Q1 2025 Earnings Call Transcript

Thank you for standing by, and welcome to the Honeywell International Inc. First Quarter 2025 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. Please go ahead. Thank you.

Morning and welcome to Honeywell International Inc.'s first quarter 2025 earnings conference call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapur, and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website.

Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first quarter, share our guidance for the second quarter, and provide an update on the full year 2025. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Vimal Kapur. Thank you, Sean, and good morning, everyone.

Honeywell International Inc. saw its strong finish to last year's cadence of 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 the second quarter, the economic climate has become increasingly uncertain in recent weeks. Global trade patterns are shifting because of increasing tariffs and duties, making customer planning more difficult.

Weaker sentiments combined with higher price expectations warrant 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 the future, and position Honeywell International Inc. for long-term success, regardless of the operating environment we face.

Honeywell International Inc. has a team across functions and businesses meeting daily to review and respond to tariff announcements. This team analyzes a number of levers to optimally respond to changing conditions. We're also closely monitoring bilateral negotiations and engaging with key stakeholders. From our perspective, there are three very important considerations 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 the 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. 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. Two Ping 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 with Honeywell International Inc. across many of our business lines and geographies will further strengthen our executive leadership team. Anne will transition into a new role as Senior Vice President of Portfolio Transformation and Senior Adviser, where her experience leading over one hundred acquisitions as Honeywell International Inc.'s global head of M&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.

Steven's decade as CFO of Thermo Fisher Scientific will broaden and deepen the expertise aboard. I want to 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 an update on separation. We hold strong conviction that separating automation, aerospace, and advanced materials will unlock significant value for all Honeywell International Inc. stakeholders by best positioning each standalone public company for long-term profitable growth.

Following our announcement in February, Honeywell International Inc. has taken many steps forward in preparation for these transactions. First, we determined a tax-free spin of Honeywell Aerospace will be a more efficient way to separate our automation and aerospace businesses. Second, the board confirmed that I will lead the automation company going forward, as this is where I've spent the bulk of my career and where I have a specific vision for the future.

At the right time, the board will evaluate the future leadership of Honeywell Aerospace as well. Third, we established a dedicated separation management office run by experts in corporate transformation. These entities have the empowerment to maintain the value of our businesses, minimize separation costs, and achieve our communicated timelines. 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 for what will be called Solstice Advanced Materials. Collectively, they bring years of experience leading public companies, operating specialty chemical businesses, and utilizing Honeywell International Inc.'s Accelerative Operating System. Solstice will be headquartered in New Jersey, where the current 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.

We have repurchased about $3 billion of our shares already this year and will continue to repurchase our stock opportunistically. 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 our portfolio transformation. As you can see, Sundyne will be the fifth strategic port-on acquisition since I became Honeywell International Inc.'s CEO, along with a couple of strategically important technology tuck-ins.

Sundyne meets each of the common-sense criteria we have set in. 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 International Inc. 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 solutions 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.

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 2024 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&A process in place to create incremental value. While we continue to evaluate acquisitions, we also look forward to opportunistically exiting 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. 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 million before taking any mitigation measures. Our better-tested accelerated 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 system 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 is part of these offsetting headwinds. Most importantly, whenever elevated global tensions do subside, we remain in an excellent position to capitalize on record backlog and continue our growth trajectory. Now let me turn over to Mike to discuss our excellent first-quarter results.

Thank you, Vimal, 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 4% organically, led by aerospace technologies, where both our commercial aftermarket and defense in space businesses experienced double-digit growth.

Building solutions remain 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 initiative.

Segment profit for the quarter grew 8% year over year, aided by the inclusion of our 2024 acquisitions, which are performing ahead of the initial expectations. 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 2024 to 1Q 2025 in the appendix of this presentation.

Orders were $10.6 billion 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 $36.1 billion. This growth was led by longer cycle building automation and aerospace businesses. First-quarter cash flow was more than $300 million, over $100 million above the prior year, driven primarily by better-adjusted earnings.

