Honeywell International Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 29, 2025
Skip to Participants
Operator

Thank you for standing by, and welcome to the Honeywell First Quarter twenty twenty five Earnings Conference Call. 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.

Operator

Please go ahead.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

Thank you. Good morning, and welcome to Honeywell's first quarter twenty twenty five earnings conference call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapoor and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

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 first quarter, share our guidance for the second quarter and provide an update on full year 2025. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to your Chairman and CEO, Vimal Kapoor.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Thank you, Sean, and good morning, everyone. Honeywell saw its strong finish to last year's carry into 2025 as we exceeded the high end of our guidance on all metrics in the first quarter, and this performance translated into substantial free cash flow growth as well. Overall, demand was strong with a book to bill above one. Although our business has solid momentum heading into second quarter, the economic climate has become increasingly uncertain in recent weeks. Global trade patterns are shifting because of increasing tariff and duties, making customer planning more difficult.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Weaker sentiments combined with higher price expectation warrants incremental caution regarding end market demand in the coming quarters. Despite these headwinds, we remain on track to deliver on our 2025 outlook as we are maintaining our full year organic growth guidance and raising our adjusted EPS guidance. Our outlook now incorporates the impact of current tariffs and macroeconomic uncertainty, fully offset by our ongoing mitigation efforts, local for local strategy, accelerator operating system, and resilient market position. As you can see, we are taking decisive actions during this uncertain time to not only protect, but grow earnings, invest for future, and position Honeywell for long term success regardless of the operating environment we face. Honeywell has a team across function and businesses meeting daily to review and respond to tariff announcements.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

This team analyzes a number of levers to optimally respond to changing conditions. We're also closely monitoring bilateral negotiation and engaging with key stakeholders. From our perspective, there are three very important consideration for supporting American competitiveness and manufacturing. Maintain the principle of USMCA, strike the right kind of trade agreement with our major trading partners, and continue the global framework that has made The US the world leader in aerospace. As external environment has become more unpredictable, we remain focused on what we can control, and we have made significant progress in planning and executing our separation into three industry leading public companies.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

This preparation has included key leadership appointments to ensure that we have the right people in place to continue our portfolio transformation. Let's turn to slide three to discuss a few important changes announced earlier this month. Souping Liu will succeed Anne Madden as senior vice president and general counsel while retaining her role as corporate secretary. Sue's more than fifteen years of legal experience at Honeywell across many of our business lines and geographies will further strengthen our executive leadership team and will transition into a new role as Senior Vice President of Portfolio Transformation and Senior Advisor where her experience leading over 100 acquisitions as Honeywell's Global Head of M and A will prove invaluable during our continued portfolio optimization. Also, our board of directors has elected Steven Williamson to join us as an independent director and audit committee member.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Steven's decade as CFO of Thermo Fisher Scientific will broaden and deepen the expertise of board. I wanna personally congratulate these three individuals on their new roles, and I look forward to working closely with each one of them. Let's turn to slide four to discuss update on separation. We hold strong conviction that separating automation, automation, aerospace, and advanced materials that unlock significant value for all Honeywell stakeholders by best positioning each stand alone public company for long term profitable growth. Following our announcement in February, Honeywell has taken many steps forward in preparation for these transactions.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

First, we determined a tax free spin of Honeywell Aerospace will be most efficient way to separate our automation and aerospace businesses. Second, the board confirmed that I will lead the automation company going forward, and it's where I've spent bulk of my career and where I have a specific vision for the future. At the right time, board will evaluate the future leadership of Honeywell Aerospace as well. Third, we established dedicated separation management office run by experts in corporate transformation. These entities have empowerment to maintain the value of our businesses, minimize separation costs, and achieved our communicated timelines.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Most importantly, they will ensure that our operation leaders are focused solely on serving our customers and achieving our financial targets. Fourth, we appointed an accomplished leadership team, what will be called Solstice Advanced Materials. Collectively, they bring years of experience leading public companies, operating specialty chemical businesses, and utilizing Honeywell Accelerative Operating System. Solstice will be headquartered in New Jersey where the current leadership team for the business sits. Fifth, we continue deploying capital as an active buyer of our own shares, which offer tremendous value at recent levels.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

We have repurchased about $3,000,000,000 of our shares already this year and will continue to repurchase our stock opportunistically. And lastly, in March, we announced the acquisition of Sundyne as we continue to optimize our portfolio. If you turn to slide five, I'll discuss how this deal fits into with our portfolio transformation. As you can see, Sundyne will be the fifth strategic bolt on acquisition since I became Honeywell's CEO, along with couple of strategically important technology tuck ins. SunDyne meet each of the common sense criteria we have set in.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

It's the right size. It exceeds our financial return hurdles. It improves our business profile by boosting both organic growth and segment margins. And Honeywell is a natural owner of the business as Sundyne addresses a closely adjusted market to our existing ESS offering, which will allow us to sell a more robust and complementary portfolio of solution to our customers, particularly in LNG. We have meticulously built a pipeline of acquisition targets with compelling financial characteristics over the past several years and we'll continue to pursue them if they become available to us.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Given everything we have in flight, only the deals that are time sensitive will be pursued for now. Buying these differentiated businesses with strong aftermarket content and secular growth drivers at a reasonable price is a powerful use of capital. Our twenty twenty four acquisitions are now increasingly incorporated into our operations and performing admirably well with the bulk of integration work behind us, reinforcing that we have the right M and A process in place to create incremental value. While we continue to evaluate acquisition, we also look forward to opportunistically exit businesses such as personal protective equipment that do not fit into our business model or strategic priorities. The PPE sale will improve margins and organic growth.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

