Thank you for standing by, and welcome to the Honeywell Second Quarter 2023 Earnings Conference. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please, go ahead.

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.

Thank you, Sean, and good morning, everyone. Let's begin on slide two. The second quarter was another strong one for Honeywell. We met or exceeded our commitments as our rigorous operating principles enable us to navigate a challenging backdrop. We grew our adjusted earnings per share 6% year-over-year to $2.23 or up 13%, excluding a $0.15 non-cash pension headwind. Second quarter organic sales were up 3% year-over-year, led by double-digit growth in commercial aerospace, process solutions, and UOP. Our Aerospace business continues to perform at a very high level. The second quarter backlog grew to a new record of $30.5 billion, up 4% year-over-year and 1% sequentially due to strength in Aero, PMT, and HBT. Similar to last quarter, orders continue to grow double-digit organically in Aero, but the other segment's unfavorable comparison to last year's peak supply chain disruption led to a single-digit decline in orders for overall Honeywell. We remain confident in our 2023 outlook as recovering end markets and operational excellence continue to deliver lean results despite macroeconomic uncertainty. Our segment margin expanded 150 basis points year-over-year, exceeding the high end of our guidance range by 20 basis points, led by expansion in SPS, HBT, and Aero. Our continued focus on commercial excellence and greater gains from productivity enabled us to remain ahead of our inflation curve. Free cash flow was $1.1 billion in the second quarter, up 34% year-over-year, driven by strong net income and improved working capital in line with our expectations. Greg will walk you through the free cash flow drivers in more detail in a few minutes. We deployed $2.1 billion to dividends, M&A, share repurchases, and growth CapEx, including opportunistically repurchasing 2.4 million shares throughout the quarter, reducing our weighted average share count to 670 million. I'm pleased with the progress we made this quarter on our portfolio shaping priorities. We invested in multiple new technologies utilizing our robust M&A playbook, including completing the acquisition of Compressor Controls Corporation for approximately $700 million. As always, we continue to execute on our proven value creation framework, which is underpinned by our accelerator operating system. The operating system, along with ongoing growth in our key end market, technologically differentiated portfolio of solutions is enabling us to navigate a challenging economic backdrop and deliver on our commitment again this quarter. Looking forward, I'm encouraged by the strength we are seeing in our long cycle Aero and energy verticals and remain confident in our position to outperform. Next, let's turn to slide three, to discuss the important leadership announcement. Last month, we announced that Jim Currier will be succeeding Mike Madsen as Honeywell Aerospace CEO. I want to congratulate Mike Madsen on his retirement and extend my sincere gratitude for the 37 years he has given to Honeywell. Mike has been an extremely effective leader and change agent in our company and the Aero industry. He has a rich history of exceeding expectations, overseeing an unprecedented $35 billion in new business in these last two years. His leadership and commitment to customers, employees, and the community are unparalleled. During his tenure as Aero CEO, Mike navigated the business through unprecedented pandemic disruptions while growing the topline and expanding margins by over 200 basis points. Because of Mike's passion and dedication to the business, he helped set Honeywell Aerospace up to be even more successful in the years to come. We're excited about the next phase of growth in Honeywell's Aero business under Jim Currier’s leadership. We are fortunate to have someone with his level of experience and tenure ready to take the helm, a true testament to Honeywell's bench strength and focus on succession planning. Jim has been with Honeywell’s Aero for 17 years, and prior to his current position, he had held multiple roles of increasing responsibility across function and geography, most recently as President of our Electronic Solutions business. The medium-term setup for Aero is the strongest it has ever been. Flight hours continue to be strong, including wide-body upside, which is now underway. We have diverse and optimized platform exposure, particularly in business aviation. In fact, over the last few months alone, we have won $3 billion in business to provide OEMs and airlines with our engines, components, and brakes, APUs, and flight management system, along with associated aftermarket services. In addition, supply chains are gradually improving, and we have returned to growth in defense and space. This momentum points to a robust multiyear trajectory for the largest businesses in Honeywell's portfolio. Let's turn to slide four to discuss our recent corporate development activity. I'm excited about our recent capital deployment announcement closing on our previously announced Compressor Controls Corporation acquisition and adding to strategic assets that will drive enhanced innovation and strengthen our technology portfolio. This mix really exemplifies the type of deals that we look to generate consistently. Last month, we closed our acquisition of CCC, a leading provider of turbo machinery control and optimization solutions, deploying approximately $700 million in an all-cash transaction. CCC Technologies, including control hardware, software, and services, bolster Honeywell's high growth sustainability and digitalization portfolio with new carbon capture control solutions. CCC integrates seamlessly into our Process Solutions business and provides meaningful revenue synergy potential with Honeywell Forge. We are excited to extend Honeywell's leadership in automation and help customers accelerate the energy transition with the completion of this acquisition. We also acquired SCADAfence, an Israel-based company that delivers operational technology (OT) and Internet of Things (IoT) cybersecurity solutions for monitoring large-scale networks. SCADAfence brings proven technologies in asset discovery, threat detection, and security governance, which are key to industrial and critical infrastructure cybersecurity programs into our portfolio. The OT Cybersecurity industry is expected to grow to greater than $10 billion in the next several years, and the SCADAfence portfolio pairs seamlessly with Honeywell's Cybersecurity business, providing an end-to-end enterprise solution that helps customers enhance enterprise resilience. In addition, we signed an agreement with Saab to acquire its heads-up display (HUD) asset, bolstering Honeywell's comprehensive end-to-end avionics and safety offering. We'll partner with Saab to develop and strengthen the HUD product line, which enables pilots to increase situational awareness, specifically at night or in difficult weather conditions. Importantly, the HUDs will be integrated into Honeywell Anthem, our revolutionary integrated flight deck with an intuitive user interface and highly scalable design, in addition to Honeywell's Primus Epic flight deck and associated solutions. I'm excited about our new technologies and the adjacencies we have unlocked through our recent M&A activity. We said before, and we have an active and robust pipeline, and this is further evidence that we are continuously enhancing our portfolio by investing in new opportunities. We look forward to continuing to deploy our capital in the coming quarters to create more value for Honeywell's shareholders. Now let me turn it over to Greg, on slide five, to discuss second quarter results in more detail as well as provide our views on guidance.

