Honeywell International Stock

Thank you for standing by, and welcome to the Honeywell Technologies Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded.

I would now like to hand the call over to Mark Macaluso, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to Honeywell Technologies Third Quarter 2026 Earnings Conference Call. Joining me today are Honeywell Technologies' Chairman and Chief Executive Officer, Vimal Kapur and Senior Vice President and Chief Financial Officer, Michal Stepniak.

This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, most new information on the Investor Relations website that may be of interest or material to our investors. 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 certain risks and uncertainties, including those described in our recent SEC filings.

This morning, we will review our financial results for the third quarter of 2026 and discuss our updated 2026 guidance. And as always, we'll leave time for your questions at the end. With that, it's my pleasure to turn it over to Vimal who will begin on Slide 3.

Thank you, Mark, and good morning, everyone. Our first quarter as a standalone pure-play automation company was a clear demonstration of the value creation strategy we laid out during Investor Day in June, with broad-based organic growth, strong margin expansion and higher free cash flow conversion, and I'm very pleased with the results our teams delivered. This quarter showed the breadth and quality of new Honeywell Technologies portfolio with strong results across all segments. We delivered 7% organic sales growth above the high end of the targets we unveiled at Investor Day in June.

Demand across the portfolio was broad-based, which drove short-cycle orders growth of 8%, excluding our divestitures led by industrial and building automation. Additionally, the growth inflection we expected in Process Automation and Technology is occurring with the business growing 8% organically in third quarter. As I will talk more about shortly, we believe PA&T is beginning a multiyear growth inflection, fueled by a robust project backlog and continued capital investment in energy sector, especially in Africa, Middle East and U.S.

On profitability, we expanded margins by 370 basis points to over 21% and through strategic pricing, productivity actions and the continued reduction in the stranded cost. Importantly, with accelerated progress this quarter, we now expect to eliminate all remaining stranded costs by end just 6 months after the aerospace spin-off demonstrating our strong execution capabilities.

Together, this combination of profitable growth and the fixed cost productivity drove adjusted EPS of $2.27, up 34% year-over-year. To round out the story, the cash conversion accelerated to 95% for the quarter, and we expect to be above 100% conversion in the fourth quarter. As a result of our strong execution this quarter and momentum heading into fourth quarter, we are raising our full year 2026 guide across all metrics. The growth inflection is in P&T and the turnaround in industrial automation are well underway, compounded by 8 straight quarters of outperformance in building automation.

Mike will talk more about our stronger outlook for Q4 and the full year in a few minutes. Our transformation into a pure-play automation company is complete. As our third quarter results have demonstrated, we have strong position in growing end markets, differentiated offerings and clear competitive advantage in higher growth verticals like LNG and data centers. We are instrumenting the business to outperform both in 2027 and over the long term, with strong short-cycle demand, a backlog of nearly $19 billion and momentum across the portfolio. This gives me and the leadership team great confidence in delivering of our 2029 targets.

Let's now turn to Slide 4 to talk more about the order trends in the business. The key takeaway is that demand remains strong across most of our portfolio. We saw growth across our short-cycle businesses, led by sensing and measurement in Industrial Automation and double-digit growth in building automation product businesses. Orders in data center vertical were up over 100%. In P&T, we saw strong refining catalyst demand consistent with our expectation for a second half recovery. And on a regional basis, we saw strength in India, the Middle East and Africa.

In Process Automation and Technology, we are navigating tough prior year comparison due to the 2 strategic low-carbon energy and LNG awards in third and fourth quarter of 2025, which were a $700 million. From time to time, large awards like this do not always correlate with underlying market demand we are seeing, which is why we have elected to present a normalized view of the demand. Excluding the impact of Q3 award last year, total company orders are up 3% organically. Furthermore, book-to-bill in this quarter was 1.0, which drove ending backlog to nearly $19 billion, up 7%, excluding our divestitures.

In PA&T, specifically, the backlog was up double digits, driven by these large project ports. We continue to believe that the ongoing transition to LNG and renewable as priority fueled increasing pipeline activity from refurbishment and rebuilds in Middle East and the refining buildout in Africa will drive a meaningful energy up cycle over the next several years. Looking ahead to the fourth quarter, we expect orders to grow in the high single-digit range, excluding the large LNG awards shown in the chart on Slide 4. This will be driven by demand in Middle East, India and Asia Pacific in process technology and building automation, continued short-cycle demand in building automation products and sensing and utilities in industrial automation and momentum in our high-growth verticals.

Let us now turn to Slide 5 to discuss the favorable dynamics we are seeing in the global energy value chain, reinforcing our growth outlook for Process Automation and Technology business. On a global basis, we continue to see activity increasing on large energy projects, including over $1 billion in process technology orders since quarter 1 of 2026. And PA&T backlog is over 10% higher than a year ago, supported by win across LNG, refining and petrochemicals and low carbon energy projects. The breadth of these orders is important, too. We are seeing investments across North America, the Middle East, Africa and Asia rather than a single region. LNG remains strong in U.S. and internationally, while refining and petrochemical orders include major projects in Africa, and continued activity across Middle East and Asia. Low carbon energy remains a small part of the business overall, but it's growing at a strong double-digit rate with wins in areas such as sustainable aviation fuel and carbon capture. And we continue to believe that longer term, this will be a growth driver. These orders expand our installed base and create opportunities beyond the initial project win. As these facilities come online and operate at high utilization rate, they will drive future demand for catalyst, automation, digital modernization and life cycle services.

Overall, the strength and global diversity of the orders give us confidence in the outlook for continued growth of PA&T segment as we enter 2027.

In conclusion, we are seeing robust backlog growth and commercial momentum across our business, and we expect 2027 organic growth to be at or above our long-term growth algorithm.

Let me now turn it to Mike to discuss our third quarter results and our 2026 outlook in more detail.

Thank you, Vimal, and good morning. In the third quarter, Honeywell Technologies delivered strong results that surpassed our expectations across most metrics. Sales grew 7% organically with strength across all segments. Process Automation and Technology sales grew 8% organically, led by double-digit growth in projects and a return to growth in aftermarket, led by refining catalyst demand. Project sales grew 14% year-over-year led by strong LNG and petrochemical backlog conversion. The momentum in Building Automation continued with 8% organ growth, our eighth straight quarter of high single-digit growth, evidence that we continue to gain share in the market. This was principally driven by 11% organic growth in products, led by both the Fire and Security businesses, while solutions also grew 4% organically, driven by strength in services.

On a regional basis, we saw double-digit growth in both India and Asia Pacific with continued strength in the Americas. Finally, in Industrial Automation, organic sales were up 4% in the third quarter led by double-digit growth in solutions, principally in industrial measurement and utilities. Product sales were roughly flat, with sensing and industrial measurement demand offset by industry-wide deferrals in meter deployments across the utility segment.

On profitability, segment profit grew 23% and segment margin expanded 370 basis points to 21.3%, driven by productivity accelerated stranded cost elimination as well as strategic pricing actions and volume leverage. This more than offset rising inflation, headwinds from the mix of projects versus aftermarket and the acquisition impact in process automation technology. By segment, in Industrial Automation, price and productivity actions in the core business drove 350 basis points of margin expansion with the business firmly on path to deliver 22% segment margin in the fourth quarter.

In Building Automation, segment margin expanded another 30 basis points to 27%, driven by volume leverage and pricing actions that more than offset rising inflation. And in process automation technology, margin contracted as expected, driven by mix headwinds stemming from higher project growth and dilution related to the acquisition of Johnson Matthey's Catalyst Technologies business.

Adjusted earnings per share was up 34%, driven primarily by 23% segment profit growth and lower interest expense, which more than offset a higher adjusted tax rate in the quarter. Finally, free cash flow was up 15% to roughly $690 million, while our conversion increased to 95% in the quarter. We expect free cash flow conversion to be above 100% in the fourth quarter as we drive working capital improvements, including strong receivable collections.

Let's now move to Slide 7 to discuss the third quarter segment margin and adjusted EPS bridges. Starting with margin, we're delivering stronger incremental margin in our short-cycle businesses, driving roughly 70 basis points of volume leverage. We're also continuing to effectively mitigate high inflation with strategic pricing options, productivity and a reduction in stranded costs. We expect inflation to remain at these levels, at least into the first half of 2027. Our strong market positions, installed base-driven business model and the mission-critical nature of our offerings give us confidence in our ability to successfully navigate this inflationary environment. On adjusted EPS, earnings growth in the third quarter was presently driven by a strong operational performance in all 3 segments, which allowed us to overcome the operating loss from our divestitures. Below segment profit, interest and other expenses declined year-over-year, while our tax rate was slightly higher. We're making good progress against commitments we outlined at the Investor Day in June. Our focus on offsetting inflation, delivering productivity and aggressively elemated stranded costs for transformation is having a meaningful impact. This provides a strong foundation for 2027.

Let's turn to Slide 8 to provide an update on our leverage commitments. As I discussed at the Investor Day, we're committed to reducing our gross leverage to less than 3x this year by lowering our gross debt balance from $18 billion in the second quarter to under $13 billion at the end of 2026. This will be enabled by the acceleration in free cash flow that we expect to continue in the fourth quarter. We expect our year-end cash balance to be approximately $3 billion, resulting in a net debt of around $10 billion. Importantly, the cash generation and continued reduction in our leverage will increase our capital allocation flexibility, including capacity to pursue disciplined M&A.

Let's now turn to Slide 9. As you can see here, we have made considerable progress reducing fixed costs related to the portfolio transformation, and we expect this to continue in 2027. We're implementing a cross-functional shared services model across the company with a simplified and more flexible corporate structure. More importantly, during this time, we continue to invest in our businesses to drive future growth. The progress on stranded cost reduction underscores the pace of execution across the organization and the progress we are making in building a simpler, more focused company. This will position the company for long-term profitable growth, executing stranded cost takeout within 6 months of the aerospace spins demonstrates the strong operational execution capabilities of Honeywell Technologies.

Let's turn to Slide 10 to discuss our revised full year outlook. Today, we're raising our full year organic growth, adjusted earnings per share and free cash flow guidance as well as tightening our margin guidance around the previous high end. We now expect full year organic growth of 4% to 5%, up from 3% to 4% previously, driven by our execution in the third quarter and stronger outlook in the fourth quarter. By business, in the fourth quarter, we expect to see continued strength in building across both products and solutions, high single-digit growth in process automation and technology led by project backlog conversion and higher catalyst volumes and continued sensing and industrial measurement demand in industrial automation.

As a result, we expect to deliver 5% to 6% organic growth. With the performance today, we expect to be at the high end of our full year margin range at 20.5% and at approximately 22% for the fourth quarter. This will continue to be driven by pricing, productivity and volume leverage, overcoming higher inflation and anticipated mix headwinds in process automation technology driven by higher project activity and dilution from the Catalyst Technologies acquisition.

Industrial Automation should be a 22% margin in the fourth quarter, while building automation is expected to expand margins 70 to 90 basis points and process automation technology will end the fourth quarter around 21.5%. We now expect full year adjusted EPS in the range of $8.40 to $8.45 which represents a $0.23 improvement at the midpoint. Notably, the low end of our guidance range is now above our previous high end. This results in full year earnings growth of approximately 30%.

Lastly, our free cash flow guidance is up $100 million to $2.1 billion given the higher income conversion. You can find additional information on our 2026 outlook in the appendix of our presentation, which includes estimates for corporate and below-the-line items. Thank you for your time today. Let me now turn the call back to Vimal to wrap up before the Q&A.

Thank you, Mike. We are proud of our results in the first quarter as a stand-alone company. We surpassed our expectations across most metrics and we see encouraging demand signal in many key end markets. We believe PA&T is at the beginning of a multiyear growth inflection, coinciding with an up cycle in global energy markets. We are also encouraged by the turnaround the team is driving in industrial automation and building automation continues to execute on all fronts. We're also launching new offering on our Forge platform, both in building automation, and process automation technology, creating a robust foundation for our future growth.

With our performance this quarter and backlog of nearly $19 billion, we are confidently raising our 2026 outlook across all metrics setting up for a strong start to 2027. Thank you for joining us today. And Mark, let's now take some questions.

Vimal, Mike and I are now available to answer your questions. [Operator Instructions] Operator, please open the line for Q&A.

[Operator Instructions]

Our first question comes from the line of Nigel Coe with Wolfe Research.

So I'm curious, the confidence in 4Q order growth. We're still only one month into the quarter. I'm assuming December is a pretty important month for bookings. I'm just wondering what gives you the confidence that the pipeline converts into orders? And maybe just touch on how you -- what you've seen in October.

Yes. So far, Nigel, the first 3 weeks of October has been trending on and above expectations. So that certainly is a good data point. And we look at our statistical performance against pipeline, our win rates when we forecasted. We also provisioned for some adequate contingency for things which cannot happen as projected. So overall, our confidence to what we are stating on high single-digit orders growth in quarter 4, less of the low carbon energy -- LNG order, I'm sorry, which we booked last year, which was several hundred million dollars. We remain highly confident on that.

Okay. Okay. And then Mike, a quick one on stranded costs. Good news that you'll be done by the end of this year. I think that's about 6 months earlier than expected. Does that change your perspective on corporate expense for next year. I think the guide was less than $600 million. How does that look right now?

Right. So it's a little bit early yet, but -- and we'll talk about it in February. But for next year, just like we talked about, I think before, we plan for our corporate cost to be about $400 million. And then we're instrumenting the teams, obviously, to productivity, margin expansion north of 60 bps like we talked about. So I feel we have a really good setup. Like you said, we're ahead and that has implications as far as us having a really good momentum going to next year, and we'll work with that.

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

Just wanted to start off with a question on the IA segment. It's had a sort of rocky or uneven time for a few years for various reasons, looks to be very well set today with a large sequential margin increase guided for the fourth quarter. So maybe when we try and look a little bit further out, how confident are you in continued margin expansion at IA in the coming quarters? And given the macro backdrop is a bit choppy, anything concerning you've seen in the order rates of IA, the shorter-cycle pieces?

So overall, Julian, for IA, we remain very confident on continued performance in both top line recovery and margin rate expansion. The reason for that is the basics are improving as we talked about it in Investor Day very rapidly. Our on-time delivery now is it used to be just shy of 40% is now 60%. Our positives are down 18%. Our new product launches are being highly accepted by our channel partners and our OE customers. So those foundation has turned the business from a negative territory to now more low single digit. And we do expect that it will continue to progress and find it pathway to mid-single-digit growth as we lap from 26% to 27%. So we remain very convicted.

Same is true on the margin rate. We expect the year to end at 22%. Primarily, it's a higher-quality business now. And from this baseline, as we continue to execute our pricing action, productivity actions, we remain very confident on the margin expansion and also achieve 25% goal by 2029. So overall, sensing and measurement building a unique segment in industrial automation, that's our pathway and we remain highly convicted. This is a high-quality business as part of our portfolio.

That's helpful. And then just a quick follow-up on PA&T margin pressure kind of year-on-year in the third quarter that's continuing into the fourth. Should we assume that margins stay under that type of pressure until the Johnson Matthey acquisition anniversaries? Or is there anything in the base business moving around that could help the margin sooner?

Yes. So versus where the team finished the 22.2%, I would say, next quarter, 21.5 million. And then in the first half, I would say probably something similar. But next year, PA&T is going to expand margins. And what's happening there is, one, we have a catalyst mix starting to mix up that volume is going to grow that's going to help the project volume mix is going to abate. And as you know, we obviously are integrating CT. So in the second half, we will be substantively past CT integration. We see a really good margin expansion into the second half of 2027. And I'd just remind you, like we talked about, this is a multiyear cycle in 2028, there is a significant margin pickup again as we counting on catalyst volume. So we have very good visibility to this cycle as we have proven it cycle-over-cycle over multiple decades, and we're extremely confident on the progression of the business in that fashion. .

Our next question comes from the line of Steve Tusa with Wells Fargo.

Very helpful chart on the segment bridge. Can you just, I think, kind of teasing out core incrementals, putting everything else aside on volume, roughly 40%, is that right? And then can you just discuss that inflation number, the 350 basis points? Like what was that in the first and second quarter? And then what do you expect for that in the fourth?

Sure. So you're exactly right. I think on core, we're about 40% incrementals price to cost in the third quarter was about 30 bps net positive. So that 350 bps that you see on inflation is a little bit higher versus the first half, but also our price is higher. We are averaging about 3.5% price in the first half will average about 4.5% in the second half, 4% for the year. That's going to be on a year basis, maybe 10, 20 bps of, I would say, margin expansion from price cost.

And we see, obviously, inflation elevated. We expect that to continue into year-end and then starting to abate in the first half everything we get from our teams as far as planning for next year, we see inflation coming down a bit. So the price will move with that, but it's still around that 3% to 4%.

Okay. And then just for the fourth quarter, my follow-up is what the margin went to the low end of the range, I guess, for the fourth quarter. Any -- is that really just the price cost timing stepping up a little bit sequentially. Just curious as to that or just conservatism?

No, not at all. Pricing cost is as well. We actually -- we manage price in the third quarter to account for year-end. It's really just mix. So revenue is coming up. And like Vimal said, the products are performing extremely well. We don't see anything changing on products. On the other hand, projects is doing better and CT outlook better and they're dilutive to our overall mix, and that's what's driving our margin to that 400 basis still, I would say at the high end of our guide for the year at 20.5%, it's about 300 bps margin expansion for the year, a really good setup for next year. .

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

Vimal, Mike and Mark, appreciate the shorter comments today, too, to leave more time for Q&A. Guys, you've been seemingly gaining a meaningful amount of share in fire security, it seems for a while now. And that was always a pretty low-growth business, like literally like a 1% to 2% type growth business, but you seem to have made it something a little bit bigger. What -- can you just update us on what you're doing there? And what's kind of changed at the margin, what's driving that growth or at least the sustainability of that growth?

I think the fundamental is our higher cycle of new product introductions, coupled with the mix change of the end markets. So we continue to amplify our new product introduction and maintaining a very high vitality by which we then gain share from a competition. Forge is playing a very important role. Fire business for the first out of the door to build a connected solution by which you can configure our fire panels remotely. We introduced that almost 3 years back. So what it does is, Scott, that while the software content is low, it pulls the core product. And that value proposition is very compelling for our channel partners because they save significant commissioning time, inspection time and improves their P&L.

Also, we have benefiting from data center growth. We have some unique products in fire for data center growth for early detection of fire in a very unique environment because you have a lot of electrical cables, a lot of servers. So that's the unique way we detect fire there. We have differentiated product line. We also introduced some unique new products for detecting fire in batteries as more and more lithium batteries are being used.

On the security side, we're benefiting from very premium position of [indiscernible] they continue to perform and double-digit growth rates across the board. And Honeywell added a lot of value in that business by globalizing it. We talked about that hypothesis when we acquired the business. And we clearly see growth of that business outside the U.S. with a lot of synergies we are bringing in. So all in all, I would say we maintain the momentum in this business, and we see no reason that we won't perform at this level in the foreseeable future.

So just to follow up on that on Forge, just that answer was complete. But how do you go to market with Forge then? Is this kind of the -- is it getting wrapped in as a standard offering with every install? Or has it come in as kind of a sidecar, if you will, and price separately. I mean how do you guys go to market with it and get value for it? Or is it just more of a tool used to again, to be able to gain share because you've got another kind of...

Very good questions, Scott. There are 3 sales motions for Forge today. So it's our recurring revenue is now coming close to $1 billion in 2026, just shy of that. The first sales motion is Forge has sold along our service contracts. So we make our customers connect to Forge, change the pricing of our service contract because we are able to provide a higher value outcome. So that sales motion 1. Sales motion 2 is, there are unique applications built in to make our existing offering better, like I gave an example of fire panel. So they are now, even though we sell it as a standalone offering, but it goes hand-in-hand with our Forge products. And then the third is a standalone offering of Forge, which we lost, I would say, 18 to 24 months back first in buildings, where we can connect standalone buildings of even competitors apart from Honeywell installed base to get better insight into customers' energy consumption, predictive maintenance, emissions, and we launched a similar offering for process earlier this year.

In that scenario, it's sold as a standalone SaaS software. So all 3 sales motion are in place. And as we talked about at Investor Day, we expect our ARR to grow. Our aspiration is 15%. We want to have high aspirations. This year, probably will be slightly shy of that, more like 12%, 13%. But we'll continue to work our way through to get to closer to 15% every year.

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

Maybe just starting with process and just understanding sort of the mid- to long-term growth opportunity as these maybe comps normalize. Obviously, great to see high single-digit growth as you expected? I know there's been sort of a management change recently from building to process. I think Forge cognition is maybe part of the growth story. Can you just talk about sort of beyond the first half of '27 and into the second half and beyond what we think the sort of run rate, steady-state growth opportunity is for process?

So we see, Amit, the growth in Process Automation Technology, both on the project side and on the aftermarket in services and catalyst side. The project side, if you see the chart we added into our prepared remarks, we see continued investments in LNG. So our backlog is very strong for LNG. We also see investments in Africa and Middle East and Asia on traditional refining, which is helping us a lot in our backlog.

And finally, we also see activity in low carbon energy projects. Just as a reminder, we have licensed 100 projects so far in stable aviation fuel and only about 20% of those have been built so far. So there's a lot of runway people coming back to us with FIDs which then turn into a significant revenue stream. So project activity remains very robust and very diversified.

Then on the aftermarket side, we expect second half of 2026 catalyst growth to be double digit. It's double digit in Q3. It's going to be actually mid-teens growth in Q4. And given the higher margins, our customers are making on the finished products, we expect that this demand to remain strong in 2027, more normalized year.

And on the automation side, we see strength in our services portfolio, cybersecurity, our Forge offering, we call it plant cognition. So that offering is also getting strong customer reception. So across the board, as Mike laid out, we see this is as a multiyear cycle in which the project strength will provide us a top line growth and we'll maintain our margin with a high mix of catalyst and services and software as we progress.

Got it. Okay. That's helpful. And maybe just as a follow-up, I know 2027 guidance is forthcoming. But I think, Vimal, you talked about sort of at or above the long-term algorithm, I think, Mike, maybe a couple of months ago, you sort of flowed this idea of 15% EPS growth. If I just sort of compare the 2, I would say, bottom line EPS growth, maybe I would have expected something a little bit higher, just given the margin opportunity, maybe just unpack that a little bit for us. Maybe the IA margins headwind in the first half of next year, maybe that's what's driving it. But just to the extent that you can just sort of still in the color between what you've already commented on '27 between the algorithm versus the 15% EPS growth.

So I would say, Amit, the setup for 2027 is very strong. First for starters, our midpoint of the guide for '26 is up by $0.23. So we are starting at a higher baseline. On the top line, we remain very confident on performing at the upper end of our 4% to 6% guide. Our backlog is very strong. Our short-cycle momentum sustained itself, and we continue to maintain our share or gain share through new products, so that's going to continue.

On the margin rate, we have done a good job to manage inflation through price cost. It's slightly positive. We expect to maintain that. And we have maintained our fixed cost by elimination of stranded costs ahead of time. So when you see the setup here across the board, top line margin expansion and fixed cost, we expect a strong print in 2027. I can't tell you specifics because I'll be giving you guide, which I think we'll have to wait for February when we plan to come back there.

But final comment I'll make is directionally, we are on the road to deliver $12 or better our long-term 2029 guide we set up in Investor Day.

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

If we could just start with the 4Q outlook. I think you're embedding a little bit of a deceleration in organic growth, but backlog is obviously so strong. short-cycle order growth is still strong. Can you maybe talk through the expectations by segment? Like what's driving the modest deceleration that you've embedded for 4Q.

I would say probably this is just more conservatism than anything else. Like we said, I think on the short cycle orders, they're extremely strong on product side, of BA, NIA booked in third quarter, high single digit, double-digit growth. So we feel good about that. And then projects are incrementally better. So I think it's just more mix. And like we said, we'll do for 4% to 5% in the -- for the year and 5% to 6% in the fourth quarter. And as we stand today, we're probably on the higher end of the 5% versus -- so it's incrementally we -- I would say we feel better about the fourth quarter.

I think it's fair to say, Nicole, we don't see any change quarter-on-quarter. I think the revenue mix can be different within a quarter of our projects. But other than that, fundamentals of the business remains very strong quarter-over-quarter.

Okay. Understood. And then maybe just in referenced some deferrals in utility meter deployments. Can you just give us some more color on what's going on there? And if that's expected to continue into 4Q or into '27, the time line for that kind of rectifying.

I think that's more of an upside opportunity for us in 2027. We've introduced some very new technology, both for gas meters and water meters. Gas meters, unlike electricity meters have not been upgraded at a large scale by utilities over the last decade. So our technology being new is being tested by multiple utilities and each utility done their testing by themselves rather than this being a common testing protocol, which just adds time. So we are in the process of working with our testing of our new gas meters with several utilities. And once they complete that cycle, which could be 6 to 9 months, we expect them to turn into a major rollout '27 onwards for several years.

So actually, the low growth in our metering business is actually already factored in, in '26 and potentially in '27. But looking ahead, it's going to turn into a tailwind when these adoption rates will pick up in the period ahead.

Our next question comes from the line of Andrew Obin with Bank of America.

Just a question a little bit on Process Automation and Technology on the aftermarket services. I think you highlighted some good tailwinds on Catalyst, but if I look at sort of year-over-year comps, I mean, the comps has gotten quite a bit easier versus last quarter. So I would have expected more of a pickup sequentially in organic growth. What are the headwinds that the business is facing because clearly, the catalyst business is accelerating. But what are the headwinds.

Obin, I won't call it headwinds. When you grow at 8% and then you grow subsequent quarter probably at 7%, I may not call it headwinds. I would simply call it the cycle of the projects. I can't control the milestone when they have to be achieved, so they come at a certain timing. So I would say, broadly speaking, the PA&T revenue profile on an organic growth basis and very similar between Q3 and Q4. Q3 was slightly higher versus Q4 but not substantially different. You are talking a narrow range here.

Catalyst demand is very strong in quarter 4, sequentially better than quarter 3. We were double digit, and we're going to go towards mid-teens growth in catalysts, for example, in quarter 3, our refining catalyst growth was up 80%. So we expect to maintain high rates there. Services growth also remains strong in automation, more like low to mid-single digits. So fundamentals are very robust in this business. I think the change you see is just the sequencing of the projects within a quarter.

Okay. And just maybe another question on Industrial Automation. On the products, what would it take for the products to start growing faster? Because I think you guys sort of talked about initiatives to get deliveries, on-time delivery improved, so that would sort of lead to a lot of good things happening. What would it take for that growth in that business to inflect materially positive? Or are we waiting for the new product introduction as you alluded in the prior answer.

I think directionally speaking, Andrew, if you observe, we have been turning this business to slow growth. Now we are at low single-digit territory right now. I would also like this to go to mid-single-digit territory. And we expect that to occur in 2027 moving forward. I think the drivers of fundamentals are the same. I talked about improving customer service, better delivery, improved past due rates that's certainly already happening.

New product launches and its penetration is, takes time. I think that's the only variable as some of them gets more penetration we expect to continue to perform better in this segment. So there's no doubt in my mind. I think it's just a timing as we go from low single digit to mid-single digit in this portfolio -- in this business, in '27.

And Andrew, I would just add that the third quarter orders for Industrial Automation core were up 15%. So this is business that's going to the next year probably with the best backlog it has seen in over 5 years. We're quite confident about finishing...

And we expect fourth quarter orders to be up high single digits. So there's a lot of momentum here, it's just the cycling of the business going from one phase to another phase.

Our next question comes from the line of Andrew Kaplowitz with Citigroup.

Vimal, I think we know your data center business overall is still a relatively small part of Honeywell. But last quarter, I think you mentioned your offerings in power generation. We're beginning to help your process business and data centers in addition to building automation. So we think about that data center, call it, ecosystem and how it might help you in '27 and beyond?

Certainly, we always talked about data center as mid-single-digit business for BA, Building Automation. We are now turning to a point with the change in demand of the customer. We continue to see this can become actually at some point, mid-single digits of Honeywell. So we -- because now we see the demand in process automation. We saw year-to-date orders growth of more than 100%. Based upon the pipeline visibility we have, we expect very high growth in 2027 also. We're mixing up not only the building automation, but even some process automation order for Power Island for controls, for energy storage, that solution is being mixed up.

One interesting thing, which is occurring in addition to this for the last, I would say, 6 months is liquid cooling. As liquid cooling will take more penetration, we expect our spend -- share of spend to further go up. We are working with customers for sensing for liquid cooling from our sensors business. And our Sundyne pumps are a premium solution to circulate those liquid cooling. Those will, as we can imagine, those are going to scale in future, probably it's more post '27. But what I sense is something we started with a very modest content in Building Automation. Now we added Process Automation, and now we are adding even our content from Process Technology and Industrial Automation is truly becoming a pan-Honeywell strategy and we continue to improve our content. Our last comment I'll make is, as we grow as data center growth is happening outside the U.S., in Europe and in Asia, particularly in Korea and India, we expect to continue to do well because of our global presence and global execution capabilities.

That's helpful. And then, I think you or Mike mentioned that you'll get net leverage down under 2.25. And so -- and I think you also mentioned at that point, you could pursue, I think, you said disciplined M&A. So how do you characterize the environment right now? Obviously, it's the new company or the new Honeywell technology. So any sort of re priorities that you have as you move forward here towards the end of the year?

Our highest priority is first to get our leverage ratio 3 or below and continue to work its way down as we get into '27 generate more cash, we want our leverage to further improve. I think from an M&A perspective, it's an optionality. As you know, our 2029, $12 commitment is all organic. So we have no compulsion. We have no need to wake up and think about an M&A to do our, meet our organic earnings commitment.

Having said that, we're looking at options 3 ways, higher priority being industrial automation, how we look at adding more content in measurement and sensing, that's our highest priority. Second area we're looking at it is higher growth verticals how can we add more content to further upgrade our portfolio.

And finally, we never overlook some of the frontier technologies. There are always tuck-ins, which can change the profile of our businesses. And we look at these midsized, small businesses in addition to that. But all said, I think near term, you will see us staying very disciplined on our debt paydown. And we'll work our pipeline for M&A for '27 onwards.

Our next question comes from the line of Joe O'Dea with Vertical Research Partners.

Can you talk a little bit about the self-help opportunities moving forward, what you're most excited about heading into next year? Not sure if you've perhaps touched on this with Johnson Matthey's Catalyst Technologies. But just on the heels of the speed with which you did the stranded cost takeout kind of thinking about other parts of the organization where you see some of the biggest self-help opportunities.

I would say just quickly maybe 2 or 3, which stand out the malls and that's obviously a focus for us as a company. One is we're moving more into lighter headquarters and more of adoption of shared services across the company, which is obviously will help us continue to focus on productivity, which is value engineering, component, engineering. That's more from a supply chain standpoint and how we think about NPI, that's a significant opportunity for us. .

And finally, we're obviously working through adoption of AI. All of our teams are either already trained or being trained on AI. Everybody has access to the models we're using for the company, and that's really an opportunity for us in terms of managed OEF and it's not as far as reduction have but manage the OEF growth or staying flat on on OEF while we obviously grow mid- to high single, operation.

Two points I'll add to what Mike said on the self-help side. First is on the Catalyst technology business. As we integrate the business, we are seeing higher cost synergies than we had forecasted. So that should certainly help us in our 2027 planning. We're also working on sales synergies, building pipeline, but that you can imagine, that takes time to convert into a real revenue. So we do expect CT business to overdrive from cost synergy standpoint.

Final point, I would say is cross-sell between different parts of Honeywell. I gave an example of data center just in my remarks a couple of minutes before and how something which was centered around just one segment, we are doing it across segment. We are doing that in other verticals, too. For example, in Life Sciences, how we cross-sell between building and process automation or in semiconductor where we have a very strong position in gas detection, how we also accelerate our participation in fire detection, which comes from building automation. So that's also self-help. It's leveraging our sales channels to the fullest potential. And certainly, we are maximizing our efforts on that.

And then on building automation and demand visibility, clearly strength in the data center side of things, but maybe talking about end markets ex data center, obviously, the growth rates over the past couple of years are tougher comps. But what the product innovation pipeline looks like, what that means in terms of the growth visibility you have heading into next year in the nondata center parts of building automation.

I think the Building Automation business, the content of higher growth verticals and in high-growth verticals, we count 3 data centers, health care and hospitality is 20%. 80% of the business come from core or base business, and that's growing at mid-single digits. And that's on the strength of great customer service and new products.

To your question on new products, we have several big launches coming up. ahead really right now, we have a new version of our security systems launched, which is cloud-based. That's going to play in the mid-segment. A lot of our new offerings are actually going into the mid-segment as a broader team. A new version of our fire system going into our mid-segment. We're also looking at similar offering and build management system. We are refreshing our EBI platform within newer versions. So across the board, we have learned that as we continue to accelerate our vitality and innovate, we will perform at this level of mid-single-digit plus. And the pipeline is very full. And I'm extremely confident on performance of results by this business.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

I'm going to focus both of my questions on PA&T. So I guess on the project side of the business, with Brent now sitting above $10 million typically that stimulates investments from your customers. I don't know if you can maybe just give us a little bit of background on like what your customer conversations are like today. Whether the pipeline has like materially increased over the past year? I thought that Slide #5 was very helpful, but just any color you can give us on that would be great.

