Honeywell had a successful second quarter, with adjusted earnings per share of $2.23 and organic sales growth of 3%. CEO Vimal Kapur, CFO Greg Lewis, and General Counsel Anne Madden were on the call, and discussed the company's financial results, guidance for the third quarter, and full year 2023 outlook. They also discussed the challenging backdrop they had to navigate and the success they had in doing so.

Honeywell's Aerospace business performed at a high level in the second quarter, with a record backlog of $30.5 billion. The segment margin expanded 150 basis points year-over-year, and free cash flow was $1.1 billion, up 34% year-over-year. Honeywell deployed $2.1 billion to dividends, M&A, share repurchases, and growth CapEx, and completed the acquisition of Compressor Controls Corporation for $700 million. The company is utilizing its M&A playbook and its value creation framework to navigate a challenging economic backdrop.

Honeywell recently announced that Jim Currier will be succeeding Mike Madsen as Honeywell Aerospace CEO. Mike's leadership and commitment to customers, employees, and the community has been invaluable and has helped set the company up for success. Jim has been with Honeywell’s Aero for 17 years and has held multiple roles of increasing responsibility. Flight hours are strong, including wide-body upside, and the company has diverse and optimized platform exposure, particularly in business aviation, setting the company up for success in the years to come.

Honeywell recently announced the closing of their acquisition of Compressor Controls Corporation and SCADAfence, which will add to their strategic assets and technology portfolio. CCC will bolster Honeywell's sustainability and digitalization portfolio with their carbon capture control solution, and SCADAfence brings asset discovery, threat detection and security governance to Honeywell's SCE portfolio.

Honeywell has seen success in the OT Cybersecurity industry, which is expected to grow to more than $10 billion in the next few years. The company has also acquired the heads-up-display asset from Saab to bolster their end-to-end avionics and safety offering. Honeywell has also seen strong growth in their commercial aerospace, process solutions, and UOP divisions. PMT has grown at a 7% pace for four consecutive quarters.

Honeywell's second quarter performance saw a 1% overall volume decline, but excluding SPS, volumes were up 5%. The record backlog of $30.5 billion was up 4% year-over-year, and segment margin was up 150 basis points to 22.4%. Free cash flow was up 34%, and Aerospace sales were up 16% organically, with over 20% growth in Commercial Aviation. Improved demand planning, production, and materials management enabled these results.

In the second quarter, Commercial Aviation aftermarket saw the strongest growth, increasing over 25%, while Defense and Space grew for the second consecutive quarter. Performance Materials and Technology had double-digit growth, and UOP had 11% growth, driven by gas processing and refining catalyst shipments. Advanced Materials saw flat organic growth, while Safety and Productivity Solutions saw a 21% decrease in organic sales. Segment margin in Aerospace expanded 120 basis points, while Advanced Materials saw a 60 basis point contraction.

Honeywell's Intelligrated business saw a sales decline due to a low investment warehouse automation environment, while the aftermarket services portion saw double-digit growth. Segment margin for SPS expanded 410 basis points to 16.7%, while Building Solutions sales grew 2% organically despite order softness. Building product sales decreased 1% organically, but Honeywell Connected Enterprises had double-digit organic growth and double-digit orders growth in the quarter.

Honeywell had a great second quarter result, with GAAP earnings per share increasing 21% year-over-year and adjusted earnings per share increasing 6% year-over-year, despite a headwind from lower non-cash income from their overfunded pension. Segment profit drove $0.21 of the improvement in earnings, with a lower adjusted effective tax rate contributing $0.06 and reduced share count adding an additional $0.05. For the third quarter and full year, demand is robust with record backlog levels, and Honeywell is increasing their guided metrics for the full year. They expect sales to be in the range of $9.1 billion to $9.3 billion, up 1% to 4% on an organic basis.

The company expects full year sales of $36.7-$37.3 billion, with organic growth of 4-6% and segment margin guidance of 22.3-22.6%. Aerospace is expected to have strong demand and commercial aftermarket growth, while Defense and Space is expected to grow at a mid-single digit rate for the full year. The company is upgrading its segment margin expectations by 10 basis points on the low-end.

Honeywell expects modest sequential improvement in Aerospace supply chain due to increasing commitments from suppliers and 20% output increases. For Aerospace, they expect low-double-digit organic sales growth and flattish segment margin. For Performance Materials and Technologies, they expect high-single-digit sales growth and modest year-over-year improvement in segment margin. Safety and Productivity Solutions outlook is impacted by decline in CapEx for new warehouse capacity.

Honeywell expects organic sales to decline in the third quarter, although aftermarket services are expected to grow strongly. Segment margins are expected to expand for the full year, particularly in Building Technologies, due to inflation management and productivity actions. Net below-the-line impact is expected to be negative in the third quarter and full year.

Honeywell is repositioning between $40 million and $85 million in the quarter and $225 million to $325 million for the year to fund attractive restructuring projects. They expect the adjusted effective tax rate to be 23% in the third quarter, and the average share count will be around 669 million shares. The adjusted EPS guidance range is now between $2.15 to $2.25 for the third quarter, and the full year EPS guidance range is $9.05 to $9.25. They expect to meet their original free cash flow guidance of $3.9 billion to $4.3 billion in 2023.