I will now move to slide six to address how we view the present global uncertainty. As a company, we remain confident in our ability to navigate the current trade environment. For decades, we have positioned each of our business lines to serve their local markets. This local for local strategy reduces our overall exposure to international trade and geopolitical tensions. Based on tariffs in place today, our approximate 2025 exposure is about $500,000,000 before taking any mitigation measures.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Our better tested accelerator operating system can quickly identify areas of concern and implement mitigation efforts. Then we pursue consistent and clear communication with our suppliers, customers, and partners to maximize operational stability for all parties. Through this well developed operational systems and our established local for local footprint, we are confident we can fully offset the impact of current tariffs and are well positioned to manage future trade uncertainty. This is evident in today's results and our confidence in maintaining and raising guidance in spite of these offsetting headwinds. Most importantly, whenever elevated global tensions do subside, we remain in excellent position to capitalize on record backlog and continue our growth trajectory.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Now let me turn over to Mike to discuss our excellent first quarter results.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Thank you, Wimal, and good morning to everyone joining us. Let me begin on Slide seven. We had a very strong start to the year in the first quarter, exceeding the high end of our organic sales, segment margin and adjusted earnings per share guidance. Our results demonstrate tremendous effort from our commercial teams, successful productivity initiatives and excellent supply chain coordination with our partners in a rapidly changing marketplace. First quarter sales grew four percent organically, led by Aerospace Technologies, where both our commercial aftermarket and defense and space businesses experienced double digit growth.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Building solution remains a significant contributor as well. Segment margin remained flat from the prior year at 23% with improvement in building automation and energy and sustainability solutions, offset by pressure in aerospace technologies and industrial automation. I would like to highlight that this margin performance includes an increase in our research and development spend of 50 basis points from the previous year to 4.5% of sales. We continue to balance current period profitability with our organic growth initiatives. Segment profit for the quarter grew 8% year over year, aided by the inclusion of our twenty twenty four acquisitions, which are performing ahead of the initial expectations.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Earnings per share for the first quarter was $2.22 per share, flat from the previous year, while adjusted earnings per share was $2.51 per share, up 7% year over year. Segment profit more than offset headwinds from interest rate expense, foreign exchange and taxes. You'll find a bridge of adjusted EPS from 1Q 'twenty four to 1Q 'twenty five in the appendix of this presentation. Orders were $10,600,000,000 in the quarter, up 3% year over year, excluding the effect of acquisitions, both supported by organic backlog growth of 8% to a new record of $36,100,000,000 Orders growth was led by longer cycle building automation and aerospace businesses. First quarter cash flow was more than $300,000,000 over $100,000,000 above the prior year, driven primarily by better adjusted earnings.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

We're utilizing our cash flow and strong balance sheet to dynamically allocate capital, including returning capital to shareholders. In the first quarter, we repurchased nearly $2,000,000,000 of our own shares at prices we find highly compelling, and we bought back roughly another $1,000,000,000 during the month of April, representing about 2% of our shares outstanding in 2025. We also paid more than $700,000,000 of dividends in the first quarter. We are investing in our business both organically and inorganically, as we allocated approximately $250,000,000 of capital projects and announced the acquisition of Sanddye. Now let's spend some time discussing our first quarter performance by business.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

In Aerospace Technologies, sales in the first quarter were up 9% organically year over year, exceeding our prior expectations. Better output as a result of supply chain improvements and robust demand from air transport customers to support increased flight activity drove 15% sales growth in the commercial aftermarket business. Defense and Space, aided by increased output and elevated global defense spending in a world of ongoing geopolitical uncertainty, delivered fifth consecutive quarter of double digit growth despite challenging comps and expiring government programs a year ago. Aerospace industry demand continues to outpace supplies, supporting our orders growth of 9% and a book to bill of 1.1%. First quarter segment margin contracted 190 basis points to 26.3% but matched our expectations as mix pressure and acquisition integration costs from Case were partially offset by productivity actions.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Industrial Automation sales declined 2% organically in the first quarter, led by lower demand in personal protective equipment, particularly in China and Europe. Warehouse and Workflow Solutions returned to growth in the quarter, up 5% as demand for warehouse automation continues to stabilize in prior year comparisons get easier. Our sensing business demonstrated recovery in the second consecutive quarter with double digit growth in both healthcare and aerospace and defense end markets. Process solution sales were flat as continued strength in life cycle solutions and Services and Compressor Controls was offset by modest declines in Smart Energy and Thermal Solutions. In Productivity Solutions and Services, weakness in Europe led a sales decline of 1% year over year when excluding the impact of the final year license and settlement payments.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Segment margin Industrial Automation contracted 130 basis points to 17.8%, driven by receivables write downs and volume deleverage, partially offset by productivity actions. Building automation delivered another solid quarter and outpaced our expectations, up 8% organically, led by second consecutive quarter of both double digit growth in Building Solutions and mid single digit growth in Building Products. Solutions continue to benefit from its robust backlog, up 11% in the quarter, led by over 30% growth in The Middle East and mid teens growth in North America. Building Products growth of 6% was driven by double digit organic growth in Fire and sustained strength in Security. Overall, orders continued to be encouraging indicator for Building Automation, with the first quarter marking a fourth consecutive quarter of year over year growth.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Building automation margin expanded 150 basis points driven by volume leverage, productivity actions and accretion from Access Solutions. Energy and Sustainability Solutions sales declined 2% organically in the first quarter. Strong quarter in petrochemical and refining projects as well as sustainability projects helped EOP deliver 2% organic sales growth year over year. Advanced Materials sales declined 4% as challenging prior year comps in Fluorine Products offset broad based strength in Specialty Chemicals and Materials, highlighted by over 20% growth in Spectrum. Orders were the bright spot for Advanced Materials, up 7% year over year, driven by double digit growth in Fluorine Products.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