So we -- as we said in the chart, Joe, the VC investment certainly in diversity of fuels and energy security. What I mean by that is Africa was not seen as a destination of investments by defining petrochemicals. So [indiscernible] refinery, if you recall during Investor Day, he was up there and talking about partnership with Honeywell. They're not only expanding their existing refinery by 100%, which is the largest refinery in the world. They are doubling it. They're also putting additional refinery in Kenya. These are all firm projects. If you look at their cash flow, it's billions of dollars in a quarter. So these are high certainty projects. There are additional investments happening in Africa and petrochemical side, too, so we can clearly see that as a trend.

One thing which we highlighted is also low carbon energy projects are finally taking shape from a low base. We had 2 big wins on carbon capture related projects in quarter 3, and we have some robust pipeline for quarter 4 ahead for us. So there are some investments happening. And the driver for that is European Union continues to hold its mandate for SAF option.

And to fulfill that demand is more capacity, which is required. And finally, we do see capacity addition for petrochemicals. Our licensing activity and automation business in petrochemicals continues to remain strong. So when you add it all together, it's less linked to the oil price. It's more linked to the drivers, which are more broader energy securities, the E&C, low carbon fuels or the broader demand of petrochemicals. And that's why we believe it's a multiyear cycle. It's less linked to the price. It's more linked to other drivers. That's why it gives us more conviction.

Yes, Super helpful, Vimal. And I guess maybe just to ask Andrew's question slightly differently from before. On the refining side of the business, are you seeing any deferrals just given where crack spreads are, refiners may be running out harder a little bit, given profitability looks really, really good right now. So are you seeing like any of that like business may be pushing out into next year? Or has that remained very healthy for you?

I would say what we all read deferrals are higher uptime by U.S. refiner is actually correct which essentially means that some of the activity, which requires a shutdown cannot be performed. We look at our services business, aftermarket business in 2 buckets. A lot of it can be done online. So a lot of our automation offerings do not require a plant shut down. If you want to harden your control system for cybersecurity or you want to migrate to the current version it can be done online. So those businesses get protected even though customers are running at a higher rate. But there are things which you need to replace like a Sundyne pump has to be replaced, you need a shutdown or if you want to refurbish a catalyst.

So to me, there's some demand moving right, but it's not a lost demand, it's moving -- it's kind of pent-up demand, which will eventually show up. But when you look at the global view, the overall services and catalyst demand is very stable. As I mentioned before, we see the catalyst demand to be in teens, high teens in quarter 4. Next year, we see overall catalyst to be very stable, mid-single-digit growth. Services growth remains very stable. So absolutely, this is a trend of high utilization and no shutdowns. But it doesn't change the overall dynamics of the business for us in near term.

Our next question comes from the line of Varun Govindaraj with Bernstein. .

So question on DAT. When you're looking at projects and their delivery times, have they been in line with historical norms? I think there's been a concern that we're short labor in North America, and that might lead to some of this just getting stretched. Are you seeing any of that in your numbers? Or is that not really a concern right now?

Not a concern because a large part of our backlog is actually not in North America. LNG backlog is in North America. Everything else is in rest of the world. And in case of LNG, we build our own equipment in our own factory, and we have enough capacity to fulfill all our backlog. So we don't have any concern on that. .

On a broader basis, yes, the construction labor or labor shortages is a trend, but that's not driving any impact on our revenue execution on a visible basis.

Appreciate it. And then just as a side note. So on Industrial Automation, big sequential jump from 18.4% to 22%. How much of that is coming from the spins of WWS and PSS? And how much of that is more productivity feels at this point, everyone is very confident about the number, but just any color on that split?

Yes. I would say that organically, if you will, the business is probably expanding 150-plus bps just by operational getting better. Rest of it is related to the TRW separation. .

Our final question this morning comes from the line of Dan DiCicco with BMO Capital Markets.

On the inflation topic, a 4.5% price in half 2. Just what businesses are you having to push the hardest on price? And then is there anywhere in the portfolio where this might be proven to be a little bit more challenging?

I mean the pricing is I wouldn't say there's a large deviation within the segment. Pricing is a factor of inflation in the segment. And inflation drivers vary from semiconductor to electronics to metals like copper and brass. So I would say that our overall pricing is a narrow range. It doesn't vary from business from 1 for one person and some business is 10, it's not in that wide range. You can have a range from 3.5% to 4.5%. So it's a very narrow range for us. And the pricing attainment doesn't require only the action of pricing, but it requires good customer service, good customer communication, a good pipeline of new product. And I think that comprehensive 360-degree view is what we have really adopted to attain the price and keep the price cost positive.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kapur for final comments.

Thank you. I would like to thank our shareholders, our customers and all Honeywell Technologies Futureshape around the world for the strong third quarter results you delivered. Today, marks another important milestone in our journey as the new Honeywell technologies. Our first quarter as a standalone pure-play automation company demonstrated progress on all 3 elements for our investment case, broad-based organic growth, strong margin expansion and a higher free cash flow conversion. .

PA&T is converting its backlog into organic growth. IA is driving meaningful turnaround and BA continues to deliver. With nearly $19 billion in our backlog and a strong 2026 outlook, we entered the fourth quarter with strong momentum. And increased confidence in our ability to deliver the commitments we outlined at Investor Day. Thank you all for joining us today, and we hope you have a great rest of your day.

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

Good afternoon, everyone. Just quick disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

So this morning, I'm happy to introduce Vimal Kapur, Chairman and CEO of Honeywell Technologies; and Mike Stepniak, CFO. And Vimal is going to kick it off with some opening remarks.

Thank you very much, and good to be back in Laguna. I would say we are 75 days as a new company. It looks like a 100-year-old company, and we are definitely reinvented ourselves with the changes of completed spin of aerospace and advanced materials. I'm not going to belabor that. I think everybody is aware of the story. I think where we are focused on is, as a new company, how we execute on the commitment we made on the Investor Day.

On our very simple investment thesis, we are a pure-play automation coming out of the gate playing into 3 end markets: Building, Process and Industrial. And building and mining installed base is our business model. We live with that every day. We are accelerating growth of our installed base by moving towards verticals which are growing at a higher rate and mining installed base using much more AI-based tools so that we can get more value out of it.

The good news is our strategy execution is pacing at a rate better than we had expected. The Q3 start for the first 2 months have been good or very good depending on how you want to say it. So we have good momentum. We expect to start the first quarter at the upper end of 4% to 6%, which is a great place to start and have similar momentum for Q4, which will make a good setup for 2027.

So where we sit today, we are executing the strategy. The momentum is good, and we think we have a good setup for imminent 2 quarters ahead. We want to have a good start, and then we have a good setup for 2027 ahead for us. So I look forward to the discussion and drill into any direction you want to go into.

Yes, that's great. Thank you. So talk about the portfolio transformation and a little bit what's different about the company now versus a year ago. What do you think the market still doesn't fully appreciate about the new company?

I mean it's fair to say that, first of all, we are a newer company. Portfolio change has been substantial. We separated 3 businesses apart from the spin, and we acquired 6 businesses. So I think just appreciating our portfolio, it requires work. I'm not saying it's good or bad. It just being a newness. But fundamentally, we, as a company, needs to prove we can grow at a higher rate, which organic growth rate was not a feature of Honeywell.

We did a great job of earnings growth through margin expansion, which we haven't forgotten. We still know how to do that. But adding to that feature organic growth and delivering that near term is the best way to prove it. So if we can, and we feel confident that next few quarters continue to be upper end of 4% to 6%, more towards 6%. We established credibility that we can grow organically through the strategy we have put in place.

So that fundamentally is different for us, too, but also market will appreciate that as we have a couple of quarters under our belt in which we prove those numbers.

Yes. And historically, as you said, you guys have struggled to kind of hit the higher end of that range. So can you go a little more into detail on what structurally has changed about the business to drive that 4% to 6% growth?

Two things have changed. I would say the first is the portfolio itself. I mean, if you have the right portfolio, that helps you to grow at a higher rate as we have seen in some of the businesses. So changes in the portfolio we made was intentional to a certain degree. So that certainly is different. And second is making growth as our first priority. That's our goal #1.

It means how we think about growth enablers, which to me is fundamentally more and more pivot towards in our mix of our business towards high-growth verticals and to mine our installed base, how we are structurally doing more and more penetration that becomes our priority that we are thinking every day that are we mixing up our business towards high-growth verticals? Are we penetrating more towards services and software?

And to do all both these, we need new products. And that becoming our primary focus area is different from what it did in the past. So portfolio is different. Strategy execution focus is different, which gives us the confidence that we are going to deliver what we committed $12 earnings by 2029. And I should have said it earlier, where we sit today, Mike said it during Investor Day, that to us is more of a floor. We are here to beat that floor and perform at a better rate over a period of time.

That's great. On the high-growth verticals, how much of that 4% to 6% growth is coming from the portfolio mix shifting towards those verticals versus improving execution within the business?

So today, let's kind of, for the benefit of everybody, we defined in each of our segments, higher-growth markets. So in buildings, it's data centers, it's hospitals and it's hospitality. And in case of process, it is LNG and life sciences and so on. So we identified 8 markets. They constitute 20% of our mix today. But these markets in 2026 are growing at a rate of net 15%. Some of these markets are well known like LNG market is growing at a high rate in process. Data center is growing at a high rate. Semiconductor is one of the identified high-growth vertical in industrial.

So the answer to your question is our rubric is today, it's 80/20. 80% of the business comes from more mature markets, which are growing at a GDP rate. So they should grow at 3% to 4% rate depending upon the geography and the market. And then the 20% grows at a 15% rate, and that's the math. So if 80% grows at 3% and 20% grow at 15%, we are going to hit that 6% mark. We are conscious of the fact that it's better if that 20% becomes 25% or even higher.

And that's one of the commitments we made during Investor Day, we want the high-growth verticals to be 25% of our mix. We expect to finish this year from 20% to 21%. So we are heading in the right direction. Hopefully, next year, we go from 21% to 22%. So we're just mixing it up. And more mixing up we do, lesser growth now we need from this higher growth even versus 15%. So I think we are headed in the right direction.

And we don't want to forget the fact that the base business also has to grow for us to deliver. It's not 'or', it's 'and'. So base business has to grow well. We have to do good customer service. We have to innovate new products. That's how the base business grows. And high-growth verticals, you basically build offering in which we can compete and differentiate against your competition.

And then the new strategy also requires monetizing the installed base through services, software and new products. How undermonetized is that installed base today? And where is the largest dollar opportunity you see?

So today, 40% of our revenue comes from services and software. We want that to go to -- we want that to be 45%. Why? First is higher margin. And second, it's more durable. You can predictably say that revenue is going to be in your revenue stream next year given the nature of the long-term contracts we have there. So to your question, it's less about, I mean, we obviously have a variety of businesses, which are less penetrated or more penetrated. So if it's less penetrated, the answer is obviously get penetrated more.

For example, in our Process Automation and Technology business, the process technology side of the house is not penetrated well. They licensed technology to build energy infrastructure and did not sell service contracts. There's no real logic behind it. This was not their focus because the business model was not built to mine installed base. Nobody focused on that. Now we are. So there, the opportunity is penetrate more. But if you look at building automation business, which has good penetration on the project side of the business, we are doing more upsell, cross-sell, right? It means we have to build more offerings.

So you need to find the opportunities, both in terms of penetrate more or upsell more depending on where you sit. But both strategies are working for us. One big change we made is we built an enterprise-level system for our installed base last year. I should look very table stakes to say, what's a big deal about it. I mean, don't you know where your installed base is? Of course, we knew, we always knew about it. But a company of our scale, if we have about 15 businesses, everybody has an installed base in their own system.

So we may have 10-plus systems or 15 systems where system of record exists. So we cannot have a common metric on penetration. We cannot have what asset is due for out of warranty. There's no common standard. So the way all companies have an ERP system or a CRM system, we build what's called EAM, Enterprise Asset Management system, where our installed base is, data is there. So that basically allows us to ask the question which you're asking where we are penetrated less, what can we do about it?

And if you are penetrated more, that's good news. What can we upsell on top of that and how we're building our offerings. So a combination of those will allow us to get towards from 40% to 45%. I think we feel highly confident about it. And this year, our offerings, specifically on the software side, they are trending very nicely.

Appreciate that. Pivoting to data center and AI. Obviously, everyone in industrials is talking about AI and data center. You guys talk about physical AI with Forge. What can Honeywell do with AI that a horizontal software provider cannot? And where do you expect AI to show up first in the P&L?

So AI is already, maybe later part of the question, our Forge platform revenue this year will be about $1 billion. That's $1 billion of ARR. We expect that to grow at 15%. So it's already in our P&L. And it's about 5% of our revenue. We will grow more. To your question, what is different about us and how we think about it? We think about this being a capability by which we serve our customer through our services and software strategy. Again, as a reminder, our strategy is build and mine installed base.

And when you go to the mine side of it, monetize side of it, you need to have offering, which are more contemporary. Customers today want to use agentic system as part of their operation. They want to have agents. And if we do not offer them agents on top of our system, we are not contemporary. So we have to think about it in context of the market need versus we are trying to catch up on something. Now what's different is you can say why a generic tech company would not be able to do this? Why you need Honeywell to do this or physical AI.

Physical AI has 2 unique features compared to, say, a traditional AI. The first is the data in our domain is not in public domain. Data is in our control system. So you can't go to Internet and get the data and train it. There's nothing to train. So if we do not become a capable company, we are ourselves becoming as a kind of a deterrent to scale AI. So that's factor 1. The factor 2 is large language models can do a great job to contextualize data, but they do not have domain knowledge to make sense out of that.

So I can have a large language model in which you can put in real-time data, we are sitting in a hotel here. So how is the chiller performing in this hotel? What's the ERP data telling us in terms of the maintenance or some pictures. Yes, you can give it all to an LLM. But LLM doesn't understand what a chiller does. So that's the domain knowledge, which companies like us possess in the segments we operate. So building a physical AI requires that last mile expertise to get that intelligence out of that data. So the combination of the friction of the data, not being in public domain and domain knowledge really becomes a value proposition for us.

So companies like us now, we partner with cloud providers and AI model providers to take their capability to build an offering which our customers can use so that it's an economic value for them and they can make money out of it versus they are shopping around from other side. So it's an important part of our proposition. It plays right into the heart of our business model. And therefore, we believe that it's something which is critical for us to be successful as part of our business.

And on the data center side, they become an increasingly important growth vertical. How large is Honeywell's addressable content per data center today? And how much can that expand beyond the traditional building controls, fire you guys sell?

Yes. So I would say our journey in data center has been interesting. We -- the automation content in a data center in the data hall is not very large. It's about 1.5% to 2% of the capital. So we are a little over 5% of building automation business come from data centers, right, today, and it's growing at a rate of, I would say, north of 20%, even higher at this point of time. But the base is also small. I'll acknowledge that.

What's changing interestingly for us is that data centers are now want to have aspiration to build their own power generation, which has started very recently because of our interconnection problems and everything else. Because the power generation is becoming an integral part of data center, our entitlement has grown because now process automation business also have room to play in the power island apart from the data hall where building automation business was playing.

So if that thesis plays out, our growth rate would further accelerate because now this is a new driver in the market. And we already have active engagements with few data center builders who want both, which improves our value proposition because there are not many companies who do both the core data center and the power generation. There are 1 or 2, but there are very few people. So we see that as an extra enabler.

Other growth enabler we see in data center is we being a global company. We absolutely are benefiting from data centers becoming global. So we see a lot of activity in data center build-out in Europe. We see early days of a lot of data center build-out in Korea, in India. Good news is Honeywell has a deep penetration in each of these locations. So as these will scale, we'll also benefit from that. So there's a geographic footprint expansion momentum in our favor and scope expansion momentum in our favor. So we do expect that even though it's a smaller portion of our revenue, but certainly is net helpful to us in the market.

Great. And then pivoting to another high-growth vertical, LNG. That remains one of the more differentiated parts of the Honeywell story. And on the most recent earnings call, you said the proprietary LNG equipment is sold out for the next 3 years essentially. What is essentially driving your strength and right to win in that market? And what does that imply for growth in years '28, '29?

So LNG growth is coming on the strength of 2 acquisitions we made over the last 2 years. We bought an asset from Air Products for the core technology, which converts gas to liquid. It's a heat exchanger. So think of it as a large refrigerator. You put gas on this side and liquid comes on other side. And that's the core technology which we possess. And we also acquired a business called Sundyne, which give us special compressors, which are required in LNG plant. So combination of those is giving us sort of growth.

We are expanding our capacity. So when mentioned that comment, it was in the context that when we acquired a business, it has a certain capacity. So if we took that capacity, we kind of booked for till '29 -- '28, '29. We are expanding that capacity substantially so that we can create more opportunity to benefit from the growth, which is coming ahead of us, and that's mostly already deployed. So we can now serve a much bigger market because demand is very strong.

Interestingly, the demand for LNG was already secular ahead of Iran war. What Iran war did was an incremental demand signal what people want to diversify their sources, because there is a risk perception now from certain supply base and people don't want to rely on one supplier. They want to have resiliency, which is creating even more demand for LNG compared to what was forecasted earlier. So we think the cycle will remain strong at least for next 3 to 4 years. What you can see ahead of you, I can't see beyond 2030. So it's hard to say what will happen beyond that time. But fundamentally, as the world energy mix is swimming from coal to the gas, that's a fundamental driver. And we see strong demand in the business, and our acquisitions are playing out to our strength there.

That's great. So at the most recent Investor Day, you highlighted a new framework of 4% to 6% organic growth and then also margin expansion of 60 basis points annually. While 2026 is going to benefit from portfolio actions and stranded cost reductions and a little bit of that in 2027, once those are out of the way, what are going to be the durable drivers of that organic margin expansion?

Sure. So there are a few, and we talked about at Investor Day, but obviously, price is a big one then productivity. Everything we, that Vimal talked about as far as mixing the portfolio to higher growth verticals, more focus on services and software ARR. That's also, I would say, will allow us to drive margin expansion. And finally, it's just good old productivity. And if you think about the accelerator, what Honeywell deploys as far as productivity, that's really the big driver of our cost out and margin expansion as we grow at the higher levels.

Great. Shifting to more near-term dynamics. You saw double-digit order growth in Q2, especially across the short-cycle segments and backlog up almost double digits as well. How much of that strength reflects improving underlying markets versus Honeywell-specific execution and share gains?

I would say it's both. I think markets remain very resilient across the board. We -- as I mentioned, we had a strong booking quarter in quarter 2. The first 2 months of quarter 3 has also gone very well. So the momentum continues both in short cycle, but also in the long-cycle demand. And our backlog continues to grow. So we are benefiting from strength in the markets we play, but also continue to keep our position or gain share in some pockets, which is net helping us.

So we have been gaining share in building automation for multiple quarters. That momentum continues, which is helpful. So little self-help here. We're also seeing trend lines now of industrial automation business normalizing and stabilizing. We had share loss problem in that in 2025 in earlier periods, but that's reversing. So that's definitely helping net because we are no more losing share but stabilizing ourselves. And the process market, as we talked, is extremely an up cycle at this point.

Our backlog in Process Automation Technology is up 25%. That's historic high, which positions us well for second half of '26, but also for 2027. So markets being strong is net positive and self-help to a certain degree where we can differentiate ourselves and at least keep share or gain share in some pockets is also providing us tailwinds.

And in Q2, you also highlighted software ARR being up mid-teens. What is driving the acceleration there? And how large can software become relative to the overall company over the next few years?

As I mentioned, our software ARR by end of '26 will be about $1 billion. It's pure-play software ARR because I think earlier, we mentioned big numbers, but they are part of our other revenue streams. So I think it's better to keep it simple on AI-driven offering, which is about $1 billion. I think driver for that is new offering as we launch and adoption rate of those offerings.

The market adoption rate on AI is variable. A few customers want to do faster, a few not. It's not in our control. What's in our control is, are we innovating at a pace and speed at which we are differentiated in the market. So that when market wants to adopt it, we are #1 in the priority because we are the most advanced. So I do see that the primary driver is continue to build new applications, which customers are willing to pay for. And our aspiration is to keep growing that at 15%.

It will remain a smaller portion of Honeywell Technologies revenue; however, this revenue pulls through rest of our offering because this is a differentiating feature, which allow us to grow our core at a higher rate. And we don't want to forget that. This cannot be looked in isolation of rest of the portfolio. We have to look at it altogether. And therefore, this innovation is critical for our overall growth algorithm.

Can you detail a little bit how it does end up pulling through the rest of the portfolio?

I mean, look at, take an example, we have seen a lot of success of building automation business growing at high single for almost 8 quarters. I mean software is less than 5%, even in building automation. But when you create an offering, which helps customers save time, because they are able to save time and get productivity, they want to buy your product because they are getting net saving in productivity in their business.

So we have launched offering, for example, we are a leader in fire detection system. Our fire detection system can be configured remotely from an office location. They can be tested. So why should anybody care about it? Because our channel partners don't have to go on a road and run a truck to do a basic work. So they get a lot of productivity. But they get that productivity on top of Honeywell system. So they have to buy a Honeywell product to use this capability.

So it's intertwined. So even though this may be a smaller portion of the revenue, but it's pulling through rest of the revenue. And that's really the whole intertwined model. We are not looking this software strategy in isolation to our business. Software strategy is part of our business. It is to compound the growth of our business and not try to have an independent strategy with independent set of customers. We are looking at it as a part of how it drives to accelerate growth of our core. And that's why we see this as not only driving the growth on the base, and we do believe we should, in the period, we have said can we hit a [ 15% ] growth rate? I think so. I must mention, I'm not aware of many industrial companies, which has a $1 billion ARR. And we'll continue to grow it and keep it, make it higher every year.

And is that kind of growth flywheel from the software expected? Is that something that's baked into the 4% to 6% organic? Or is that more like a long-term cycle that needs to happen?

To me, the adoption rate growth will become a tailwind for us. I mean if you see our growth algorithm, we have said we have 2% of bridge or contingency and there's a lot of dialogue that why we need it and nobody else earlier shown because we're instrumenting our business for a higher growth rate. Things like these have potential to grow at a higher rate.

But there's also going to be a risk in a business of our scale. We're a business with multiple end markets and global scale. So we only felt it's prudent to have sufficient contingency so that we don't have to come and explain why can't we meet a year to our earlier discussion, we want to be a highly reliable organic growth delivery. And if we instrument our business at a higher rate, the probability to achieve is much greater because now we are not living with the short-term issues in the businesses or in the geographies.

You mentioned building automation and the improvement that we've seen there. It's now persisted, as you mentioned, for roughly 8 quarters now. What specifically changed in the operating model there that took the business from low single digits just a few years ago to now 8% organic last year, starting this year, roughly the same level year-to-date.

So fundamentally, the building automation has been following the Honeywell strategy for 3 years, mixing up to the higher-growth verticals. They have a very good position in the 3 high-growth verticals I mentioned, data center, hospitality and health care. So that's certainly helping them, mining the installed base, certainly doing a great job on aftermarket services and through software, and they're also keeping the share in the base through new products.

So that's our strategy. They're executing it every day. We are executing other parts of Honeywell, and that's what we talked in Investor Day that we may be lagging. But one benefit of being a pure play is we only have one strategy for the entire company. We don't have segment A strategy and segment B strategy. It's universal. The variation is end market drivers a little bit and things of that nature.

And building automation is the longest in the journey and more consistent, and they are delivering results. And you will see the same thing in other parts of Honeywell. We're already seeing, as I mentioned, results in Industrial Automation, reversing its share loss, becoming more stable. So similar performance, we're going to repeat across the board.

Great. Shifting to Industrial Automation. You saw orders grow 11% in Q2, excluding businesses that we divested, strength kind of broad internationally. Does this suggest that the short-cycle industrial environment has turned more positive than you expected entering the year and it sounds like that's continuing through the quarter?

Yes. I mean I'll ask Mike to also add in. I mean we do see strength in short cycle, both in industrial and building automation. Q2 was strong. First 2 months of Q3 has trended very, very positively. So we haven't seen any change. What has helped us is incrementally in Industrial Automation is that the share loss we had in pockets that is slowly stopping and it's becoming more stabilized. So that's turning a business which was not growing to shrinking to modest growth. And we think we are going to keep this trend for the rest of the year and continue to get better in 2027. Mike, anything to add?

I'll just add. I think the team is executing extremely well in Industrial Automation. Like Vimal said, just generally across the board, our short-cycle businesses, orders are high single-digit for the first 2.5 months of the quarter. Long cycle has been book-to-bill 1.1, 1.2 for a while. So that's helping. Specifically on [ Pete's ] business, they've been delivering quite well, which means they're gaining share. They're taking the stranded cost out ahead of time. So they should have a really strong second half.

Great. And then on PA&T, you had sales down low single digits Q1, but orders grew book-to-bill above 1, 1.2. You're expecting a sharp growth inflection in the second half. What gives you confidence in the order strength converting to revenue on that timetable?

We talked about it during Investor Day also in our earnings call. It's just a backlog conversion. These are long-cycle businesses. Our backlog is up 25%. We have consistently said in Investor Day and then during our earnings call in July, and I'll repeat it again, we will grow high single-digit in Process Automation Technology. We've said it repeatedly. We are a couple of days away. We are saying it again. We are just -- we're going to do it, and numbers will speak itself. We're going to do second half.

Now quarter-to-quarter, there be small differences. But if you say next 6 months, we are highly confident that we'll deliver high single-digit growth in P&T. Just we have so much of backlog. There's no, there's nothing secret behind it. It's just those projects are going to get delivered. Our short cycle within Process Automation is also shaping up quite well. There are some short-cycle businesses. So overall, performance will be pretty robust for the business.

And then within that segment, you also closed the Johnson Matthey Catalyst acquisition. What does that business add strategically that Honeywell couldn't replicate organically?

So it's a business which brings in capabilities to our core process technology business, which we did not possess. Essentially, we are a believer that the world is going to go through change in energy mix over a period of time. The demand of energy is increasing, which we all know for different drivers, but energy mix is also changing. Right now, the world is going through a change of energy mix from coal to gas. That's why the growth of LNG is a big, big driver.

But we are also a believer the world will move from traditional fuel like diesel, gasoline, jet fuel to sustainable fuel or biofuels. That cycle hasn't started yet. But that cycle eventually take over at the right time. The projections are that will be 5% of the energy mix net. Right now, it's less than 1%. Johnson Matthey business adds our capability in incremental to what we had. We had a very good position on sustainable aviation fuel, but this adds capability to in spaces like hydrogen and methanol. So we have a variety of renewable fuel option for our customers.

So think about an energy company and as they think about their future strategy, nobody bet on one product to say, I'm going to make only product A. They want to have options to say, I want to make, consider a mix of A and B or A and C. We provide capability to build all potential options. And that's why this acquisition just adds that capability into our mix. So it's a long-term play. We have to think about in process automation technology cycle, 5-year or 10-year cycle, and these cycles play out on that term. So we believe we are extremely well positioned when the cycle pivots towards renewable fuels in the future.

Got it. And shifting to margins. Inflation has remained persistent in electronics, memory and the commodities that we all can see. How would you characterize the price cost environment for you all today and your ability to keep that neutral to positive going forward?

I would say it's consistent to what we said before. We're being neutral to slightly positive on price cost. We're managing actively. We're being mindful of not destroying the demand. And in the second half, price for us should be around 4%, which just helps us offset the inflation. And we've been saying that for a while, we're highly convicted that that's kind of what's required right now as far as pricing. And that's been playing out, I would say, true to us in our end markets and with our customers. We're obviously working actively with the customers to make sure we manage the overall equation, but pricing is about 4% right now.

I mean we talked about it during several of our calls that we do see industrial inflation staying at a high level. Even in Investor Day in our walk, we talked about 3% price, and I think it was a bit of a surprise for a few people. And that trend persists because electronics cost is high, commodities cost is high, labor cost is high, and there's no real fundamental driver which changes it.

I also don't want to create an impression that it's so easy to get price just because inflation give people a call to say, "Oh, I'm going to raise price." It means you need to have a high rate of innovation. People want to buy your products and your customer service levels have to be high. You deliver on time, your lead times are attractive, your customer service levels are at high standards. When you do those 2 well, you innovate well and your customer service levels are high, you are likely to get price to offset the cost in that scenario.

If you don't do those 2 well, guess what, there's going to be a lot of resistance. And we have learned at hard way that we just need to do, run our business well, anticipating a high inflationary environment. We see this is occurring now. I have no signal which makes me believe things will change in '27, if I will let you guys know. But things continue to look at this 3%-ish inflation, even 4% in some segments, and we just need to deal with it.

Great. Since we're coming up on time, I just want to give you a kind of long-term question. Finally, if we sit here a year from now and say the first year of stand-alone Honeywell was successful, what will the company have accomplished?

That's a good question. I would say that we are meeting or beating our financial commitment is our high priority. We have given set up a $12 earnings goal in 2029. So sitting in one year from now, everybody feels confident that that's the floor, and we're going to beat it. I think that will be a great outcome. And supplementing that with the leading indicator of our strategy execution are progressing in the right direction.

Our higher-growth vertical mix is trending higher than what we committed. Our software services mix is committing higher than we committed. So our strategy execution is ramping up, while our financial performance is at or above our target. So I think that will be a great outcome. And we get invited again on this. That will be a great outcome.

Great. Well, appreciate it, Vimal. Appreciate it, Mike. It's great to talk to you all.

Thank you very much.

Thank you.

Good morning, everyone. This is Nicole DeBlase, Deutsche Bank's multi-industry and electrical equipment analyst. We're back with Honeywell. Pleased to introduce Mike Stepniak, CFO; and we also have Mark Macaluso in the room, SVP of Investor Relations. So please keep this interactive. If anyone has questions, please feel free to jump in. I'll stop my questioning a few times throughout to just make sure everyone is getting their questions in.

But Mike, I thought I'd start with some high-level stuff for you. So now that the 3-year portfolio is complete, how does management define success for Honeywell Technologies as a pure-play automation company? And what metrics will you hold yourselves accountable to the next 12 to 24 months?

Sure. So first, thank you for having us here today. Super excited to be here. The year is progressing extremely well, strong first half, orders in July looking good. That's why we raised the guidance and feel good about the second half. As far as your question, and we just laid out, obviously, this is our first month as a new company. We laid out our 3-year growth targets, so 4% to 6% top line growth, double EPS growth, trying to get to the $12 in 2029 and strong margin expansion as well as 90% plus free cash flow conversion. We're off to a good start. We feel really good about the second half. And based on how the orders are coming in, next year looks quite strong as well.

That's great to hear. And I guess maybe just double-clicking a bit on what you guys are seeing from an orders perspective. Can you talk a little bit about like short cycle versus long cycle trends, maybe things that are standing out in different parts of the portfolio as particularly strong?

So as you know, we put a lot more emphasis on higher growth verticals within our portfolio as far as [ NPI ], commercial, how we focus commercial. We reorganized a lot of our teams within Industrial automation, process automation and building automation as far as being closer to the customers in the regions. We see broad-based growth across all of our regions. So historically, last few years, Europe was a headwind for us. That's no longer the case. China is doing okay. It's obviously pressured but doing okay. Middle East is surprisingly continues to be strong for us, other parts of the Asia. North America is really strong. So that's progressing well.

And that's where really the short cycle orders coming in. We're seeing growth in our traditional verticals, but also obviously outsized growth in the hydro verticals. So that's progressing well. And on top of that, we have a long-cycle demand. So we talked a lot about our process business getting a lot of orders, building backlog. That backlog is starting to convert. On top of that, we have incremental demand. So the conflict in Iran stimulated demand in Middle East as far as rebuilds, but also in Middle East as far as just security and then a lot as people are reassessing the new order, if you will, and how they're going to manage their supply chain things. So really, I would say, generally a very good vector for us going into the second half of this year.

Okay. And we'll definitely get into each of those areas as we talk through the segments, but maybe sticking with some more of the high-level questions. So as you become a more nimble pure-play company, what should investors expect to remain the same versus the Honeywell we've known for many, many years? And what might be different?

I think what you -- hope you're noticing is that we are much more focused, much more focused and our core, very methodical in terms of how we execute. What's maybe where we are pivoting and where is different is much more commercial focus. So co-innovation with our customers, a lot more focus on the innovation. We've been doing some M&A. We'll continue to do M&A, and our team is committed to continue to do thoughtful M&A to supplement our portfolio. And then at the core, it's really, I would say, for us it's accelerated. Accelerator has been our backbone as far as how we run operations, how we leverage accelerator to expand margins, and we'll continue to do that.

Last few years, Accelerator program focused on us in terms of our revenue models and driving consistently across the company as far as how we deploy our revenue models. Last few years now, we were shift towards Six Sigma, supply chain excellence. And then now we're pivoting again into artificial intelligence and how we leverage accelerator there. So it's ever evolving, but the management operating systems that we had are at the core of everything we're doing.

Okay. Okay. Understood. Software and services, I think at your Investor Day, you targeted 45% of revenue to be generated from software and services over time. Where does that stand today? And what's like the big pieces of the road map to get you to the 45%.

It's really Forge and Forge offering. So last year, we connected more assets last year than the 5 years prior. So if you think about the investment we've done in Forge over the last 5 years, is starting to pay back in a very meaningful way. Over the next 2.5 years, we'll connect Today, we have about, I think, 5 million assets that are connected. We'll probably connect about in total 9 million assets. So why is it important? The connection really gives you a gateway then to try to innovate with customers and provide solutions, et cetera, the data of those connections. So really excited about that, and that's where that 15% annual revenue growth comes on software.

