Honeywell International Inc (HON)

• Honeywell anticipates organic growth across all four business segments in 2025, supported by a backlog up 6%, or 10% with acquisitions, and plans to return to margin expansion next year. -
• The company is experiencing a moderate recovery in European building automation, having "crossed the trough in Europe". Additionally, there is strong double-digit revenue growth in India and Saudi Arabia, acting as catalysts for growth. -
• Honeywell is strengthening its portfolio through strategic acquisitions in high-demand markets such as defense, LNG, and access solutions, which is improving the growth profile of the company. -

• Honeywell's automation businesses in China are flat to slight contraction, with no observed change in trajectory, indicating weakness in this key market. -
• Industrial Automation sales decreased 5% organically in the quarter, primarily due to lower volumes in warehouse and workflow solutions and short-cycle safety and sensing technologies, reflecting ongoing declines in this segment. -
• The company had to rebaseline its expectations for the year due to near-term delays in project-led businesses, lack of short cycle improvement, and supply chain disruptions, resulting in organic growth of 3% coming in below guidance, highlighting operational challenges. -

1. 2025 Outlook and Margin Expansion
   Q: Any updated thoughts on 2025 outlook and margins?
   A: Honeywell expects all four segments to have organic growth in 2025 and anticipates returning to margin expansion. Confidence stems from a 6% increase in backlog (10% including acquisitions) and a robust cost position driving margin expansion across all segments. They remain cautious due to uncertainties like wars and upcoming U.S. elections and will provide specific guidance in January. - -

2. Free Cash Flow Guidance Cut
   Q: What's causing the free cash flow guidance cut?
   A: The reduction is due to higher inventory in Aerospace, which remains challenging to reduce, and slowing payment cycles in high-growth regions, partly because of oil prices and Middle East disruptions. Progress has been made in inventory reduction in Industrial Automation and Buildings Automation, but not in Aerospace. -

3. Portfolio Actions and Divestitures
   Q: Any impact of market changes on portfolio measures like PPE and Advanced Materials?
   A: Portfolio actions are driven by fitting Honeywell into three simplified megatrends. Actions like spinning off Advanced Materials and selling PPE reflect this commitment. Honeywell is continually assessing its portfolio to improve growth and margin expansion, with further divestitures possible but not on a specific timeline. - -

4. Aerospace Growth and Margins
   Q: How is Aerospace growth and margin outlook for Q4 and 2025?
   A: Aerospace growth is slowing to mid- to high single digits in Q4 due to elevated comps and prior disruptions like a plant fire and hurricane impacts. The company expects continued organic growth and maintains a positive outlook, with a backlog exceeding $2 billion carrying into 2025. Margins will see some reversion in Q4 due to increased OE shipments, but the full-year margin outlook remains unchanged. - -

5. Project Delays in Process Solutions and UOP
   Q: What's causing project delays in Process Solutions and UOP?
   A: Delays are due to customers pushing out smaller projects and catalyst shipments, influenced by uncertainties like Middle East conflicts and oil price fluctuations, as well as awaiting outcomes of U.S. elections. Despite this, UOP achieved a historic high of $1 billion in orders in the quarter, driven by long-cycle commitments. -

6. Industrial Automation Performance
   Q: Is Honeywell holding or losing share in Industrial Automation?
   A: Performance is aligned with market drivers across multiple global end markets, including significant presence in Germany and China. Economic dynamics in these regions have impacted results. Looking ahead, headwinds like the rebaselining of Intelligrated volumes and the absence of Zebra royalties will be behind them, positioning the segment for growth in 2025. -

7. Intelligrated Business Turnaround
   Q: How do you plan to fix the Intelligrated business?
   A: Intelligrated saw slight sequential growth in Q3, expected to continue in Q4, indicating the business is at its bottom with a slight turnaround. The aftermarket is projected to become 60% of revenue in 2025, up from 30%. The main constraint is customer adoption rates due to high capital investment requirements. The cost base has been rebaselined to a $1 billion run-rate revenue. -

8. Defense Business Growth Outlook
   Q: Can defense growth momentum continue into 2025?
   A: Honeywell expects strong growth in its defense business to continue in 2025, supported by solid order books and sustained demand. The acquisition of CAES, serving the defense segment, will increase the mix of defense in the Aerospace portfolio, further boosting growth. -

9. Aftermarket Performance in Aerospace
   Q: What's driving aftermarket growth in Aerospace?
   A: Aftermarket growth is stronger in Air Transport (ATR), with double-digit increases, while Business General Aviation (BGA) is growing at single digits. This trend is expected to continue, driven by expanding international flight hours and successful RMU (Retrofit, Modifications, and Upgrades) portfolio development. - -

10. Geographical Performance
    Q: How are different regions performing, especially in Buildings?
    A: Europe is showing moderate recovery in Building Automation, having crossed the trough with improving short-cycle business. In China, performance is flat to slightly contracting in automation businesses, with no change in trajectory. Honeywell sees strong growth in India and Saudi Arabia, which are becoming catalysts for growth with double-digit revenue increases. -

Quarterly guidance for Q4 2024:

• Fourth Quarter Sales: $10.2 billion to $10.4 billion - (no prior guidance)
• Segment Margin: 23.8% to 24.2% - (no prior guidance)
• Adjusted EPS: $2.73 to $2.83 - (no prior guidance)
• Net Below the Line: negative $250 million to $300 million - (no prior guidance)
• Repositioning Spend: $60 million to $100 million - (no prior guidance)
• Adjusted Effective Tax Rate: 17% - (no prior guidance)
• Average Share Count: 653 million - (no prior guidance)

Annual guidance for FY 2024:

• Full Year Sales: $38.6 billion to $38.8 billion - (lowered from $39.1 billion to $39.7 billion - )
• Segment Margin: 23.4% to 23.5% - (raised from 23.3% to 23.5% - )
• Adjusted EPS: $10.15 to $10.25 - (raised from $10.05 to $10.25 - )
• Free Cash Flow: $5.1 billion to $5.4 billion - (lowered from $5.5 billion to $5.9 billion - )
• Net Below the Line: negative $650 million to $700 million - (raised from negative $700 million to $800 million - )
• Pension Income: $600 million - (raised from $550 million - )
• Repositioning Spend: $150 million to $190 million - (lowered from $150 million to $225 million - )
• Adjusted Effective Tax Rate: 20% - (lowered from 21% - )
• Average Share Count: 655 million - (no change from prior guidance - )
• Impact of Acquisitions on EPS: Neutral for 2024, 1% to 2% accretion in 2025 - (no prior guidance)