This quarter marked a second full quarter of ownership of the LNG business acquired from Air Products, which continues to grow at accretive sales and margin rates. ESS segment margin expanded two thirty basis points in the quarter, led by productivity actions and the year over year benefit from the LNG acquisition, partially offset by cost inflation. Taken altogether, we still see long cycle businesses outperforming short cycle ones, while record backlog levels and best in class operating system position us well for future periods. I'll now move to slide eight to talk about our second quarter and full year guidance. Although a strong first quarter like we delivered would typically indicate improved expectations for the remainder of the year, we cannot ignore changes in the geopolitical environment that Wimal mentioned in his earlier remarks and believe that continuing to take a pragmatic approach to our guidance is appropriate given the increasing global uncertainty.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Rest assured, Honeywell is actively and successfully addressing both potential cost and demand challenges to mitigate their impact on our business. We have a playbook of rapid implementation of sourcing, pricing and productivity changes. As a reminder, our local for local approach to maintaining supply chain has been our strategy for more than two decades and is a very mature part of our operating system. This structure and our leading market positions will help mitigate much of our recent tariff changes across the portfolio, but we're not immune. We'll continue to balance protecting margins and sustaining volume across our end markets.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Now let's discuss what this means for 2025 guidance. For clarity, our guidance now assumes the impact of announced tariffs net of mitigation actions as well as additional contingency for potential end market demand weakness triggered by this uncertainty. We're maintaining our prior outlook calling for organic sales growth of 2% to 5% for the year or one percent to 4% when excluding the prior year impact from the Bombardier agreement, with better 1Q performance being offset by a prudent guidance posture given greater uncertainty for the rest of the year. As we contemplate the potential influence of uncertainty on our customers' activity, we are assuming an impact to organic sales for the remainder of the year approaching 1% to segment profit of about 2% and to EPS of about $0.18 comparing to the guidance we laid out in February. Full year sales are now projected to be $39,600,000,000 to $40,500,000,000 as favorable movements in foreign exchange rates since year end are being offset by two fewer months of revenue from our PPE business, given an early May exit rather than June.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Our guidance does not incorporate the acquisition of Sindheim, which is still expected to close in the second quarter. We anticipate year over year organic sales improvement to be relatively balanced across the next three quarters when excluding the impact of last year's Bombardier agreement, which will only influence the fourth quarter comparison. Consequently, we also see second quarter sales growing 1% to 4% organically, which translates into sales of 9,800,000,000.0 to $10,100,000,000 with one more month of PPE operations included or a $200,000,000 impact compared to a full quarter. We now anticipate our overall segment margin to basis points this year or to be down 10 basis points to up 20 basis points ex Bombardier. Changes to our margin outlook from prior expectations are focused in IA and ESS, given their relatively higher exposure to China trade.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

For the second quarter, segment margin is expected to be in the range of 22.8% to 23.2%, down 20 basis points to up 20 basis points from the prior year as margin improvement in IA and BA is offset by contraction in Aero and ESS. For the year, we now expect earnings per share of $10.2 to $10.5 up 3% to 6% or down 1% to up 2% excluding the prior year Bombardier agreement impact. Earnings per share in the second quarter is anticipated to be in the range of $2.6 and $2.7 up 4% to up 8% year over year. I will provide additional details for full year EPS in a few minutes. Free cash flow for the year is still expected to be 5,400,000,000.0 to $5,800,000,000 down 2% to up 5% ex Bombardier and roughly in line with earnings growth.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

You can reference the 2025 free cash flow bridge in the appendix. Beyond our CapEx and dividend commitments, we plan to continue to deploy capital diligently over the course of the year, funding both attractive time sensitive acquisitions such as Sundyne, as well as being opportunistic on repurchase of our shares. Year to date, we have already bought back $3,000,000,000 worth of our stock, including $1,000,000,000 in April, putting us on the path to reduce our net share count for the year by 2%, far exceeding our 1% annual commitment. In summary, we're taking a clear eyed look at the remainder of 2025 to set appropriate expectations for our business given all the information available to us today. We are also not pausing the investment needed to fuel the future of innovation growth.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

I'll now turn to Slide nine to spend a few minutes on our outlook by business, discussing high level expectations by segment with additional details by SBU covered in the commentary portion of the slide. For Aerospace Technologies, we are holding our twenty twenty five full year outlook for organic sales growth in the high single digit range or mid single digit to high single digit when excluding the impact of last year's Bombardier agreement. Eros is expected to maintain its position as the growth leader for Honeywell, driven by ongoing ramp in flight activity and global defense spending. For the second quarter, organic sales are expected to be up in the mid single digit to high single digit range, led by strength in our commercial aftermarket business as supply chain outlook continues to support our outlook. Margins for the quarter and the year should be roughly 26% as case integration headwinds temporarily bring the segment below the run rate levels.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

We are lowering the 2025 sales outlook for Industrial Automation to down mid single digits year over year as the trajectory of short cycle orders and customer CapEx decisions has become increasingly uncertain in the current environment. We expect IA margins to be up modestly versus the prior year as we work to mitigate a potentially weaker demand environment and incremental costs related to tariffs with additional commercial excellence and productivity actions. We also anticipate second quarter sales to be down mid single digits year over year as strong end market talents in sensing and continued growth in warehouse automation offset by muted demand growth in productivity solutions services and personal protective equipment. Industrial Automation margin is expected to expand as the PPE exit, commercial excellence and productivity more than offset volume deleverage and cost inflation. For Building Automation, we are raising our 2025 sales outlook to mid single digit growth given standout performance in both long and short cycle businesses in the first quarter.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Our sales outlook for the remainder of the year remains largely unchanged as momentum from new product innovation and robust demand in high growth regions is partially tempered by global uncertainty for our business segment with the most international exposure. In the second quarter, we expect sales to be up low mid single digits with sequential and year over year growth in both solutions and products. Margins for the quarter and for the year should expand as volume leverage, accretion from access solutions and productivity actions more than offset cost inflation. In energy and sustainability solutions, we expect twenty twenty five organic sales growth to remain in our previously guided low single digit range year over year, led by strength in EOP and ongoing momentum in SDS. We continue to build on our robust pipeline from sustained global demand in projects despite ongoing macroeconomic uncertainty.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