How does AI fit into Forge? Like are you enabling -- are you using AI -- are you applying AI tools to Forge that something that becomes available for customers?

That's correct. So we're building leveraging cognition of the assets as far as learning about these AI models.

And how is the customer response to that so far?

Very good. I think generally, if you think about where we were 5 years ago, there's a lot of hesitation as far as getting access to data, sharing data, et cetera. Now people realize it's really necessary. And I think the cybersecurity got much better too over the last 5 years as far as being able to contain things and your data and your domain knowledge, and that's playing out quite well.

Okay. Okay. Understood. And how is -- I mean, we've got 2 specific AI factors here. You've got the tools that you can use for Forge to drive adoption. And then I would assume that you're doing a lot with AI internally as well. Can you talk a little bit about that?

Yes. It's actually quite topic for us as a company. We just made a big investment into AI as far as equipping all of our associates with AI tools and copilots, et cetera. And now we're building out that. Look, there's common knowledge, I think, will tell you that a person that's proficient in AI Copilot probably saves 2, 3 hours a week in their productivity. That's great, but for us it's much bigger than that. And we're really focusing on being able to deploy AI at scale. I can give you a couple of examples. Within our engineering organization, we're using AI for drawing retrievals, putting proposals, et cetera. That's tens of thousands of hours of productivity that our engineering team can do and can get to the market faster with proposals. In finance function a couple of -- we do now balance sheet analysis using AI.

So we gather our balance sheets across our 300-plus entities and AI tools analyze them for essentially variances for comments that analysts put into it, help you look at things, help you analyze things in a much, much more dynamic way. Same with audit. we leverage a lot of AI doing our internal audit as far as how we review, how we think about various audit cycles. So there's a ton of productivity out there. You just have to be very, very purposeful. And I would say we need to make sure you employ it in the right areas.

Okay. Okay. Understood. After the Investor Day, I would say there's still kind of a good base of investors that are skeptical that the 4% to 6% long-term organic growth target can be met. What would you say to those skeptics?

I guess I would say we're going to prove it. I'm a big data. And -- if you step back and if I look at the business and why I feel so confident we will achieve those targets, it's looking at leading indicators. Our orders pipeline is extremely strong. We are being successful as far as focusing on verticals. We have done a very good job integrating our acquisitions, which is driving growth. We have been very diligent and purposeful in terms of how we deploy products. And we've been spending a lot of time on driving our [ NPI ] machine, which we talk about it. And it's hard to really show you the data kind of day-to-day, but we see in the pipeline, we see it in the orders. We see it in customer sentiment scores.

And then finally, we've done a lot of work in terms of self-help in our Industrial Automation business as far as customer delivery being better on time to deliver as far as first promise and customer and that's helping. So we have now 3 businesses, all of which are gaining momentum and growing and both on the short cycle and on the long cycle. So we feel really good about the progress the team has made and where we're going.

And I guess it also helps that you did put a few points of contingency into that outlook.

Points of contingency for things, demand destruction, inflation or pricing, maybe not being at 4%, et cetera. So it's there. So I feel that the 4% to 6% framework is a good frame for us. And obviously, everybody is incentivized to be there.

Got it. You talked about NPI, and I thought this came up a lot at our dinner last night. I thought it was interesting. It seems like that's an area where at least from an outsider, it feels like you guys are kind of doubling down on NPI after the spin, and that's been something that feels like it's changed a little bit. Is that -- is NPI something you're excited about across like all of your businesses?

I am. And obviously, each of our businesses is a little bit different stage of the journey. I would say the building automation business is most mature they've been working on the NPI machine for the longest. And what I mean by making sure that they are diligent on how much money to spend on [ NPI ], the provision. They're very thoughtful in terms of launching NPI, making sure the supply chain is ready to fulfill NPI, working closely with customers and collaborating both with channel partners and customers as far as what to launch, to launch, the product features, et cetera.

So that's extreme well. Industrial Automation has been on it now for about 18 months, and we start seeing successes, and they have a lot of exciting launches coming up. And process automation technology, that business was just in the lower -- wasn't in the cycle this one. So the NPI is a little bit slower there. But nonetheless, you had some really good things coming out as far as Process Technologies. So yes, so I would say, generally, the NPI machine is firing on all cylinders.

And I would assume that with NPI, you probably have the opportunity to get some of that price that people perceive as aggressive in the guidance. And so maybe that kind of contributes.

NPI, it tends to come with better price or better mix, however you think about it, generally within first 2 years as accretive to your business, which is great. We're obviously managing the overall demand and balancing things. But as we ultimately look to grow EPS -- so while being thoughtful as far as how much price we drive demand, but NPI has been coming with pricing as well.

Okay. Great. And then maybe just shortening the lens a little bit to 2027, we're starting to get investors focused on 2027. It's a big part of the conversation now. Strikes me that Honeywell could have really nice above average, maybe even top-tier earnings growth in 2027. You've got stranded costs coming down, you've got interest expense coming down. And then on top of that, we have clear acceleration in order trends. Do you agree?

I do agree. So in the second half, we'll grow 4% to 6%, hopefully more closer to 6% versus 4. Things are looking good. That gives you a really good, I would say, into 2027, especially the first half. So we feel good about that as well. The macros are in our favor. businesses are performing. As far as margin expansion, we talked about it at the Investor Day, we'll get much more margin expansion in the near term versus later term, right? So '28, '29, we should get to the more normal 60 bps margin expansion. In the near term, this year and next year, the margin expansion is going to be much more pronounced because we're still working through tailwind from the portfolio transformation, stranded cost takeout, et cetera. As far as the EPS growth next year, I'm looking 15% EPS growth. I think that gets us to that $12 in 2029. But that's something that we're instrumenting the teams.

Okay. Okay. Perfect. So I wanted to start drilling down into the segments. So starting with Building Automation. I think the biggest question I get from investors is like how is it growing? -- single digits. Can you give us a window into what's going on in that business to drive such strong growth and maybe the sustainability of that?

Sure. So it's not the one thing. That's a great thing about building automation. This is -- building automation is a business that's the most diversified as far as the end markets as far as being diversified regionally and how the revenue comes together. So it's a multitude of things, not one thing. If you even just look at data centers, data center is about 5% of building automation. Yes, it's growing tremendously, but it's only 5% of the overall business. So your question is how sustainable is it? I think it's fair to say that this business has a good runway to be able to grow at mid-single-digit plus for the foreseeable future.

We're not guiding in high single digit, just to give the team a little bit of room, if you will, to experiment, to do things that they need to do to grow and to really manage for the longer term versus just the short term and 90 days. From a margin expansion standpoint, that's really what I'm excited about. The business will finish this year about north of 27%. But we have a really good line of sight for the business to be 29% margin in 2029. And I don't think that -- so really just going to depend once again on the innovation and customer propositions, software, Forge, et cetera, all that's playing. The business is getting really good leverage right now. They're investing in R&D. There's a lot of good things going forward.

Okay. I understood. But I guess just to be clear, like is there anything happening now within that high single-digit growth rate that shouldn't be viewed as sustainable, certain end markets that you think won't grow as fast in the future or maybe a surge in NPI that could slow down? .

No. I would say there's no red flags right now. But as you know, like I said, the business is well diversified. So if something happens in Europe, for example, and all of a sudden, there is a demand that's going to affect -- so that might have a change and the impact from the business growing 7% to 8%, growing 6%, right? So that's why we're guiding the business that we're guiding.

Okay. Fair. And then data centers, you mentioned about 5% of sales today. That was 0 not that long ago, right?

Yes, they're about 4 years ago, it was close to 0. We would like our data center business to double over the next 3 years. So we would like to be over $1 billion. And it should be 10% of the building automation business. We'd like the building automation business to be a $10 billion business. .

And what are the key -- remind us what the key products are that you're selling into data centers today? I get that question a lot.

Look, it's really a lot around fire sensing, security, physical security and monitoring building management systems, those type of things. And then as you -- as the data centers become more sophisticated, there's a lot of cross-sell opportunity for us from other parts of the business. So think about a lot of new data centers will require their own power. We have a lot of great managing the, sensing the low stability, liquid cooling with the data centers with these higher compute power, they require different cooling. We have a lot of great technology that we're launching sensing cooling. So there's just a big opportunity for us.

Okay. Okay. Perfect. And if you were to kind of look at the order and the revenue growth recently within BA, which regions stand out? Or has the strength truly been global?

The strength is global. I mean China is a little bit.

Construction is terrible there.

It's just slower growth right now, but we're still doing okay. But Europe is doing extremely well. North America is doing extremely well. Middle East, other parts of Asia outside of China as well, we'll be able to see. So it's broad-based.

So kind of outside of China, everywhere else is doing pretty well. strong. Okay. That's great. And you mentioned your excitement about margins improving, which kind of surprises me because the margins have been expanding so much for so long. Like what do you view as the key levers to unlock getting to 29% and then going further than that at some point?

It's really NPI forge and leverage. Those are the things. We talk about it just a minute ago, NPI has to be accretive. You have good NPI delivery, you can demand a better pricing. And as long as your NPI demonstrates savings for your customers. So obviously, participating the savings. So we feel really good about it. And Forge, it's really, I would say, something very unique and powerful for us. And as we're commercializing, we see a lot of opportunity as far as margins.

Is BA where Forge is maybe the most evolved? Or is that the wrong assessment from an external perspective?

It's, [indiscernible] I would say, we have the most penetration. After that, it's really in process automation.

Okay. Okay. Makes sense. Okay. I think that's pretty much everything I had on building automation unless anyone else wanted to Okay. Perfect. I'm going to move on to Process Automation and Technology then. I guess maybe if you could talk, Mike, about the impacts of what's happening in the Middle East to process automation. And it seems like you're already starting to see some of the positive effects of that conflict with respect to the oil price on orders. Can you talk a little bit about what you're seeing in real time?

Sure. So we just have a ton of demand across the board. And what the conflict, I would say, generated is, obviously, it generated higher prices for -- within the oil and gas industries. And with that, there is where, say, in the -- if you look at the first quarter, there was maybe just a pause on catalysts as people were trying to run their facilities harder to get the benefit of the oil prices being higher.

As people realize that oil prices are going to stay higher for longer, people are taking down their facilities and then reloading, if you will, to run them efficiently for longer. So we're seeing an inflection in the catalyst demand. And our catalyst demand, if you look at the second half versus first half, it's going to be up double digits. It's still about flat for the year, but the second half year-over-year will be up high single digits.

So we feel good from a short-cycle demand. From a long-cycle demand standpoint, what we are seeing is a much more pronounced build-out outside of Middle East of new facilities. You think about Africa, if you think about Asia, we see activity also in Latin America. So it's broad-based. And obviously, LNG is performing extremely well right now for our LNG business is essentially -- I mean, we're taking orders now for slots in the end of 2028. So we're building out capacity in our LNG business to continue to support the demand. And then there's some rebuild happening in Middle East as well, which is, I would say, it's outsized growth. It's obviously just one point in time bubble that we have to accommodate with our customers. The bigger our, I would say, team in Middle East is people are focusing on resiliency. So we see much more demand from our process automation business, especially around cyber, building automation, security, et cetera, that's also helping.

Okay. And I guess if you were to kind of bifurcate what you're seeing in orders for process technologies versus process automation, are you seeing a pickup kind of across the board?

We see a much more pronounced pickup in process technologies. And process automation at least our experience has been that process automation is about 18 to 24 months behind Process Technologies. So when Process Technologies was going down in 2 years ago, 18 months ago, process automation was still growing for us. Now Process technology is starting to grow. Process Automation is kind of flattish. It's going to grow faster next year. In Process Automation, too, there is an interesting dynamic that our Process Automation business is moving to new verticals as well.

So if you think about life sciences, if you think about a little bit of discrete from pharma medical devices build-out, if you think about cyber, if you think about U.S. onshoring and semiconductors business, all that is helping the business grow as well. So it's actually diversifying quite nicely.

The only thing I'd add to what Mike said is last year, remember, we had a couple of mega -- really big orders starting in the second half of last year. So the book-to-bill will still be strong. We're starting to bump up, especially in [ PT ] up against some really big comps. a couple of multi-hundred million dollar orders in 3Q and 4Q of last year. So still great demand, but just the variances are going to look a little different as we bump up against those tough comps.

That's exactly right. You'll see probably our orders in PT to be potentially down in the fourth quarter, maybe in the third quarter, but book-to-bill is way above 1 and the revenue inflection is happening. So it's just the nature of the cycle. And obviously, like Mark said, we're lapping some really, really big deals.

Okay. Important to point that out. And then you mentioned that you're booking LNG projects out to 2028, how would you classify the LNG pipeline today? Like is the demand still flowing? We're going to be booking into '29? -- like.

I think so. We -- there are new customers coming in essentially almost daily with new asking opportunities, et cetera. So we're seeing a lot of demand, and we're obviously working with the customers to satisfy the demand.

Okay. Understood. And maybe just to double-click on the comment that you made about second half catalysts. I know you guys are expecting Process Automation and Technology to kind of return to high single-digit total year-on-year growth for the segment in the second half. Is the biggest driver of that, is it the catalyst business?

It's projects. It's projects. So I mean our total Catalyst business, about $6 billion to $7 billion segment is about $1 billion it's really the projects that's driving the top line growth.

Okay. And I guess that means that from a mix perspective, we need to take that into account when we're thinking about forecasting margins, right?

That's right. So a couple of dynamics in Process Automation Technology. And I think generally, folks have our Process Automation and Technology business a little bit too high of a margin right now, -- you have to remember, we just acquired Johnson Matthey. It's going to be dilutive to us. So this year, Process Automation Technologies will finish the year probably -- we will print about 22.5% margin for the year. It's going to be, I think, about 150 bps erosion year-over-year. But that's driven by mix, Johnson Matthey integration, et cetera.

Within that, though, obviously, LNG is accretive I would say catalyst is coming back, that's going to help as well. And then I would expect us to continue to expand margins in the next year, especially going into the second half of next year. So Honeywell will still have a very strong margin expansion progress in the second half of next year. Within Process Automation Technology, we're working on the dynamics of JM and just margin mix.

Okay. Okay. Understood. And maybe we could just spend a little bit of time on JM and you could talk about what you're most excited about with that transaction, if you see the opportunity for margins to get to the Process Automation technology average over time or better?

Yes. So as far as getting the business to Honeywell margins, especially if you think about -- north of 20%, 24%, 25%, 25% is what we guided for 29 for Automation Technologies. That's going to take a while. That's going to take 2, 3 years. Now there's -- in the short term, there's a big benefit. Just looking at the inflection of our current business, we should see the inflection in demand as well in [indiscernible]. And we'll actually spend the next couple of weeks just working through that, and we know there are opportunities there. And then from a cost standpoint, there is just a big cost opportunity for us. as far as how efficiently we're running the business, how we manage the cost synergies. So I'm actually quite excited about the opportunity here as far as improving the business performance.

Okay. Okay. Understood. And I think you guys have targeted for Process Automation and Technologies 25% margins in the 3-year plan.

That's right.

What's the confidence in that given that this is probably the segment where mix can have the biggest influence on reaching that margin?

I would say the confidence is high. The business is -- and that's why we've done some M&A in this business. If you think about LNG, if you think about Sundyne, they're accretive to the overall Process Technologies business. Process Automation is also accretive to overall process. So -- and we're making the business less cyclical. So I'm quite confident as far as us being able to get to the 25%. It's not going to be linear. We have to get through this build cycle -- but while we're getting through the build cycle, we're also working on our various offerings as far as software, recurring revenue in that space, et cetera, which is a big deal and the margin is going to progress quite nicely.

Okay. And maybe just one more before we move on to Industrial Automation. Just with the orders that you're seeing related to the mid conflict, both rebuild and as a result of the Middle East conflict because of the focus on resiliency, when should we start to see revenue? Is that -- could that be 2027?

You'll see some of it in 2027 because these projects, they're -- on the rebuild side of the least, the drawings are there and customer wants exactly the same thing -- so from a drawing standpoint, it's not that it's not a lot of work, I would say, incremental work. It's just being able to get that product through the manufacturing process, which obviously takes a while.

Okay. Okay. Does anyone want to ask anything else?

[indiscernible] in North America.

I would -- based on we're seeing is refining is coming up. It's probably high single-digit growth for us this year. I think you will see more reloads next year. That's I would frame it.

Is it going to keep running through user risk on plan now with that [indiscernible]?

There will be some downtime, but I would expect -- based on our demand profile that we're seeing right now, we see more results happening next year.

Okay. I'm going to move on to Industrial Automation. -- we still get a lot of questions about the underlying drivers of segment demand. I guess what would you highlight with respect to key product lines and end market exposures as we're thinking about like forecasting this business?

Sure. It's a good question. And the business is now pure-play really sensing and measurement. I think [indiscernible] obviously, the picture was quite clouded. This business coming out, you have a really nice pure-play sensing and measurement business. And it's very, I would say, very similar to building automation business as far as it's global. right? So it's some presence in the U.S., but they're also a lot of presence in Europe, China, Asia.

What Pete has been focusing on during his tenure so far is from a commercial deployment standpoint, it's really being able to deliver better for our customers. So on time to first promise increase, getting it to 80% on-time delivery. That helps and then drive more demand, secure more demand from the customers. It helps with pricing, better pricing because we haven't been able to price in the business for a very long time due to our poor performance. That's getting better. In the meantime, and actually, even before Pete got here, we reinvested into NPI.

So as you remember, last year, we talked about NPI cost, R&D costs being a little bit of a headwind for us, about 50, 60 bps, I think, we talked about. A lot of that NPI reinvestment or R&D investment budget went into industrial automation. And these products are going to start coming into the market that obviously now works the flywheel, just like in building automation, building automation probably 3 years ahead where IA was. So Peter is going to grow low single digits, low single-digit plus in the second half. And next year is a really good, I would say, line of sight to grow mid-single digits, and we'll build from there.

But it's really based on a lot of self-help as far as execution and then commercial intensity as far as NPI and getting products to the market and refreshing the offerings with our -- so that's on the top line side. On the margin expansion side, the team has just had a lot of opportunity as far as cost, post separation, simplifying the organization, they've done a lot of that. And then you'll see a very nice margin expansion progression in the fourth quarter from that team. They will expand margins some in the third quarter, but they still have a little bit of a TLW overhang based on where that business came out. You should see about 22% margin rate out of that business in the fourth quarter, which then gives you an idea of what that business can be in 2027.

And on-time delivery, what are some of the key enablers there?

It's really -- it's really running a better side of the process. So the commercial teams talking with the supply chain teams as far as what's needed, when it's needed, where we're going to manufacture it, running things in our supply chain as far as sending the right signals to our suppliers, our own suppliers as far as when we need product, holding the commitments, et cetera. Those are kind of the -- really just basics of basics.

Yes. I mean I know you've improved on-time delivery already quite a bit, but it's probably still not up to Honeywell standards, right?

Yes. So we're on time to first promise, we're about 80% right now, which we would like to be 85%, north of 85%. The more important metric is on time to customer date. So it's really just, I would say, collapsing just our own production cycle and fulfillment cycle to be more responsive to our customers, which obviously also then has implications on how much inventory you carry, what kind of inventory you carry, what kind of SKUs of an offering, et cetera. So that's everything we're working.

Okay. And with the NPI investment, was this like kind of a onetime, let's fix this issue and actually invest or now we need to spend more on an ongoing basis on keeping that NPI engine running?

NPI is really about the flywheel. So it's -- think about it as a bread machine, right? When you start making the bread, you need to continue to feed it and stop because when you stop, then you have to start from scratch. And I think as we're going post 2020, we've had a lot of starts and stops and a lot of team turnover, et cetera, and we weren't consistent. So it's really -- we find that when we're consistent in allocating 4% to 4.5% of our revenue dollars into R&D, we have the best outcomes.

Okay. And I guess like is industrial automation best thought of as the business within Honeywell's portfolio that should benefit the most from just a general short-cycle industrial recovery?

I would say building automation is benefiting as well in a big way. I think that in terms of incremental improvement, that's the business that has the most opportunity because it's the market, but it's also self-help. And it's coming from, I would say, the lower level. And that's, I think, where we're so excited because we can see the opportunity of this business being as good as building automation is today.

Wow, that's impressive. 25% margins in 3 years, what's the level of confidence? This is the one that I think investors are the most skeptical about.

On Industrial Automation?

Yes.

100% confidence.

Wow. Okay.

Look, it's -- you'll see it. You'll see it in the fourth quarter, and you'll see it next year. And then once that business gets to close to 24%, then I think people will have less anxiety about getting to 25%.

Probably fair, yes. Anything else on Industrial Automation before I move on to a few other issues, topics? Okay. I just wanted to talk a little bit about portfolio capital allocation before we wrap up. So it seems like from the way management communicates that your portfolio transformation journey is kind of coming to an end. Do you agree with that, Mike? Or do you still think there's work to do on the fringes?

We're never done with portfolio transformation. But I think where we set out 2.5, 3 years ago now as far as what we wanted to do, we were largely completed, right? So the big things that we wanted to accomplish, we have accomplished. There are some things that we still need to do, but it's nothing really that I would say is disruptive to the overall business, our capital allocation, how we think about our debt structure. So none of that a few hygiene items that we're working through. But it's kind of normal course of business.

And the teams always are incentivized to always continue to look at the portfolio as part of our MOS, if you will, and we constantly relook at the portfolio as far as opportunities. Generally, from a capital allocation standpoint, talk about it, short term, we're focusing on reducing our debt and getting our debt ratio to below and that we're on a good, I would say, trajectory to be able to accomplish that by year-end. Our dividend ratio should be around 35%. So that should be north of 1% yield on dividend. And then from a share count reduction, right now, given we're focusing on debt repayment, we'll probably keep our share count flat.

We'll try to offset dilution. From a CapEx standpoint, with Solstice coming out and BLW coming up with aerospace coming up, we're a little bit of a more CapEx-light business. So our CapEx percentage of revenue should be around 3%. We talk about -- we'll spend some money on building out capacity in LNG, but we're being thoughtful about it, and that's kind of contained without our overall CapEx plans. So those -- I would say those are kind of the big things around the capital allocation.

The only thing you didn't hit on is M&A.

Yes. Most important thing, I guess. We'll continue to do M&A. And we talked about the right ticket size for us is $2 billion to $4 billion type of bolt-on M&A. I think if you look at our portfolio and where we'd like to focus, I think the biggest opportunity we have is in Industrial Automation for various reasons. One is the industry is probably the most fragmented. it's probably the easiest to find assets that are accretive to our growth, accretive to our margins. They have some -- there are a lot of exciting targets out there. So that's what we're focusing on. For us, firstly, I mean, Industrial Automation business is close to $4 billion business. We'd like it to be a $7 billion business. It's going to be, I would say, much harder to get to $7 billion without doing any M&A.

But as we said in our Investor Day, we'll be extremely thoughtful on it. We want these acquisitions to be accretive to growth at good synergies, be it the core, which is sensing and measurement. We do not want to experiment, and we want to get them at the right multiples. our average multiples have been 13-ish type multiples. Those are good multiples for us. And then I would tell you is that we want to hit our 10% ROI by year 5. So those are the parameters we're looking as far as potential targets.

And I guess within IA, any aversion to discrete given that you're more of a process-focused business today? Or could that be an area of interest?

No aversion to discrete and the discrete markets are quite attractive to us, I would say. The reason we don't have any discrete -- meaningful discrete portfolio, we have some discrete businesses in Honeywell, but not in a meaningful way. The reason for it is just how the business evolved. But if you talk to [indiscernible] or you talk to our general managers, there is no aversion to discrete. It's just how the business evolves.

But what about a version to a large transformational deal? Is that off the table?

You never say never, but I would say probably not a priority for us, just given how disruptive we would be. And at least personally, I feel as that we have a really good setup that we need to execute on and stay focused. I'd like us to stay focused.

Makes sense. All right, Mike. Well, I think we're almost out of time. So we'll go ahead and wrap it there. I really appreciate your time. This is a great conversation.

Thank you very much.

Thank you for your time.

Thank you.

Good morning. Thank you for standing by, and welcome to the Honeywell Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Mark Macaluso, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Honeywell Technologies Second Quarter 2026 Earnings Conference Call. Joining me today are Honeywell Technologies 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 on the Investor Relations website that may be of interest or material to our investors. 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 certain risks and uncertainties, including those described in our recent SEC filings.

This morning, we will review financial results for Honeywell Technologies for the second quarter of 2026 and discuss our updated guidance. And as always, we'll leave time for your questions at the end. I would also like to take a moment to remind our audience that the 2026 results and guidance we will present today exclude results from Honeywell Aerospace following the spin-off on June 29.

Additionally, our guidance reflects both the completion of Johnson Matthey's Catalyst Technologies acquisition as of July 17 as well as the anticipated closures of the productivity and warehouse divestitures, which we now expect by early August. Pension income and the results of Quantinuum have also been removed from our adjusted results in all prior and future periods.

Finally, adjusted EPS for Honeywell Technologies now reflects the impact of the 1-for-2 reverse stock split. You'll find a summary of these changes on Slide 3. With that, it's my pleasure to turn the call over to Vimal, who will begin on Slide 4.

Thank you, Mark, and good morning. The second quarter marked an important milestone for Honeywell Technologies as we began our next chapter as a pure-play automation company. At Investor Day, we laid out our go-forward strategy of growing and monetizing our installed base through outcome-based services, software and new product innovation.

We also introduced long-term targets for Honeywell Technologies, which will be our road map for the next 3-plus years. And as you can see, we are laying the foundation today to deliver on our commitments. Our results this quarter have demonstrated the strength of the new Honeywell Technologies portfolio. We delivered 4% organic sales growth driven by continued strength in Building Automation and a better-than-anticipated performance in both Process Automation and Technology and Industrial Automation businesses.

Orders grew 16% organically with broad-based demand across all segments, resulting in 9% increase in ending backlog. Notably, short-cycle orders grew double digit across all segments. In PA&T, orders were up 24% organically, led by roughly 50% orders growth in Process Technology, providing even greater confidence in their expected second half growth inflection.

We also expanded segment margin by 100 basis points, overcoming significant cost inflation headwinds and unfavorable mix through a combination of productivity and volume leverage. This drove earnings in the second quarter above our expectation from early June with increased confidence heading into the second half of the year. As a result today, we are raising our full-year outlook for organic growth, segment margin and adjusted earnings per share.

We continue to expect a sharp growth inflection in Process Automation and Technology and continued momentum in Industrial Automation in the second half of 2026. Combined with the sustained outperformance in Building Automation, we now expect to grow 4% to 6% organically in second half of the year, in line with our long-term targets. We're also raising our adjusted EPS outlook by $0.10 at the midpoint, which reflects the second quarter outperformance and improved second half outlook that is more than offsetting the loss of income from the earlier-than-anticipated close of the 2 divestitures.

We also took important action this quarter to strengthen the portfolio to support long-term growth. On the portfolio, we closed the acquisition of Johnson Matthey's Catalyst Technologies business on July 17. With this business, we add a differentiated technology portfolio that will expand our installed base and strengthen PA&T's portfolio across refining, petrochemicals and renewable fuels.

Ken and his leadership team are already fully engaged with our new colleagues, meeting with over 90% of employees globally at key sites in just the first week. They have been involved in all aspects of the transaction and are prepared to hit the ground running to deliver for our customers and our shareowners. I could not be more excited to welcome the JM Catalyst Technologies team to Honeywell Technologies.

As part of the final stage of our portfolio transformation, we completed the separation of Honeywell Aerospace and also supported the Quantinuum team in their successful initial public offering in June. On Quantinuum, we expect to provide more color on our plans of our 47% ownership stake by early next year. We remain strong supporters of Raj and his team and are excited to be shareholders in such a groundbreaking quantum-computing company.

Thanks to the great work of our team, we also now expect to close the divestitures of both Productivity Solutions and Services and Warehouse and Workflow Solutions business by early August. This is approximately 2 months ahead of our initial planning assumption, which has reduced our 2026 revenue expectation by approximately $400 million. We're also confident this will drive greater focus and further simplification of Industrial Automation portfolio, which is already beginning to see improved financial performance.

We wish both these businesses and their team continued success as they embark upon next chapter. Our transformed and simplified portfolio is well positioned to outperform with momentum in both long-term and short-cycle orders, ramping activity in pipeline and meaningful macro tailwinds for the next several years.

Let's turn to Slide 5 to recap our recent Investor Day, where I had the pleasure of spending time with many of you in New York City last month. On June 11, we hosted investors, sell-side analysts, media and others at our Investor Day for the new Honeywell Technologies. We kicked off the day laying out our revamp and focused strategy that will drive value-enhancing solution for customers and drive outperformance in our focus markets.

Each business leader walked through their differentiated offering, connected strategy, growth framework and 3-year targets. Guests also heard directly from our leading customers and partners, including Exxon, Dangote, Google, Equinix, Duke Energy and others about the differentiated outcome we are delivering and the long-standing relationship we have built over many decades.

My team and I are highly confident in our ability to deliver on our 3-year commitments. We have a strong position in key end markets, differentiated technologies, a global footprint and a clear competitive advantage in high-growth verticals. Our team is comprised of Honeywell veterans, talented new additions and even some folks that rejoined us after successful careers elsewhere. All of this, coupled with a proven Honeywell Technologies Accelerator operating system, positions us for a new chapter of growth and profitability as Honeywell Technologies.

The event concluded with us delivering our new 3-year target, which you can see on Slide 6. Over the last 3 years, we transformed our portfolio through acquisitions, spin-offs and divestitures into a pure-play automation company focused on innovating in mission-critical environments where uptime, safety, productivity and efficiency are paramount. This has set us up to deliver on these commitments.

Our strategy focuses on 2 key pillars: growing our installed base and then monetizing this vast installed base through innovative software, services and outcome-based solutions. While maintaining our leading position in core verticals, we are also increasing our exposure to higher-growth verticals like data centers, LNG, grid infrastructure and life sciences as examples, which are all linked to compelling megatrends.

Our projected top line growth and margin expansion is also underpinned by a more meaningful shift towards services and software annual recurring revenue. On margin, we have over 200 basis points of margin expansion coming quickly from stranded cost removal, portfolio actions in Industrial Automation and benefit of Aerospace trademark agreement. On top of that, we expect to drive 60 basis points a year of operational margin expansion through price, improving mix, new product introduction and productivity.

As you heard from our CFO in June, we are confident that the 24% target is achievable and provides meaningful upside as we execute our strategy. Collectively, this will drive approximately $12 of adjusted EPS, representing more than 10% growth annually. The important point here is that we will generate these returns right out of the gate given all the actions we took to prepare the organization ahead of aerospace spin.

And finally, on cash, we expect to improve our conversion to over 90% and have line of sight already in the second half of this year to hitting 95%. I want to talk more about the acquisition of Johnson Matthey's Catalyst Technologies business, which will become part of our Process Automation and Technology segment. This addition to Process Technology will unlock strategic growth by increasing our existing installed base and creating a more integrated offering across Catalysts and Process Technology.

It also expands Honeywell UOP's capability across refining, petrochemicals and renewable fuels with complementary offerings and capability, which you can see on Slide 7.

What makes this acquisition specifically attractive is its strategic fit with our existing business. We are already on many of the same customers with complementary process units, and the business perfectly aligns to our core verticals. The acquisition also enhances our end-to-end solutions by combining catalyst process technology and digital capabilities powered by Honeywell Technologies Forge. We have clear visibility to both commercial and cost synergies and our long-term outlook for this business as part of Honeywell Technologies has not changed.

Let's now turn to Slide 8 to discuss our orders trend in each business. As you can see, our orders growth has been accelerating across the company, driven by strong demand generation, NPI and continued share gains. This resulted in 16% organic orders growth in second quarter with broad-based growth across all short-cycle businesses, driving considerable momentum on the LTM basis as a result.

PA&T had an incredibly strong quarters of orders growing nearly 25%, leading to a book-to-bill for PA&T above 1.2x. Our refreshed portfolio with the addition of JM's Catalyst Technologies business is set up well to benefit from energy upcycle, particularly as customer CapEx forecast support the ongoing transition to LNG and renewable fuel as priority. Strength across both long and short-cycle orders growth, including increased pipeline activity from refurbishment and rebuilds and Middle East will provide meaningful macro tailwinds for the next several years.

In Industrial Automation, we saw strong demand across Europe, Middle East and China. For the core business that remains after the divestitures, order grew 11% or 7% sequentially with Sensing and Industrial Measurement orders up over 20%. Pete and his team continue to execute the turnaround strategy in IA to win back share and grow the core business.

Finally, in Building Automation, the team continues to drive innovative NPI that is driving share gain while growing our position in a high-growth vertical. This quarter, we drove over 50% orders growth and 30% organic sales growth in high-growth verticals while maintaining our strong position in the core with approximately 30% orders growth in our Fire business.

Orders in Middle East grew over 50% this quarter by our Process Technology business. Regarding the conflict, we are assuming the situation remains as it is today with no improvement from the currentation, but also no significant escalation in the war or further disruption to the supply chain. This is, of course, a very fluid situation, but our teams in the region have done a tremendous job, minimize impact to our business while ensuring our employees are safe, and we're able to continue to support our customers.