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 solutions, 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, leading to an 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 optimized our production and materials management using our improved end-to-end processes 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 a strong recovery in both flight hours and higher shipset deliveries. Growth remained strongest in the Commercial Aviation aftermarket, up over 25% led by over 30% growth in air transport as increased flight hours resulted in higher spare shipments and repair 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 order growth outpaced our backlog burn down. Segment margin in Aerospace expanded 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 Solutions 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 the 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 comparisons. 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 in 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 remained flat 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 Technologies 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 in 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 the 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 Q2 2022 to Q2 2023 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 persist in the current environment, our rigorous operating principles enable us to increase our guidance 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 to 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 space. 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 of 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 original equipment 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 seen 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 supporting sequential growth in the first half. Despite more challenging comparisons in the second half, these favorable markets and conditions, along with 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 await 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, but 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 comparisons, 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 spending 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 2023. For segment margins, we now expect HBT to lead Honeywell margin expansion as a result of strong inflation management and productivity actions. Turning to our other core guided metrics, the 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 to $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 Q2, which is unchanged from our previous guidance. That implies a lower fourth quarter rate due to the timing of discrete items. Importantly, this higher tax rate in Q3 reflects an approximately $0.06 headwind to EPS, which will be offset by a commensurate tailwind in Q4, leaving the full year unchanged. We expect the average share count to 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 2023 remains intact. A robust backlog of $30 billion underpins our strength and 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.