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 billion of our own shares at prices we find highly compelling, and we bought back roughly another $1 billion during the month of April, representing about 2% of our shares outstanding in 2025. We also paid more than $700 million of dividends in the first quarter. We are investing in our business both organically and inorganically, as we allocated approximately $250 million of capital projects and announced the acquisition of Sundyne.

Now let's spend some time discussing our first-quarter performance by business. 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 supporting 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 the fifth consecutive quarter of double-digit growth despite challenging comps and expiring government programs a year ago.

Aerospace industry demand continues to outweigh 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 expectation as mix pressure and acquisition integration costs from Kays were partially offset by productive reactions. 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 and 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 lifecycle solutions and services and compressor controls was offset by modest declines in smart energy thermal solutions. In productivity solutions and services, weakness in Europe led the sales decline of 1% year over year when excluding the impact of the final year license and settlement payments. Segment margin in industrial automation contracted 130 basis points to 17.8%, driven by receivables write-downs and volume deleverage, partially offset by productivity options.

Building activation delivered another solid quarter and outpaced our expectation, up 8% organically.

Led by the 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 and 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 continue to be an encouraging indicator for building automation, with the first quarter marking a fourth consecutive quarter of year-over-year growth.

Building automation margin spending 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. A strong quarter in petrochemical and refining projects as well as sustainability projects helped EOP deliver 2% organic sales growth year over year. Advanced material sales declined 4% as challenging prior year comps in flooring products offset broad-based strength in specialty chemicals and materials highlighted by over 20% growth in spectra.

Orders were the bright spot for advanced materials, up 7% year over year, driven by double-digit growth in foreign products. This quarter marked the 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 230 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 systems 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 Vimal mentioned in his earlier remarks and believe that continuing to take a pragmatic approach to our guidance is appropriate given the increasing global uncertainty. Rest assured, Honeywell International Inc. 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 the supply chain has been our strategy for more than two decades, and it's 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.

Now let's discuss what this means for 2025 guidance. For clarity, our guidance now assumes the impact of announcing 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 1% 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%, the segment profit of about 2%, and to EPS of about $0.18 compared to the guidance we laid out in February. Full-year sales are now projected to be $39.6 to $40.5 billion 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 the end of June. Our guidance does not incorporate the acquisition of Sundyne, 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 $9.8 to $10.1 billion with one more month of PPE operations included, or a $200 million impact compared to a full quarter. We now anticipate our overall segment margin to six basis points this year, or to be down ten basis points to up twenty 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. 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 $10.20 to $10.50,

Up 3% to 6% or down 1% to up 2% ex-prior year Bombardier agreement impact. Earnings per share in the second quarter is anticipated to be in the range of $2.60 and $2.70, 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 $5.4 billion to $5.8 billion, down 2% to up 5% ex-Bombardier and roughly in line with earnings growth.

You can reference the 2025 free cash flow bridge in the appendix. Beyond our CapEx and dividend commitment, 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 the repurchase of our shares. Year to date, we have already bought back $3 billion worth of our stock, including $1 billion 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. I'll now turn to slide nine to spend a few minutes on our outlook by business. This discussing high-level expectations by segment with additional details by SBU covered in the commentary portion of the slide. Aerospace Technologies, we are holding our 2025 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.

Aero is expected to maintain its position as the growth leader for Honeywell International Inc., 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. By strengthening our commercial aftermarket business as the supply chain outlook continues to support our out Margins for the quarter and the year should be roughly 26% as case integration headwinds temporarily bring the segment below the run rate levels. 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 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 cost. Related to tariffs, we 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. Our sales outlook for the remainder of the year remains largely unchanged 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 2025 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. 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 comps 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 ten to go over our 2025 EPS bridge. Walking from 2024 adjusted EPS in expound on year to the midpoint of our 2025 EPS guidance range involves a few moving pieces.