Finally, book-to-bill for the total company was 1.1x, and our ending backlog was up 9%. This and continued momentum we see in all segments supports 4% to 6% growth outlook in the second half and over medium term.

It's been our pleasure speaking with you this morning, and let me now turn it over to Mike to discuss our second quarter results and 2026 outlook in more detail.

Thank you, Vimal, and good morning. In the second quarter, Honeywell Technologies delivered strong results that surpassed our expectations. Sales grew 4% organically, led by continued momentum in Building Automation and stronger-than-anticipated growth in Industrial Automation. Process Automation and Technology sales decreased 1% organically, but were still materially ahead of our original outlook for the quarter.

On a segment basis, Building Automation delivered 9% organic growth, driven by double-digit growth in products and continued strength in solutions. The teams drove double-digit growth in the Fire and Services businesses, respectively, and we saw strength in all regions led by Asia Pacific, Middle East and Americas. All in, another strong quarter from Billal and the Building Automation team.

Industrial Automation sales were up 4% in the second quarter, exceeding our expectations led by strength in solutions. Products grew slightly with continued momentum in Sensing and Industrial Measurement, partially offset by utilities. The core Industrial Automation business, excluding planned divestiture, grew 2% organically in the second quarter.

Finally, Process Automation and Technology sales declined just 1% organically in the second quarter, ahead of our prior expectations as the upcycle in energy end markets and activity in global projects begin to materialize. Projects grew 5%, driven by strength in gas, LNG and petrochemicals. This strength was offset by a 6% decline in aftermarket due primarily to a tough prior year comparison from a large catalyst shipment in the second quarter of 2025.

Importantly, consistent with our messaging at the Investor Day, we expect a sharp inflection in growth in Process Automation and Technology beginning in the third quarter, led by Process Technology and driven by backlog conversion and much stronger catalyst shipments. On profitability, segment profit increased 9%, while segment margin expanded 100 basis points to 19% with strong margin expansion in Building Automation and Industrial Automation.

In addition to ongoing volume leverage and productivity actions, stranded cost removal continues to track ahead of plan. By segment, Building Automation segment margin expanded 90 basis points to 27.1% on volume leverage and price, which was partially offset by inflation. Segment margin in Industrial Automation also expanded 90 basis points to 17.2% as pricing and productivity actions more than offset inflation and unfavorable mix.

In Process Automation and Technology segment, margin contracted 180 basis points to 22.1%, largely driven by unfavorable mix from lower catalyst volumes as expected. This, however, was also ahead of our original margin outlook for the quarter. Adjusted earnings per share of $1.95 was up 10%, driven primarily by higher segment profit. We drove lower net interest expense stemming from debt paydown, which was partially offset by higher repositioning costs. And as we previewed in the first quarter, a higher adjusted effective tax rate drove a $0.16 headwind, which we overcame with stronger operational performance. You will find additional information on the segment performance in the appendix of our presentation.

Rounding out the results, free cash flow grew considerably this quarter, both year-over-year and sequentially to roughly $0.5 billion. This was principally driven by higher income as well as improvements in working capital, which more than offset ongoing collection headwinds in the Middle East. This quarter, we deployed $1 billion of capital through roughly $800 million of dividends and roughly $200 million in high-value capital expenditures. Year-to-date, we have deployed over $2.8 billion in capital to repurchase our own shares, pay dividends and invest in future growth.

Let's now move to Slide 10 to quickly discuss the second quarter adjusted EPS bridge. As you can see, we delivered high-quality results in the second quarter. Strong segment profit growth, including elimination of stranded costs, lower below-the-line expenses due to interest expense and lower share count allowed us to overcome the higher tax rate. Excluding the tax headwind, earnings would have been up 20%.

Let's turn to Slide 11 to discuss our updated 2026 guidance. Today, we're increasing our organic sales growth outlook to 3% to 4% for the year, up from previous guidance of 2% to 3% and now expect the second half to grow 4% to 6% versus 3% to 5% previously. Building Automation continues to execute well, leading to a mid-single-digit plus organic growth outlook, supported by incredibly strong orders growth in the second quarter, particularly in our focus verticals, including health care, hospitality and data centers.

We expect Process Automation and Technology growth to accelerate to high single digits in the second half as global energy projects resume, backlog conversion ramps and catalyst shipment volumes increase significantly. Finally, Industrial Automation growth will continue in the second half, driven by resilient short-cycle demand for industrial measurement and sensing, continued growth in Europe and China and strengthening Americas demand.

As a result of the momentum in Process Automation and Technology and Industrial Automation, we're increasing our full year organic growth expectations for both businesses from roughly flat to up low single digits for the full year, and meaningful improvement from our original expectations coming into the year. We now expect full year segment margin expansion of 250 to 290 basis points, up 25 basis points at the midpoint from the previous guidance.

This reflects the outperformance in the second quarter in Process Automation and Technology and Industrial Automation, significant progress on stranded cost elimination and accretion related to the accelerated timing of PSS and WWS divestitures. Importantly, we expect Honeywell Technologies will exit the year above 22% segment margin. We now expect full year adjusted earnings per share of $8.20 at the midpoint or up approximately 27% versus prior year and up from our previous midpoint of $8.10.

Finally, we continue to expect free cash flow of roughly $2 billion in 2026, with the majority of this coming in during the second half and approximately 95% conversion rate. You can find additional information on 2026 outlook in the appendix of our presentation, which includes estimates for corporate and other below-the-line items. On Page 12, you will find the bridge from our June 8 guidance call to today's update. As you can see, we expect full year adjusted earnings per share will be $8.20 at the midpoint, up from our previous midpoint of $8.10.

Let me now turn the call back to Vimal to wrap up before Q&A.

Thanks, Mike. We are pleased with Honeywell Technologies second quarter results, which enabled us to increase our 2026 outlook across all key metrics. We successfully navigated an uncertain geopolitical backdrop with the strength of our resilient business model and the rigor of our Honeywell Technologies Accelerator operating system. With our portfolio transformation complete, our simplified pure-play automation portfolio is well positioned to benefit from long-term macro tailwinds, including the prolification of AI, increasing global energy demand and an aging population and increased consumption.

This, combined with our focus on increasing exposure on higher-growth verticals, driving annual recurring revenue growth from outcome-based services and software and maintaining our innovation engine will enable us to achieve double-digit annual adjusted EPS growth at greater than 90% free cash flow conversion. We laid our 3-year targets for new business and I look forward to updating you on our progress to achieving them in coming quarters. Today is only the beginning of that journey, and I'm pleased with how we have started, but we have considerably more work and opportunity ahead of us.

With that, Mark, let's take the questions.

Vimal, Mike and I are now available to answer your questions. [Operator Instructions] Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets.

I'd just like to say congrats to Vimal and the whole leadership team on the successful spins. You got them all done on time. It was well communicated, and I do like seeing that boost to guidance here right out of the blocks. So congrats.

Thank you.

Thank you, Deane.

Since it is so topical, I'd like to circle back on the Middle East impacts. I mean you still had double-digit orders. So you still have got momentum there. Just -- I'm interested about the idea that you've got some collection issues. Is there any risk of like force majeure here and any kind of disruptions like that?

I would say, Deane, the Middle East is the way we have guided the second half, it is a normal which exists today, as we said in our prepared remarks, how things have shaped up over the last 4, 5 months, we have understood the dynamics on the ground. We did lose some revenue in Q1 and Q2 as we had guided. But now we are assuming our future state is built upon how the conditions prevail today unless things change dramatically.

To your question, we are -- we observed some collection issues in pockets. They are modest. They are not material, but we have taken a prudent decision to address the customer set where we have limited risk. But we don't have any risk to your point of any major disputes and things of that nature. We think business is in good shape.

As an example, 50% orders growth in Q2 primarily driven by a few big deals in our Process Technology business, refurbishment, which are occurring there, that certainly is providing us some tailwinds. But overall, we believe that we are well positioned. And as this region invests more, as the things settle, mostly in transportation and logistics-related investments and some resiliency will benefit from that.

And Deane, I might just add that majority of our collection issues happened in March and April in Middle East. That started to normalize. We still expect the revenue in Middle East to be about high single digits this year and orders should be about 40%. So we look really forward to seeing Middle East perform in the second half and next year.

Good to hear. And then just as a follow-up, and congrats on getting the Johnson Matthey deal closed. Can you talk about the implications because you did renegotiate a lower price. Just what were the circumstances there and the conditions that you got the lower price? And what are the plans, near-term plans for integration?

Yes. We are excited about having this business, and it's -- the business is really built upon our fundamental belief that the world needs more energy and energy mix will change. Those are the fundamental principles that was the reason behind doing 2 acquisitions in LNG and that the reason behind doing the JM acquisition. Primarily, we believe that the world will need more investment in petrochemicals and renewable fuels and the JM acquisition strengthens our portfolio around that.

We also get more installed base and our ability to serve it. We -- the negotiations are just part of the normal course in my view, as any deal transaction occurs. There are a few milestones. And depending on how the business was trended, we work with our counterparty to look at how we should value the business. So I don't want to dwell a lot upon that. But we remain excited about how we got the deal done at about 13x EBITDA with cost synergies, no sales synergies. And you will agree with me that we have acquired this business for commercial synergies at the heart of it. But we're not going to count on that in our early innings, but we'll build upon it.

And then I would just add that just -- I think we got the business at the bottom. And I would say that the second half looks good. Even in our own catalyst business, the second half is sequentially versus first half up 25%, 30%. So we look forward to getting our hands on this business.

And Deane, congratulations on retirement, and you should have good next innings, and we will stay connected.

Our next question comes from the line of Nigel Coe with Wolfe Research.

So Mike, it's obviously good news to see the guidance increasing. You did indicate that in June that there was scope for upside. But I'm curious if there's anything you saw in June, July to give you more confidence? Just any color in terms of how we exited 2Q, entered 3Q on your end markets? And then within that discussion, maybe just touch on IA. It sounds like the upside came outside the U.S. So I'd be curious if you're seeing any momentum in the U.S.

Sure. Look, I would say is just launching the new company here today, we -- what we saw in the second quarter, we feel extremely, I would say, confident in the second half. As you can -- as you saw, orders across the board were strong. Every business printed double-digit short-cycle orders in the second quarter, which gives us a lot of confidence in the third quarter and the fourth quarter.

And for IA, I would say that the growth and the strength is broad-based, including in China and Europe. And the U.S. is recovering nicely as well and the business is benefiting from onshoring. So I would say across the board, we see a really good outlook for the second half. We raised the guidance, as you saw, but I also think there is more room as we're going to go into the third quarter and fourth quarter to beat even the raised guidance.

Yes. Only thing I'll add, Nigel, is that I think Pete and his team are executing quicker than we anticipated how the business recovery will occur. And as we reported, the orders growth for Industrial Automation business is about 10%, which signals our performance in the second half. We are -- we have the right momentum, and that was the reason behind raising the guide of the business to low single digit in the second half.

And I'm confident that Pete will deliver a 22% margin rate in the fourth quarter. So the team has worked on it for a long time, and we have a really good line of sight here.

Mike, that's a great segue to my follow-up, which is the 2 points of sequential acceleration around 2 points of expansion in segment margin from 3Q to 4Q. There's a lot going on here with portfolio, the sale of the warehouse, PSS businesses and then stranded costs tapering off in the back half of the year. But I'm just wondering if you maybe just unpack that 2 points of expansion from 3Q to 4Q for us.

Yes. Sure. Nigel, it's Mark. Just a couple of things. I think it's pretty broad-based. I mean BA continues to drive strong volume leverage and productivity. So they'll -- 3Q to 4Q, they'll be up. As Mike mentioned, IA continues to take a considerable step up, including in 4Q. And then PA&T will continue to get better, particularly as the growth resumes and also we start to see a little bit more mix towards catalyst. So I would say, broadly speaking, it's really in all segments, but just quarter-to-quarter, probably the largest increase in IA.

Yes. So -- and I would just add that we talked about it, I think, at the initial of the year and then the Investor Day, about half of the margin expansion is operational and half of it is, I would say, structural given the portfolio actions. As we stand today, I see the team is driving operationally 100, 120 bps of margin expansion.

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

I was on mute. My apologies. Anyways, I'll start over again. I will also echo congrats to Deane. We'll miss having Deane around. He's been a great colleague for a lot of years. So we'll miss him, too. Guys, a couple just smaller things here. One, when you look at your M&A pipeline, is it kind of evenly split between your segments? Is there -- are there particular segments where you think you're more likely to over-index? Just a little bit color there, please.

Sure. So Scott, I would say, think of M&A in 3 distinct categories, how we're looking at it. The highest priority is strengthening our industrial automation, sensing and measurement portfolio. I and Pete are looking at a variety of options. So that remains our first priority or priority #1. Second bucket is, as we're thinking about accelerating our business in some of the higher-growth verticals, whose impact we can clearly see in our orders growth rate, we are getting more and more convicted that's the right strategy for Honeywell.

So how can we add some portfolio additions in some of these end markets to further accelerate our growth. So we have identified those 8 high-growth markets. So looking at M&A opportunity. In the end, we'll acquire a product line only like we acquired 2 businesses in LNG, for example. So what can we do more on same lines in verticals like hospitality and semiconductor, microgrid, et cetera. So they're broad-based.

And finally, tuck-in acquisition on the tech side. We always have looked at frontier technologies, a few in fire detection, a few on cybersecurity. So we'll keep looking at -- keep an eye on those. Those are much smaller, of course, but they do propel our organic growth.

Okay. That's helpful. And guys, can you just help us kind of size or at least help us understand the opportunity within the data center? I mean it's pretty easy to picture the fire and security stuff, but can you walk us through kind of the longer list of SKUs and opportunity that you have there?

Yes. So I would say that we are looking at data center in 2 dimensions. One is the growth beyond U.S. We can clearly observe the build-out of data center has now grown beyond U.S., across Europe, across Asia, and we have a better position as a company globally given Honeywell's brand and participation globally. So that certainly is a tailwind for us. So certainly, that's benefiting us.

But we are also observing now more data centers putting on-site power generation, which allows our process automation business to participate in data centers to automate the utilities and energy storage on location, the gas coming in there for pipeline for those power plants. So we can clearly see that as a new business opportunity. None of that is into our orders even yet, but we have multiple proposals by process automation team apart from the building automation, which you mentioned very correctly, has benefited a lot from fire detection, security and building management system, which goes into data center.

Finally, I would also say the third leg for the stool for Honeywell emerging longer term is liquid cooling. Sensing required in liquid cooling is a good play for us. Our sensors are required as a critical input for liquid cooling. So all those OEs are actively working with us to develop new strategies on how they're going to execute the liquid cooling.

So all things being equal, we will continue to expand our play in data center from almost nothing 3, 4 years back to -- that's 5% of the building automation business. And I expect that we will be at a higher number across Honeywell as the time progresses.

Our next question comes from the line of Andrew Obin with Bank of America.

Congratulations. Just a question. Did I hear right? I apologize. You mentioned 40% order growth. What was that number related? Was that on process automation in the second half? Or was it referred to, I apologize?

No. What I said that -- I think what I said on the catalyst, the second half versus first half will be -- should be up 25% to 30% on that framework. Our orders for the quarter were up 16%.

Okay. Apologies. Can you talk about -- sorry.

No, I was just going to add the orders in Process Automation Technology were up 24% for the quarter.

Okay. Can you -- you sort of alluded to seeing orders in Process Automation related to the Middle East outside of the Middle East. Can you just talk about this trend? What exactly are you seeing? Are people trying to derisk the exposure to the Middle East? And how soon can you see that show up, a, in orders and b, in your actual work?

Yes. So Andrew, the strength in orders for second quarter in Process Automation Technology was -- the biggest enabler was LNG demand in globally. U.S., of course, being the big one, but also outside the U.S. And some of the big deals in LNG is a big driver for orders growth in the Process segment. To your question, do we see diversification of investment beyond Middle East due to the conflict? Answer is yes. We absolutely are seeing projects coming in. We have a large project in Africa. We are actively working. Some of it has been booked. Some booking will occur in the technology side of the process business. So we see investments there.

And we also see investments happening in Asia for the downstream refining petrochemical side because I think as we all observed, there was a very high price for fuels, 200%, 300% cost up for diesel and jet fuel. So there are customers and countries looking at more domestic production for fuels as well as downstream petrochemical products there. So overall, the process market will see more capital investment to derisk the Middle East conflict situation. That's our forecast.

And then maybe can you talk about industrial automation, just maybe you can give some KPIs on improving performance, I don't know, sort of on-time delivery. Anything you want to share how you're moving along in improving execution in this segment driving this improvement?

Yes. So I would say that the KPIs we are looking at it is, first, of course, how our delivery performance is improving. It's a very channel-driven business. So the sensitivity to the delivery performance is high. We're working towards high 80s percent performance as we progress through the course of the year, and that's our trend line. Pete mentioned in the call at the start of the year, we were in mid-40s, and we are trending from 40% towards 80% as we speak at this point of time.

The other critical KPI for us is performance on new products. We have launched several new products end of last year, early this year, and they are becoming an enabler for our growth as evidenced by our orders growth rate of 10% in Q2. We do expect continued strength in our orders rate in the segment for the second half of the year. So the actions we are taking on innovation, on operational performance is the foundation of how this business is going to turn around. And we expect the improvement trend will continue from no growth to low single-digit growth to -- at some point, we'll turn the business into a mid-single-digit grower.

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

Just wanted to ask on BA continues to show really nice high single-digit growth and then orders up 13% in 2Q. It just feels to me that, that high single digits should be sustainable into the second half, keeping all of that in mind. Would you disagree with that for any reason? And then why wouldn't this -- if orders continue to hold up, like why couldn't we see high single-digit growth proceed into 2027?

Yes. Nicole, the evidence suggests you're right, 7 quarters in a row, high single, so why it should become more single. There is no real logic. We are -- as being a new company, we are printing our new forecast. So obviously, our aspiration is meet or beat it. So there is a level of prudence, which we have used in our guide. But fundamentally, the strategy of the business is pivot towards high-growth verticals. We clearly see tailwinds in data center, hospitality and health care. They are certainly driving a lot more orders growth and pivoting towards more and more acceleration of the base business on the strength of new products. In fact, we're going to launch even more new products as we progress in the second half.

So yes, fundamentally, there is no logic, but we are always cautious given competition can respond to some of our actions over the last 2 years, and we need to be cautious. But I remain optimistic to surprise everybody on the performance of the business in the second half.

Awesome. We all love beats and raises. Okay. And then I guess maybe on stranded costs, you guys referred to making more progress than expected. Can you just put a finer point on that with respect to any changes in the stranded cost reduction timeline versus what we got at the Investor Day or in the periods before?

Sure. So stranded cost is progressing extremely well. We -- at the Investor Day, I think we said something around $85 million of stranded costs at year-end. This is about $20 million better right now. So we should enter 2027 with about $60 million, $65 million of stranded costs that we'll proceed to eliminate early next year. So it's a good story. It's incrementally better at about $20 million to what we talked about.

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

Just coming back to Johnson Matthey, Vimal, maybe 2 questions. One, as you've looked at that business over time, has its sales been relatively synchronous with what goes on at UOP? In other words, I'm wondering if this is more of the same kind of quarter-to-quarter volatility or there's sort of differences in timing and what they do versus what you do that possibly take some of this quarterly volatility out of your catalyst sales.

Yes, I would say that their licensing technologies are different from UOP. That's the reason we acquired the business because of the complementarity of the technology. So given the differences they have, they are more into spaces like hydrogen, methanol, ammonia, where we don't have capability. It's not one-to-one comparison because the end markets they serve are different from the end markets UOP serve, which is more refining, petrochemicals and LNG.

So those comps are not comparable. There is a variation between that. But on the catalyst side, I would say trends are very convergent. I mean, each one of us has product lines and customer base. So they are not wide differences in the catalyst performance. But the technology licensing, there are differences.

And as you've noted, you don't want to include revenue synergies in your outlook, but maybe just a little color on where you get after those, how quickly you might be able to capture some of those?

Yes. I think they are driven by the combined offerings of Johnson Matthey and our process technology business solves customer problems better. And that's the Chart 7, if you see in our deck there. We, for example, can combine our capabilities in area like hydrogen, if you see, there is a capability which Johnson Matthey brings in for production of -- on-purpose production of hydrogen. We have capability on CO2 elimination in that. So that produces low-carbon hydrogen. So that's an example.

There are examples in sustainable aviation fuel, complementary technology on what Johnson Matthey brings on table versus what we built. So combining the 2 technology improves our proposition. And there are similar example on the gas processing side in terms of the core technology, which JMCT business brings in versus what we bring in. And that's the whole thesis here that 1 plus 1 here is equal to 4.

And because we are able to build a higher proposition, we will be able to get better win rates in the market because so far, we were not able to do it. They are 2 different companies. Customers can't buy this combined proposition. They have to sign 2 agreements, which is complicated. But now with a single umbrella and with our reputation in technology licensing business, we expect that to bring synergies.

But we also expect synergies through 2 more key areas, which brings Honeywell value proposition. First is connecting Johnson Matthey's very large installed base and building services and software portfolio. This is our core. We are an automation company. We know how to do it. And the second, our process automation business will benefit by installed base of Johnson Matthey and understanding that customer relationship where it may not be present gives us additional door openers by which we can create opportunity for our process automation business.

So a variety of opportunities here. We're extremely excited. And that's why I mentioned, Jeff, that even though right now, the headline number is 13x EBITDA based on 2027 earnings because that's the first year we'll fully own the business, but that's purely cost synergy based. We haven't acquired the business for cost synergies. We have acquired it to add value through sales synergies. So I'm very, very confident that we are going to print a much better number when we are done with everything in terms of opportunities here.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

So I wanted to double-click a little bit on the Middle East, right? So your orders were up over 50% this quarter. I'm just curious like what you're seeing is some of the disruption over there actually helping? And then maybe conversely, I know that you guys called out the large catalyst shipment a year ago, a tough comp on the aftermarket business, but aftermarket was down. Are you impacted at all from an aftermarket perspective in the region? Just any color around both would be helpful.

So as I mentioned, Joe, the things are settling. I would say that initial months of the conflict, April -- March, April was more where we lost revenue. It's like anything new, we did not know how to shape. A lot of customer sites were closed, and we were not able to perform our service contracts, et cetera. So after losing some revenue in Q1 and Q2 things have normalized, and we don't expect from -- our current revenue forecast does assume some modest loss of revenue, but not material in bigger scheme of things.

So as we are observing today, I think the business activity is more resumed to normal. We do see some big orders. That was the reason one of the big deal we got for -- in Process Technology business was in Middle East for LNG facilities. So their investment cycle back. We also see customers looking at ways and means for improving more resiliency, how can they run their operation in spite of this? What can we do in terms of things like remote operations, more digitization and operations so that they can take countermeasures.

And then finally, early days, but we clearly see investments in Middle East pivoting towards logistics infrastructure, so pipeline terminals, different way of shipping product as we all read and observe from the media. So clearly, there is a direction towards that. So all in, I would say the things have settled. Hopefully, no worse happens from where we are today. And we see investment becoming more and more normalized and some large projects coming back into the pipeline.

Got it. That's helpful, Vimal. And then I guess just maybe a broader question on the guidance, the 4% to 6% baked into the second half of the year. Obviously, the trailing 12-month orders up double digits is very supportive of that guide. It does sound like there's probably maybe some conservatism into the second half as well. But I guess the question I have is how much of what you're seeing from an order perspective today is maybe even like longer cycle and is already starting to help support a pretty good outlook for 2027 as well?

I would say it's both. And I think versus what we guided at the Investor Day for 2027 and looking where we're entering the second half and how things are progressing, given the strength across the board in the short cycle and then the continued orders on the long cycle, you're right, our 2027 incrementally is looking stronger versus when we talked even last month. So we feel really good about the prospects for next year.

And what I will add, Joe, is that orders growth is on the strength of our strategy of pivoting more and more towards high-growth verticals, which we talked about during our Investor Day. So building automation is seeing 13% orders growth in last quarter. A lot of that growth came from data center, hospitality and health care. Process got a lot of its growth from LNG and low carbon energy or renewable fuels, which we called out as high-growth verticals.

And in Industrial Automation, we saw a lot of growth in semiconductor fabs. So exactly the -- it's not only our narrative, that narrative is turning into actual reality, and we expect to maintain this momentum, which then becomes basis for our second half guide and then, of course, continue that in 2027.

Our next question comes from the line of Andy Kaplowitz with Citigroup.

Mike, can you comment on price versus cost? As you know, commodity inflation is obviously all over the place, but your margin that you said is trending a little better than expectations. So maybe just talk about what you're seeing and what, if any, updated thoughts you have for price versus cost in the second half of '26.

Sure. So I think -- we talked about it earlier in the year, and we thought that inflation was going to be persistent, and that's what we continue to see going into the second half. Price was about 3.5%, 3.7% for the second quarter. I think looking at the second half, it will be around 4%, and that's where we see inflation to be. So essentially, we're able to cover inflation with price, but inflation is stubborn. We see a lot of inflation in electronics, memory, obviously, copper, and we also see inflation in labor. So I think this is the environment we're in. We'll continue to price at that level and continue to manage things with our customers.

But yes, I would say, generally, things are very similar to what we assumed going into the end of the second quarter. I would say a lot of the margin expansion you see here from us is not really driven by price cost, but it's really by our productivity, stranded cost takeout and the teams just being able to get a much better leverage on cost and NPI introductions.

That's helpful. And then maybe just going back to core Industrial Automation. You mentioned improvement in the product side of the business would lead to growth in the second half, which I think is a bit different from what you recorded in Q2 or solutions-led growth. So I assume that's just continued recovery in short-cycle demand that you're seeing and maybe NPI self-help tailwind kicking in a little bit more. But maybe you could elaborate on that dynamic.

Yes. So the solutions side of the business is a smaller component, but it's growing very nicely for us. And that's basically aftermarket services on our product installed base. Specifically, if you look at our gas detection side of the house of the business in Industrial Automation, we have a very large installed base, and that service very well through our traditional way of service contracts and others. So that's growing extremely well.

And the growth of the business, as I mentioned, is on the basis of our improved operational performance so that customers have more trust in giving us more business, also new products, which are creating more differentiation for us. And certainly, on the top line basis, as Mike mentioned, the pricing is certainly some help given the high inflation prevailing in across all segments in Honeywell.

Yes. And I'll just add also that part of the growth in Solutions 2Q was related to Intelligrated. So we have a little bit of that, that obviously won't continue post the divestiture. So you should think about kind of the core IA business growing sort of in the low single-digit range, call it, 2% or so exiting as a kind of a start path for post-divestiture world.

Our next question comes from the line of Alexander Virgo with Evercore ISI.

I wondered if you could just elaborate a little bit more on the 15% growth in software ARR. Is there anything in particular driving that strength? And then a couple of housekeeping questions, if you could. I think you've raised the guidance on repositioning costs, and they were a little bit higher in the quarter than I had anticipated. So I'm just wondering if you can give us a sense for what's driving that and whether that perhaps brings forward some costs that might otherwise have fallen next year?

And then I wondered if you could just give us a sense of the magnitude of the impact in the quarter from Catalyst volumes being down on the margin and then the benefit that, that would have commensurately in the second half. Just to give us a sense, that would be great.

Okay. I'll answer the first portion on software and hand over to Mike. So we do expect our ARR growth to be in the -- about 15% for 2026. Of course, the year is still 6 months to go, so I can't really give you a precise number, but we are working towards that goal and won't be substantially different towards that. What is driving it is your question? Two things. First is our existing offering is penetrating more. So sell existing offer to more new customers. We're seeing a lot of strength that across the board, both on the building and process automation side because our offerings are getting more and more market acceptance.

And the second is launching new offerings. We continue to have new offerings on our Forge platform aligned with the customer needs. and that continues to create more pipeline so that 2027, we also need to deliver the 15% rubric there. So we just need more products towards that. So fundamentally, we remain bullish on performance of our Forge-based strategy and that becoming an important part of our earnings algorithm moving forward.

And on the repositioning, we decided to consolidate footprint within our process business in the second quarter. So that's why you saw the spike in the repositioning. We're estimating repositioning right now for the year around that $100 million, $110 million. And I think that's what you should see. We -- that repositioning helped us to get some benefits in the second half and next year as far as depreciation and other things as far as how we absorb the footprint from an ISC standpoint. So net-net, I think it will be positive. It will be a pretty fairly quick payback for us on this repositioning, yes.

And on the question of catalyst, I think the second half volume of catalyst is more normalized versus first half. First half, we had said that right at the earnings guide during January time frame that we will see pressure on the volumes of catalyst and it occurred that way. But now we see things normalize like a normal year. So the second half volumes are way greater than the first half. On the margin side of catalyst, there are basically 2 types of catalysts we sell, one in which we compete with the rest of our peers, therefore, pricing is on a market line basis.

And the second type of catalyst where we have unique intellectual property, so our ability to get better margins is more superior than that. So in a given quarter, the mix of that really drives the net margin of catalysts. Sometimes you can sell some of these unique IP catalysts a lot more. Therefore, our margins are very favorable. Sometimes that happens in the front end of the year. And that is not forecastable easily because that's driven by the actual consumption based upon the plant conditions.

If you run plant really very hard, you need more catalysts. If you run at a lower capacity, then the catalyst runs longer. So there is a variability on when that occurs, which creates these variations on the margin in Process Technology on a quarter-on-quarter basis. But on a yearly basis, the margins are very predictable. They are more linear on an annualized basis and less linear within a quarter.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I also wanted to ask about the Middle East. I think you guys said the full year up high single digits. I presume the back half is even stronger. And I appreciate that activity has stabilized. But the outlook for you guys seems a lot more constructive relative to broader U.S. industrials in the region. So I guess my question is, is there something specific about what you guys are doing there to support volumes? Or is there something specific about the products or the markets served that is allowing you guys to show that kind of growth, which is -- and still, which is a tough situation over there?

I think it's -- I mean, at the heart of it is our portfolio. If you see Honeywell portfolio is big in building automation and process automation. And if you look at Middle East market, that's what the market is all about. It's a big energy market, and we have a leading position with our Process Technology segment and Process Automation segment. So clearly, we serve all countries for that. And then it's a big infrastructure market in which there's a built-out of different type of infrastructure, be it hospitality, be it health care systems, airports, et cetera, and building automation business does extremely well in those circumstances.

I think what also separates us out is heavily localized model. We are one of the most localized company in Middle East for decades. We did not evacuate even one person during this conflict, not even a single person. All our people are on ground because they're all local. So we didn't have to do any big move out. So I think combination of our portfolio and where customers are investing, therefore, and our portfolio is favorable towards that, which will make a distinction between us and other industrials and our heavily localized footprint puts us in a more favorable position probably compared to our peers.

I really appreciate that. And then maybe just following up on M&A. You signaled willingness to do M&A. Do you think that -- is there a balance sheet and maybe bandwidth capacity for deals of material size in the back half of '26? Or is this more '27 and beyond maybe after monetization of Quantinuum just gives you guys even more dry powder?

So '26, we are very focused to retire our debt. We have committed that, and we will absolutely execute on it. So I would say the M&A activity should be previewed more in the lens of 2027 onwards. These things take time, but we're actively working on pipeline. I would say the Honeywell balance sheet of its own have strength for the deal size, what we mentioned during Investor Day, $1 billion to $5 billion enterprise value. The Quantinuum demonetization will give us additional tailwind should we need it, and we'll plan it appropriately.

But overall, we will continue to upgrade our portfolio should the right opportunity exist. But all our earnings forecast of $12 by 2029 is based upon organic growth. There's not even single M&A assumed in that because we all know that's unpredictable, and we'll see what comes on our way.

Our final question comes from the line of Andrew Buscaglia with BNP Paribas.

Just a follow up on some of the process discussion. It's encouraging to see that LNG activity pick up. Could you just reiterate that timeline for conversion of the LNG projects, would you say 6 to 12 months? Or is it multiyear...

Multiyear, this is -- for us to build our proprietary equipment. In LNG, we have little distinction in our business model. Typically, we license our technology and customers will hire an EPC to build their plant. In case of LNG, we don't license technology. We give a proprietary equipment, heat exchanger. Typical delivery times are somewhere from 2- to 3-year window depending upon the design. So you're talking about conversion. If we book something in 2024, they are converting today. And what we are booking in 2026 will convert 2028.

But also don't forget, a lot of the revenue recognition is on POC basis, percentage completion. So you will do accrue some revenue. It's not 0, but then large revenue accretion happens mainly on a 2-year window.

And I would just maybe add that we're sold out LNG for the next 3 years.

3 years, yes. Totally sold out. So we have a lot of tailwinds in the business.

Yes. Okay. That's about what I figured. And AI had not come up in the Q&A yet and everything's pretty picked over. I wanted to ask a high-level one that sort of this notion of physical AI driving demand or interest in physical AI. I'm wondering if you're beginning to see that notion of AI driving incremental investments in hardware to get ahead of being able -- customers being able to monetize AI long term?

Are you hearing that in your discussions? Are you seeing that maybe potentially in any of your orders across maybe Industrial Automation? Just maybe talk a little bit high level on what you're seeing there.

As I mentioned, we -- when we sell software on our Forge platform, that's all AI-based offerings. So clearly, 15% revenue growth. The base is small, I agree. We are going to inch from about $900 million to a little over $1 billion of ARR in that segment this year -- in that offering this year. That does pull in products to a certain degree. And that's our core strategy. We continue to launch new offerings and drive demand to our products.