Thank you, Greg. I'd like to take a minute to zoom out from the quarterly results to emphasize the long-term journey Honeywell is on. As you can see from the chart on slide, Honeywell has made tremendous progress, whether it's accelerating organic growth, expanding gross margins and segment margins, or growing free cash flow, we have come a long way, but we are not done. We have identified a critical lever that will enable us to reach even higher levels of financial performance. We remain committed to our long-term growth as good metrics that we discussed during our May Investor Day and during 2023 guidance closely aligned with this framework. We carefully track our progression towards achieving our targets and remain confident in our ability to accelerate growth, achieve 25% segment margin and expand gross margin to above 40% and free cash flow margins to mid-teens and beyond. As I said in May, my priorities as CEO include accelerating organic growth and enhancing our innovation playbook, growing our sustainability and digitization capability, and maintaining our leadership position in high-growth regions. I also plan to evolve the accelerating operating system to drive incremental value through business model optimization. Additionally, Honeywell has undergone substantial internal transformation, the result of which you can see in our top line and bottom line improvements over the last decade. I plan to further optimize the portfolio through strategic capital deployment and reduce exposure to non-core areas. Our three significant deals announced this quarter demonstrated the strength of our M&A pipeline and our commitment to deploy capital. I'm excited to lead the change for this next phase of transformation for Honeywell, and I'm confident in our ability to deliver superior returns for our shareholders. As we deploy our global design model across our portfolio, we are uncovering substantial opportunities to capture value, whether it is expanding margins, driving incremental sales growth, or generating more cash, and we will continue to update you as these efforts translate increasingly into enhanced financial performance. Now let's turn into slide eight into the closing part before we move into Q&A. Honeywell executed very well in what remains a very dynamic operating environment. We'll continue to effectively manage through ongoing external factors by delivering on our commitment and relying on our value creation framework. The macro economy remains challenging, and the timing of our short-cycle acceleration is uncertain, but with ongoing strength in our two biggest end markets, Aerospace and Energy, combined with the operating rigor you have come to expect from Honeywell, we are confident in our ability to weather near-term challenges and meet our performance targets. Thank you to all our Honeywell colleagues who continue to enable us to outperform in any environment. With that, Sean, let's move to Q&A.

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

Our first question comes from the line of Andrew Obin with Bank of America. Andrew, your line is now open.

Yes. Can you hear me?

Yes. Good morning, Andrew.

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, do you guys need to add capacity to grow this business, how strong is the structural demand? Thank you.

Yes. Thanks, Andrew. So, I think the key is the comps of Advanced Materials to 2022, we grew more than 20% last year. So, combined with some of the weaknesses we see in the electronic material side, we are having a moderate year for the Advanced Materials this year. We do expect markets to turn better during the second half and more importantly in 2024. To your question on capacity expansion, we remain very excited. In fact, in the next trough cycle, we expect more capital investment to increase our capacity for Advanced Materials for some of the existing offerings and potentially some new offerings. So overall, we remain very bullish on Advanced Materials portfolio.

Thank you.

Our next question comes from the line of Steve Tusa with J.P. Morgan.

Hi, good morning, guys.

Good morning, Steve.

The underlying positive aspect is a very strong margin in Aerospace, but it's difficult to fully understand the OE incentives. Was there anything unusual in that regard, like were the OE incentives simply influenced by the timing of the quarter? I'm estimating an underlying incremental margin of around 40% for that business after adjusting for some of these OE incentives. Can you discuss the various factors involved and confirm if my calculations are approximately correct?

Yes. So, the OE incentives, we haven't disclosed the exact amount of them, but first half is going to be a little lighter than the second half in terms of those OE incentives. So, that's why when we talk about the full year margins still being flattish, even though we had a pretty strong Q2, I think that's really what's going on in that regard.

Okay. I have one last question about HBT. That business seems like it should be performing better in this environment, and even Building Solutions appears to be somewhat weak. This doesn’t seem to be just a factor of destocking. So, could you explain the various factors at play and why you aren't keeping pace with other non-residential players? Thank you.