We anticipate ESS margin to remain flat as cost inflation is offset by productivity actions and the full year benefit from the LNG acquisition. For the second quarter, organic sales should be up sequentially with plus to up year over year growth as backlog conversion is partially offset by the final quarter of difficult foreign incomes for the year. Margin is expected to contract from the prior year as a result of timing impacts, but remain in line with the first quarter. Now let's turn to Slide 10 to go over our 2025 EPS bridge. Walking from 2024 adjusted EPS ex Bombardier to the midpoint of our 2025 EPS guidance range involves a few moving pieces.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

We see organic segment profit growth adding $0.13 per share to 2025 earnings, down from our prior guide. The first quarter surpassed our outlook, but that will be more than offset by our more prudent posture towards guidance for the remainder of the year, driven by geopolitical changes seen over the past few weeks and their possible impact on customer demand, particularly in the back half of the year. Contributions from our 2024 acquisitions are still expected to add approximately $0.33 per share to twenty twenty five EPS. Notably, expectations for these businesses have shown stability at levels ahead of our initial plans at the time of purchase. Again, I remind everyone that the Sanday acquisition is not yet included in guidance for the year.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

The sale of our PPE business, for which we now model an early May close, will drag down earnings by $07 for the year, so it will prove beneficial to segment margin and organic sales growth. Foreign exchange movements since February have modestly reduced the expected currency headwind to earnings for the year to $05 per share. Please see the appendix of this presentation for a bridge with the sales impact of FX. Below the line items, the difference between segment profit and income before tax remains the largest headwind to year over year earnings growth at $0.52 per share. Pension income for the year is still expected to be $550,000,000 50 million dollars less than 2024 because of onetime item in Europe.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

The related transaction ended up closing early in the second quarter rather than the first quarter as anticipated previously, which shifted the negative income effect. Repositioning expenses are now expected to be $125,000,000 to $225,000,000 as roughly half of the lower first quarter spending assumed to occur later in the year. Lastly, other below the line expenses anticipated to be modestly higher at $1,350,000,000 to $1,400,000,000 increasing from 2024 on account of higher interest expense from last year's acquisitions and the first quarter's accelerating share repurchase. Full year tax rate expectations have not changed, though we anticipate a lower rate in the second quarter offset by higher third quarter rate. Finally, our full year average share count expectation has been reduced by 12,000,000 shares, increasing the tailwind to EPS to $0.19 Now I'll turn the call back over to Vimal.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Thanks, Mike. In closing, our performance in the first quarter exceeded all our communicated targets on the strength of our business model and the dedication of our more than hundred thousand future shapers around the globe. Our BOS installed base continues to provide stable demand for our solutions in this time of uncertainty. Simultaneously, we are investing substantial resources to expand further into high growth verticals to develop innovative new products and services and to grow our supply capabilities to fulfill our record backlog even as we maintain promised level of profitability. In updating our 2025 outlook, we sought to prudently balance the strength of our first quarter results with the unfolding economic uncertainty in the global economy.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Taking both into account, we are raising the midpoint of our 2025 EPS guidance. The work to separate Honeywell into three stand alone public companies has begun in earnest, and the value creation opportunity from greater strategic focus, financial flexibility, and tailored capital priorities for each of the business are becoming clearer each day. Our separation teams kicked off the process with a preparatory spins to lay out clearly the road ahead and the large obstacles to overcome. Such planning will allow us to move both quickly and effectively in the months ahead while ensuring our businesses do not miss a beat. In this way, we'll be certain to deliver our commitment to our shareholders, customers, and our employees.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

One way in which we can further maximize our value as we work through our spin off transaction is to continue to selectively utilize our strong balance sheet and cash flow generation for a creative bolt on acquisition. In lieu of the availability of such deal, we'll believe our shares offer tremendous value at recent levels. With that, Sean, let's take questions.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

Thank you, Vimal. Vimal and Mike 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 and A.

Operator

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

Nigel Coe
Managing Director at Wolfe Research, LLC

Thanks. Good morning, everyone. Thanks for the question. Maybe just a bit more details on the tariffs. In fact, the way

Nigel Coe
Managing Director at Wolfe Research, LLC

that flows

Nigel Coe
Managing Director at Wolfe Research, LLC

through, obviously, 500,000,000. I just want to confirm that's the sec I'm assuming that second half, so the annualized would be closer to $1,000,000,000 But just maybe just talk about kind of the offset strategies there, any pricing versus supply chain measures, anything there would be helpful.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Hey, Nigel. So, of all, I would say, if you see the chart in our deck, our local for local strategy is a foundation for counting the impact of the tariffs. We are largely localized in each regions in United States and Europe and so on. So our impact that way is informed by that local footprint. Now to your question, the countermeasures are going to be some pricing.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

We are going to do pricing where we have the opportunity. At the same time, we have substantial direct material productivity option available this year. And with a combination of the two, we are going to offset the impact of this 500,000,000 of tariff. I do believe that if we look at our business mix, it's largely a large part of it is aftermarket, which give us the resilience to allow pricing execution there. At the same time, we operate in very rational markets.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Most of our competition are public companies, which are projecting very similar strategies. So, our confidence to execute mitigating this $500,000,000 tariff is very high.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

And Nigel, this is Sean. Just a clarifying point on that, the $1,000,000,000 estimate as you put, keep in mind, tariffs in the first half are not zero. So I think as you annualize a full year impact, it'd be something a bit lower than what you suggested, but not too far off.

Nigel Coe
Managing Director at Wolfe Research, LLC

Okay. Thanks, Sean. That's helpful. And then, Mike, you mentioned contingency in the guide, Luke's macros. I'm curious, you know, is that more of a top down, you know, reading all the stuff in the press that we were reading?