So to me, AI is an integral part of our offering set. Honeywell believes that it's how the automation industry will move towards autonomy. Today, we have been selling automation since 1975. Our offerings are becoming more and more autonomous to -- semi-autonomous to autonomous and the best way to measure our progress to see our ARR growth. I cannot give you any other indicator because they are all wrapped up into other products, and that's a direct measure, and that's the reason we are updating you on our ARR growth on the Forge on a periodic basis.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kapur for any final comments.

Thank you very much, operator. I would like to thank our shareowners, our customers and all the Honeywell Technologies future shapers around the world for the strong second quarter results you delivered. We are confident on our path ahead and look forward to sharing our ongoing progress in the months to come. I hope all of you have a pleasant and restful summer. Thank you very much for joining us today, and we hope you have a great rest of your day.

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

Good morning, and welcome to Honeywell Technologies 2026 Investor Day.

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 on this website that may be of interest or material to our investors.

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 certain risks and uncertainties and including those described in our recent SEC filings.

[Presentation]

Please welcome Senior Vice President of Investor Relations, Mark Macaluso.

Well, good afternoon, and thank you, everyone, for coming. We finally made it and no one is more excited to be here than this team. So we have a packed agenda for you, a ton of great content plenty of time for Q&A sessions, and then we hope you all stay and join us for a reception at the end.

So a quick look at our agenda for today. We'll start with our Chairman and CEO of course, Vimal Kapur. And just a quick look at our presenters. It's going to be a great day. Thank you for sticking with us, the whole afternoon. And with that [indiscernible]

Good day, everyone. I've been privileged to work in Honeywell over the last 35-plus years across different sectors of automation, be it buildings, be it process industry, be it industrial sector. And each one of them I've been highly influenced by the customer voice who talk to us every day on making their business better and solving their complex problems. These customers are in refining. These are in hospitals. These are in data centers. These are in hotels. These are semiconductor fabs and then the list goes on. So I thought what an exciting start to the Investor Day to hear voices some of these customers, which are shaping the future of Honeywell. So here we go.

[Presentation]

Please welcome Honeywell Chairman and CEO, Vimal Kapur.

Good afternoon, everyone. And a warm welcome to everybody to join us on our Investor Day. I thought it's important to start with our customers because if we have to commit to you growth, if we have to commit to you our bright future, it's not without these people who shape our decisions every day. And I really take it very seriously to thinking about customer-first mindset.

So I'm going to walk through my story, and you will hear these messages. So I thought I will lay it out in the front, what you're going to hear from me in the next 35 to 40 minutes.

The first is about our transformation to a pure-play automation company, something which you have been following upon. But more importantly, focusing automation on mission-critical segment.

Automation is a very wide market. You can make a lot of choices. We are making a choice to operate in a segment where mission criticality matters, where uptime matters, customers want to use these systems 24/7. And making that choice is a critical decision we have been evolving upon over the last 2 years since we are reworking our portfolio.

But also the point number three, that we, as a company, are practicing a single business model, which is a bit novel because companies having a business model is not unique about it. Having a businesses following a practice is very standard. But we are going to follow at Honeywell level, a single business model that we build an installed base and we served our installed base through services and software at scale of the entire company.

Then moving along to AI, which is going to be a future opportunity for us. You will hear from me and subsequent speakers how our industry of automation will turn towards autonomy. It's real. Some of you had a chance to look at our demos. You can already see that we are pivoting towards our offering. But I believe that as a future optionality of revenue opportunities, it's going to create much bigger than what is in our numbers today. And then, of course, our operating system, which gives us an execution certainty and our team, which knows how to deliver.

So jumping on to it. So I'm going to tell my story to you in three parts. I'll first walk you through our portfolio transformation, then I'll move towards what's going to drive growth in Honeywell and finally, how we're going to execute it. So the three simple chapters.

So working on the portfolio transformation before that, I thought, let me go back to the last Investor Day of Honeywell, which was 11th of May 2023. So about 3 years and 1 month back. I was not a CEO at that time. So my chart said incoming CEO priorities, and I thought it just could go back and say, what did I say? And did I do what I said or I just wondered around and chose to do different things.

And if you'll see the list of things to what I said, we will accelerate top line growth, improve our say = do on that. We'll execute on Honeywell transformation. We will accelerate our new product machinery. We'll improve our operating system. We'll pivot towards more corporate responsibility even though priorities have changed there over the last 3 years, but we haven't lost a course on that. And we deploy capital strategically.

I won't say that we've done 100% precisely, but the direction of travel has been what I committed. There are some tweaks. The point being that I stay on course. I don't change my mind. If we are -- what we're going to present to you today, you can have a high amount of certainty that me and my team are going to deliver on these commitments in the times ahead.

If you look at our portfolio, many of these actions are known, but I thought it's good to summarize on a page what we have been able to accomplish since start of January '24 until about 2.5 years of journey. Two spins successfully executed the Advanced Material spins last year. Aerospace spin happening in about 2 weeks' time from now. We did seven acquisitions in the Automation portfolio. There were two additional we did in Aerospace, so I'm not counting those.

We've done three divestitures, one completed, two are under execution, should occur in the Q3 of this year. We also had significant balance sheet simplification so that our business is easier to understand.

And finally, we were able to accomplish the IPO of Quantinuum about a few days back.

Now imagine I started as a CEO in June of 2023, and I presented on this chart, I'm going to do this. You may think this is a crazy idea to do all this in such a short period of time. But we are able to accomplish this because we are mission-centric.

We really want to build a automation-centric portfolio. So when you work for a mission you get the energy and execution speed on which we have delivered on this. And this has really created the new Honeywell.

These are 2025 numbers, so they are backward looking. So $17 billion rough numbers is our revenue of the Honeywell Technologies, divided into three segments: buildings, industrial and process.

But 25% of the portfolio is refreshed with all the changes we made of divestitures and acquisitions, 1/4 of the revenue is going to come from the new revenue stream, generally speaking, from a higher growth opportunities and not only have we've been able to create a pure-play diversified end market portfolio, but also have positioned it well for the growth.

If you look at the distribution of the revenue, the center pie chart, if you pay attention to that, we really start really focusing upon this whole notion of growing installed base and mining installed base. 60% of our revenue come from solutions, 20% and 40% product. That's when we grow our installed base. We do it every day. That's when we ship a product, or we build a solution. So our installed base keeps growing.

But if our mindset is that we need to mine installed base, that's 40% of our revenue, 30% come from services, 10% come from software. And we like both. There's no question of that we need more of services and more of software. We want both of them, because both are equally profitable.

And that mindset allows us to really think about our future business model. So one of the things we are planning as part of this layout is we want our services and software revenue to grow to 45%. Because it makes our business more predictable, less cyclical but also more profitable because clearly, that revenue stream has a higher margin compared to the solution and product stream. And that's one of our strategic goals that we want to treat this business with this mindset of building and mining installed base.

If you look at our geographic distribution, as you would expect, businesses geographically very distributed, a little over 40% revenue from U.S. and 60% rest of the world. So we will benefit from -- as the global expansion occurs in different end markets will equally benefit from that.

Now if the question will obviously come in that automation is a big market, where exactly we play and why we made these choices. It's important question because that's a heart and center of the discussion. So I put a very simple illustration of automation on the left-hand side. Some of you are familiar is called Purdue model, so you started sensing and measuring something, then you define a control measure on what you want to do, and finally, you can optimize it using software. This is how the industry has evolved since mid-70s when this industry got created.

As I mentioned, we play in three end markets. building, process and discrete. We have made choice to play in the mission-critical part of these markets. And also you don't see some other parts of automation we have not representing because we believe it doesn't fit into the either mission criticality or our business model of building and mining installed base doesn't really fit in well. Because if that's our core principle, we need to be selling true to our principle.

So if you walk the stack here in buildings, we play through sensors, controls and software. So in building the sensors are smoke detectors, cameras, field devices, then we have significant position in the control domain, and we have significant position in the software domain.

But when you can do the process, we have significant position in the solutions side, both in the control and software. And on industrial automation, we have sensing and measurement play at this point.

We want to build a strong sensing and measurement business in the industrial automation. This is a space we believe in because the thesis is very simple. If the world is going to invest much more in AI, AI is built upon data. And in the physical world, data comes from sensors. You can't estimate temperature of a room or a condition in a building or any such asset based on estimate, it's some going to work. So physical sensing is the heart of it. It's a very fragmented industry. We have already built a strong product-based business in buildings, and we want to illustrate that reputation in Industrial Automation.

Discrete automation, in the control side, we don't represent today. And the question will be why we don't participate in this market. It's an attractive market with the U.S. onshoring occurring, there should be growth here. At this point, we don't have a participation in that because that's how our portfolio has evolved over the last many years. It doesn't mean we won't participate in the future. We understand these domains quite well, but today, our position is open at this point. So we're keeping our optionality open. And near term, we'll continue to focus on strengthening our sensing and measurement space. But moving forward, we'll keep ourselves a room to grow into discrete Automation on the control side.

So very wide portfolio, which jumps in nicely to the next chart, why do we like all this? Okay, why do you like this combination. First and foremost, we play in a market which is a little over $200 billion between building, industrial and process. And market grows somewhere around 3.5% in a given period. So 3% growth in industries and process and 4% growth in building. Now we want to grow 4% to 6%. So why would we grow higher than market? I mean if market grows about 3.5, what's our entitlement to grow higher than market. There are two fundamental reasons for that.

Before I get to those reasons, automation by itself is a secular growth market for several decades to come. In the critical segment, we operate, thinking about critical segment like hospitals, like data center, pharmaceutical facilities, refineries, semiconductor facility, utilities. Automation is like oxygen for these facilities. You cannot run these complex facilities without automation. So we are not in any fundamental shift, which is likely to occur for decades to come. It has 5 decades of proven history. So secular growth here is highly probable in the times to come. So that's a table stakes.

But the fundamentals of macros are strong, whether it's infrastructure built out the energy security, which has become a major challenge due to two wars. The labor scarcity and AI issue, which are interrelated, I'll talk to it and reshoring. I think these are the foundational growth vectors, which are occurring in Automation, which support us and support the entire peer group with whom we compete with every day.

So question comes in that why would we grow higher than the market? The thesis is built upon two fundamentals. The first is within these markets, there are verticals which are growing at a much higher rate. We are greater than 3.5%, like data centers like semiconductor fabs and many others like LNG. If we are able to participate in those markets and grow at a higher rate, we are able to change the rate of acceleration of our group.

So part is how do we make those choices because we can't be everywhere, how we carefully make the choices and grow those markets at a higher rate, while we maintain our share in the core. So that's the first change we want to make and I'll talk more about.

And the second, our installed base built over the last 50 to 75 years in some businesses is significant. You're talking here tens of thousands of plants, millions of buildings and assets which we own, how do we execute our aftermarket services strategy?

In this mission critical segment, where service is very important. Uptime is very important. Customers care about these assets to work all the time. So if we are able to execute our strategy on service and software flawlessly, that gives us an incremental growth opportunity. So it's fundamentally grow with the market with these two optionality of growing higher on the high-growth markets and mining our installed base better, makes the case for us not to grow 3% to 4%, but make a case to grow from 4% to 6%.

In addition to that, the market characteristic of fragmentation in buildings and industrial market, in particular, is very attractive for us, more from future growth and optionality to further do acquisitions. Because fragmentation allows us to make choices. The markets are big, as you can see, $200 billion, and we are shy of $20 billion. So we have a lot of runway organically, but equally importantly, inorganically. And we believe that there's an aggregation opportunity selectively where necessary possible in addition to that. So there's a lot to like in these markets for us to feel bullish about on how can we deliver in the years ahead.

All that really comes together in form of where our position is as a pure-play Automation leader, #1 player in building automation and #1 player in process technology. Now if I was standing here in 2019 and saying we are going to be #1 player in building automation, mostly most people will not believe that statement because the segment itself did not exist.

We have created a segment called Building Automation from scratch after spinning off our residential business in late 2018. And from scratch, we built a business, which was $5.3 billion, sub 20% margins, to a business which is trending towards $8 billion and high 20s margin. We know how to create pure-play. And we are going to repeat that formula in industrial and process automation, where we believe in honest admission, we are top 3, but our ambition is to stay also become #1.

It's going to take a while. I'm not saying it's happening next quarter. but that's part of our strategy that how we continue to execute and bring our position. Our foundational strengths is our installed base, our global scale and our operating system.

But our differentiation comes from three points. The first is domain experience. Now domain experience matters in mission-critical segments and our participation in these industries give us a deep understanding on how these sectors work.

And more importantly, if we have to mine our installed base, we have to understand the customer needs much more deeply than only at our product level.

As an example, if you take care of process industry, which is about 40% of our business, the domain experience there come from understanding the conversion of molecule. These domains really drive a convert a molecule from position A to position B. Not easy to understand domain, it is possessed by very few people who provide technology to asset builder to do that.

We own that business. We are #1 provider of process technology in the whole world. which makes us uniquely positioned to have deep domain knowledge to play in that segment.

And by the way, the same argument applies in industrial and buildings too. And that gives us a unique advantage as we are turning our focus more from automation to autonomy. Domain experience is going to be paramount to do that.

Number two, Honeywell Forge something we have been investing in since 2019. 7 years of journey, now this is a foundation of our business model. If we have to mine our installed base, we want to do through Honeywell Forge platform, which is an AI platform, which mines our installed base better and creates a higher value for our customers.

And pivots the path to autonomy. I will ask you to consider checking how many industrial companies announced a cloud strategy in 2019? And how many companies still have the cloud strategy in 2026. We are one of the few companies who stayed on course because we believed into it. And therefore, it has become a competitive difference for us after 7 or 8 years.

And then finally, our decision to play in innovation across critical control points, the mission criticality. It's a choice we have made. The whole company runs with a mindset of serving customers, which are mission-critical, which positions us differently from others, which want to serve all the segments. So that's where we believe at our starting point.

Now before I go away from my portfolio section, I want to spend a minute on our commitment on ESG. We have stayed on course on that, specifically after separation of Aerospace and our Specialty Chemicals business. We don't have any exposure to nuclear weapons. Some of the shareholders have that as criteria. That obviously was obstacle in our previous portfolio, not anymore. But more importantly, for me, 75% of our offerings are sustainability oriented. That number will only go up in terms of how we think about this business.

And finally, our own emissions have been reducing. We haven't changed our course just because it became less visible to the outside world. We have been executing on it. We will be carbon neutral by 2035. We'll be half of our emissions since we started measuring it by 2030. We do it every day. We do it every week, so we are going to stay on course on that.

So that was the first part of the story. We have transformed our portfolio we believe in every part of our portfolio we have, and we're in a good position. The question is now what do you do with that? Portfolio is just a good starting point. You need to execute and drive a growth based upon that.

So before I jump into our growth strategy, I just want to show back -- go back to this interesting chart for you. If you see the left-hand side, I started my first year was 2024. So I thought it's good to start from the year 1 of me being the CEO.

We had a, I would say, at best okay year or not so great year, whichever word you want to choose in. Our Industrial business, Automation business shrank about 4%. And Process and Building grew both around 2%. So not good performance out of the gate, but that's where we started laying out the strategy, which I'm going to share to you that how we are going to grow as a company from mid- to high single digit. There has to be a consistent way to do it. And that way is consistent across all the three segments.

You've seen how the Building Automation performance have changed from low single to consistent high single-digit growth we have delivered over the last 6 quarters. And I believe that we are well positioned to do that for rest of the year.

The question is, is that strategy replicable in industrial automation and process automation? The answer is yes, because we have a consistent and the same strategy. We don't have different ways to think about it. We are in a different stage of journey in terms of maturity of our strategy execution in our portfolio and have a very high confidence that what we are committing to you in terms of our growth of mid-single-digit growth for Industrial Automation and Process Automation technology and Building in from mid- to high single-digit growth is absolutely going to happen because of the consistency of the strategy.

So what's our growth strategy? It's built on this whole circle of shared value creation. We start with growing installed base, which is 60% of our revenue. We need to make careful choices on where we go, and I'll talk to that in a minute. And then we really start with the circle of monetizing installed base.

Now if you go back 10 years back, monetizing installed base was all around getting about some parts business, some break/fix services, some service contracts. That changed over the last few years since we started instrumenting our business with the cloud. Now we think about every asset need to get connected, harness the power of Honeywell Forge platform, which creates optimized outcome for the customer. And then as the customer asset gets older, 5 years, 10 years, we refresh it with our migration software offerings. And the cycle starts all over again.

That's a fundamental principle. If we think about it across all our businesses, it changes the mindset on what business you're in because you think your growth strategy around that.

So with that in mind, this is how we think about our growth strategy. It's a simple triangle. We grow our installed base by selling products and projects, that's 60% of our business. And then we mine that installed base using our Honeywell Forge platform through services and software. And to do 1 and 2, I need new products. If I need to participate in high-growth verticals, I need something to sell to them, which is differentiated. If I have to mine my installed base, I need to give them an offering by which customers are willing to pay for all that converts into 3. And if I do a good job on new products, that ensures my growth.

So simple way to think about Honeywell Technology is going to be in a typical year, how much growth came from new products, how much growth came from price. You add the two, substract from them, any market disruption or any churn which happens, that's going to be our growth numbers. Relatively simple to do and why it relates this way because that's linked to our strategy. So we want to make ourselves so easy to understand that we don't have to do a lot of thinking on how to think about Honeywell in the future.

Let me dig into each one of them, how we think about growing installed base, monetizing installed base and introducing products. So let's talk about growing installed base.

On the left-hand side, you see our current construct of revenue, 80% of our revenue come from what we call mature verticals where the growth happens at GDP rate, around 3% SAM growth, a typical year. So that's our businesses in end markets like commercial real estate, education, airport, refining chemicals, absolutely important business for us. We want to keep our share in these markets and gain some where we have an opportunity through our innovation, that's core part of our strategy.

But equally potent for us is that it's an "and" strategy that while we do that, we also make a choice of high-growth verticals, which is 20% of our revenue and growing them at a higher rate. At a double-digit growth rate. And when we do that well, consistently, that 20% becomes 25%.

The question will be, how do you choose where do you want to grow? If you randomly pick up what's occurring at this point? Or you want to be thoughtful on that. We're really putting bets on four things on the next 5- or 10-year horizon. The four things should not surprise you. The first is, we believe AI is here to stay for a long time. That's why the two end markets of data center and semiconductor are important for us. Number two, if AI is here to stay, you need more energy, Therefore, LNG and grid infrastructure is important. And those are two end markets we really want to focus upon.

Number three, aging population is here to stay for a long time, which means the world needs more life sciences, more drugs and also likely need more hospitals. So we're putting bets on those too. And then finally, hospitality, as world becomes more richer, consumption increases, people want to spend money on leisure and therefore, the hospitality industry grows.

So we are not putting random bets on what's in fashion. We are thoughtful on four big vectors of AI, energy, aging and consumption. If those two are true, which we believe they are based upon our analysis, that gives us a structured way to keep thinking about where to focus on high-growth verticals.

And we have proven it already. We have grown nicely in LNG through our inorganic acquisition. We have built a good position in data center from nowhere over the last 3 to 4 years. We built a good position in hospitality with a combination of our actions of organic and inorganic. So we're going to continue this journey. Some places, we have a lot more runway, some places we have lesser on this. So that's part of one of our strategy growing our installed base in a very thoughtful manner through our solution and our product.

Then once we have built our installed base, then we want to buy an installed base, which is the upper end of this bar. So 40% was -- 60% was at the bottom. Now we need to mine it. Now we are not selling, as I said, breakfast services. We are selling outcomes. That's the direction we are pivoting towards selling labor efficiency, selling asset uptime or operational efficiency, the offering which customers care about consistently across all the segments we operate. That's why the mission criticality matters. If you operate in mission-critical segment, customers care about uptime. They care about operational efficiency. They care about skilled labor. And therefore, our offerings remain highly repeatable because we can work on them across many sectors.

And if you see the middle chart of our installed base penetration, we have wired our entire installed base, which is a bit relatively unique feature. If you have time to walkthrough one of our demos in the room here, is we have visibility to our entire installed base of whole of Honeywell. Why it matters? Because If my business model is to my installed base, the obvious first question is, do you even know where it is. It looks very pedestrian question, but it's hard for industrial company, which has grown over multiple years through multiple acquisitions to instrument that.

Now we have that data. We know which customers are under contract. We know the life of the asset, which parts are obsolete, which are not obsolete, which needs renewal, and that gives us the penetration option. And you see some businesses are in mid-single digits like process technology, 3%. I see that as an opportunity of runway. We can grow from 3 to 10s and 20s. But every business have a runway to grow.

From a critical option if we have to get all the service business in theory in the planet from my installed base, the critical model or empirical model is roughly $20 billion, and our service business is just $7 billion. So that to me is an opportunity set.

How we should think about it, how to get from $7 billion to $7.5 billion to $8 billion, which gives me a confidence that we will get to 45% of revenue mix of services and software because the entitlement is very large and mission criticality drives us towards that.

Which nicely puts the whole story of Honeywell Forge, which is the center of our strategy to monetize our installed base. Forge, as I said, we've invested [indiscernible] in dollars since 2019 to really build this hardware-agnostic AI platform, which allow us to build our offerings to mine our installed base through services and software. Suresh will walk you through in his section, how the journey has evolved over the last few years?

But really started with connected services, connect our installed base and offer our customers a service contract through force platform. Why it matters? Because customers are able to get better uptime, they have better visibility of the assets, we're able to get better prices as a company and also have a lower cost to serve. That's how we started in 2019.

Then we pivoted toward new software applications, applications which were created with the power of data. You can create new software application to configure our products. You can create application to inspect our product. For a license fee, and they became a new revenue stream for us.

So revenue streams are growing to a point that today of approximately $1 billion of revenue is annual recurring revenue for us, only for software. Company like us used to have big software numbers. We have learned our lesson to keep it simple, just report ARR, which is what we invoice. And this should grow about 15%. We believe if we execute the strategy well. and that becomes a growth engine for monetizing our installed base.

Of course, as I said, total service or business is $7 billion. $1 billion of that is from software recurring ARR. So obviously, we will work towards growing that in the future.

Now the last box here of autonomous operation is equally important. As the word is growing as we are getting more and more data, we clearly see automation industry moving towards autonomy. So what does it mean?

If you go back to automation industry, when it was created in mid-'70s, the whole model was built upon the concept of rule-based system where human is in the loop. So you take an asset, take a hospital, take a semiconductor fab, take a refinery, you instrument it, you put control measure. There are exceptions which happened, exceptions are managed by humans. Humans will come in and take a control measure to deal with exception.

Now at the hindsight, after 50 years, you say, wow, there's a problem in that model. The problem in that model is that human, which was running that asset for 10 years, 20 years, acquired a lot of knowledge why this system fails, why it doesn't operate the way it operates it. So when that human leaves, the knowledge leaves with the human. And that's becoming a problem over the last 10 years as lesser and lesser skilled people were available -- are available, knowledge is becoming an issue.

AI solves the problem. So we are in a world today of Agentic systems where agents are helping human to augment the knowledge we are missing. So our customers are asking for more and more agents to run their facility, run their buildings, run their plants, run their process facilities, and eventually, we will find a pathway towards autonomy. But augmentation itself has a huge opportunity of transforming our industry from automation to working towards autonomy.

And if you look at it, how we are enabling it, look at some stats on the right-hand side of the chart, we have more than 300,000 customers connected. I would argue that some scale, 5 million assets which are connected. And every day, every day, we collect more than 1 trillion terabyte of data. That's the basis for us to build our autonomy. It's not going to happen just because I want it needs a foundational system, and we have created a foundation on which we're going to build an autonomous system on the future.

So future optionality. Only $1 billion of ARR revenue is in our revenue stream today, but I'll argue that there's a lot more runway to come.

Now all for us to do moving into verticals and serving our installed base requires new products. And one of the decisions I made as incoming CEO was to raise our R&D spend in 2025, if you observe our R&D spend went up by about 50 basis points. I think it was necessary, because if our thesis is all about growth through new products, we need to spend at median or above end of the market.

That's -- but we need to spend it smartly. So we have done that. I don't see a necessity for us to make any more correction. We are at the point we like it to be. Now we need to grow our revenue every year and earn that incremental revenue through our growth while keeping the percentages the same.

But what that has done is our vitality has been progressively growing to mid-40s. The typical industry leverage of vitality is about 20s. Vitality is defined as products you created over the last 3 years so that you can see the health of the business. You're not selling old stuff, you're selling the new stuff, so you're less disruptive to yourself.

And then all that is leading to our organic growth, what you can see on the right, we are slowly progressing from not growing based upon new products to more growing. And we do expect this number to keep going up as we make progress on this.

But it's less about spending more money. I wish that you can grow by just spending more R&D dollars. It's not that straightforward.

We have also invested heavily in refreshing our offering managers. We have 600 of them looking at their talent, making sure that we have the right people in the right jobs. That's an important part of our execution.

But also looking at underlying systems, do we have the right systems on how we look at our new product performance. How do we know which is working? What's not working? What's the basis of that? What's the definition of that?

And then our launch processes. It's because we launched hundreds of products in a year, that's a big opportunity. So all that really is a basis for us to think about high confidence in this.

I spend a lot of my personal time on this process. Question is why? Because all our growth is linked to new products. And if me and my colleagues, SBGs CEOs are not passionate about it, we will not be able to execute the growth we're really talking about.

All that really comes back to the story I started about. This whole cycle of shared value creation is in motion. This is not something we are thinking about. It's a strategy we're going to do it in the future. 5.2 million assets connected it will be 9 million conservatively by 2028, almost double, which is giving us a high confidence that using Forge will continue to propel our services and software revenue from 40% to 45% because we create outcome for our customers. And then we keep refreshing our installed base and go back to the whole cycle. So the cycle of value creation is a whole part of our growth strategy, which we want to get across.

So before we wrap up this section, I thought also spend a minute on our M&A. Our growth is heavily dependent on organic growth. I want to make it very clear. That's the majority of our growth. We did six acquisitions. And acquisitions were done more around some known growth vectors we strongly believe in, either in end markets, we believe there's a high growth. So we made three acquisitions in LNG space. Air Products LNG business, Sundyne business and CCC business. But we also made two acquisitions in the space of security. We believe the world isn't going to invest more in security, be it physical, be it cyber. So we are acquiring in the spaces, what we call bolt-on, the space is extremely well. So there's a lower risk and higher probability of execution. And Mike will share with you numbers of all these acquisitions, we want to be absolutely transparent on how we are doing against them.

But the good news there is we are beating our internal model across all of them, and they are based upon some tough numbers we are committed to ourselves. And we're going to stay on the same strategy. We're going to stay on the bolt-on strategy in the optimal size of $2 billion to $4 billion. With a clear path on commercial synergies, continue to operate in mission-critical segments. So we're not going to change our rubric what has been successful for us.

And we'll be very selective. We'll be very thoughtful because we are very focused at least in 2027 to wind down our debt and continue to make our commitments on that front.

I thought it's important to spend a minute also on Quantinuum, a good success story of completing IPO a few days back. The Quantinuum now becomes an optionality for us in the future. We own 47% of the company. So how do we monetize it with future optionality for us? But what excites me about Quantinuum is the quantum story and AI story it goes hand in hand. As AI is scaling, the compute power is not able to keep up with that. The compute power is running in differential to the compute power, which AI is demanding. And the best way to solve that is quantum.

And the areas like drug design, optimization, new material discovery, cybersecurity is where cyber demand where quantum demand is imminent. And we believe that at the right time, when these start scaling up, it will be the right time for us to monetize our stake. But we are in a much better position now because the company being public and will execute at the right part of time.

So moving to the last part of the story now, I'm spending my last 5 minutes on, okay, it's all great. How are you going to execute it? I mean anybody can say and it's good to tell the story, but do we have a muscle to execute all of that? I'll first point out to our Honeywell Accelerator, which is our operating system.

This has grown over 20 years. I am proud to say that my two predecessors did an excellent job to lay down a strong foundation of this operating system since 2005 when Dave Cote started really focused on functional excellence and manufacturing operating system. Under leadership of Darius, we really moved into new products and pricing and to some it to commercial excellence. And under my leadership, we focused on business models and customer obsession.

So the point being that this is an ever evolutionary operating system. This is how we make a choice to work by discipline and it makes our businesses better. It also gave us an assurance that we can execute with certainty versus execute with high variability across businesses. And you will hear from different business leaders, how they use operating system, not only for running their business. And if we did an acquisition, how we integrate those acquisitions flawlessly as part of our business.

Which nicely flows into the next point that accelerator is a big part for us to also drive our margin expansion. The margin expansion tools are going to be typical. It's going to be pricing, it's going to be productivity for sure. But rather than pricing on productivity through not a systemic manner, we use our tools, we have created over 15 to 20 years, to drive manufacturing excellence, to drive pricing execution, to drive commercial excellence, to ensure that we can deliver on our margin expansion.

But also use our tools to manage our fixed cost. Our fixed cost has come down by almost 600 basis points with all the work we have done. Now our job is to keep it at 31%. We have got it. And if possible, make it even lower to further expand our margin. And our operating system really drives us to understand what are the optionality and options for our fixed cost management.

And finally, as I mentioned before, our mix of -- revenue mix as it changes is certainly going to be margin accretive. So all that gives me high assurance that our margin expansion in rubric is very solid, because it's built on a back of operating system, which we use every day.

Now to do all that, we have a very capable leadership team. You're going to hear from six of them later today. From Mike, Suresh and 4 CEOs. I can tell you that this team is super charge up and highly excited about optionality it had in front of them.

We have executed, as I mentioned to you, flawlessly over the last 2 years. Delivered to you, hopefully, in surprisingly matter on executing our plans, flawlessly acquisition integration, but also continue to deliver our financial commitments. And this team is very capable to deliver to future commitments. We're really talking about ahead of us.

It's also interesting that many of the team players rejoined Honeywell, I thought it's an important feature to point out. Starting from Mark himself, who rejoined us, but also Anant, who rejoined us from Microsoft, Billal, who joined us and Pete, who also rejoined us. The question is why people are excited, not because they're a great friends. But because they believe in the strategy. They believe that we are on to something which creates a new opportunity, and we collectively are excited about that.

So it's also our Board. I'm proud to have three of our board members in the room today. Mike Lamach, who hopefully needs no introduction, CEO and Chair of Trane. Mike is going to be our Lead Director. We have Indra Nooyi, who as Chair and CEO of PepsiCo; and Stephen Williamson, who was CFO of Thermo Fisher. They represent our board here today, and I'm very proud to have a Board which is not only driving governance but driving us insight, helping us execute this strategy.

And like any other purpose-built company, you also get to build a purposeful board so that it's aligned to execution of your strategy. So the great team with the right Board gives me high confidence that we're going to execute on it in a flawless manner.

This chart is -- I wanted to leave this chart for you, which is a very interesting data point. If you see on the right-hand side, this is an attrition trend of Honeywell since 2019. And if you see the numbers like when the big resignation happened, our numbers went up like everybody else, and if you see the chart on the extremely right in end of 2025, our attrition is lowest in our history to our data we can ever find in the last 15 years. That sounds very counter-intuitive that a company which is going through such a big transformation, spinning stuff, selling companies, why people are not leaving because they believe in the future. We are creating a true growth culture.

look at some of the stats on the left-hand side. Our Voice of Employee Score is 74% above industry median. Our Glassdoor score is way higher than our peers because we are investing in people, in their training in customer co-creation, they can see the strategy. So I think if know the stat gives you confidence, I think this is all facts that this gives you confidence that we're on the right trajectory because the employees believe into it. they're insiders, they can see and feel it every day on how we are executing that.

So with that and wrap up, I will say that we as a company feel -- Mike will talk more about our financial rubric, but I, as a leader of the business, feel highly confident on delivering what we are committing to you today, 4% to 6% organic growth. We do have a contingency built into that. We are absolutely transparent about it. I do believe in today's uncertain time, you do need some contingency to deliver the commitment. So you can't build a plan and come back with you to excuse us to say, here is the reason we can't deliver that. I feel highly confident about our margin expansion and delivering 10% plus adjusted income growth.

So with that, I'm going to wrap up here, my section. I hope the story of building a pure-play automation leader is convincing the story of durable growth margin with our mission criticality focus and business model is convincing. And optionality of future are going from autonomy from automation to autonomy is real. And our operating system is going to be the backbone and our team. It's going to be the backbone, which I've executed.

So I look forward to the more conversation. I'm going to invite my friend, Billal on the stage to talk about his successful story of Building Automation.

Please welcome President and CEO of Building Automation, Billal Hammoud.

Thank you, Vimal, and welcome, everyone. Thank you for being here. In Building Automation, we have created an amazing business that's operating in an attractive space, $120 billion space are pure-play controls, growing at 4% annually with strong secular growth trends.

Our focus on Building Automations on the three primary operational control domains, fire-life safety, security & access and energy management. We do all of those while addressing the #1 problem facing our customers around the world which is this shortage of skilled labor.

In the next 20 minutes, you will see firsthand how we've transformed this business into one of the fastest-growing businesses in the industry. We've done that really we're focusing on three things: one customer centricity; two, on speed of innovation; and three, having the best empowered talent to do that.