Yes. So Steve, we are conscious of our margin rates in HBT and make careful selection of our projects which have adequate margins and strong service. So, I think given that choice we make, you can see the impact of that in the margin expansion of Building Technologies, and that comes to a certain degree at the organic growth rate. So, it's a choice to be made, and we want to deliver both an ideal world, but we remain biased more towards growth in margin expansion versus the top line growth.

Great. Thanks a lot.

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

Good morning, guys, and thank you. I want to ask on Aerospace specifically. 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 going to 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?

So Sheila, our deliveries for the year are pretty well aligned with all OEs, both on the transport as well as on the business jet side. We have our commitments to all key OEMs for Q3 and Q4, and our projections are based upon those commit rates. So I can't comment on their commitments to their customers, but we are pretty well aligned with our commitments to them. And our revenue growth and our volume growth is linked to that. And it's going to be pretty strong. I mean, we expect the momentum in Aerospace not to change in 2023 or for that matter even in 2024. Our backlog is extremely strong, and our supply chain continues to improve every quarter.

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

Got it. Thank you very much.

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

Hi, good morning. Maybe just my question would be on SPS. Just wanted to try and understand how the sort of orders and backlog there are moving. I can imagine it's not moving well, and that's why the revenue guide has come down. But any finer points on the orders and backlogs? And I suppose in the conviction level around warehouse accelerating next year, if that's starting to get sort of tested now because of the ongoing backlog pressure. And if we think about the shorter cycle businesses, how severe do you think the inventory depletion needs are in that business? And what does that mean for exit rates in SPS from this year on the top line?

Sure. So I would say if we take IGS first, our order rates are down meaningfully as we've talked about, but when we look at overall pipeline, we're starting to see the pipeline build back to a little bit better levels. That may not occur immediately, but we see a chance that we may be growing again in 2024, and that will really be dictated by how the back half orders 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 that have been either going up sequentially or staying roughly flat. So, I think we've reached this stabilization point on 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.

Thanks very much.

Yes.

Our next question comes from the line of Scott Davis with Melius Research.

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

Hi, Scott, good morning.

Vimal, couple of small things here. One, I mean, you guys are spending a couple of hundred million dollars a year on quantum. Vimal, do you have 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?

So, Scott, I mean, we have publicly stated that we would like to monetize the value of the quantum investment we have made in Quantinuum. And as the markets are more ready for IPO, which probably are here for a while, we are getting prepared for that. So, we are doing everything towards that endgame, and the strategy hasn't changed to create more value for our shareholders at an appropriate time through an IPO for that business.

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, or is there other competitive dynamics?

Look, I mean, we are definitely seeing better bookings for Forge for buildings. But one fact I would like to state is that business runs on a SaaS model. So even a large booking, the revenue recognition process is different from a traditional perpetual license-based model. So the revenue accretion is going to spread over multiple years for that. And we are consciously making that decision because rather than showing a short-term win, we are more biased towards a recurring revenue model there, as I've mentioned before. So that's why you see lesser impact, but we are scoring wins in Forge for buildings. And I continue to remain very bullish on that segment.

Okay, fair enough. Best of luck, Vimal.

Thank you, Scott.

Our next question comes from Nigel Coe with Wolfe Research.

Thanks. Good morning. Thanks for the question. Just wanted to maybe just put a final point on Julian's question on SPS. So obviously encouraging signs of the bottoming process here, but it does feel like the guidance embeds flat to maybe flattish plus or minus growth in the fourth. Just want to make sure that's the case and you've got good loans on that. And maybe on HBT, just break down geographically what you're seeing versus North America, Europe, and China? And whether there's any channel dynamics here we should think about as well?

So I'll start with HBT, and then turn to Greg for a response to the SPS question. I think HBT from a geographic perspective, Europe continues to be where we want to have a 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 the Middle East, India, and China in buildings, while 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 it's a very short-cycle business. So we don't see any dynamics of channels having less or more inventory in the HBT business. Maybe Greg, do you want to respond to the SPS question?