Nigel Coe
Managing Director at Wolfe Research, LLC

Is that more the top down contingency? Or are you starting to see unusual behavior or anything to kind of inform a weaker second half?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

That's correct. That's more a top down view. If we look at our first quarter orders, very strong. April, strength in orders also continued. So we feel good about that.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

That said, just looking at our end markets, especially in industrial automation, our exposure to China there, We took a little bit more, I would say, prudent view in terms of what contingency we want to have just to make sure we protect our total year. So, yes, this is demand contingency for the second half. I don't have any data that would suggest that demand is falling out, but we'll continue to take a prudent stance on our guide. I want to make sure that the guide I give you, I have a high level of confidence that team can deliver on it. Okay.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Thank you.

Operator

Thank you. Our next question comes from the line of Steve Tusa with JPMorgan. Please proceed with your question.

Steve Tusa
Steve Tusa
Managing Director at JP Morgan

Hi, good morning.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Good morning, Steve.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Good morning.

Steve Tusa
Steve Tusa
Managing Director at JP Morgan

Can you guys just parse out what your volume assumption is? I think coming into this year, you've talked about like three points of price. Maybe what's the volume assumption just in the context of this contingency? Just trying to kind of gauge what's kind of in the base case and what's just a hedge on that front.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Sure. So just to clarify one more time, our total year framework is unchanged, that everything holds. If you look at now price volume, going to the year, we're assuming about, I think, 2% price, that's what we communicated.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

Excluding Bombardier.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Excluding Bombardier.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

And then and the volume was minus 1% to 2% up. In this current guide, I'm assuming about 3% of price, and I'm assuming about minus 2% of volume to 1% of volume. So that's the conservatism is there.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

So whether you include Bombardier or not, either way, one more point of price, one less of volume would align to the

Sean Meakim
Sean Meakim
VP - IR at Honeywell

same guide.

Steve Tusa
Steve Tusa
Managing Director at JP Morgan

Yes.

Steve Tusa
Steve Tusa
Managing Director at JP Morgan

Yes. That makes a ton of sense. And then just related to the tariffs, can you maybe talk about how much is roughly coming from China? And I know this may be kind of old news at this stage, but any other other than Mexico, any other kind of hotspots that we should be watching when it comes to other regions? Or is this mostly like a China thing, the $500,000,000

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So Steve, if you peel out our tariffs, I would say that going into China, exports from U. S. Into China is a big part of impact. As we've always shared, we are net exporter to China for many years. Aerospace and ESS business, UOP, we ship it from U.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

S. So clearly, a part of our tariff impact is channel related tariffs. On incoming side in The U. S, the impact is not big, because we're largely localized, but at the same time, there's impact of some products coming from impacted by reciprocal tariffs, because we do impact parts from all over the world. And then there a tail off impact from China, both in specifically in industrial automation business.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So that's the construct of it. And as we said before, we have factored all known tariff rates, which are known today, both coming into U. S. And coming into China.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

And Steve, I would just add, so for China, it's about 60% to 70% of our overall tariff exposure, rest of it is reciprocal, Mexico is 100% offset.

Steve Tusa
Steve Tusa
Managing Director at JP Morgan

100% what, sorry?

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Mexico? Yes,

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Mexico, it's not material to us.

Steve Tusa
Steve Tusa
Managing Director at JP Morgan

Yes, got it. Yes, 100% covered. Okay, got it. Great. Thanks a lot.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Thank you.

Operator

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

Hi, good morning. Maybe just wanted to start with the Industrial Automation segment. So maybe help us understand, you have that big drop off in the PSS top line in the first quarter. Kind of how are you thinking about that playing out for the balance of the year? Anything odd going on sort of share wise?

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

And on the margin front, I suppose those IA margins were down in the first quarter. I think they guided to be up slightly for the year. So maybe any help around the sort of cadence of that margin swinging from down to up as we go through the year?

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Yes. So, Julian, the PSS quarter one was roughly flattish. If you take out the royalty we get from Zebra, that was the last quarter we had the comps. So, there's a flattish revenue. We did extremely well in North America.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Europe, there was some pressure. I think it's too early for us to see any comps related to competition. So, I think as our competition will declare results, we'll observe if there's any specific puts and takes to share. I would say in our guide, when we talked about contingency, there are two drivers of that contingency from the future demand, if I can use the word unknown. One is definitely China.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Mike talked about uncertainty we see there. We have a business exposure. And then second part is the uncertainty around our businesses, which touches the retail markets. So PSS being one of them. I cannot tell you an absolute number because we are not trying to drill down a number business by business.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

We have taken overall broader view. So, we do expect some pressure to a certain degree on PSS business in our assumption for rest of the year. On the margins in first quarter, the large part of the margin contraction in IA was receivables write off. We had some past receivable write off, and based upon the progress of that, we wrote them off. The year as we progress, we don't have a similar event for us of the year.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Also, as the PPE business retires from our portfolio, that gives us a favorable tailwind. So, fundamentally, I think all those factors play out to help us margin expansion for the rest of the year.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

I would add PP is obviously accretive to our segment margin and accretive to our organic growth.

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

That's helpful. And then just my follow-up on the capital deployment. Last year, you had under €2,000,000,000 of buyback and close to €9,000,000,000 committed to M and A. This year, year to date, you're running a sort of €3,000,000,000 buyback and a couple of billion euros of M and A. Any way you could frame for us sort of the buyback scope for the year?

Julian Mitchell
Equity Research Analyst at Barclays Investment Bank

And I understand it depends on share price action and other uses of cash potentially, but just trying to gauge sort of how aggressive or large could that buyback be, assuming the share price stays around current levels?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Julian, I would just say at this stage that we will continue to be opportunistic. We obviously view our share price as very attractive business stage for buybacks. But at the same time, we want to balance our capital deployment with M and A. And obviously M and A machine has been now in play for us for a couple of years. So if deals there are specific deals that we've been working for a while and then attractive to us, we'll not pass them on.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Yes. So it'll be a balanced approach, Julian. I mean, we do expect opportunistic approach on share buyback to continue. But at the same time, if there's a time bound M and A deal we have been working for a couple of years, We also don't want to miss the window at this point of time.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So, it

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

will be a balanced approach.