On customer centricity, working along with our channel partners, we've really increased our focus on growth verticals, and we have made intentional decisions to reorganize our people as well as change our decision rights to allow highly talented, capable people in the regions, closest to the customers to make decisions. They understand the customer best, and they are able to move fastest to make the right decisions.

On innovation, multiple years of double-digit increase in our R&D sales, led by our focus on Forge Connected Building, which has become an important part of our overall growth algorithm.

So all in all, what this allowed us to do in 2025 is to grow our top line by 8% to $7.4 billion and expand our margins by 80 basis points to 26.5%. What you will see here is a well-balanced business with a lot of optionality for growth, both in terms of how we look at products and solutions as well as our strong geographic mix as well as our exposure to different verticals.

Specifically, when you look at these verticals in health care, hospitality and data centers, Vimal touched on them, we see those for Building Automation as three growth verticals globally. And especially when you think about data centers, which a couple of years ago was really a negligible part of our sales. And in 2025, it became 4% about sales. And as we sit here it's operating well above 5%. That's how it's trending. So we expect these to continue to grow in the years to come.

So how do we serve these verticals? It's not enough to show up with end-to-end business teams. But you have to have something worthwhile to sell. And specifically, what you can see here is how we position our technologies to deliver things in each vertical that, that vertical cares about. When I keep going on this, and the benefit we get with Honeywell Technologies as a pure-play automation company is now we are able to work across all the businesses in Honeywell to start to bring one Honeywell offerings.

Specifically, what you see on this chart highlighted in red, data centers, utilities and life sciences. These are the first verticals that we are tackling from a class Honeywell, where we believe we can bring on Honeywell offering that will be absolutely unmatched by any other competitor in the world. We're really excited about this.

Specifically for Building Automation, how we are serving these customers with these offerings you heard Jim will talk about the basic of our offering, which is very true for Building Automation. We have sensors, we have controls, we have software that lives on top of it. We sit at that critical intersection between the physical world and artificial intelligence. And we see a lot of value creation potential as we lead the buildings industry into true autonomous building operation.

But even within each one of those specific domains, there's a lot of opportunity to differentiate and create value. I'll share with you just one example from each.

If I start with fire, some of you may have seen how people walk around with literally with a stick that creates smoke. This is part of a -- in the U.S., that's a annual compliance test that has to be done. Typically, it takes two people wake takes one person walking around with the smoke. Sometimes it needs to help with the ladder. Another person standing next to in the back room, next to the fire panel. I just expose smoke. Do you see smoke? Yes or no. Well, all of that is gone now. We have smoke detectors that actually generate and test themselves. So you no longer need two people walking around doing the test.

And without connected life safety offering, what we are able to do now is do this test completely remotely and our connected life safety generates that report. It's a simple task, but it's 1 that takes a lot of time and one that you have to do to be in compliance. So not only have we saved the time, but we've done two important things. for our channel partners. This is a skilled labor that was not working on new projects that now is able to do that, and they are able to grow that business. And when they build the business, they grow our installed base with it.

For our end users think about the hospital and having to walk into different rooms with patients they have and having to disrupt that operation. So a lot of differentiation being created there with this capability.

If I think about security, our OnGuard platform is by far the most scalable platform and access solutions, we are able to serve customers that need to run global operations with hundreds of thousands of devices and users all off of one platform.

As we look into what we're doing next, we will -- we are taking this into a cloud native offering that is super scalable and creates a unified view for customers around the security and access operations.

And then building management, we are the very proud owner of Niagara framework. It is the most commonly spoken language in building controls that are more than independent developers around the world that use Niagara and any other thing in building management systems. And obviously, we'll continue to build on that as we take Niagara as a cloud native offering and we layer them Forge and bring in the AI capabilities to that.

Our services businesses, no surprise, will benefit greatly from our Forge and Connected Building Capabilities, as we are able to create more better outcomes for our customers, and we're able to do things on a more as-need basis as opposed to check the list.

And finally, in our Projects business, what we do there, we actually take our own products and we go install them for customers. Why do we do that? If you can think about some of our customers being global customers that operate in multiple countries around the world, they benefit from the ability for us to execute consistently around the world no matter where they are located.

And also, sometimes you have complex projects that involve multiple control domains, and this is where we do it ourselves. In our Projects business, it's about 15% of our business.

So if Projects, we're only installing 15% of our installed base who else is doing it. And this is where the very important and highly differentiated channel partner network that we have around the world comes into play.

Our channels represent over 60% of our sales. These tend to be highly capable, very nimble companies that know their customers very well. I'll work with them allows us to do two things, two things. Number one, they are able to take out innovation and scale it faster than Honeywell or any of our multinational competitors can. So they are able to drive more quickly than anybody -- bigger companies can. The other thing they do is they keep us on our toes. And they move fast. They expect us to move fast.

So as you've seen in the last few years, what we've done here in our major regions, we are serving over 80% of the needs of that region locally. And also since 2021, we've done tremendous, almost a 90% decrease in our lead times from the time the customer tells us they want something to the time we were able to ship it. And we did that while significantly improving our say = do for these partners. So great partnership works really well for us. It works really well for that for our partners and that allows us to focus on the high end of the value creation for pure-play controls.

We have a balanced portfolio mix with Fire and Security being over 2/3 of what we sell. The HVAC building management system controls is less than 1/3. So if you see that the overlap between us and the HVAC player is less. For one thing we're not doing equipment, we're just doing controls. And then obviously, the global nature of controls as opposed to when you're doing heavy equipment, lot of that for these players tends to be more focused on a regional basis.

And as you can see here, we have leading positions across the worlds in very different countries here. So, what does that do for our growth algorithm and multiple ways here for us to look at it? If I pointed that tension to the top right of the chart, when you look at other offerings, and then we'll show this as a overall Honeywell Accelerator growth algorithm. We have software growing high double digits. We have services growing in the high single digits, low double digits, and we have fabs and projects going in that mid-single-digit range. All of that gives us instrumentation to grow consistently in that high single-digit percentage.

Our vertical focus, something similar way with a different way to come at it. Our high-growth verticals growing in double digits. The established verticals growing in the mid-single digits, that gets us into that high single-digit space.

Similarly, on our regional focus between the high-growth regions and the established lesions. And last but not least, multiple years of double-digit increase in R&D investment meant that we are getting a lot more of our revenue now and the new product introduction is a real growth accelerator for us.

In fact, of the 8% that we delivered in 2025, 4.5% came from new product introduction. So clearly, those choices we are making on R&D investments are paying off and showing up in our financial performance.

So how will we continue to do this? We have the #1 position in the three critical building controlled domains, Fire and Safety, Security and Access and Energy management, and we will continue to build on that and create more differentiation.

For Connected Building has reached escape velocity, the flywheel turning. In fact, we connected more buildings in 2025 than we have since the inception of Forge several years ago and expect that to continue to accelerate and continue to grow very nicely for us.

New product introduction. New products have the blood lifeblood of an organization. You heard Vimal talk about it, that we don't delegate new product introduction. This is our responsibility as a Honeywell leadership team. In fact, 2 years ago, Suresh and I started this thing where we do every other week, we sit with our team for the good part of a full day and we review our new product work that our team is doing. And we're very proud of what the team has done in the last couple of years.

Our conversations have gone from 3 years ago where we will focus on execution. To now, our team has execution. We don't need to get involved in it. They do a very good job at it. And our conversations are more about road maps, a lot about thought leadership and all about the vision for the future. We allow individual contributive offering managers to come in and we sit there for the day and we problem solve with them. We talk about different scenarios. We're able to understand our competitive position, certainly not only from the established competitors, but also for any up-and-coming competitors. It's a great way to stay on top of the business, make sure that capital allocation is going to the right place. And it's also -- it's an amazing way to develop talent. And it's really nice to see how people pick up from these conversations and what they do with it.

And certainly, our business model is all about an installed base that we continue to monetize. And we will continue to do this. We cannot overemphasize the importance of our highly differentiated network of skilled third-party partners that help us to scale our business as we go.

Said another way, a virtuous circle of growth. We grow the installed base. We connect the assets. We leverage Forge. We deliver more outcomes, and we allow our customers to make the best utilization out of that asset. Buildings are inexpensive assets. Our customers expect us to help them get more out of that building each year.

Especially when you think about verticals where the building itself is key to the way the customer makes money, whether it's a data center or a hotel or the hospital. And Forge will play an outsized role as we move forward in connected building will be very prominent in how we help customers make better utilization and serve the customer better through the building -- what the building can do.

This is an example of that. This is -- in this case, this is Vanderbilt University. This is a project that we're working on with one of our channel partners. In fact, Vanderbilt University, one of the very few, but it just so happens that there are no Honeywell controls on that building. So we leverage our Niagara framework, and we leverage force connected building to come in and connect these buildings.

And when you see on here, clearly, the fact that we've gone from 2 weeks connected building to a few hours really helps with the return on investment. And it's not only about the energy savings and the labor savings but for Vanderbilt University, the mission is on education, and they continue to grow.

One of the obstacles for growth was how do they continue to service those buildings because they cannot find enough trained technicians. So now we take that off the table with Forge connected building, and we allow the customer to focus on that core mission, and we help with making sure that the building does not become an obstacle for that.

Another good example here in data centers. You all saw [indiscernible] talked about, she said literally helping them do things faster. If you think about how you serve the verticals, you show up with end-to-end empowered business teams, but you also have to get to a point where you truly understand what it takes for the customers in those verticals to succeed with their own customers.

And in the case of data centers, it's all about speed of scaling. And with Equinix, when you think about the commissioning of that data center, it typically takes 5 to 8 months, and this is where you find the surprises that you don't want to find. So we work with Equinix to reduce that commissioning stage by 33% and in the process, not only make it shorter, but make it more reliable and again, help Equinix focus on scaling and serving the customers they worry about commissioning a new building.

So what will this give us for the outlook? We have instrumented this business with the focus on verticals with talented empowered teams and our visions. The investments we're making on new product introduction and the acceleration we're getting from Forge connected building, we have instrumented this business to grow at high single digits. And we expect no matter what comes out from the world will be consistent in that mid single to high single-digit space.

Some of you in this on a couple of years ago, we had a lot of interesting discussions on margins and building automation. And why does building automation has the highest margins in the industry? And is that sustainable? Or we're going to have to trade-off between margins and growth.

I hope you see now that we can do both. Fundamentally, as you saw from what we just discussed, our margins and the differentiation of margins is because of our differentiated business model. The combination of us focusing on the pure-play controls. The combination of us innovating and having channel partners who can scale that innovation very quickly, and they worry about the most of the time, most of that labor content and we stay focused on the parts and smarts. That's the fundamental difference here that you see in our margins.

And the good news here, 26.5% in 2025. We see that going to 29% over the next 3 years. How is that going to happen? Well, as we are busy transforming the business and transforming good results in 2025 and 2026, we've also been investing in the business. Today, we can serve the volume growth that will come at us without having to build a single factory and in fact, without having to expand a single building. In fact, we don't even need to put any major capital investments in our factories. We've pulled up our factories to help us deliver the growth for the next 3 years.

Not only enough factories, but R&D investments, consecutive years of double-digit growth in R&D, we now have the scale we need to continue innovating effectively and quickly. And are being close to our customers, we've invested hundreds of resources in our regions and our verticals focus on demand generation. So the business is well instrumented to be able to continue to grow and benefit from the volume leverage.

I have Honeywell Accelerator framework, which is very proven, and we have a clearly proven formula that talks about pricing and productivity always exceeding inflation and investment. We did that last year, we were going to continue to do it. And that, but certainly not least, as we accelerate force connected building and our connected offering in our software recurring revenue, expect to see that margin mix continue to be favorable as we launch these products.

All in all, we have an amazing business. This is one-of-a-kind business that we'll continue to give as we invest in it. We are super excited about it, and we truly see sky is a limit for this business. Thank you.

And with that, I'll turn it over to Pete Lau, my good friend and colleague.

Please welcome President and CEO of Industrial Automation, Pete Lau.

Incredible job Billal, amazing stuff. Okay. Good afternoon, everyone, and welcome to our Investor Day. It's good to see a few familiar faces out there. My name is Pete Lau, and I'm the President and CEO of Industrial Automation here at Honeywell. I'm excited to be here with Vimal and our colleagues today talking about Honeywell Technologies.

I am acutely aware that probably the least understood part of our portfolio is industrial automation. So I'm looking forward to explaining IA in more detail. We'll spend this time talking about our customers and our offerings, and I'll cover how IA has evolved, where we play, why we win and why we're a valuable part of Honeywell. But mostly, I'm looking forward to talking about why we're an essential part of our customers' workflows.

Okay. So it's been a bit of a journey for the businesses that make up IA today. These are product-led businesses with attractive and growing software and aftermarket offerings.

As Honeywell has evolved, these businesses have had multiple homes, a partial position in performance materials technology, a partial position in safety productivity solutions as a part of the previous $10 billion IA that I joined in October.

The opportunity here for these businesses is all about focus, focusing on these product-led businesses. Historically, IA was a part of larger entities that were dominated by project-led -- integrated project-led businesses. And trust me, those businesses take management's time. They take attention and they take an outsized portion of the investment. And the larger entities had critical mass in specific end markets like process and warehouse automation. And so the product businesses really just existed to further the interest of those entities, which means that the IA businesses did not invest enough in new products.

For solutions that are tailored to their technology in high-growth verticals. We've lacked a little bit of an identity. We've lacked an operational focus, and we've lacked rigor in these businesses. And as a result, these really good businesses have underperformed.

In the last 4 years, the pro forma for these businesses, revenue CAGR was minus 4%. NPI contribution to revenue was less than 0.5%. And gross R&D investment down 20%, our on time to delivery for our customers was 45%. As a result, we lost share.

But in the new focused portfolio that is IA with all the portfolio that work that we've done, that's going to stop. And it's already stopped. We've already started to turn the corner.

The new IA is a sensing and measurement business. And sensing and measurement forms the foundational technologies for the automation tech stack. And for the first time in over a decade, we'll be able to focus on these product-led businesses. We enable industrial automation through data collection, and we collect a lot of data across a variety of verticals in a lot of different industries and channel to markets. Our offerings are used in basically every single one of Honeywell's businesses.

Commonality for IA will be in the technologies and our operational excellence rather than in a singular end market. This setup will allow us to optimize the IA businesses in a way that we've never been able to do in the past and really drive world-class operational efficiency. This is an incredible set of businesses. IA's technologies are engineered for mission-critical environments. Precise accuracy and reliability are absolutely essential for our customers, and failure to meet those objectives carries material impact to human life, to safety, to customers' revenue, to their operations, to compliance. And we have really high barriers of entry because of those regulations. And so we have a lot of competitive differentiation.

Our offerings make up a small part of the bill of material for automation and so that implies a certain amount of price inelasticity. We built a well-deserved reputation for quality and reliability, and our installed base is substantial. So a lot of times, it's just too risky for our customers to substitute our solutions. And that creates the ability to expand our services and software offerings in a way that we've not been able to focus on the past.

With a highly focused organization and differentiated businesses in highly regulated markets, IA is primed to be a value creation engine for Honeywell over the next couple of years and beyond.

Okay. So here's -- this is a one-page overview of our businesses moving forward. And to be clear, this page really reflects Industrial Automation post the sales of Intelligrated and our PSS business.

So today, we're a $6 billion business. But after those divestitures will be about a $4 billion business and pro forma is about 20% segment margin.

As Vimal noted, we operate in a $35 billion space. And so there is a ton of opportunity for M&A. But I want to be really clear that the organic opportunity for these businesses is significant.

When I look at this page in this portfolio, I see nothing but opportunity, we're way underpenetrated in our solutions offerings. Our vertical mix is 85% skewed towards mature markets. And that's led to margin contraction.

But our new homogeneous business model will allow for focused NPI investments in higher growth verticals and higher-margin spaces, sustained focus on offerings and software offerings. And as a result, we expect to expand margins significantly.

There's meaningful white space for organic growth, either by expanding on our sensing use cases, so becoming more important to our existing customers or selectively moving up the tech stack and growing our position in instrumentation.

Today's IA is positioned to reach its full potential by allowing our businesses to flourish within their target high-growth verticals. And by pooling investments to drive world-class processes in these product-led business models.

Okay. So a little bit about where we play today, and I categorize our offering into three main areas: all directionally about the same size. And so the first is an industrial measurement.

Typically, we are measuring highly toxic gases in mission-critical environments related to human safety. They require reporting to regulatory bodies.

The second is in utility measurement. Think about the movement and measurement of resources and the mission criticality here is all about the measurement. We move billions of dollars of gas, water and electricity around our world then the third is in sensing. Sensing for the most mission-critical environments that demand the ultimate in reliability, failure is simply not an option here. Our sensors are designed into a lot of equipment, both OEM equipment and our own, and they cannot fail. And I'm going to give you an example of that in just a little bit.

The spaces we play in are all highly regulated with significant installed base, an installed base that's not fully mined to its potential and with the ability to expand our services and software offering set in a meaningful way.

About 18% of our revenue is solutions focused today. But just to give you a feel, we think entitlement is probably closer to 35%.

Understanding the technology stack is a really important part of understanding how we set up IA in the pure-play automation Honeywell. On the left-hand side of the page, I'm showing an overly simplified version of a tech stack for automation. But generally, to achieve automation, a customer first requires equipment at their site. Okay? And then that equipment generally has measurement or sensing technologies, either designed into that equipment or set in a stand-alone instrument. These are the technologies that collect data and then they deposit that data into a data link in our instance, Forge. And then the controls and the software consume that data to deliver automation.

The new IA is pretty much a slight departure from how we've generally set up the business groups in the past. Normally, in Honeywell, we moved vertically. We own the really valuable parts of the tech stack, and then we do critical mass to really drive differentiation, as Billal just described in buildings or what you'll hear from Ken and Jim in process. What's really cool about IA is that we're unique. We go horizontal. We own the sensing and measurement portion of the tech stack. We collect the data that enables automation. And this is a really fragmented but extremely valuable part of the tech stack. Especially when you play a highly regulated or highly specified use case -- specified use cases, and that's our core business. The horizontal setup will allow us to pursue meaningful white space both inorganically and organically.

Just a reminder, we're a $4 billion business and a $35 billion space. So with our new configured focus, we're free to invest in new products in high-growth end markets, in really attractive spaces with great cash flow margin and capitalize on our pooled investments that are applicable to these common business models.

Just to bring to life our solutions a little bit and where they show up across industries. As a sensing and measurement platform, we're designed into a lot of instruments and a lot of equipment. We tend to show up everywhere. Inherently, we cover a lot of geography. But I want to point out a couple of use cases or industries that will continue to focus our organic and inorganic efforts towards.

We make critical sensing technologies highly regulated industries, industries like aerospace, industries like utility, industries in life science, where I partner with Jim and PA to deliver a differentiated offering.

And then we make sensing and measurement technologies for highly regulated use cases in less regulated industries. Semiconductor is a great example. Industrial is a great example. Petrochemical, where we team up with Ken to deliver a differentiated solution is incredible.

These are just a few examples of how our product and solutions drive mission criticality in our markets and across the world.

So in summary, IA is an extremely differentiated businesses with many tangible proof points. 90% of our offerings are certified either to very tight specifications or to regulatory requirements. That makes us competitively advantaged.

Our solutions have a high cost of failure and are a small part of the overall bill of material for our customers, which makes our customers reluctant to change. And this enables deep domain expertise and customer intimacy that solidifies our relationships across a very vast and growing installed base. And that intimacy and that installed base serves as a launch point for more life cycle services and solutions.

So to give an example, one of the parts of our portfolio that's extremely differentiated is our sensing business. Most of the sensing portfolio is highly engineered solutions that are designed into products, whether they be OEM systems or so many Honeywell instruments. This makes the business extremely sticky and gives us multiyear visibility into revenue tied to our customers' product life cycles.

And so to bring that sensing to story of life a little bit, let's take a look at our ultra-high four sensitivity sensors, that our customers use to ensure reliable medication delivery for health care patients.

A good example is Fresenius. So Fresenius along with a lot of other medical device makers, sells millions of infusion and dialysis machines every year. These are regulated devices that are FDA certified. Health care facilities use these to really identify potential events that would block a fluid pathway of medication. The solution is mission critical for patient safety. HSS's sensors can simply touch a fluid delivery line and identify these events, enabling our customers to deliver really reliable solutions.

The sensor is mission-critical in the ultimate of high-risk environments, it can mean the difference between life and death for a patient. These customers have been trusting us to design these sensors into their equipment for many decades.

The risk of change for them is massive. If I'm on the other side, I'm not trusted anybody else but Honeywell to continue to design these sensors as we have for decades. Plus, these customers get the knowledge that the unique sensing elements are made and are owned and operated wafer fab in Richardson, Texas, which is a competitive advantage in this industry.

Last year, we made 200 million unique sensing elements alone in just that fab.

Okay. So here's another example of IA's highly differentiated capabilities this time in gas detection in the semiconductor fab.

So most of you know that semiconductors use a host of highly toxic flammable gases to create wafers, right? Monitoring for gas leaks is mission critical, not just for human safety. But the accuracy of that measurement is so important because uptime and fabs is worth $2 million of productivity an hour. Honeywell's comprehensive gas solution -- gas detection system is the standard for hazardous gas detection. We are the specification in every single semiconductor manufacturer across the world. And again, we benefit from having done this with these folks for multiple decades.

And that enables us to partner and offer life cycle solutions. So it's an OpEx and a CapEx solution. It's the gift that keeps on giving. But these are just a few examples of how our products and solutions support mission-critical applications across a wide range of industries.

And so before I hand it over to Jim and Ken, I want to leave you with a summary of what all this means for IA's future.

The opportunity for these businesses to finally be in a home with similar business models is massive. Over the next 3 years, the revenue of this business is going to grow mid-single digits and we'll reach 25% operating margin. And so to tie that back to earlier in the presentation, it's a drastic change in our revenue growth fortunes, but also 500 basis points of segment margin expansion in the next 3 years.

And it's not back-end loaded. I feel very bullish about the second half of 2026 and 2027. We're going to do this by focusing on three key revenue levers in the Honeywell growth algorithm that Vimal talked about.

First, we're going to increase our exposure to high-growth verticals through a combination of NPI, channel expansion and go-to-market. As I talked about earlier, only 15% of our business is exposed to high-growth verticals today. But as we shift our mix, we're going to stay true to our core and really expand in highly regulated environments where we have unique differentiation, which means the right to play and the right to win.

Second, we're doubling down our investment full stop. In the last 18 months, we've increased our R&D investment by 13%. And over the next 3 years, we're going to do another 15% to 20%. Like Billal has done with buildings, we are going to turn this business into new product introduction machines. We are going to relentlessly focus on building solutions that really drive customer value and give solutions to our customers that they want. We'll do this in our core, where we know we already have relationships with these customers, and we'll do this in close adjacencies to our core where our technology has an obvious fit.

And then third, as we grow that vast install base through #1 and #2, we're going to compound customer value by delivering more solutions and offering set. Look, as a part of these larger businesses, we did not focus enough on solutions. And we talked in our tech demo today about different solutions for aftermarket that we're going to be able to do. We highlighted Safety Suite, which is a software service that's based on CLSS. Some of you may not know, but I was the President of the Fire business in Buildings when we launched the CLSS that Billal was talking about. Billal of course, is supercharged it. But Safety Suite is based on that CLSS.

This is a core competency for Honeywell. One that we know how to do and one that we'll do really well. And then last, on the right-hand side of the page, we'll apply Honeywell Accelerator to all that we do. The operational excellence that's not been a focus in these businesses is absolutely fertile ground. We have a clear path to expanding margins through better pricing, productivity and then stranded cost reduction through all the portfolio moves that we've done in IA.

But we'll apply a milestone funding approach to this. We'll responsibly invest, but we'll do it in concert with growth. The productivity that's in these fertile grounds will allow us to not just expand margins, but also simultaneously invest heavily in the growth of this business.

And when we start growing, look out, the thing that I'm most excited about in this business is the leverage that exists in it. Look, these are extremely high variable contribution margin businesses. So as the revenue starts to turn, the operating leverage that exists in this business is incredible.

So the refocused IA as a sensing and measurement business is prime to reach its full potential. Into my 20,000 colleagues around the world that are sitting in watch parties right now in Shanghai, in Pune, in Dubai, in Mines, Raleigh, Charlotte, Muncie, Houston and Richardson, Texas, I can't wait to create value with you guys. So thanks so much for your time, and I'm going to hand it over to my dear friends, Jim and Ken to talk about PA&T.

Please welcome President and CEO of Process Automation, Jim Masso; and President and CEO of Process Technology, Ken West.

So to start, something we know a little bit different with this presentation. There's two of us on stage, Ken West, who leads our Process Technology Business; and myself, Jim Masso, who leads the Process Automation business.

Now in my almost 1 year with Honeywell, I know before coming in, how incredible the technology of this business was. And I was excited to be a part of the transformation.

But nothing has been more amazing to me than the transformation I've seen over the last almost 12 months.

At the intersection of the deep domain knowledge and intellectual property informed by 141 years of innovation in process technology paired with the unique and leading software and automation capabilities and process automation, where we're at the heart of every one of our customers' operations.

Now this was clearly illustrated to me earlier this week at the Honeywell Users Group in Phoenix that I just got here from. We had a little over 600 of our customers and a number of our partners, NVIDIA, Google, Cisco, all excited to partner with us and the enthusiasm was incredible. The value we're unlocking by bringing these capabilities together is amazing. The transformation is having a direct impact on our customers' operation every day.

And I can say, Jim, having been here at Honeywell over the last 7 years, I've been a part of that evolution as we've gone from Performance Materials and Technology, to energy and sustainability solutions and now to Process Automation and technology.

And you're absolutely right. It is different. It feels different today as we really unlock the value of the cross-sell opportunity through our combined offerings and we are driving differentiation through that distinct domain expertise.

Thanks, Ken. Now there's a lot of things I want you to take away today, but here's four to start. The first is this is an incredible market opportunity. And 30% of that market opportunity, we're in these high-growing verticals where we have deep domain expertise, in LNG, in life sciences, in low-carbon solutions and grid infrastructure. And we're systematically cross-selling across all of Honeywell technologies, enabling end-to-end life cycle value in a way that no other company can.

Our installed base is massive. And we're continuing to create value across over 28,000 assets and monetizing that even further with Honeywell's unique Forge infrastructure.

Furthermore, we're expanding margin through the Honeywell Operating System, both in operational excellence as well as adding additional service capabilities across the long tail of life on these assets.

Now let's talk about the business, the $6.4 billion business, with, again, end-to-end life cycle solutions across both physical and digital applications. we served last year over 4,197 customers, in 72 countries with, again, software and automation capabilities that are defining their operation with differentiated domain expertise in the critical verticals we play. Amplifying that value with connected solutions with AI and a platform enabling enterprise level impact across these critical verticals where we have these unique capabilities.

Jim, that's actually where the real power unlock comes in PA&T. It really comes from that deep domain expertise you mentioned at the beginning. And when I think about the other solutions that are out there in the marketplace, this is where we truly are unmatched. No one else in the industry can bring together the capabilities of truly physical twins, I mean, hundreds of pilot plants behind the scenes, getting true data merging that into our operating system.

Yes, Ken, I completely agree. Now let's talk about where we play. These are some of the markets we're in as PA&T. And one thing you should see immediately on this slide, these are critical industries. The risk of loss is massive. Customers have to look at safety resiliency and ensuring when they make these massive investments, they've got the right strategic partner to bring it through.

Our services and expertise is amplifying that value for every one of our customers. and then we're connecting it with digital solutions that further enable value. Not to mention, we have over 0.25 century of cybersecurity experience. And what we're able to do is take our unique Process knowledge and direct telemetry to do things in cybersecurity, no one else can, using AI and other advanced solutions to keep ahead of the curve and keep our customers' OT infrastructure safe.

Not to mention, and a lot of companies are talking about autonomous operations. We're already doing it, embedding critical intellectual property and years of data directly into our customers' control systems, allowing them to improve outcomes, improve yield and operate with a lot more certainty.

Now I'm going to pick two, although there's many where we're cross-selling across all of the reported segments in Honeywell. The first is life sciences. Now I'll talk a little bit more about this today, but our building automation, industrial automation and Process Automation businesses all play a critical role in this end market. Grid infrastructure is another one where we're seeing a lot of growth. And we're across the entire energy value chain of the grid from creating energy to our control systems being on over 50 gigawatts of installed base of power to our grid management capabilities with our smart meter business that sits in industrial automation.

Not to mention in Process Automation, we do behind and in front of the meter energy storage with energy management systems that enable microgrids as well as on grid automation.

Furthermore, we pair that capability with our building automation business, enabling virtual power plants, and more scale and impact to a number of these energy management solutions.

Now let's talk a little bit about the portfolio and what makes it up. The first intellectual property, unique domain expertise in our Process Technology Business, where we have unique knowledge of our customer system all the way from inception through the end of life. Not to mention a robust and durable services business and with catalysts and absorbents, constantly increasing our customers' profitability and yield. Not to mention aftermarket services that spans across the entire portfolio. Again, life cycle relationships with these customers constantly moving them to the upper quartile of operations.

And then our automation and control systems, again, extensive industry experience, unique software capabilities. And we take our domain knowledge and directly embedded into some of the most reliable solutions in the world.

Now you then pair that with digital and cybersecurity, where we maximize and elevate the customer value. These solutions allow us to unlock more incrementally. And just Process Automation alone, when you take our services and software, got around $1 billion of ARR, again, differentiated solutions that stick with our customers throughout the life cycle.

All right. Well, one of the exciting things in Process Automation and technology is truly how we go to market and what we deliver to the customer. So you heard a lot of great things about our domain expertise and why we go with customers. But what does that customer journey look like?

Many of you know the value of Honeywell UOP. This is a 112-year-old legacy of technology, engineering and expertise. This gets our foot in the door. Many times 2 to 3 years before a project, whether it's a refinery, a petrochemical plant, a new renewable fuels plant or an LNG plant is even starting with construction.

So once our foot is in the door, we have the start. And we bring on top of that right at the very beginning of the project, the capabilities of merging all of that data that we have, the analytics and the know-how behind the scenes, the domain expertise. We merged that with our automation capabilities. We commissioned the construction, sometimes in a modular basis in challenging countries around the world and then doesn't stop there.

Now we take that installed base. As Jim said, over 28,000 units around the world, and that installed base we monetize it for ARR, recurring revenue out into the future. We have the benefit of not only building these plants, but we provide consumables, things like catalysts and absorbents to the plants that are going to provide that life cycle.

This really feeds into and builds out the growth algorithm that Vimal spoke about in the beginning of the presentation and why this growth is so powerful.

And so just a few proof points of why -- how we win when we're out there. Well, today, about 70% of all of the fuels anywhere around the world in gasoline are actually produced on Honeywell UOP technology. We're, in fact, in more than 2/3 of LNG installations. So when you think about where -- why we did some of the acquisitions that we did, the Process technology business from Air Products or the Sundyne business that we brought together to build that end-to-end solution, we were already in 40% of LNG trains with our pretreatment technology. We added this together and we get into end solutions.

And not only that, all of these installed solutions around the world give us a capability to automate that installed base. We're automated in more than 700 of those customers. And in fact, that includes not just energy, but it also includes high-growth industries like life sciences when we're in 8 out of the top 10 med tech companies.

So how does the growth really come together? Well, when we take a look at it, this has been an industry that we recognize has been somewhat lower growth, low single digit and cyclical over the history.

When we bring together these new capabilities that are unlocked in PA&T, we are able -- we are moving into higher growth verticals, verticals like LNG, low-carbon energy and life sciences. We are going out and monetizing that installed base that we talked about. Providing an avenue for new connected solutions for driving recurring revenue as we go forward.

And the thing I'm most excited about is we're driving true cross-sell synergies. Now when we do this, these synergies allow us to be in at the beginning. We're not getting into a price war as we go down and we drive that application, and we broaden the scope later in the project.

Yes. One of the things I get really excited when I see this slide because I know the impact it's having on our customers, we're unlocking outsized margin for Honeywell, but major impact for our customers.

Absolutely. And there's no better place to think about that than within LNG. And as we've expanded our capabilities in LNG. We take a look at this broader offering. And the broader offering brings together, as I said, not only over 40 years of experience in UOP pretreatment and developing LNG capabilities. It also brings the acquisition we did of compressor controls in our automation business. It brings together the acquisition of the Air Products, liquefaction technology, and it brings together the Sundyne technology.

Now we have an integrated end-to-end solution that is turnkey. It takes away the risk of -- and mitigates the risk of budget. It takes away the risk of schedule. We can provide a one-stop shop for our customers to come in and do the project with us.

But I think what's important as you look at the verticals to the right is we remain focused in this business on a balanced approach and on the 70% that's core. When you take a look over to the focus on the left as well. So yes, we're going into high-growth verticals, yes, that's adding to our growth, but we're remaining focused on the core of the business. And I also think that separates us a little bit from where our competition has been because we have not moved up and down through the different cycles.

Yes. So another high-growth vertical where we're having a huge impact, where we've quietly become the largest life sciences business in the markets we serve at around $600 million of revenue.

And this one is really interesting. We're serving with biopharma and medical devices with over 1 million users just of our quality software alone. Now to kind of bring this to life, I was talking with one of our large biopharma customers last month. They have over 300 treatments they want to bring to market. Some of these treatments are life-saving with AI used in drug discovery and all of the advancements in research they're looking to bring these technologies to life.