Yes. So, SPS is likely to be down in the fourth quarter. So I would say it's not going to be flattish; it's going to be probably more like down. I think both Q3 and Q2 are going to look pretty similar to one another, and then we'll get a little bit of a normal seasonal bump in the fourth quarter. So, that's the way I would think about the progression for SPS top line overall.

Great. Thanks.

Yes.

Thank you.

Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners.

Hi, thank you. Good morning, everyone.

Hi, Jeff.

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 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?

If our business model and HBT is a combination of serving the market both through direct and channel. So we have to make a choice in what business we want to serve direct and what business we want to serve through channels. In direct, we want to pick projects which have strong first-party content and aftermarket services. So given that algorithm, we make choices with that rule. And we are sensitive to drive top line growth, but we are not going to compromise to book projects which are lower margin and show shining top line growth without any margin expansion. That has been our principle. And the reason we are quite determined on the principle is it takes one bad project to deteriorate the entire business and the portfolio. So we remain committed to that model. And I'm not suggesting that we will not see growth in Building Technologies. I do believe that as energy efficiency becomes more prominent across the board, our energy business there will do well, and we will deliver more growth in the project side of the house too. But that remains our overarching goal.

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

Okay. On a total Honeywell basis, I mean, organic growth on the top end of our range is my biggest priority. I stated that in Investor Day; it's something I want to make my contribution in my tenure is how we grow at a higher rate. Now we are having favorable macros in two of our biggest SPGs, both in Aero and PMT. So on the strength of that, and if we couple that with the right new products, I see no reason that we should not be delivering our growth in the upper end of our four to seven algorithms. And that's what I work on every day and continue to drive our new product execution and M&A accelerating our overall growth algorithm. That remains my top commitment.

Hi, good morning.

Hi, Josh.

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?

Sure. So, Josh, if I look at each of the three segments, our Automation Business Process Solution has increasingly reduced its dependence on oil and gas. It has diversified very well in other end markets like energy storage, the gigafactory, metals, and mining, etc. So we can see that in the growth rate of revenue generation for Process Solutions, and we remain very bullish on that business for 2023 and 2024. The UOP segment, our strategy has been to grow our business into sustainable technology, renewable fuels, clean hydrogen, carbon capture, and we see pretty strong bookings in our sustainable technologies business. Just as a data point, we now have licensed 40 renewable fuel projects by Q3, and we are on a path to reach 50 by Q1 of 2024, which I mentioned in a couple of earlier investor meetings. So, the UOP business is becoming less linked to traditional refining petrochemicals but is fast moving towards renewable technology. And in Advanced Materials, our business is very specialty chemicals, our product line continues to grow. We see some pressure in electronic materials, which is reflected in our overall growth rates. But we do expect that to return to normalcy in 2024. So overall, the extremely positive outcome and bullish view on PMT for the second half of 2023 and 2024. The booking rates remain strong, backlog is very strong, and the new innovation pipeline is very robust. So, all good news there.

Our next question comes from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, guys.

Good morning.

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?

So, the way we have guided it, we are short-cycle orders have stabilized and we're expecting similar trends over the next few months, and our guide is based upon that. We are expecting stronger performance in warehouse automation orders because our pipeline has become better, but that will really strengthen the 2024 position given the long-cycle nature of the business. And that's our forecast right now, and we'll continue to update you if things change.

Yes. The teams have adjusted their cost structure to align with the current situation, and when the short-cycle businesses pick up again, you can expect those to have very high margins at the BCM level, leading to significant improvements in our margin rates. The margin rates we are reporting now will be in a higher range until we experience that pickup, but the business is prepared for it. It remains uncertain whether that will happen in Q4 or Q1, but we have structured the business appropriately, and there will be a considerable opportunity for leverage once that growth occurs.

And then here a question on Defense, when we could see an acceleration in demand there.

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 the second half versus the 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.

And from here though, we've passed probably the comps where small increments are going to create meaningful growth from a percentage basis. So, it should be all accretive from this point on.