Honeywell has made significant progress in terms of organic growth, gross margins, and free cash flow. CEO Vimal Kapur has outlined a plan to accelerate growth, reach 25% segment margin, expand gross margin to 40%, and increase free cash flow margins to the mid-teens. Kapur also plans to optimize the portfolio through strategic capital deployment and reduce exposure to non-core areas. The company has already made internal transformations, which are reflected in their financial results, and has a strong M&A pipeline.

Vimal Kapur explains Honeywell's commitment to delivering superior returns for shareholders, as well as their value creation framework. He also discusses the current challenging macroeconomic environment and the strength of their two biggest end markets, Aerospace and Energy. Kapur is confident that Honeywell will be able to meet their performance targets and weather near-term challenges. Finally, he invites questions from the audience.

Advanced Materials had a moderate year, but the company is expecting markets to turn better in the second half of the year and in 2024. They are bullish on their Advanced Materials portfolio and plan to increase capacity for existing and potential new offerings. In Aerospace, the underlying margin was strong despite some OE incentives, which will be lighter in the second half of the year. Building Solutions was weak, but this is not likely due to destocking.

Vimal Kapur states that the company is well-aligned with the commitments of key OEMs in terms of volume and revenue growth for the Aerospace sector, and that they expect the momentum to remain strong through 2023 and 2024. He also mentions that they are making careful selections of projects with adequate margins and strong service, which has led to margin expansion in Building Technologies.

Greg Lewis explains that orders for IGS are down significantly, but the pipeline is starting to build back up, and the short-cycle businesses have stabilized over the last few quarters. He believes SPS will grow in 2024 when some of the markets begin to recover.

Vimal Kapur has stated that the company's strategy is to monetize the value of their quantum investment through an IPO. Scott Davis asked Kapur if they have an endgame in mind to reduce the cash flow bleed and if the rollout of Forge for buildings has provided a lift. Kapur explained that the business runs on a SaaS model, so even a large booking may not lead to a large revenue recognition.

Vimal Kapur and Greg Lewis discussed the revenue accretion of their business and the guidance for SPS. Kapur discussed the geographic breakdown of their HBT business, noting that Europe was a drag while Middle East, India, and China were showing strength. Lewis noted that SPS is likely to be down in the fourth quarter.

Vimal Kapur explains the philosophy behind their trade-off between growth and margins, which is to focus on projects with strong first-party content and aftermarket services that will drive top-line growth without compromising margins. He emphasizes that they are sensitive to the need for top-line growth, but will not book projects with low margins in order to achieve it.

Jeffrey Sprague asked Vimal Kapur about Honeywell's organic growth on a total basis. Kapur stated that his priority is to deliver growth at the upper end of the four to seven percent range, which he believes can be achieved through favorable macroeconomic conditions in their two biggest SPGs, Aero and PMT, as well as the right new products and M&A. He also mentioned that traditional oil spending has been okay, but not as strong as what some of the other process guys are seeing.

Vimal Kapur explains that the Automation Business Process Solutions segment has diversified away from oil and gas, while the UOP segment has shifted towards renewable technologies. The Advanced Materials segment is made up of specialty chemicals, but there is some pressure in electronic materials. The booking rates remain strong, the backlog is strong, and the new innovation pipeline is strong, leading to a positive outlook for the second half of 2023 and 2024.

Vimal Kapur and Greg Lewis answered questions about the impact of reduced short-cycle businesses on margins for the second half of the year and the Defense business. Kapur stated that their forecast is based on the stabilization of short-cycle orders and the expectation that warehouse automation orders will strengthen in 2024. Lewis added that the teams have resized their costs envelope to the current reality, and there will be a substantial leverage opportunity when the short-cycle businesses reaccelerate. Kapur also mentioned that bookings in Defense remain strong and delivery performance is expected to be better in the second half of the year than in the first half.

The pipeline for SPS's warehouse automation is growing due to its diversification into retail, fashion, and logistics, and this is expected to result in improved orders performance in the second half of the year. Additionally, the aftermarket flywheel is already working, suggesting that the company is close to its targeted critical mass of installations.

Honeywell saw strong order activity in UOP and HPS in the first half of the year, with high-single-digit growth expected in both businesses. This was attributed to the strength of the aftermarket business in HPS and the diversification of UOP towards renewable technologies.

UOP, the catalyst business, has had a lot of success in both refining and petrochemical catalysts, and Advanced Materials had a 20% growth in 2022. However, the margins have been put under pressure due to the launch shutdown and contraction in electronic materials business. Despite this, the business still has the highest margin in the PMT portfolio. Greg Lewis mentioned that they expect a sequential improvement in Q3 and Q4, and Vimal Kapur stated that the pipeline of potential acquisitions remains strong.

Honeywell is actively working on more outbound activities in M&A and is optimistic about the deals they can make at the right price. The pipeline for potential acquisitions is growing and the environment is favorable for strategic acquirers, while private equity financing is more difficult. Honeywell is confident that this environment will continue into 2024 and beyond. Honeywell is deploying a rigorous operating playbook to navigate near-term uncertainty and is well-positioned to outperform in any environment.

This summary was generated with AI and may contain some inaccuracies.