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 impossible 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 2025 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 Sundyne acquisition is not yet included in guidance for the year. The sale of our PPE business, for which we now model an early May close, will drag down earnings by $0.07 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 $0.05 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 million, $50 million less than 2024 because of a one-time item in Europe. 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 million to $225 million as roughly half of the lower first-quarter spending assumed to occur later in the year. Lastly, other below-the-line expenses are anticipated to be modestly higher at $1.35 billion to $1.4 billion, 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 a higher third-quarter rate. Finally, our full-year average share count expectation has been reduced by twelve million shares, increasing the tailwind to EPS to $0.19. Now I'll turn the call back over to Vimal.

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 one hundred thousand future shapers around the globe. Our VAS 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 levels 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. Taking both into account, we are raising the midpoint of our 2025 EPS guidance. The work to separate Honeywell International Inc. into three standalone 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 businesses are becoming clearer each day. Our separation teams kicked off the process with the 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. 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 accretive bolt-on acquisitions. In lieu of the availability of such deals, we'll believe our shares offer tremendous value at recent levels.

With that, Sean, let's take questions.

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&A.

Before pressing the star key. Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Thanks. Good morning, everyone. Thanks for the question. Maybe just a bit more details on the tariff impact, the way that flows through.

Obviously, $500 million. I just want to confirm that's the sec I'm assuming that's second half the annualized would be closer to a billion dollars. But just maybe just talk about kind of the offset strategies there. Any price versus supply chain measures, anything there would be helpful.

Hey, Nigel. So first of all, I would say if you see the chart in our deck, you know, our local-for-local strategy is a foundation for, you know, counting them back up the tariffs. We are largely localized in each region in the United States and Europe and so on. So our impact that way is, you know, informed by that local footprint.

Now to your question, the countermeasures are going to be some pricing. We are going to do pricing where we have the opportunity. At the same time, we have substantial direct material productivity options available this year. And with a combination of the two, we are going to offset the impact of this $500 million of tariff.

I do believe that, you know, if we look at our business mix, it's largely, you know, a large part of it is aftermarket, which gives us the resilience to allow pricing, you know, execution there. At the same time, we operate in very rational markets. You know, most of our competition are public companies, which are, you know, projecting very similar strategies. So confidence to execute, you know, mitigating this $500 million tariff is very high.

Just a clarifying point on that, the billion-dollar 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 could be something a bit lower than what you suggested, but not too far off.

Okay. Thanks, Jonas. That's helpful. And then, Mike, you mentioned contingency in the guide Luke's macro. So I'm curious, you know, is that more of a top-down, you know, reading all the stuff in the press that we are all reading? Is that more of a top-down contingency or are you starting to see unusual behavior or anything to kind of inform a weaker second half?

That's correct. That's more a top-down view. If we look at our first-quarter orders, very strong April, strengthening orders also continued, so we feel good about that. That said, they're just looking at our end market, especially in industrial automation, our exposure to China there, we took a little bit of 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 you can deliver on it.

Okay. Thank you.

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

Hi, good morning. 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.

Sure. So just to clarify one more time, our total year framework is unchanged. 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.

Excluding Bombardier. Excluding Bombardier.

And then the volume was minus one to two percent. 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.

Whether you include Bombardier or not, either way, one more point of price, one less of volume. Yep. Align to the same guide. Yep.

Yep. 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 than MEC, other kind of hot spots that, you know, we should be watching when it comes to other regions, or is this mostly, like, a China thing, the $500 million?

So, Steve, you know, if you fill out our tariffs, I would say that going into China, exports from the US into China is a big part of the impact. As we've always shared, we are net exporters to China for many years. Aerospace and ESS business, UOP, we ship it from the US. Clearly, a part of our tariff impact is channel-related tariffs.

On the incoming side into the US, the impact is not big. Because we're largely localized, but at the same time, there's an impact of some products coming from impacted by reciprocal tariffs. Because we do impact far from all over the world. And then there is a tail-off impact from China both in, you know, specifically in the industrial automation business.