Operator

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

Scott Davis
Analyst at Melius Research LLC

I hate to beat the dead horse, but still on tariffs. The I just wanted to clarify kind of the cadence of you've got the cost side of tariffs and you have price. I imagine they don't match up kind of perfectly unless you're doing surcharges, I suppose. But is the intent to match up price and mitigation efforts with tariffs by, say, the end of the year and have it be neutral by then? Or do you think you can do it sooner than that?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

I would say it will be much sooner than that. I mean, we stood up a large team of people that can understand tariffs by HTS code and know it essentially to $1 And the teams have been quite active in terms of understanding what how to offset it and what are the mitigation actions. I would say it's not 100% price. I mean, like Wimal said earlier, we have other options and our direct material productivity has been really good. So we're trying to manage, I would say, demand with cost and demand destruction vis a vis price.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

So we feel very confident in the second half, we'll be, I would say, on par. And definitely by fourth quarter, we'll be in a stable operating mode, assuming things don't change materially for us here.

Scott Davis
Analyst at Melius Research LLC

Yes, that's good color. Hey, I'm not asking for specific numbers, but let's just say that it's $800,000,000 ballpark of total tariff impacts. If there was a way to kind of rank it by segment or give us

Scott Davis
Analyst at Melius Research LLC

a little

Scott Davis
Analyst at Melius Research LLC

color by segment of where the bigger impacts are, just be helpful. You want to give numbers, that would be great, but I don't expect it.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Yes. So Wimal mentioned earlier, but our largest exposure on tariffs is in industrial automation, just because of the supply chain there and also in aerospace, which aerospace exported to China. So those are two largest segments that have exposure. Building automation is largely protected. They're almost 100% local for local in their geographies.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

And then ESS, we don't see a lot of tariff exposure, maybe a little bit of a demand risk in China, given they sell to China as well. But that's something that I think is all of it is contained in our guide. And I feel at this stage is derisked, assuming things stay the way they are.

Scott Davis
Analyst at Melius Research LLC

Good color. I appreciate it. Thank you, guys. I'll pass it on.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Thank you, Scott.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

Hi, guys. Good morning.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

So

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

looking at aerospace, think on ROE, I think we were sort of indicating that ROE was going to be better than I think what happened. And then on the aftermarket, I think it came in quite a bit stronger. And I appreciate that your numbers seem to be in line with what other folks are reporting in the aerospace. But can you give us more color as to what's happening on the OE? What's happening on the aftermarket?

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

Is there a destock going on? Would be greatly appreciated. Thank you.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Okay. So, Andrew, at the first of the outset, I would say, you know, the aero volume manufacturing volumes are growing. Why you don't see that showing up in the OE revenue is there are two drivers for that. The first is the mix of our products. We have you know, when we ship specifically mechanical products, we have cost oversell.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So even though we are shipping more volume due to cost over sell, our revenue growth actually goes towards opposite direction, goes negative due to that. So when you have a higher mix of cost over sell products in a given quarter, that has its impact. And the second driver is the timing when we recognize we ship the revenue and customer recognizes revenue, that does also have a driver on our overall revenue recognition process. So, the combination of the two really drives the OE growth numbers, what you see. As the year progresses, we do expect these numbers to improve.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

And overall, as we reconfirm the aerospace guidance for the year, we continue to remain very bullish. I think these are the puts and takes in the business with more than $2,000,000,000 of backlog. And we remain very confident on delivering for aerospace.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

Excellent. And just a follow-up. I mean, I guess there are a lot of headlines out there about all this traffic, all this shipping traffic out of China collapsing over the next four to six weeks. How should we think about it? I would imagine is that in parts of IA, the supply chain is exposed to China.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

Just can you just tell us because you're so diversified, you've been in China for a long, long time. Like how is that going to play out because there's this doom and gloom scenario how everything is going to come to grinding halt in about four to six weeks. It doesn't seem we see that in your guidance, appreciate different manufacturing footprint, longer cycle exposure. But as I said, I would greatly appreciate any color you can give us how you guys are going to deal with sort of effectively trade embargo between U. S.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

And China? Thank you.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So, I would say, the products coming into from China into U. S, the biggest impact that of is in Industrial Automation business. So, to that degree, there

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

will

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

be a tariff pressure, which is already to our guide. It's already factored in. And on the opposite side, when we ship products from U. S. Into China, that's primarily a driver in aerospace and in ESS business.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So, again, the impact of those tariffs are again factored into our guide. And then, overall, we also have factored the demand destruction on either side of the fence due to the known facts, what we know today. And that's how we have guided at this point of time. Any view for us, I would say, we are really looking at potential reduction in volume in our short cycle in our automation business or reduction of demand of catalysts for UOP, those are the kind of assumptions we have made. But it's to be seen if they really play out depending on how economic situation plays out.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

But it's actually it's demand destruction. It's not ability to access the actual components and parts, right? I think the headlines indicate like this massive shortage of parts, but it seems for you, it's under control.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Yes. I don't see we don't foresee any shortage of parts. I think it's just the tariffs coming in and the business demand destruction. I haven't seen or heard any lack of product availability for Honeywell so far.

Andrew Obin
Andrew Obin
Managing Director - Equity Research at Bank of America Merrill Lynch

Really appreciate it. Thanks so much.

Operator

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

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

Good morning, guys, and thank you. Maybe two more on Aerospace. First, if I could, just following up on Andrew's comments on aftermarket 15% commercial aftermarket growth versus the guidance of mid to high single digits. How was price a contributor? And how do you think about overall price in aero versus the 3% for the total company?