Now challenge number one, speed matters, bringing these treatments to life in a predictable way is essential. And when you bring building automation, so looking at the facility, they're going to be manufactured in Process Automation enabling the actual process to run with industrial automation, actually measuring the process, you're able to bring these treatments to market faster, building a new facility in a way that no other company can enable.

Now quality. Two reasons why this is so important. First is we're talking about more challenging manufacturing operations. In biopharma, we're talking about culturing treatments in human cells. Small variations can have a major impact to the predictability of the operation. Not to mention the second, ensuring that when you make this large investment, and we're talking about almost $300 billion of on-shoring of life sciences manufacturing. In this country alone, over the next 5 years, these are big investments. And when you make them, they need to work.

So bringing environmental control together with Process Automation and then our quality software that ties this all together and allows continuous improvement, enables these offerings to have certainty on their operation. And enabling a quality that no other company can unlock with these combined solutions.

And then lastly, energy optimization. So I talked about grid infrastructure. These have an environmental footprint. They need energy. They need water. So looking at our building automation business and our Process Automation business as well as our ability to manage energy in and out of the facility with our Industrial Automation business, we're able to scale these operations in a sustainable way.

This isn't just changing one facility. This is fundamentally changing our customers' business model and enabling a revolution in life sciences.

Now we need to talk about our installed base, a massive installed base of over 28,000 systems. As I mentioned before, more than half of our business is in the aftermarket. We have a large services installed base, and that's growing. Now when I add that, we're also adding Connected, which is growing at a rapid rate. Now you'll see in Process Automation. Only 14% of our systems are connecting, but that is growing quick. Same thing in process technology around 13%. And what we're able to do as we connect what is an increasingly robust model, we're able to unlock incremental value.

The first I'll mention is resilience. So OT cybersecurity. These are critical assets Honeywell's OT cybersecurity solution is unique. Again, we're using proactive solutions to help monitor a scaling threat. Furthermore, we're enabling outcomes, unlocking enterprise insights that are critical to our customers' operations and then a critical thread at every single site workforce. Every scaling process facility is struggling to fill the talent gap. And these systems unlock incremental understanding and capability within each of these systems.

And then with process technology, directly embedding intellectual property with our connected plant offerings, engineering services, understanding catalysts, again, ensuring resilient operations, enabling our customers to do things better. This is a long-term impact.

Now let me hand it over to Ken to talk a little bit more about this.

Yes. Actually, Jim, just even on this slide, I'll say this. It's exciting to me, this is where this starts to get to be exponential growth. If you look at these numbers, that 1,075 of connected plants or process technology, just a couple of years ago, what would that have been, it would have been 0. We wouldn't have had any. And you see how many of those are getting recurring revenue contracts.

So this is where we've taken that investment that we've made within Honeywell Forge. We've unlocked that with our capabilities with Process Automation, and we've really built combined offerings. So when you ask what makes it different, that's what makes it different.

Now, I'll go into just maybe a brief story, we saw the customer testimonial is early because we can come up all day and say how much we have an offering that works together, but are the customers seeing it? And really are.

I had the opportunity about 18 months ago to meet Mr. Dangote, who you saw in the customer testimonial. And I mean in Italy for dinner, and we talked through some of the expansions that he was doing within his refinery.

And he knew Honeywell UOP very well, and we were a hook that got us in to help with the expansion of his refinery, one of the largest in the world. But what I can tell you is this, once we got through that conversation and he understood the data we were collecting on other facilities around the world. He understood the 100 process plants we had in our R&D centers that were literally mockups running 24/7 of almost every refinery in the world and the fact that we were bringing 3.5 billion data points a day off of these. He, all of a sudden, it clicked on him, the value was there, and he said, "Look, I really want to go with Honeywell". And not only that, he took contracts away from others for the automation side of the business and brought this as a combined offering. That's when it clicked for me and I realized, wow, we have something powerful here.

As we take a look at what this means for us as we go, we talked a lot about the growth levers here over the last few minutes between Jim and I. We're unlocking that incremental growth through high-growth verticals like LNG, in low-carbon energy, life sciences, we're monetizing this broader installed base. And we're also going and managing that cross-sell with folks just like Mr. Dangote at what we were able to do there. But what we really are driving more than that is a big leverage and margin improvement.

Our capabilities, when we go into these higher-growth industries, we have a differentiated position. Our position of coming together with an end-to-end solution, no one can match that provides us the lever to be able to drive the margin that's there. I can tell you firsthand, this is working as I stand in front of you. We shared in some of our public earnings releases a little bit about the order rates, particularly within process technology. We have very good line of sight into the future in the long-cycle business. We are seeing order rates that are there and predicting that they will drive future growth. We've been driving higher than 1.2 book to bills over the past few quarters, and this is going to drive a very good result and very good growth in this business in the second half of 2026 and beyond.

So I'm incredibly excited to be here. Thank you so much for a few minutes to listen. And with that, I am going to invite Mark and my other colleagues up to the stage to do our first Q&A session with all of us. Thank you.

Great. So we're going to spend the first 10 minutes or so addressing some key questions we get from investors in each of the segments, and I promise you we're going to open it up to Q&A as promised.

So Billal, maybe we'll start with you. Every investment meeting we have, one of the first questions we get on Building Automation is the how? How does this business grow 7%, 8%, 9% every quarter.

And the second question immediately goes to, is it sustainable? So maybe we'd start there.

Thanks, Mark. I mean you see a couple of years ago, Building Automation was not performing like this. And it's all about the transformation in the last couple of years around customer centricity. Speed and effectiveness of innovation and then having the absolute best talent empowered to do what they do best to get it done. And that has really allowed us to do this. And we've instrumented this business to continue to do that for the years to come.

Excellent. And then maybe sticking with Buildings, maybe you could just talk about the levers to grow margins, obviously, issued some pretty good targets for segment margin.

I mentioned a little bit about this. In fact, a couple of years ago, we walked into the fact of these and everybody was talking about, oh, we need to knock the wall down and expand if you're really going to be driving the growth and so on.

So we challenged our team and said, let's think about how we think about that, how we use the space. And in fact, a couple of weeks ago, I was visiting one of those factories. And it's helping us -- this is one of the factors that's driving the highest growth right now, close to double digits. And when you walk into that factory, you think that business is slow because they have taped off all these empty areas.

And I said, you challenged us to lean and continuous improvement and Kaizen projects to reduce our open we've done it, tell us come, keep growing this business. That's just one example. And then obviously, in the rest of the business and R&D and in demand generation capabilities, we've made all those investments. We are where we need to be to deliver our commitments for the next 3 years. So when the volume comes in, it's going to have a really great leverage for us, along with the acceleration of our force connected offerings and the margin favorability that those will bring.

Excellent Great. Pete, on IA, you've talked about being a bit of a turnaround story. So maybe as you step back, how could we help investors get comfortable that this business is going to sharply inflect to mid-single digit and obviously, strong margin expansion as well?

Yes. I think I wouldn't disagree with any skepticism because over the last couple of years, it has been a negative 4% CAGR story. But the portfolio moves that we made, the focus is really important.

And just if I was just going to go back to the basics for a second. Vimal talked about our markets growing at 3%. I told you that our on-time delivery was 45%. So when that happens, you don't participate in market growth.

And so just really fixing our operations. I truly believe the market is going to grow at 3%. We feel really good about that. I feel good about our ability to fix our operations and participate in the market growth.

And then when you do that, you can actually get a couple of points of price. And so that should be a flywheel, right, that we get a couple of points of price a year on top of that market growth. And that's before we even start talking about the growth algorithm that we talked about, the move to higher growth verticals, the investment in new products and the services and the software.

So I feel really confident about the growth. On the margin expansion of 500 basis points, I go as far as a guarantee, I feel really good about where we are, where we sit right now and the opportunity ahead for the businesses. And then the operational leverage, it's -- I feel really good about it.

Excellent. Great. Maybe quickly moving to Process for Jim and Ken. Obviously, Ken as you noted, you've spoken a lot about the orders and backlog growth in your business and that we expect a sharp inflection in the back half to sort of high single-digit growth for your business. So obviously, it's somewhat tough maybe for investors to underwrite that, especially what's going on in the Middle East. So maybe just take a minute, talk about what you're seeing and why the confidence in that growth inflection?

Well, first, just given the events even in the last few days, my thoughts are with all of our partners that are in the Middle East and operating in the Middle East every day. It's become a very, very challenging place. I will -- I've been over there over the last few weeks. I'll be back over there next week.

What I can say is this that the nice thing about energy is the demand profile behind it. And the fact the world needs more energy tomorrow than it has today. And when there's a disruption in one area, we see upticks in other areas around the world. And so that is absolutely occurring. We've seen refurbishments, catalyst reloads that may not have happened. So we're seeing a return to that activity.

And then very unfortunate, but there's many facilities across the Middle East that are our technology and our equipment that have been impacted, and we're going to be brought in to help do the refurbishment and rebuilds that's already getting started. We're already partnering with many of those. And so we see that as a tailwind for us.

Great. Okay. And then, Jim, starting with Vimal's presentation, we talked a lot about the enhanced focus on some of these higher growth verticals. So maybe just dive a little deeper for everyone into the life sciences as an example.

Yes. When you think about unlocking the power of focus and the partnerships we've been able to have across all the businesses here represented on stage, it's amazing, right?

I mean, you think about the problems our customers are trying to solve, right? They have to have absolute assurance when a facility is built. It's going to do what it was designed to do. And so that -- again, environmental control with the ability to directly measure the system. And then run that process with a quality thread with our track-wise quality, again, allowing this feedback loop to keep improving and scaling operations.

This is going to be one of the backbones that the life sciences industry is built on for decades to come. This cross-sell is doing something where we're all using a lot of the same tools. We're all on similar software, we're all connected into this forge platform.

Again, these businesses together are having a real impact on how our customers do business.

Excellent. And maybe just on the high-growth verticals, Billal. Maybe you can talk a bit about -- you mentioned data centers going from next to nothing to 4% to 5% of revenue. So what is it that BA does in that space?

It's about how you show up and you have to have end-to-end teams focus on it that understand that space. And then you have to make sure that you position your offering in a good way.

If I think about data centers, we have the #1 solution for advanced fire detection and data center, and we added Lion Tamer for Lithium-ion battery fire detection to that. In building management systems, we're leveraging Niagara to help our customers drive through the integration within the building domain console.

And then on the Access Control side, we have some of the most complex global networks of access control that OnGuard platform does. So showing up understanding what it takes for your customers to succeed and then making sure that we position our offerings to help them deliver what they need to deliver to their customers.

Excellent. Great. Before we open it up for Q&A with everyone, just maybe one last question. We often get asked, even after all the work we've done in why do these businesses still belong together?

And I think from our perspective, one of the things that binds them is the cross-sell opportunity. So maybe just in 30 seconds you need to -- one tangible example on the cross-sell opportunity in your business. Can we start at the end, Ken?

Sure. For me in process technology, it's domain expertise. What makes us differentiated is the fact that we truly have the technology, the models behind the scenes that are going to augment the pure-play automation of Honeywell technologies.

Yes, I look at the certainty we can provide. Again, the domain expertise of process technology coming in, it has been fantastic to work with customers, not to mention bringing our capabilities with the building automation business to data centers with Pete's business to semiconductor fab, right? These are just incredible impacts that no other company can do.

Yes, I'd just say in a word, everywhere. We're sensing and measurement business. We were embedded in all of these businesses. But if I had to pick one, I choose semiconductor since we become really intentional about showing up as one Honeywell, we -- our business leads in semiconductor because we are the specification for gas detection. And just last week, had a great conversation with a major semiconductor player who a lot of equipment runs on similar batteries in the fab and had a really great conversation about Lion Tamer, which is a gas detection and Billal's business. So there's a lot there.

Well, everything is a building. In fact, it's our building. So in the case of Ken's business and Process Technologies, what we do, in some cases, very hard for other people to do. So we leveraged that high differentiation to bring in building automation along what we do with Pete's technologies.

And data centers, as an example, liquid cooling requires a lot of new sensing capabilities. that did not exist. And Pete's team are developing some really compelling solutions there. So we're able to bring those.

And then in Jim's business, we're able to bring that high level control system of systems and bring that approach along with PLC controls into the data center space.

Excellent. Great. So let's move to a live Q&A, and I'll just ask that everyone to introduce themselves when they're hand to the mic. So maybe we can start with Julian Mitchell of Barclays.

Julian Mitchell at Barclays. Maybe Pete, start with you. If you think about the operational side of things in IA, you mentioned the OTIF very bad. So maybe help us understand on some of those operating KPIs like what should we expect as the rate of improvement?

Also, you had that Page 52, which had some maroon boxes but masses of white space around it. When we look at that, is the assumption that the white space will be filled in through M&A coming up, and that block will be very kind of fully covered in a few years' time?

And then lastly, who are the main peers but we should think about comparing you with in the segment, whether aspirational or just who you fight with day-to-day?

Okay. Yes. Cool, I'll take those in order, Julian. Yes, I think the first one is really just about customer satisfaction. With Vimal leading Honeywell, he's made it and he said it at the outset, everything that we do and we talk about is customers and customer obsession is a real thing.

And so if that means putting in $20 million of extra inventory on a bet that we're going to make that up in second margin that flows to cash flow. That's what we're going to do. And we have the we have the latitude to make those sorts of decisions. And so the big things we'll look at is customer set, we'll look at delivery. We'll look at actually, time to resolve our quality cases is probably a bigger deal than our quality metric right now. So there's a lot of things that feed into that. But ultimately, we're going to judge ourselves on free cash flow margin, operating profit and revenue growth.

A second question, I forgot...

The white space.

The white space, yes. Look, we're going to do both. Organically and inorganically where we see an opportunity and together we make the decision to go inorganically. We're going to go inorganically.

Organically, we're probably going to stay a little closer to our core than we otherwise would become more important to our existing customers we've got still a lot of places that we can go in aerospace and in data centers, solutions that we don't have today that where the customer uses or we've got a spoon today, we're going to offer the fork in the knife. In the salad and fork too, right? We have that opportunity to do that. And that's a higher right to play and a right to win a higher probability win. So we'll probably do that.

And then, of course, we've got some work on paying down debt, reducing the interest expense. And once we get through that, and Mike and Vimal will say we're ready to go, we're working a list of high-value targets.

In terms of competition and peers, we're pretty broad space. We've got point competitors everywhere, but I think of us more as like -- if you think about a peer business and AMETEK, Teledyne and IDEXX. Those are the kind of quality of businesses that we have, the kind of the cash flow that I think that we can put off. Or the [ Ralliant ] business, for example, those are the kind of people that I would say the best way to look at us is think about it from a peer perspective and not competitive because there's no one company that we compete with in every place that we play.

Great. See it there. Go to Scott Davis right on the end.

Thank you, guys. Pete, to what extent will you integrate these assets, I mean there they're very different, but you also seem to have a lot of confidence that there's some synergies. So to what extent will you -- will they stay decentralized versus having some level of demand and control centralized?

Yes. I mean, we're going to do -- like we're going to follow the accelerator playbook, right? And so for me, world-class processes across engineering, where it makes sense. Operations, supply chain where it makes sense, productivity on variable costs and supplier negotiations.

To an extent, our pricing processes, right, we'll do that. Offering specific R&D, we want to be very close to the customers for those business units. So we won't touch that. It will be more in the operational processes, and that's how we're going to drive the margin expansion.

And I'm just curious, just each one of you can give a 10-second answer, so we can keep this flowing. But why is price so much easier to get today than 3 years ago? It can't just be new products. There has to be more to it than that.

I can start. The price is ultimately about the value that you deliver and the ease which you're able to do pricing as to how much value there levering. And far you live the new products is a big part of it. But how you do a job every single day when your customers ask your question, when you deliver something to a customer, the speed of innovation, all of those come into the value creation that you do for customers, specifically in building automation, that group of some of the other businesses.

What we sell into our channel is less than 20% of the cost of our channel to go do something. To the extent that we have that 80% is sitting in the labor and design and engineering, to the extent that we are able to go and tap into that 80% and help them make that 80% lower, that gives us a lot of opportunity to create value.

I could add maybe as well. We have different tools today than we have been -- so if I think about it 3 years ago, we were developing the tools we're using today. So we have some of the best tools I've seen in the industry in terms of real-time looks at what our raw materials are at a SKU level at a base raw material we saw very quickly we had built out a model as the impact of tariffs came on.

And these real-world models that we have skills, give us the tools behind the scenes, as we're running our pricing reviews to know exactly where we need to be. So I just think the speed of decision-making is increased with the tools we have behind the scenes.

This thing around mission-critical matters. I mean we are in really high-impact environments across all these businesses. And so when you think about sort of some of the lower end of the spectrum of automation. We're in these critical facilities where, again, everything we do has to work. It has to deliver an outcome.

And so when I look at what we've been able to do with price, I completely agree with what we said. I think we're all -- we talk a lot about our operating model, how we get effective scale. But the markets we're in, we're having a real impact. When we talk about this cross-selling, we really are doing things that others can't. And so that directly correlates to how we position in the market.

One on. I just wanted to just -- Scott, to your point on how much of commonalities in Industrial Automation businesses and will be -- what processes may come in. I want to draw a parallel to Building Automation business. While Billal's business serves same end market our channels in fire, security and BMS are unique, we don't share any channel partner. So Billal has unique offerings for each one and each channel, but back end is common, factory, pricing process, we are applicating the same model. It's exactly the copying the same model. The it appears everything is same, but in reality, it is not.

In fact, we do not share channel partners for the reason we'll appreciate. And that scale is highly replicable in industrial automation. So I want to clarify that this is not a new invention. We're basically copying what we always have been very successful.

Yes. Let's go to Deane Dray of RBC.

Thank you. Appreciate all the color here today and what you all did to put this together. I'd love to hear a bit more about the statistic that Vimal gave on new product vitality, the mid-40s is an extraordinarily high number for an organization. I'd love to hear just a bit from the team. How do you manage it within your business incentives and the concern about cannibalization as you maintain such a high level of new product introductions.

Why don't we start with Billal.

Yes. Sure. Then we'll touch on it, the importance about offering management, and we've put a lot into our offering management community. At Honeywell, when we think about innovation, we can engineer anything. I grew up at Honeywell. I first started annual 22 years ago. We never failed because we cannot come up engineer this solution. The trick for us and the challenge for us is to make sure that we are working on the right thing. And that's why we spend so much time without offering management team.

And to your question about the incentives and so on, they are planning to have many businesses within the larger ecosystem, and they're getting compensated just like a GM would on top line and bottom line free cash flow growth. So that allows us to -- that focus we've done the offering management in the last couple of years has really helped us to turn the corner on the effectiveness of our new product offerings.

And your question about cannibalization and so on, our core is very strong. So as we work on new exciting ideas like Forge connected building, which is completely new and some of the other things we talked about today, we make sure that we keep an eye on our core because that was so crucial to keep going. And this is how we make sure that the vitality and that's where the vitality comes in, that people will want to continue to buy these additional products as we lay in new solutions on top of them.

Yes. I would say on that one, too, we measure it not just in vitality, but in net new, right? So it's a net NPI number. And so vitality is always then going to be a little bit bigger because your core is shrinking and you're intentionally shrinking that core to get new products. So it's not just the one metric, but they work in concert with each other.

I think as well on the long life cycle businesses. We have put in a distinct investment in some of the longer cycle research as well as new product innovation that's going to come out in the 1 to 2 years. So we monitor our investment very closely, and we have a very strong feedback loop to say when is the project working and when is it not working so we can make fast decisions and be nimble with that spending. And we've seen that review even on a monthly basis at every level of our organization.

Excellent. Let's go to Jeffrey Sprague of Vertical Research.

Great. Thank you. Good afternoon, everyone. So we can all probably clearly understand that connected is good and connected with ARR is even better right? But as long as I've been doing this, Honeywell has been an installed base, harvesting installed base play, right? So we've had all this technology innovation. We've got Forge, et cetera, et cetera.

But we heard a lot of good stuff about the customer outcome the outcome to Honeywell is obviously embedded in the guide that you're sharing with us. But I'm wondering if you could give us some context on that, right? A piece of installed base that goes to something you're servicing regular way old way to now connected, now with ARR. Some way to think about the context around that, whether it's points of organic growth or something along those lines?

And then separately, just Ken or Jim, can you just give us a little bit more color on the energy cycle that might be unfolding in front of us and whether that gets you to promise land on your organic growth all alone without everything else you've talked about.

Both are good, Jeff, and I can give you a little bit on both. First off, I mean, a great example is one. I don't know if you happen to see it in our demonstration over here or not. But as we're connecting to each of these process units, we're learning a lot more about it. And one example where we're changing the customer outcome is on digital imaging of catalyst.

So as many of you know, Catalyst is something that a customer puts into a refinery every sometimes 1 or 2 years, sometimes 3 to 5 years depending on the product. And it's a very nice cycle for us because it provides a revenue stream.

And in the past, what customers had to do is they had to go pull a sample out of the bottom of that catalyst unit, send it to a lab, analyze it many times, by the time they realize the catalyst was bad. The refinery is already losing efficiency. It's already starting to go down and it has a problem. We're now through our connected solution able to do that every day, let the customer know exactly when they should change the catalyst or if they have a plug somewhere in the system and let them know they should be proactive.

We have another customer that's running a PDH unit. This is a unit that provides plastics from crude oil. And they were having all kinds of problems. In fact, both Vimal and I were down to meet with them. There's a big challenge with it. And we've been connected to that unit, put our engineers down there, been able to fix the problem and showing that we can bring that up. Those are the kind of examples that I can share with folks like Mr. Dangote to be able to drive this integrated growth. So that's kind of the first piece of where we're seeing the customer outcome.

And I'd say it is an exciting time to be in the energy industry right now. We're seeing really almost unprecedented growth in certain areas. The time that we put the investments in place to do LNG. We had done the strategic research ahead of time to understand it was an attractive play, but I don't even think we realized how attractive that was going to be with the need for more power and now particularly with the need to move power between continents. So that's going to continue to unlock that growth and provide better results here, second half and beyond.

Yes. And it's important to mention, a lot of businesses are being disrupted by a lot of the new software capabilities that are coming out, AI, right? So if you think about where we're unlocking this massive value, there's domain depth across all of these businesses. And very uniquely, are Cognite demos over there if you haven't seen it come to me after.

Where we're putting that domain depth directly into our control systems directly into our automation, whether it be building process facility, it doesn't matter. And so the impact we're able to have on our customers' operations, depending on the industry, it's a wide range, but we're often talking tens of millions of dollars of immediate incremental difference for some of our automation solutions that are augmented by this domain depth.

And again, because of that position, a lot of these new compute capabilities are really augmenting our capability. And actually allowing us to get into markets in a way that no one else can. And so it's kind of interesting in the cycle of disruption. And I knew this coming into Honeywell, but it's been pretty incredible to see it play out over the last 11 months. It's driving a lot of value direct to our customers, which is where we're focused.

Okay. Maybe we'll squeeze in two quick ones. We go with Nicole and then end with Kap.

Maybe Nicole DeBlase from Deutsche Bank. Maybe just following on from Jeff's question. You shared that within process automation and technology, the connected systems percentage is kind of around 14%. I think ARR was similar, 13%, 14%. That struck me as a little bit low versus what the potential could be. So could you talk about that opportunity?

And then same segment. Second question is just how often do you guys work together today when it comes to cross-selling with your customer base? And how often could you work together in the future?

I think I speak to Ken more than anybody in my family. My wife is probably watching in life it's constant. It is absolutely constant. And I think Ken can talk a little bit more about how quickly we've been driving these solutions across the business.

Yes, absolutely. I mean I think the nice thing here is, as Jim came on, we were really developing out this kind of joint offering, and it came right at the right time where we were getting the pull on the connected capabilities we were pulled in almost immediately with key customers, many times will travel to the customers together. At times that we'll kind of divide and conquer with the customers as we can kind of show both sides of that. So I do think from a customer point of view and a customer space, it's a single offering.

Now the backbone behind that are very different between the two businesses. And that's why both of us are up here. It's a little bit different how you develop molecules and process technologies versus how you develop the new automation systems. But I think we have the best of both worlds as we bring that together.

And then on that fair to say that mean the time spent together, the pipeline, but the real benefit is still on the come because you guys are working really well together right now, but the benefit is...

It is. And that really gets into the second -- or the first part of the question, which was you're right. That's really low. I mean we connected our 1,000th plant. I think it was on December 17. We're now at 1,075, as you saw. We're connecting plants almost every day. We're just starting to see that ARR ramp up. Customers are now starting to see that benefit.

This has very much changed. A couple of years ago, many customers didn't recognize what that was or what the value really was. They're starting to now. And I do believe this will be exponential.

As more and more customers start to see it, we're also playing into a couple of really important kind of macro trends across the industry. One is labor shortage. Many of our customers just don't have the experience control room operators to continue to run. And they're losing some of their engineering expertise and talent to retirement. We're coming in and helping augment that existing workforce with these capabilities.

So you're dead on. It's going to be a lot of opportunity in the future coming off of that low base, and we're going to be able to solve it together.

Okay. Great. Maybe we'll end with Andy Kaplowitz of Citi.

Got it. So Pete, you talked about 500 basis points of margin improvement in 3 years. As you know, that's not a lot of time. So do you need some of these bigger initiatives to kick in NPI sort of accelerating or focus on high-growth markets? Or can you just get it from operating leverage. So is it back-end loaded or not?

And then maybe just quickly for Billal, you talked about the high-growth regions, 25% of the business. It feels like you kind of talk about it like it's the 20 teens, but as you know, the world has changed a bit, right? So China may be not the growth driver than it was before, but it's doing well for you. So like -- have you shifted at all and what high-growth regions mean? Or is it still kind of the same?

Yes, I'll just start on the operating expansion. It's all within our control. And this is why I feel highly confident about it. I think we get there low single digits to almost no growth just on the self-help -- some of the self-help stuff and then growth will obviously supersize that or be a part of that or we would take some of that and reinvest it as we're growing, but we would -- I feel -- obviously, on the growth side, there's more that's out of your control. But I feel pretty in control on the margin expansion and feel like we could do that at low single-digit growth.

Yes. On the vision, the good news is with the new organization we have and regional focus, all of our regions are growing. China and Europe have long been slow. But for us, they're growing quite nicely. In fact, Europe is showing up in the mid-single digits, and we expect that to continue.

Your question about how things change I think the fact that we have capable teams empowered to make our own choices and the visions will help us to do that. If I take the example of our Middle East and Africa region. A couple of years ago, when we talked about growth in that vision, it was all about the investments happening in Asia. Well, last it was all about Saudi Arabia and more than Northwest Africa. Our teams anticipate the growth and they have the capability and the empowerment to go and make sure that they are the default when it happens. And we see that dynamism and how our team approaches it to across all of our regions and the customer centricity help them continue to deliver on that.

Excellent. Great. Let's leave it there. We take a quick 15-minute break. We'll get back here right about 3:35 to kick off with Suresh. Thanks.

[Break]

[This call length has exceeded streaming capabilities - Please refer to the preliminary transcript that will be posted shortly.]

Please welcome Chief Technology Officer and President of Honeywell Connected Enterprise, Suresh Venkatarayalu.

Welcome back. And just to let you know, I've been with the company for 31 years. It's a great day and great beginning to rewrite the chapter of Honeywell along with Vimal and the leadership team. I really feel both excited and fortunate to really do so. I actually met many of you here back in CES and also in AHR along with Billal. So great to connect with some of you, and I would love to really spend more time this evening. Forge, why Forge matters. I'm sure the question you hear from Vimal, you hear from all the 4 segment CEOs. They talked a lot about Forge is enabling their services growth, software growth, how that's going to be the future and foundation for driving automation to autonomy.

For me, there are 3 or 4 things that really matters from a customer standpoint. #1, please imagine or reimagine the future buildings, plants, data centers, critical infrastructure are not going to be just connected. Maybe that's what all of us have done in the first 6, 7 years. It's going to be more intelligent, adaptive and increasingly autonomous. I think that's the future state our customers are going to demand in the name of outcomes that they demand. Second, if you really look at our history for a century, we have automated the physical world. And how did we do it? It's a combination of installed base asset with domain knowledge, and we brought Forge to really drive the outcome. Third, for me and for us, Forge is that intelligence layer. And it brings in this 2 interesting dynamic, which is deterministic model. I think many of you would actually really question what it is.

As a control system company for the last 140 years, the control system company have to have a control lot to deliver 99.9999 in person. That means those algorithms that model, a predictive input parameter from sensors and actuators has to deliver a predictable output all the time. Now with all of it, there are 4 things that we have done different that's very real in Forge. You see that frictionless connectivity. We saw our customer environments are fragmented. You actually walk into a customer site, data is fragmented, systems are fragmented. When you actually really see it, you would have seen an example. We connected our campus in India. When you walk into that building, you need to connect 14,000 assets, not easy. They are specialized protocols that requires certification. So when we sat on it 2 years ago, Vimal looked at it and said, how long does it take to connect any of those buildings, our industrial plant, we said close to 100, 150 days or 150 hours, sorry.

And it wasn't clicking because we were working with our system integrators and system integrators who lose interest and they don't have the technical skill. That's something that we really brought it down to less than a day. And not only that, in Billal's business, we have 14,000 system integrators. We have taken Forge Academy to train them, handholding them, supporting them across the region. That's clicking. Second, we use the word Ontology. It's not new for many of you. We hear it from all the software companies like Palantir and others. We thought -- we used -- how many times have we used the word domain knowledge. For us, it's codifying the domain knowledge that AI understands, and that's what we have been doing in the last year or so. Third, it's our control systems. It's built for the regulated and safety industry. We are proud about it. AI in itself needs a guardrail.

I think we speak a lot about the guardrail, which we believe that the control architecture and Experion, EBI, I think it's a control guardrail for us. The last one, I think with our cyber business, we believe that we will be the bridge between IT and OT world. I think 3 things that I would actually ask us to really remember, it's all about data. It's about domain knowledge, deterministic model together. I think it's going to be speed. I think we spoke a lot about the speed of innovation, and I'll give you a little bit more teaser about how we are retransforming our company. There's 2 chapters, Chapter 1, 2018 to 2024. We enabled the connectivity, brought the visibility, sold a lot of remote services to our customers. Customers believed in it. I think there are a lot of value additions that we brought in for them, for us, and I'll walk you through the evolution model. But there's one thing that it lacked.

I think if you look at the point #5, it lacked the contextual insights around our installed base because you're dealing with bits to Athens. That's the difference between the traditional AI to physical AI. And that's something that actually said, you could do more because that's where you can deliver outcome. And that's an area that we spent a lot of time. So that led into 2025 last year, we said physical AI was real to an extent. I'm sure if you've all been in CES last year, Jensen set the tone on physical AI as a new reality. It's going to be a near term. And we actually said we need to take the lead right there. And then in the last year or so, as you really look at it, it's not -- meaning I'll be happy to really walk you through a little later. It's not just on the compute box. We absolutely believe that it has a category to bring in a compute with controls and an ability to contextualize using ontology, it's the new beginning.

That's how we are actually starting to tease you with an opportunity to show how we drive autonomy in a building environment or a plant environment. So what have we done in terms of -- from 2025? We said, Billal said it nicely. The amount of connections we have had in the last 12 months was much larger than what we have done in the first probably 5, 6 years. One of the reasons was frictionless connectivity. Second, once we connected right there, the next thing was how do we move up your value chain, not just selling services upgrade or a software upgrade, it's an outcome. So for us, it's a real pivot point where physical AI was a reality, and I'll talk to you a little bit more about partnership and we'll also give you a teaser on how we are trying to do this. Now with that, Forge business model is evolving, evolving all the time.

Now there are 4 ways to really see this evolution. Look at 2020 to 2024. I think we focused on connectivity selling digital services on top of our installed base. I think it's there in that $1 billion ARR that Vimal talked about. We have grown our services portfolio. We brought in other assets like Sparta and 3DM. So there is a high focus around connectivity upselling services. That was our focus from the first 4, 5 years. Look at from '25 onwards, which points out to what Billal said, we had more connections from sites, customers and assets. That's an acceleration, which we really brought in. Then from there, our focus was all about selling software as a Forge Performance Plus, customers were asking us to run their operations better. So asset performance management, predictive maintenance, carbon energy management, you have cyber. So a lot of software evolved. And the final category is an automation economy.

We believe that it's a closed-loop operation. Customers are expecting us to really deliver on certain outcomes. I think it's an interesting pivot, and I'm sure that you're starting to see some of the demonstration later this evening and something that we're going to show, it's the beginning for the new reality. And that new realization is going to be a tremendous opportunity growth for us moving forward. There are 2 or 3 case studies that I want to really talk about before we jump into automation economy. Take a digital services. We built this business along on the process automation, traditional services portfolio. As you look at it, we had probably a traditional reactive support model, which over a period in time, we were able to connect to our installed base. Look at it 660 sites, 350 customers, 130,000 assets. Now what does it do? One, direct visibility to our installed base. Two, we were able to really upsell some of the new product portfolio, Digital Prime, Assurance 360, but it also helped us to improve our cost to serve.