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 the US and coming into China.

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

Yeah.

100% what? Sorry.

Yeah. Mexico, it's not material to us.

Oh, it is material? Yep. Got it. Yeah. 100% covered. Okay. Got it. Great. Thanks a lot.

Thank you.

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

Hi, good morning. Maybe just wanted to start with the Industrial Automation segment. So maybe help us understand, you know, you have that big drop-off in the PSS top line in the first quarter. Kind of how you're thinking about that playing out for the balance of the year?

Anything odd going on sort of share-wise? 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.

Yeah. So, Julian, the PSS quarter one was, you know, roughly flattish if you take out the royalty we get from Zebra, that was the last quarter we had the comps. So it was a flattish revenue. We did extremely well in North America, Europe.

There was some pressure. I think it's too early for us to see any related to competition. So I think as our competition will declare results, we'll observe if there are any specific quotes 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. Mike talked about uncertainty. We see there. We have a business exposure.

Then the second part is the uncertainty around our businesses, which touches the retail markets. So PSS being one of them. Cannot tell you an absolute number because we are not trying to drill down a number business by business. We have taken an overall, you know, broader view.

So we do expect some pressure to a certain degree on PSS business in our assumption. For the rest of the year. On the margins in the 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.

You know, the year as we progress, we don't have the similar event for the rest of the year. Also, as the PPE business retires from our portfolio, that gives us favorable tailwinds. So, fundamentally, I think all those factors play out help us margin expansion. For the rest of the year.

I would add PPE is obviously

Accretive to our segment margin and accretive to our organic

Right. The PPE is that. Yeah. Yep.

Growth. That's helpful. Thank you. And then just my follow-up on the capital deployment.

Last year, you had under $2 billion of buyback and close to $9 billion committed to M&A. This year, year to date. You know, you're running a sort of $3 billion buyback and a couple of billion dollars of M&A. Any way you could frame for us sort of the buyback scope for the year?

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

Julian, I would just say at this stage that we will continue to be opportunistic. We obviously view our share price as very attractive as a stage for buybacks, but at the same time, we want to balance our couple deployment with M&A, and we always say M&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 will not pass them on.

Yeah. So it'll be a balanced approach, Julian. I mean, we do expect an opportunistic approach on share buyback to continue. But at the same time, if there's a time-bound M&A deal, we haven't worked working for a couple of years. We also don't want to miss the window. You know, at this point in time. So it'll be a balanced approach.

Perfect. Thank you.

Thank you.

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

Hey, good morning, Vimal, Mike, and Sean.

Mark,

Hey. I hate to beat the dead horse, but, still on tariffs.

I just wanted to clarify kind of the cadence of, you know, you 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?

Oh, I would say it will be much sooner than that. I mean, we have a we stood up a large team of people that can understand tariffs by HTS code and know it essentially to a dollar. And the teams have been quite active in terms of understanding how to offset it and what are the mitigation options. I would say it's not 100% price.

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

Yeah. That's good color. Hey. And not asking for specific numbers, but let's just say that it's $800 million ballpark of total tariff impacts. If there was a way to kind of rank it by segment, or give us a little color by segment of where the bigger impacts are, just be helpful if you want to give numbers, that would be great. But I don't expect it. Yep.

So Vimal 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 exporter to China. So those are two largest segments they have exposure. Building automation is largely protected.

They're almost 100% local for local in their geographies. 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.

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

Thank you, Scott. Thank you.

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

Yes. Good morning.

Good morning, Andrew. Good morning.

So looking at aerospace, I think on

Aero OE, you know, I think we were sort of indicating that Aero OE

Gonna 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 aerospace. But can you give us more color as to what's happening on the OE? What's happening on the aftermarket? Is there a destock going on? Would be greatly appreciated. Thank you. Yeah.

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 over sell.