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

And any color regionally you could provide on aftermarket behavior?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Sheila, I would say on the aftermarket, as Timo mentioned, we still have over $2,000,000,000 of positive backlog. So whenever our I would say our shops have capacity, we ship to whoever we can to satisfy that demand. So our I would say results for the next couple of quarters will still be, I would say, lumpy in terms of OE aftermarket mix. Generally, our price is in line with what we guided at the beginning of the year. So there's no change there for aftermarket.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

And I know what the hours I would say, flight hours moderated a little bit here going to second year, but we still see good hours, four plus percent hours. And we as you know, we have exposure to ATR and business aviation and those business aviation hours are more stable. And defense also has aftermarket in there and defense is growing extremely strong, especially in the aftermarket. So I would say overall, I know it's a little bit lumpy, but I would say our construct for the year is not changing vis a vis what's happening in the commercial aviation.

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

Okay. And maybe if commercial OE is still set to outperform aftermarket for the year and any color on commercial OE production rates you could provide?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

So commercial OE will normalize in the second half. Right now, what I see is we have a little bit of mix within a mix issue. It's not even an issue, just a reality of how our OEMs take product between mechanical and electronics. That said, Wimal said, our supply chain output, our factory output for the quarter, again, was double digit. So we're really confident that this OE demand is continuing to stay with us for the remainder of the year going to next year.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

And within that $2,000,000,000 OE is about $1,000,000,000 of positive backlog, if not more.

Operator

Our next question comes from the line of Amit Mehrotra with UBS. Congrats

Amit Mehrotra
Amit Mehrotra
Managing Director at UBS Group

on the quarter. Just maybe a couple of quick ones. One, can you just update us on the timing of the spin, if you think it could happen sooner than what you noted earlier? And then if aerospace margins, I get the case and there's some mixed dilution, is there but is there an opportunity to kind of build on the 1Q margin as we progress through just given the higher revenue? Or do we think first quarter is kind of the right run rate for the rest of the year?

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So timing of the spin, Amit, as we've indicated, for Advanced Materials, it's Q4 this yearQ1 of next year. I think we are far along the way. And as we'll come to the Q2 earnings call, we'll be able to provide I think we have some external elements which are not entirely our control. So because that's the only variable.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

If you ask me our own execution, that is progressing extremely well. You know, we are on schedule to execute all the tasks, but I cannot control anything which are not in Honeywell controls, specifically regulatory agency approvals. We cannot control the timing of that. And aerospace spin date, I think it's early days. We started work just about two months back.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

But we are working to make it on schedule. And as the schedule progresses, we'll provide you more specific color what will be the specific date. Because right now, I fully appreciate the date is a bit wide, H2. And our goal is to refine the date and provide more specific outcome on that. On aerospace margins, as we had provided the guide during start of the year, I think there are two specific drivers for the aero margins for 2025.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

'1 is the mix of mix or mix within the mix of the products we are shipping. And the second is the case acquisition integration is going to be part of the P and L. There's integration related costs. The business also gets onboarded with a lower margin, which on a longer term is a good news because we can expand those margins. But the combination of those two contracts the aero margin, I would say that the aero margins will remain on a similar pace as you've seen in Q1.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

We don't expect any substantial shift. But on an overall year basis, I think the guidance what we provided at start of the year, that still holds good.

Amit Mehrotra
Amit Mehrotra
Managing Director at UBS Group

Okay. That's helpful. And just as a follow-up, building automation, we've now had two straight quarters of high single digit growth. I know last quarter, you didn't necessarily want to extrapolate the goodness into this year, but now we've had another quarter of high single digit growth. As we think about the guidance over I mean, comps get a little bit more difficult, so maybe that explains it.

Amit Mehrotra
Amit Mehrotra
Managing Director at UBS Group

But is the guidance still reflective of kind of not extrapolating what we've been seeing over the last couple of quarters? Or do you think now it's kind of more realistic based on the trend?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

So as you saw in our guide, we raised building automation guidance from low single digits to mid single digits to mid single digits. And then part of our demand contingency, we think in the second half is related to us just taking a prudent stance on potential demand destruction in the second half. Building automation projects, I would say, continuing to be strong. We're just watching our short cycle demand, product demand. And if building automation continues on this space, I think they have a chance to beat that.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

But we're just being prudent as far as second quarter, the rest of the second quarter and the third quarter, given everything going on in the market.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

I think the overall strategy in building automation is really playing out. We focused on pivoting our business to higher growth verticals like data center, like hospitality, and those segments are growing regardless of the current conditions. So certainly, that's helping. But also, at the same time, the business has the largest global footprint exposure. This business is like literally onethree in US, onethree in Europe, onethree in Asia.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So given the uncertainty in the global trade environment, we are therefore being conscious of the fact that it can hit on the headwinds on the economic side economic uncertainty. So we have factored that. But if you ask me on the strategy side, the business is executing extremely well. And if things don't change, the business will continue to deliver the numbers you've seen over the last few quarters.

Operator

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Hey, good morning, just following up

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

on that last point and just relating it to the demand contingency that you've baked into the guide. So is it fair to say then you've got some good visibility on your long cycle businesses, but it's really just on the short cycle side, maybe in IA, maybe in BA that you're most concerned and you're building in as contingency. Just any color that you can kind of parse out for what's baked into that demand contingency number?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Sure, sure. So I would say we have very good line of sight to long cycle for the year. With respect to short cycle, if we look at Industrial Automation, that's the business has the most exposure to China. We're watching that, especially the products part of business. And then building automation, I mean, building automation has been doing extremely well for the last three quarters and continues.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

We have really no reason to worry at this stage. But like I said, we're just taking a prudent approach to the second half. So I'm feeling confident about the second half. But like I said at the beginning, we want to continue to make sure that we give a guide that we have high level of confidence we can deliver.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Got it. That's helpful. And then just my quick follow-up. Helpful to get some color on the separations. I'm just wondering, has there been any update on either the onetime cost or the stranded cost that you can give us any more information on either of those two options?