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

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

Thank you. Good morning, everyone.

Hi, Deane.

Good morning.

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?

Sure. So, the pipeline is growing very nicely, and that gives us a little bit more optimism on better order performance for the business in the second half of the year. And the part of where the pipeline growth is driven by much more diversified end markets we serve now. So we are not limited to e-commerce. We are diversified into retail, into fashion, into logistics. So that wider coverage is giving us a better pipeline, and we are anticipating good progress in the orders in the second half of the year. On the aftermarket flywheel, I would say it's been working now. We are growing double digits in aftermarket in 2023 and will cross our aftermarket business more than $0.5 billion in bookings and pretty much nearly the same revenue for the year. And we don't expect the momentum to stop. That's our strength. Honeywell has a strong playbook on how to drive aftermarket services, and that's the value we'll continue to add to the business. And our strength in that business in 2024, therefore, we anticipate low to moderate growth, but very strong margin expansion because we continue to build more business with more first-party content and very strong aftermarket. When we couple the two together, we expect pretty healthy margin growth in the warehouse automation business in 2024.

Yes, I mean that business was around $200 million of the total in 2018. By 2022, it doubled to roughly $400 million. As Vimal said, this year is going to be over $500 million.

The aftermarket business is expected to experience low to moderate growth in 2024, but we anticipate very strong margin expansion as we build more business with first-party content and a robust aftermarket. When we combine these factors, we foresee substantial margin growth in the warehouse automation business for 2024. In 2018, this business generated around $200 million. By 2022, it had doubled to approximately $400 million, and as Vimal mentioned, this year it is projected to exceed $500 million.

So that aftermarket is happening.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Yes, thanks guys. Good morning.

Good morning.

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.

So orders remain pretty strong in the first half for UOP and HPS, and we expect to finish the year strong in both the businesses. I would say, high-single-digit orders growth in both UOP and HPS. And I explained the rationale for it. In HPS, it's more diversified end markets and our strength of our aftermarket business there. And in UOP, it is diversifying into renewable technologies. And as they become a more important part of our portfolio, it continues to grow the business. In UOP, the catalyst business continues to have a lot of strength in both refining and petrochemical catalysts. Advanced Materials, as I mentioned, 2022 was an outstanding year of 20% plus growth. So our comps year-on-year are tough. The margin rates are driven by some of the launch shutdowns, which we had announced earlier. So that certainly puts pressure on our cost positions, and then some contraction in the electronic materials business, which is depressing our margins. But overall, let's say still the highest margin business in the PMT portfolio, and as mentioned before, with the potential capacity expansion coming in years to come, this business is poised to perform very well in our portfolio.

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 Q1 to Q2. 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.

Thanks guys.

Welcome.

Liz, we have time for one more question.

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

Good morning, everyone.

Hi, Andrew.

Vimal, could you talk about the stepped-up level of acquisitions you did in the quarter? Would you expect that kind of activity to continue over the next few quarters? Have you changed any of your methods for assessing potential acquisitions? I think given the investor day, you probably didn't, but could you talk about the pipeline of opportunities going forward? 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 on is our deal metrics. We want to stay disciplined to create shareholder value, but at the same time, our number of opportunities in play are at a much higher elevated level compared to this time in the past. So, Anne, if you want to add any comment from your perspective.

Yes, I would just add, the pipeline is growing. It's rich. We feel good as a strategic acquirer. We maintain the view that it's a hospitable environment for strategic acquirers, while the private equity community still is having a harder time financing. So it's a good time for us to be a buyer, and we expect that environment to continue into 2024 and beyond.

Thank you.

Thank you.

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

Thank you. Our value creation framework is working. We are deploying our rigorous operating playbook to navigate near-term uncertainty. Honeywell remains well-positioned to outperform in any environment as we capitalize on recovering end markets combined with solid operational execution. Thank you to all our Honeywell colleagues who continue to drive differentiated performance for all our customers and shareholders. Thank you for listening, and please stay safe and healthy.

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