So even though we are shipping more volume due to cost over sell, our revenue growth actually goes towards the 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 the revenue.

That does also have a driver on our, you know, 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. And overall, as we reconfirm the aerospace guidance for the year, we continue to remain very bullish.

I think these are the percentage in the business with more than $2 billion of backlog. And we remain very confident in delivering. Space.

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? You know, I would imagine is that, you know, in parts of IA, the supply chain is exposed to China.

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 gonna play out? Because there's this doom and gloom scenario, how everything is gonna come. To grind and halt in about four to six weeks. It doesn't seem we see that in your guidance.

Appreciate different manufacturing footprint, longer cycle exposure. As I said, I would greatly appreciate any color you can give us how you guys gonna deal with sort of, you know, effectively trade embargo between the US and China. Thank you.

So I would say, the products coming into from China into the US, the biggest impact that of is in the industrial automation business. So to that degree, there will 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 the US into China, that's primarily a driver in aerospace and in ESS business.

So, again, the impact of those tariffs is 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. So and that's how we have guided at this point in time. If any of you for us, sir, 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 catalyst for UOP.

Those are the kind of assumptions we have made. But it should be seen if they really play out depending on how the economic situation plays out.

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

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. Yep. I haven't seen or heard any lack of product availability for Honeywell International Inc. so far.

Appreciate it. Thanks so much.

Thank you.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Good morning, guys, and thank you. Maybe two more on aerospace. First, if I could just follow 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 and any color regionally you could provide on aftermarket behavior?

Sheila, I would say on the aftermarket, as Vimal mentioned, we still have over $2 billion of past due 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. There's no change there. For aftermarket, and 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 as you know, we have exposure to ATR and business aviation, and those business aviation hours are more and more stable.

And in defense, also has an 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 commercial aviation.

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

So commercial OE will normalize in the second half. Right now, what I see is we have a little bit mix within the mix issue. It's not been an issue, just a reality of how our OEMs take product between mechanical and electronics. That said, like Vimal said, our supply chain output, our factory output for the quarter again was double-digit.

Double-digit. So we're really, really confident that this OE demand is continuing to stay with us for the remainder of the year going to next year. And within that $2 billion we owe you is about a billion dollars of past backlog, if not more.

Okay.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.

Okay. Thanks. Congrats 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 solution, is there an but, you know, but is there an opportunity to kind of build on the one q margin as we progress through just given the higher revenue or do we think the first quarter is kind of the right run rate for the next rest of the year?

So timing of the spin, Amit, as we've indicated, for advanced materials, it's Q4 this year slash Q1 of next year. I think we're far along the way. And as we'll come to the Q2 earnings call, we'll be able to provide you a specific date. I think we have some external elements which are not entirely out of control.

So because that's the only variable. 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 is not in Honeywell International Inc.'s control, specifically regulatory approvals. We cannot control the timing of that.

And aerospace spend dates, I think, are the early days. We started work just about two months back. But we are working to, you know, make it on schedule. As the schedule progresses, we'll provide you more specific color on 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 a more specific outcome on that. On aerospace margins, as we had provided the guide during the start of the year, I think there are two specific drivers for the aero margins for 2025. One is the mix of, you know, mix or mix within the mix of the products we are shipping. And the second is the case acquisition integration is gonna be part of the P&L. There's integration-related cost.

The business also gets onboarded with a lower margin. Which on a longer term is 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. We don't expect any substantial shift. But on an overall year basis, I think the guidance what we provided at the start of the year, that will still hold good.

Okay. That's helpful. And just as a follow-up, you know, 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. 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 kind of more realistic based on the trend?

So as you saw in our guide, we raised the 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, are continue to be strong. We're just watching our short cycle short cycle demand, product demand, and if building automation continues on this pace, I think they have a chance to be dead, but we're just being prudent as far as the second quarter the rest of the second quarter and the free quarter, given everything going on in the market.