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So, think they are the onetime costs we had indicated between the band of 1,500,000,000.0 to $2,000,000,000 we are on plan to stay in the same range. Given the large part of that one time cost related to aerospace and we are early innings of execution of that, it's, therefore, it's hard to refine that number at this point of time. Stranded cost, we already started doing the work to look at standard cost, starting with advanced material spin happening end of the year. Our confidence that stranded cost will be eliminated between eighteen to twenty four months' time is very high post spin. So, working on that front, and we will make sure that we execute on the same.

Joe Ritchie
Joe Ritchie
Managing Director at Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your question.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

Thank you. Maybe for my first one, just on Q2 margins, you know, guided flat quarter on quarter despite volumes going higher and the PPE divestiture, which should have some level of margin tailwinds. I guess, is this kind of saying that there's some margin pressure in Q2 on the tariffs? And then as we go into the back half, we'll get neutral per some of the earlier comments?

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

I

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

don't see any, I would say, margin pressure right now incremental everything that we saw in first quarter. Second quarter to me looks benign in terms of any new information. Feels more like first quarter. And the $260,000,000 to $270,000,000 that we guided, we feel it's appropriate given everything that's going on and our mix holds, our price is holding. So I don't see any structural issues.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Only item I'll add to Mike's point is, I think quarter to quarter, if you really want to look at quarter to quarter differences, ESS margins were substantially up in Q1. That won't be the case in Q2. It's just a mix of shipments of catalyst, catalyst shipment by product by product, some are high margin, some are moderate margin. So, depending on Q2 has a different shipment levels or shipment mix compared to Q1, but that doesn't concern us at all. I think it's just a very normal course of this event.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

And overall, the guidance what we did for the ESS margin, that still holds very good.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

Oh, no. Yes. I appreciate that. And then maybe, Vimal, just maybe a bigger picture question on industrial automation portfolio. The business has leading positions in process, building and warehouse.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

There's not much of a discrete presence for sales into a factory. You talked earlier about willingness to do M and A. So I guess my question is, do you think it's important for Honeywell Automation standalone entity to have discrete exposure in the portfolio? Thank you.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Chris, as we're looking at the equity story of Honeywell Automation, the way we are looking at it is our exposure to the end markets. We want to build a portfolio which is exposed to high growth end verticals. So, of that would be LNG, example of that would be data center, example of that would be semiconductor. So, rather than looking at the business with the lens of process and hybrid and discrete, we are looking at the business with the lens of end markets and how much exposure you can have, and we'll share more with you when we are ready. We have nothing for or against discrete automation.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

It's not that we like or don't like it. I think it's a factor of our exposure in that segment is low. That's a fact. But if it's any attractive opportunity, which is exposed to higher growth markets, as we have demonstrated in our acquisition profile, we'll absolutely execute that. We are looking for an acquisition which are accretive to our growth rates, and if possible, also accretive to our margin rates.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

We don't want to onboard something, which then we are, you know, being defensive on our growth profile. So, more to come there. We remain active in our M and A portfolio and continue to outlook for good opportunities.

Chris Snyder
Chris Snyder
Executive Director at Morgan Stanley

Appreciate that. Thank you.

Sean Meakim
Sean Meakim
VP - IR at Honeywell

We'll take one more question.

Operator

Thank you. Our final question this morning will come from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

Hey, good morning, everyone. Thanks for fitting me in. You mentioned that HPS is expected to lead Industrial Automation's growth in twenty five percent, I think in the presentation, but it didn't lead growth in Q1. I think warehouse automation did. So can you talk about the visibility you have in HPS going forward?

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

And then, you're having conversations with your customers, are you seeing any hints of CapEx delays or project deferrals and what end markets or regions are driving HPS' growth?

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

Yes. So, HPS number, Andy, if you see on a reported basis, as we've said in our prepared comments, we saw strength in our aftermarket services. That certainly drove a lot. There are other businesses which are reported as part of HPF, Thermal Solutions and Smart Energy. They saw a minor pressure.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So net net, the whole segment was reported as flat. But if you look at the projects and services in HPS, they are performing on expected lines. To your question, are we seeing any pressure on projects? I think with a combination of the lens we have both on UOP side of the projects and HPS side, I certainly see some push out on projects which were sustainability related. I think customers' willingness to spend money on sustainability related investment, energy companies are becoming more cautious.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

And certainly, we expect that factor to persist. On other side, we see very strong trends on growth in gas processing and LNG. So, of one offsets the other. And that's why we have a portfolio which is very diversified. We cover all these end markets.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

So, net net, we do believe that we will have a normal year for HPS in 2025.

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

Helpful. And just back to Aero and Defense and Space. You have difficult comps essentially all year in defense, but you delivered double digit growth in Q1. Are you seeing more strength in international defense now? Or is it growth relatively balanced?

Andrew Kaplowitz
Andrew Kaplowitz
Managing Director at Citi

And then it doesn't seem like you have or expect to see any impact from Doge, but maybe you can elaborate on that.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

Yes. So I think first, maybe just answer the Doge question. We don't see an impact. Majority of our programs are funded or have been funded, and those are multi year programs. So we don't see an issue there.

Mike Stepniak
Mike Stepniak
SVP & CFO at Honeywell

And like I said earlier, international defense is continuing to showing strength and a lot of demand and interest out there. So I don't think the team will have any issue in terms of managing the comps on the defense and space side this year.

Operator

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Kapoor for any final comments.

Vimal Kapur
Vimal Kapur
Chairman & CEO at Honeywell

I want to express my sincere appreciation to our shareholders, our future shapers and our customers for the unwavering support during this transformational time for Honeywell. Our future is bright, and we're excited to share more with you as we make progress in delivering with our commitments. Thank you very much for listening, and please stay safe and healthy.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Executives
Analysts
Powered by Quartr
Earnings Conference Call
Honeywell International Q1 2025
00:00 / 00:00

Transcript Sections