readiness efforts in aero also enables single-digit sequential improvement in output. We continue to reap benefits of Honeywell digital transformation investments made over the past few years. We leverage these digital tools to drive commercial and operational actions, which enabled us to stay ahead of inflation curve and help us expand segment margin by 60 basis points year-over-year to 21.8%. We are also starting to see some benefits in inventory from our digital and process improvements in planning and sideline. Now let me share a few comments on third quarter performance by business. Aerospace sales for the third quarter were up 10% organically year-over-year as commercial aviation sales grew double digits for the sixth consecutive quarter despite ongoing supply chain challenges. In fact, if we had held past due backlog flat sequentially for the quarter, we would could delivered an additional 9% of organic sales growth. Commercial aftermarket demand remains robust with continued flight or recovery leading to increased payer shipment and repair and overhaul sales. Both air transport aftermarket and business and general aviation aftermarket sales grew over 20% organically in the quarter. Commercial original equipment sales increased 30% year-over-year including approximately 50% growth in our air transport original equipment, driven by increased shipset deliveries to these customers. Defense volumes were down in the quarter, but we believe 2022 will be trough for this business as our elevated backlog position and an expected increase in defense spending support recovery in coming years. Aero segment margin expanded 40 basis points to 27.5% as our commercial excellence effort more than offset our cost inflation. Building Technologies was our fastest-growing business in the third quarter with 19% organic sales growth. Sales of our fire products and building management system remains strong, resulting in 23% organic growth in Building Products portfolio, the third consecutive quarter of double-digit growth. In Building Solutions, the sales grew 13% as project volume increased despite ongoing part shortages. While supply chains have not fully unlocked and significant material constraints remain, we did see sequential improvement in volumes for the third consecutive quarter, a sign that supply chains are moving in the right direction. Backlog in our Building Projects and Services business remains robust, roughly flat to the second quarter and 7% above third quarter 2022 levels. Orders were down 3% reported, but growing 3% on an organic basis, with continued strength in U.S. and China, somewhat diluted by softening in part of Europe and Asia. Our agile commercial actions were a net contributor to both top line and bottom line growth in the quarter and segment margin expanded 60 basis points to 24.1%. Performance Materials and Technologies grew 14% organically in the quarter despite an approximately 3% headwind from Russia. Advanced Materials grew 33% organically, leading PMT for the third consecutive quarter as we continue to see favorable demand, specifically in our Marine Products business. UOP sales increased 6% in the quarter, returning to growth and overcoming a 7% year-over-year headwind from lost machine sales. Growth in UOP were led by sales -- led by gas processing and refining catalyst demand and sustainable technology solutions offset sales growing triple digits year-over-year. Process Solutions grew 6% organically on continued demand for life cycle solutions and services and Thermal Solutions. Sparta Systems grew over 40% for second consecutive quarter and continues to be earnings accretive. Orders for PMT grew double digit in the third quarter, led by approximately 40% growth in orders in Advanced Materials and approximately 20% in UOP underpinned by strength in gas processing orders. Segment margin expanded 40 basis points in the quarter to 22.6%, driven by commercial excellence, offsetting cost inflation. As expected, Safety and Productivity Solutions sales decreased 4% organically in the quarter. We saw double-digit growth in advanced sensing and gas detection portion of our Sensing and Safety Technologies business, and Productivity Solutions and Services also grew organically in the quarter. However, this growth was offset by expected softness in warehouse automation and lower volumes in personal protective equipment. Intelligrated will be a key area of focus for me as we continue to improve our operations and drive margin expansion in that business. Our strategic pricing and productivity actions, along with favorable business mix, brought segment margins for SPS in its highest level since the fourth quarter of 2018, expanding 250 basis points year-over-year to 15.7%. Honeywell Connected Enterprises continues to underpin the growth we are seeing across our portfolio. Recurring revenue grew over 10% in the quarter and SaaS growth was approximately 40%. Part a system was once again stand out within CE, growing over 40% in the quarter with cyber and connected building also seeing double-digit organic growth. So overall, this was a great operational result for Honeywell and our SPD performance was a key driver for our third quarter adjusted earnings per share growth. Adjusted EPS for the quarter grew 11% to $2.25, which exceeded the high end of our guidance range by $0.05. On cash dynamics, we generated $1.9 billion of free cash flow in the quarter, up 108% year-over-year. The increase was driven by a positive contribution from working capital due to strong collections and continued focus on matching our supply to our demand, which enabled us to reduce inventory for the first time in 7 quarters, an encouraging example of the results that Honeywell is capable of delivering despite the supply chain challenges and expected lead times we have been battling in recent quarters. The Honeywell playbook continues to deliver outstanding results and these operating principles, combined with our attractive end market exposure and differentiated portfolio of solutions will allow us to maintain the resiliency for quarters to come. Let me turn it over to Greg to discuss third quarter earnings per share in more depth and provide an update on our 2022 outlook.