I think the overall strategy in building automation is really, you know, playing out. You know, we focus on pivoting our business to higher growth verticals, like data center, like hospitality, and those segments are growing regardless of, you know, the current conditions. Certainly, that's helping. Also at the same time, the business has the largest global footprint exposure.

This business is, like, literally one third in the US, one third in Europe. One third in Asia. So given the uncertainty in the global trade environment, we are therefore, being cautious 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.

Wonderful. Okay. Thank you very much.

Thank you. Thank you.

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

Hey, good morning, guys.

Maybe just following up on that

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 business businesses, but

It's really just on the short cycle side, maybe an IA, maybe a 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.

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 that's the most exposure. Exposure to China.

We're watching that especially the products part of the business. And then building automation, I mean, building automation has been doing extremely well for the last three quarters and continues. 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 a high level of confidence we can deliver.

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

So I think the one-time cost we had indicated between the band of $1.5 to $2 billion, 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 in time. Stranded cost, we already started doing the work to look at stranded cost starting with the advanced for deal that's been happening end of the year.

Our confidence that stranded cost will be eliminated between 18 to 24 months time is very high. Post spin. So working on that front, and we will make sure that we execute on the same.

Okay. Thank you.

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

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

I don't see any, I would say, large impression right now incremental to everything that we saw in the first quarter. Second quarter to me looks benign in terms of any new information. It feels more like the first quarter. And, you know, the $2.60, $2.70 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. Only item model-wise. Rate.

One 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, per substantially up in Q1. That won't be the case in Q2. It's just the mix of shipments of 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. And overall, the guidance, what we did for the ESS margin, that still holds very good.

Oh, no. Yeah. Thank you. I appreciate that. And then maybe, Vimal, just, you know, maybe a bigger picture question on the industrial automation portfolio. The business has leading positions in process, building, and warehouse. You know, there's not much of a discrete presence for sales into, you know, a factory. You talked earlier about willingness to do M&A. So I guess my question

My question is, do you think it's important for Honeywell International Inc. automation's

Standalone entity to have discrete exposure in the portfolio? Thank you.

Chris, you know, as we're looking at the equity story of Honeywell International Inc. 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 examples of that would be LNG.

Example of that will be data center. Example of that will be semiconductor. So rather than looking at the business with a 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 are there nothing for or against discrete automation. 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 is accretive to our growth rates. And if possible, also accretive to our margin rates.

We don't want to build 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&A portfolio and continue to outlook for good opportunities.

Appreciate that. Thank you.

Listen, we'll take one more question.

Thank you. Our final question this morning will come from the line of Andy Kaplowitz with Citigroup. Please proceed with your question. Hey, good morning, everyone. Thanks for filling me in.

You mentioned that HPS is expected to lead

Industrial Automation's growth in 2025, I think, in the presentation, but it didn't lead growth in Q1. I think, where else automation did. So can you talk about the visibility customers, are you seeing any hints of CapEx delays or project deferrals and when end markets or regions are driving HBS's growth?

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 HPS, thermal solutions, and smart energy.

They saw a minor, you know, pressure. 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 line. To your question, are we seeing any pressure on projects?

I think with the combination of the lens we have both on the 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. And, certainly, we expect that factor to persist. On the other side, we see very strong trends on growth in gas processing and LNG.

So kind of one offsets the other and that's why we have a portfolio which is very diversified. We cover all these end markets. So net-net, we do believe that, you know, we will have a normal year for HPS in 2025.

Helpful. And just back to ARO and defense and space, you have difficult comps essentially all year defense, but you delivered double-digit growth in Q1. Are you seeing more strength in international defense now or is it growth relatively balanced and then it doesn't seem like you have or expect to see any impact from Dilig, but maybe you can elaborate on that.

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

Like I said earlier, international defense is continuing to show strength and low 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.

Thanks, guys.

Thank you, Andy.

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

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 International Inc. 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. Thank you.

This concludes today's conference call. You may disconnect your lines

At this time. Thank you for your participation.