Now the business is growing in spite of some of the core erosion, they were able to keep up with it. For me, this is important because it gives you a hook back to your installed base to really upsell more software and then a future possibility what Ken and Jim talked about, a connected plant cannot happen without hooks back into your installed base. And this is a replicatable one for Billal's buildings portfolio and also for the Industrial Automation in terms of really selling, upselling services on top of your installed base. A second case study, which is organically built CLSS. Billal talked about it. I think you heard Pete referring that CLSS. This is a connected life safety services business on top of Fire. Fire was working with this system integrator portfolio, selling panels and selling services and they were selling outcomes, which is compliant, which is manual-driven compliance outcomes they were selling.

What we were able to do in the last 8, 9 years is $130 million software portfolio with $40 million ARR that is growing at a rapid pace, move from remote operation, compliance response, human-driven to a Digital alarm transmission, AI assist with integration with Rapid SOS, that business is transforming. We believe that this is replicatable for our gas detection business and utility business moving forward because you actually deal with a similar system integrator dimensions right there. Now for me, case study 3, which is the automation to autonomy is an interesting one. I think autonomy, we speak about it, and we spoke about it as an industry for the last 2 to 3 years. Two things, process automation that our customers are working with us. For them, it is clear. Can you eliminate the variability in operator handling of abnormal solutions?

I think you can actually read it. It's in the public domain. I think we have a demo coming up with -- in a Middle East customer with Borouge. They've been very happy partnering with us, taking experient cognition. That's an important use case. On the building side, it's 10% to 15% operational efficiency, meaning when you double-click it, it's energy performance, operational performance because of all the nuisance alarm coming from multiple systems on top of it, cyber, on top of it, comfort performance. There are 4 or 5 KPIs. But directionally, they will tell you that 10% to 15% improvement that you needed. Now Interestingly, though, right here, there are 2 stories before I jump in and give you what I'm about to show. 2025, CES, and some of you were there and I was there where NVIDIA launched what they call a DGX and AGX, which is a supercompute at a price point was available for every automotive player.

And then we talk with them and we said, if that is available for every single car, can we bring that category into every single building. It could be a commercial building or industrial plant because I was looking for a brain behind a building similar to a brain behind a car to drive autonomy and action. 6 to 7 months in a row, I think we really built that both the compute and the AI engine as a full prototype. I think around September, we showcased it to our Board with an initial idea of our forge cognition with some few use cases and whatnot. But this CES, within a 12-month period, we actually sat down with NVIDIA leadership team. Vimal was there, and we've been talking about a future prospect of building autonomy in action. I think Jensen's leadership team pushed us back to say, we should have a lighthouse customer. And then Vimal being Vimal, he said, yes, we need to have a lighthouse customer. Why can't you be the Lighthouse customer? And I was a CTO sitting there not really knowing what are we committing for. But here we are.

We were able to really take -- I think to give a credit back to the NVIDIA team, they took their one of the campus, Wag headquarters. You see the picture. They hand over back to us on February 6. I, along with Rahul Patel and Greg Turner, technology leaders pitched in the vision and what we could do. It was not on our installed base. But OnGuard was our installed base. We were able to get cognition up and running. What it does is 3 things. That box is powered by Blackwell architecture from NVIDIA. It has Omniverse to simulate the entire campus. You can emulate and simulate the building connected to their assets, and I'll show you that very quickly. Third, it has the whole NVIDIA model, Nemotron and Cosmos reasoning and Gemini model and is autonomously running. So let me take you live to our Voyager campus, give you a view on what it does.

So as you really see, as we get into the real aspect on zooming into the NVIDIA campus, Santa Clara, it's a 750,000 square feet area. And close to 1,000 assets, a combination of building management, BMS assets and then some of the security access control. What you see as a virtual reality is Omniverse powered up. You would be able to pick any of those assets to see their real-time performances. I just want you to know, for me, it's a ChatGPT moment for the industrial world as a technologist. And from there, you have an opportunity to have an interaction directly with the building. So you're asking the question, how much electricity have you consumed? This is Voyager headquarters data point. It also highlights 30% of their energy spend every single month was during the peak load that to in California. In fact, I presented back to their GRE head 2 weeks ago. He is seriously looking at should they have a battery energy storage to optimize the spend, how should we do it? As you look at it, one of the biggest pain points that they have is the nuisance alarm all over the place.

You have an opportunity to really interact with your building to say, how much is the nuisance alarm coming from a security system? As you look at it for a week, close to 5,000. Remember, they have to have human beings, more operators inside an SoC who are clearing up every single false alarms, which they call a nuisance alarm. So we actually built an agent for them, which is a semiautonomous agent, which technically goes back and then looks at it, BMS system today for the past 1 month had 85% nuisance alarm. And then it's not just at this level, the agent goes back and gives them all those alarms so that the operator in building operations can go back and look at what those alarms are, what the fact stays, what are the insights and then there is a point in time we should be able to train the system to provide more recommendation. But end of the day, it also gives an operator opportunity like you post your e-mail by saying, these are pretty much junk e-mails or spam e-mail. You have an opportunity.

So if the operator trains this model 3, 5, 10x, then there'll be a confidence to give the control back to autonomy. And if you really look at the next big thing, which is their biggest ask when we started was security system. You look at 98% false alarm. And I can just tell you, in one of the buildings that we are not touching right now, 250,000 alarms per quarter. And they need 14 to 15 people clearing up every shift. This actually gives -- this is an interesting one. You're dealing with security means your camera inputs have to be fed in and with facts that SOC should be able to clear up to say is it false or not. So as you're really looking at it, you're interacting with the building and then you are actually dealing with an algorithm and you're reinforcing the model, either you're reinforcing the model or reinforcing the process side altogether. So this is a great use case where I just wanted to really give you a first instance perspective on how we are approaching this autonomy.

We have done -- we have showcased to some of you how we did Bangalore campus. That's how we took this idea back to NVIDIA. The head on GRE initially was not very sure what we could do. But having done this, and I presented it last week, they've given us 6 more weeks where if they can actually really go back and look at all the KPIs, if it hits it well, I hope that we can actually go and deploy across their entire campus, and we may have a PR release. But I want to really get to a point on partnerships. These things are not possible. I think there's an NVIDIA partnership. You have seen me in Dell World Congress or Technologies World last month. But Google's partnership started 2 years ago. We brought in Gemini 1.5, 2.5. We've rewired a number of things. But what you're going to see in our cognition is GDC, which is Google distributed cloud compute, which is like a GCP. So Thomas and his leadership team has been working with us for the last 2 years, and then we have asked him for a short video about his partnership and how he sees he can contribute to a physical AI transformation.

Hello, everyone. I want to start by thanking Vimal and the entire Honeywell team for inviting me to join you today. When we announced our AI partnership with Honeywell in 2024, it was centered on a mutual vision to realize and accelerate the path to autonomy for the industrial sector by combining Google Cloud's leading AI capabilities with Honeywell's industrial expertise and installed base. This means bringing AI into the physical world in a way that can help buildings, plants, utilities and other industrial environments move from traditional automation and static data to self-managing agentic systems.

For example, Honeywell Forge provides the industrial software foundation and operational data from buildings, plants and utilities, while Google Cloud and Gemini help process that information, identify patterns and support better, faster decisions. This enables organizations to move beyond automation to autonomous systems that can sense, reason and react in real time. Our partnership is critical to shaping the future of physical AI and supporting the infrastructure that businesses, communities and economies rely on every single day. At Google Cloud, we're fully committed to our strategic partnership with Honeywell, and we look forward to shaping the future of physical AI together. Thank you once again, Vimal, and the entire Honeywell team.

Just to sum it up, I think the whole piece that I want to say is Forge is here to stay for driving the physical AI transformation. And with a partnership in place, for me, automation to autonomy for future has 3 fundamentals. Assets need to work harder, People to work smarter and Processes work more efficiently. Those fundamentals are important to enable the future buildings, plant and industrial operation that can see, think and learn and act and which is the fundamental for autonomy. And I'm really, really happy to really take this evolution forward, and we'll be happy to really share more later this evening and connect with all of you back. So with that, I'm going to be inviting Mike Stepniak for the next session.

Please welcome Senior Vice President and Chief Financial Officer, Mike Stepniak.

Good afternoon, everybody. Thank you again for being here today and your support. I realize it's been a long session, so I promise I'll be quick. But I think I understand why they always put the finance guys last in those sessions. Vimal and the team took you through our strategy, and I think they gave you a really good overview of the business and how we think about the future. In the next 20 minutes, I'll give you a little bit more insight into our financial framework. But before I do that, I just wanted to have a quick moment of reflection because I think days like that require that. I've been with Honeywell now for about 6 years. I've been the CFO of Honeywell for about 16 months. And I can tell you, I have never seen a team that is more committed and excited to deliver on our commitments and on the mission.

Vimal talked about our VOE scores and our attrition. It goes beyond that. We have people that left us over the last 5 years, knocking back on our doors. Wanting to be part of the story. So it's extremely exciting. And look, I'm not a very outwardly excited person. I realize that, especially if you put me in the room with Mark Macaluso. But I am extremely excited about our financial framework and about our strategy and what we are going to deliver for our shareholders and our customers over the next 3 years. So with that, let's just recap the day really quick. Vimal talked about our transform and simplified portfolio. This is going to deliver higher, more profitable growth. Our legal team, our business development team spent the last 18 months deleveraging our balance sheet, which is unlocking our cash flow and helping our G&A costs. We are rapidly eliminating stranded costs and going beyond that, and I'll talk about it, it's a significant driver of margin expansion for us over the next 3 years.

And all the presidents talked to you about refresh NPI, about better offering, being closer to the customers. Everything that we have done over the last 24 months makes me more than comfortable committing to delivering 10% plus EPS growth through 2029. Honeywell prides itself on execution. And before we talk about the financials, we just have to acknowledge and talk about how much the team has executed because I think that's been largely unnoticed, but a significant impact on our financials in a very good way going forward. So let's start with Industrial Automation. Industrial Automation, like Pete said, now it's pure sensing and measurement business. This business alone is going to deliver 100 bps of margin expansion for Honeywell over the next 12 months. More importantly, Pete can now keep the team focused and deliver not only the margin expansion, but deliver growth and think about expanding -- growing the business inorganically.

Solstice spin-off made us less CapEx intensive and less cyclical. By the way, Solstice is up 60% since the launch in October. What a great story for the team and the shareholders. Like I said, we divested over $2 billion of legacy liabilities over the last 18 months. It's a significant tailwind for our cash flow and our G&A. And the automation segment, there is a reason why Ken and Jim talked to you together today. Their teams this year alone will deliver over $100 million of commercial synergies just between these 2 businesses. And this is -- we're really just in early innings of the journey. And finally, Quantinuum is making just excellent commercial progress, and you'll hear about it in the second half and delivering on their strategy. And once again, I'd like to congratulate Raj, Nitesh and their teams on a very successful IPO last week.

By the way, that business, you'll see it in our second quarter financials, is going to sit on our books at $7 billion. So if you think about the optionality as far as cash flow and capital allocation, it's a big help for us going forward. So here we are. We are a pure-play automation company delivering mission-critical solutions in building automation, industrial and process automation industries. And the keyword here is mission-critical. The nature of our products and solutions allows us to have life cycle relationships with our customers. Most of our products, once again, have to be certified and have to be specified. More importantly, these products allow us greater pricing, more predictable revenue streams and getting closer to our customers. But this is just the beginning. So let's talk about where we go from here.

Our value creation engine has 3 pillars. And I realize this is kind of on par with the -- this is on par with our peers as far as the growth, top line growth, margin expansion. What's exciting to me and what's compelling that this growth is going to come early. And there is a very good chance for us to overdrive this framework. And I'll talk about each of the pillars in a minute. Both top line and margin expansion will be underpinned by a more meaningful shift towards services and software annual revenue, recurring revenue. More importantly, margin expansion, the 60 bps of annual margin expansion, that's just operational expansion. We have over 200 bps of margin expansion coming structurally from us removing stranded costs and driving the portfolio actions that we talked about in IS. So let's talk to each of the pillars. And I think this is the most consequential page of today's presentation. And I'm really excited about the growth framework because as Honeywell, we know we undergrew last few years, but that's changing significantly.

And let me just go through each of the pieces here. On volume, volume, we should grow 4% a year. And we talk about NPI, we talked about higher growth verticals. I'll talk a little bit about software annual recurring revenue. But I'm a data person to just give you some data points that I'm seeing. Billal is very humble human being. His business now delivered high single-digit growth 7 quarters in a row. His fire business last year launched over 30 NPIs. His orders quarter-to-date are high double digits. This business has momentum, not only in data centers, it has momentum in every vertical and every region that his business operating with. Pete has turned the corner on the business. It's really a story of self-help. The business is delivering better for the customers, starting to introduce NPI, team has focused and have mission.

And finally, Process Automation Technologies. We talked about it now for 3 or 4 quarters. This business has been building the backlog, projects backlog. This backlog is converting. We are mobilizing our teams and starting to deliver these projects. And this is a multiyear cycle. Majority of our projects take 3 years to deliver. Our LNG business is sold out for the next 3 years. And by the way, catalyst volumes coming back. Second half over first half, catalyst short-term demand is going to be up more than 20%. So I'm really excited about this setup because all of our businesses have momentum and it's a strong momentum. Price. Look, we learned a lot about the art and science of pricing over the last 3 years. And just like Ken said, our models are better. They're much more dynamic. We're closer to our customers where we can understand how to price.

And for better or worse, pricing now reports to me for the last 9 months. So I can give it the right level of visibility and drive the say do when needed. But I'm confident we'll deliver 3% plus pricing over the next few years.

And then M&A, I'll have a slide later on to talk about M&A. M&A will drive 1% incremental growth for our company. All of our M&A is accretive to our growth. So why are we not growing 6% to 8%? Well, it seems these days, we have a 100-year flood about every 6 months. So I am assuming a very healthy level of contingency to make sure we can withstand all the geopolitical uncertainty and issues that we face every year.

I have 2 more slides on top line growth that I want to touch on. One is on ARR and one is on M&A before we move to margin expansion. So let me start with services and software. Our services and software business is today about $7 billion or 40% of our business. Recurring revenue is about $2.3 billion, and software ARR is about $900 million. That's as of 2025. As the team said earlier today, we'll grow service and software from about 40% to 45% of overall revenue mix over the next 3 years. And software is going to grow at about 3x the rest of the business. We like this revenue model a lot. As we are maturing Forge and looking at connected and starting to analyze our installed base, we realize we have a massive opportunity here to lean in and drive incremental growth. This growth is also accretive to us and gives us a lot of leverage. Our incremental cost to scale this business is actually minimal. We're studied -- we're looking at our compute costs and for software. And on 15% revenue growth, our compute cost grows about 2%. So we're getting really good leverage on this growth.

So let's talk about M&A. Look, our M&A strategy, bolt-on M&A strategy is doing extremely well. And that's something that I think is core to our -- it's a core strength for us. And team has been doing an excellent job, one, identifying M&A targets, vetting them and then bringing them on board at the right multiples. And the teams in the businesses have been doing really good job integrating these businesses. All of our M&A that we've done since 2023 is accretive to our growth, is beating revenue synergies and delivering on return on invested capital. If you take just Air Products LNG as an example, this business next year is going to be $0.5 billion business and it's sold out for the next 3.5 years. We'll continue to do M&A in the future, but we'll be very selective and continue to strategically supplement our businesses where we think there is a close adjacency or a strong fit.

So let's move to margin expansion. I can guarantee you, Honeywell has not forgotten how to expand margins. We talked about this earlier this week, we'll deliver about 20% segment margin this year. We have a very clear path to expand about 200 bps over the next 12 months through structural actions. On top of that, organically, we'll expand another 60 bps a year. And that 60 bps a year has a ton of contingency and optionality in it. So if you start calculating this data, I think it becomes very clear that 24% is not only achievable, it's actually beatable and gives us a lot of optionality for M&A investments and obviously, contingencies. How we think about the 60 bps? Look, we have, I would say, plenty of optionality as far as how we expand the margins depending on the market. Like I said, price should be 3% to 4%. We're improving mix. We're doing more NPI. We're doing cross-sell. That's giving us a better leverage on our growth and expanding margins. But to me, the biggest opportunity is still in cost productivity. It's not only stranded costs. We're going much further beyond that.

I'll just give you an example of what we're doing. Today, Honeywell has still about 700 legal entities. We can operate at 300. Over the next 2 years, we'll eliminate 400 legal entities as a significant source of productivity for us and margin expansion. Today, we still have about 10 ERPs. Over the next 2 years, we're migrating to 2 and now a significant source of simplification and productivity. And finally, if you think -- start thinking about artificial intelligence productivity tools and how you're going to deploy them, you need to deploy them at scale.

So we are leveraging our shared services. Today, our shared services penetration is about 40%. Over the next 2 years, it will be over 70%. And that's where you get really payback on productivity on your AI investment. So we feel really good about this margin expansion. While we're also taking out stranded costs, and we get a lot of question on stranded costs. What is it? How much is it? When are you going to take it out, et cetera. So I'm pleased to say that today, our stranded cost is only $290 million. Just think about it, it's $290 million on over $20 billion of revenue.

More importantly, we'll be taking this cost out -- remaining cost out in the next 12 months. We already actioned about $200 million of that through repositioning and other actions. It just needs to show up in our run rate. And then we have about $85 million of cost left that we'll take out next year by simplifying our structure and taking out -- sorry, and getting better penetration in shared services. So our fixed cost is going down by about 500 to 600 bps from '25 to '27 while we reinvested and stepped up our investment in R&D. So I think a really good story on cost. So with that, let's talk about EPS. And look, to me, the $6 EPS in 2029 of 10% drop, this is table stakes. I really have -- I'm asking 2 questions to myself.

It's not whether we can hit it, but by how much can we beat it. And this EPS growth is coming in early years, meaning it's front loaded. So I'll be super disappointed in next year if we don't grow EPS by 12% plus. And to that point, the $4.05 for this year, there's still a lot of opportunity to beat that as well. So the teams are working really hard to deliver that. And I could assure you that, that growth is coming sooner versus later. You don't have to wait 3 years to see it, and it's operational. It's all through above-the-line items, volume, price, mix, productivity, everything we talked about today. So with that, let's maybe talk about -- a few minutes about cash and capital allocation because, obviously, those are extremely important to our future.

So on cash, we will be 80% 'free cash flow-converted this year. We will be 95-plus percent converter in the second half of the year. There's just a lot of things went on in the first half of the year that we had to manage. If you think about it, we're raising $16 billion of debt. We're in the process of retiring $21 billion of debt. We're separating 140-year-old company and creating hopefully 2 companies over $100 billion market cap over the next few years. Just a lot of complexity that we had to deal that manage through transitory interest costs, taxes and also the conflict in Middle East, we had some [ possibilities ] in the first quarter.

Now I am convinced we are 95% free cash flow converter going forward based on all the structural things we've done. We're paying out our debt, focusing on -- that's going to help our cash interest. Our tax rate going forward is about 19%. It used to be -- our ETR used to be 22%. That's a significant source of cash as well. And we have higher quality portfolio that is going to deliver better cash flow. And finally, look, as people -- our folks are coming off the separation work, including myself, we're getting more focused on cash. So I'll be focusing a lot on cash over the next 18 months. I can promise you that.

So what are we going to do with all this cash? So first, we're going to pay down debt. We're managing our debt and that leverage ratio to below 3, hopefully by year-end. In the midterm, we'll continue to invest in CapEx. Our CapEx should be about 3% of sales. It's lighter than it used to be. It used to be more like 4% -- 3.5% to 4%. And then medium term, we also -- obviously will focus on returning excess capital to shareholders. Our dividend payout ratio should be about 35%, which is on par with our peer set, and we'll focus on about 1% share count reduction. And then we'll continue to do bolt-on M&A. Ticket size will be for us, bolt-on is about $2 billion to $4 billion of the purchase price. But we'll be thoughtful and we'll be patient. There is no urgency, but we'll continue to add assets strategically, just like we did with Access Solutions, just like we did with LNG and Sundyne.

So with that, in closing, I just want to say we have created a very unique pure-play automation company. And from my vantage point, this company has a very, very good financial profile and financial framework for the next 3 years. And I'm confident that with the team you saw today, we're not only going to deliver this financial framework, we will beat that.

So with that, I would like to invite Vimal, Suresh and Mark back on the stage for the final Q&A. Thank you.

Let's start right in the middle, Mr. Sprague.

Somebody said white space earlier. I think it was Julian. But Vimal, you really started off very early with our interest with the comment on discrete. And then also in the process pitch, we didn't really hear a lot about M&A, but you got sort of big white space maybe in field instruments and some other places. So maybe just spend a little bit of time on like what your strategic priorities are now as you try to take the company up to the next level.

I mean I would say the 2 biggest priority. One is we need to strengthen our IA portfolio goes without saying, but it has to be done thoughtfully. We have built this portfolio with a lot of effort, sensing and measurement. So we're not going to excursions here and there and just again create unrelated portfolio, but we'll absolutely pay more attention to that. But if I move beyond it, because that's must do, the two things I focus on, one is a vertical-based offering M&A.

What we have learned hardware, it just takes 1 or 2 offerings just to give you a tremendous opportunity in a vertical. Look at LNG business. It was an Air Products business acquisition, which changed the whole profile of our business. And of course, we added on Sundyne subsequent to that. If you look at our hospitality segment, we have a big play in hotels. We always did the thermostat in the hotel INNCOM business we have for 10 or 15 years.

But when we acquired Access Solutions business, we got electronic locks, which have digital identity of all of us linked to those locks. So all of a sudden, we became so critical for the hotels. So the point being one acquisition can change your whole profile. And those 8 verticals we have identified, which I talked about, the semiconductor and data center and LNG, hospitality and so on, that's where I want to focus on how we bring more strength so that our story is going hand in hand.

We want to grow in those verticals. Can we find more space to inorganically to grow in that? And the last but not the least, I'm a big believer of frontier technology. Frontier technologies have an important role to play in our businesses. So think about we have made 2 acquisitions in cybersecurity in a very thoughtful manner. It's a frontier technology in our world. OT cybersecurity is still a nascent business. But if we continue to invest in frontier technology, we will be the leader in that space. We made 2 acquisitions in that. We made an acquisition in fire detection. We were the first company in 2017 to made a fire detection for data centers, a fact, which is not well known under Anne's leadership.

Now of course, it's benefiting us from today because nobody would have put a bet on early detection of fire in data center in 2017, but we did. And we made a detection of the lithium-ion battery, the off-gases 3 years back. That's frontier technology. We need to know about it because they are disruptive. You need to be staying ahead of the game, which means we need a deeper understanding of our segment. So I think that's fundamentally our playbook here. Strengthen our IA business, continue to have our vertical story building together and keep an eye on frontier technology. And as we generate more cash, we'll responsibly spend it and do it in a thoughtful manner.

We'll go to Nigel Coe of Wolfe Research.

You sound very confident on overdriving the plan. So I'd be curious if you maybe just like emphasize where you think the best opportunities are driving, I'm guessing is the margin expansion. And on the margin question, can you just talk about the drop-through and the incremental margins on the ARR and recurring services because I'm guessing that's going to be higher margin. And then on the process side, you only pointed to 25% margins by 2029 versus 24% in 2024 -- 2025, I should say. Why is there limited opportunity there?

So a lot of questions. Four questions. So I would say, I think the reason I feel so comfortable about the margin expansion is in -- in many ways, our margin expansion is not dependent on the strong top line growth. So with whatever we're guiding at 4% top line growth, we still can get majority of this margin expansion. And this is because of us taking out the stranded costs, but also, like I said, going beyond that. It's really, I would say, about our structural simplification across the company. And I think with now having a cleaner portfolio and more focused portfolio, we can drive a lot of that.

Second, pricing. Pricing discipline in Honeywell got much better over the last two years. Like I said, we learned a lot about pricing as far as how to be more into the markets. how to price regionally versus globally in one cookie approach. We're closer to our customers. Our offering is better, which allows us more pricing. So that's all helping us. So I think the margin expansion is largely derisked. It's really about can we get -- how far beyond 24% we can get there. As far as the incrementals on software are going to be really high. We invested $1 billion in Forge. We're not investing as much anymore. And that's why those incrementals that you're going to start seeing on the software revenue are higher than our product incrementals.

So with all that, we see a lot of opportunity there. And then in terms of the growth, like I said, we -- all 3 businesses have momentum, and it's really strong momentum. IA is different because it's all about self-help -- so Pete is going to grow for a while at this mid-single-digit rate without even having considering too much of the market itself. And process automation technology, if you follow this industry, the cycles are multiyear cycles, and they're on the cusp of it. And Billal just -- he's taking share across the world, and he regionalized the first in the -- in Honeywell, and he's been on this journey now for 3 years. So -- and it's really -- his growth is driven by offering.

The P&T segment, we have assumed the Johnson Matthey acquisition. It pulls our margins down. But the rate of change opportunity it provides is very large. So it's like a little bit of short term, the math works against us, but then the rate of change opportunity, that's why we acquired it. So that's why kind of '25 is a little bit -- if we take it out, the numbers look different. So that's more of a math.

Okay. Let's go to Andrew Obin, Bank of America.

Just a question on your installed base and getting better attachment rate. So who does the service and specifically building automation and industrial automation. So what kind of people perform the services right now? And what's the strategy for increasing your share of the wallet with your customers?

Yes. So Andrew, if you look at it, if I look -- let me start with building automation, then I'll go to industrial automation. Building automation, as Billal shared, 60% of our revenue comes through channels. And two years back, we said we have no entitlement for any service there. We ship the product and they should serve it. I mean that sounds like a logical answer. And then 40% installed base, we own because we sell projects, and that's -- we have a large service business on that.

So our first inning of Forge was to connect our installed base and make our service contact more digitized and Suresh talks about it. And then we said, who stopped us to ask service business from our channel partner? Whose thesis was that? It turns out nobody's thesis. It was self-imposed kind of a ban. Now our Forge is open to our channel partners. They can sell connected building to their installed base. When they sell it, they have to pay me a license fee. We have opened them an academy to train our channel partners on how to sell Forge. It's a big transformation for them.

Our classical system integrator grown up to sell fire system, security system, and HVAC system. We are selling go and sell this IoT platform, and they obviously said, that's hard. We will train you for that. But every time you sell it, you have to pay me a license fee. So a great example is we talked about Connected Life Safety Solutions business in Fire launched in 2019, more than $100 million revenue from the recurring revenue it generates, but that's the engine which grows the product business because our channel partners are so dependent on our software to configure their product, it's unlikely they can move to anybody else.

So I think how you -- the compounding effect of that is very high. Same is going to be now moving towards industrial automation. When we look at our installed base of gas detection, which is very similar to fire detection, the hazard to human. We are replicating the same model, building the tools by which our customers can remotely inspect these gas detectors, they can configure them, but it's in early innings, and we will repeat the same process. So it's a learning from one and transferring to other. And my confidence is that the ARR growth of 15% from a base of about $1 billion will require us to constantly innovate and generate that extra revenue.

And just a follow-up question. It sounds like pricing embedded in your medium-term forecast is 3 percentage points. Which sort of implies midpoint of volume growth is 2%. Am I correct? And it seems not much macro acceleration is embedded in that.

That's right. That is correct. And I think that's really where the opportunity is for us to overdrive.

I mean that's why we show the hedge of 2%, right? I mean, look, the inflation wants to just want to go up. The thing we can't do is we don't want to forecast next 4 year of price to say our prices will stay 3.5%, 3% to 4% range. But I and Mike know it is in that range for '26 and '27. It's in front of us. Can I say that Tony? I don't know. Maybe the inflation cools down and maybe it wants to become 2% or 1%, but we are then ready with higher NPI efficiency to still grow our revenue 4% to 6%.

So I think it's a one variable we control in our growth, which is new products. one variable in our top line growth we don't control, which is inflation, which drives our pricing. So we'll manage the 2% and deliver the 4% to 6%. Do we have a hedge in it? Yes, we do. But if we plan a strategy in which we don't plan any hedge, I think we are not being responsible to making our commitments.

Let's go to Jairam Nathan from Daiwa.

Thanks, Mark. So I had a question for Suresh and kind of in terms of Forge, what's the go-to-market strategy here? Do you have a separate sales force? Or is it connected with the different segments? And I would think that the skill set for a sales team would be different for selling Forge compared to the...

The last two years, we took a go-to-market sales offering management. It's under Billal, it's under Jim Masso and Ken. We believe that, that is a very important pivot as part of our connected enterprise redesign that we have gone through because central team will own the whole platform operation, innovation partnership. I think -- and to that point, Billal and Jim and others are completely rewiring the skill set that's required to sell software, new business model, and there's a mix that is happening on an ongoing basis. And I think I completely agree that's a new muscle that we are building.

That's a journey we have gone through. So your question is absolutely right. when we started Honeywell Connected Enterprise in first phase, we said we need a separate -- we need very smart people who can sell software. It turns out that thesis was wrong because it creates an internal conflict in one organization. So we made a decision in early '25, late '24, operational '25. All those salespeople have been moved to all 4 segment leaders. They are very smart people. They know how to sell. They need offering, which this guy makes. Do we need to upgrade our sales force? Absolutely. That's our future. We want to sell services and software. So let's solve the real problem to upgrade our sales force progressively versus putting a band-aid to say, I think you are not so smart. I'm going to hire some extra people. I don't think that really works.

We acknowledge our -- we created detour here and come to this core. And this is really working for us. Our confidence factor is high. The limiting factor for growth of ARR is innovation. Salespeople are smart. They'll always sell what sells in the market. if the offering is creating value for our customer, they want to sell it. So if we are innovating, if we have the right set of proposition and have a high confidence in Suresh's ability to think through innovation engine, and we are on the right trajectory there. It's hard, but we will do that.

And just as a quick follow-up. So to the earlier question, so would it be possible to kind of be a little more in the future, be more selective on the project side, given that it's slightly margin dilutive overall, if the channel partners' effort kind of succeeds?

I mean, look at our current mix of question, if I understood right, today mix of project business is 20%. It's very concentrated in process segment. You bring installed base through selling projects. That's how the market buys. So I don't think we want to walk back from that. We are not moving our process business to channel. There's no such strategy. Our channel business are industrial and buildings.

There again, we don't have any plans to go direct. So we're very clear on our business model. Two channel businesses, direct business. And as we sell more software and services, between product and solution, what will reduce? I mean, I'm not going to forecast a guess here. 60% is going to become 55%, there'll be probably some adjustment. But net-net, we are more focused to kind of maintain our overall mix to 55%-45% range.

And I would just add to it, in our process business, and that's where we're really owning the life cycle, product life cycle relationship with the customer. We, a lot of times design the chemical process and own the IP on it for our customers. So before we even build anything, the customers will come to us and ask us to essentially engineer the outcomes for them, chemical outcomes as far as their feed, et cetera. So it's really the channel model there wouldn't work.

Let's go to Scott Davis from Melius.

Mike, how do you cut 400 legal entities without having your tax rate go up?

Yes. So look, I mean, we obviously -- we're working through it. It's really -- we're changing and thinking through how we're going to operate in countries. We operate materially in about 70 countries. We have countries where we have 30 legal entities. So we just have massive proliferation of legal entities. Like Germany, we have 30 legal entities in Germany. I guarantee we don't need 30 entities in Germany. So we have some of the frictional tax coming our way as far as trying to simplify it, but that's already, I would say, calculated in the context of what we're trying to do and as far as our simplification.

The low-hanging fruit, Scott, is pretty large. I mean if you look at it, one thing we did not pay attention to is we made -- Honeywell has made a lot of acquisition over the last 15, 20 years period. We did not pay an attention to eliminating the legal entities. And what we are realizing is that you don't need those legal entities just for the basic transactions, and that number is large.

So low-hanging fruit out of the $400 million reduction is significant. And then comes a difficult portion of the tail where the fractional tax will come in and the team has to be thoughtful at how do we do that work here. The motivating factor for us is very clear. The motivating factor was we created Solstice and Aerospace from scratch. Aerospace has got 100 legal entities, and I can't stomach it. We need 300. There's no reason when we create a new entity, they have such a pristine business and then the RemainCo tends to carry the burden of the history. I think we can do it. It's just going to be a lot of effort, but I think structurally, we know how to execute that.

And a lot of this is also -- it's really simplification, not necessarily externally, but internally within Honeywell, we have a lot of intercompany transactions, et cetera. That's really eliminating this noise. That's where the leverage comes in, if you will, or the productivity.

That's helpful. And I just wanted to clarify, will there be some fine-tuning and tweaking to the incentive compensation program?

The compensation of the people?

Executive compensation.

We're working with our Board here. That's going to be one of our key topics coming right off as we become. The answer is absolutely yes. I think we need to make our compensation aligned to the strategy, which we are presenting to you. I haven't discussed with our Board of Directors. It's too premature for me what it will look like. But directionally, it will look like the things we talked about, our compensation should link to what we committed to you, should be directly proportional to that. So there's an opportunity here, and we're going to work with all our directors to make it happen.

Great. Okay. Let's go to Brett Linzey from Mizuho.

Just want to follow up on the 200,000 AI deployments. And specifically, what are the highest ROI opportunities at the segment level for the customers? And then as you guys look more inward and you gave a lot of customer examples, but more inward, is there more opportunity with physical AI in your own plants and footprint?

Let's take the inward example of AI. I think Mike talked about it. We as a company has been a productivity engine because we had an operating system for many years. So driving productivity 15, 20 years back was using Six Sigma and Kaizen and then you move forward, it became robotic process automation and so on. What we have realized is that for us to create opportunity of productivity at scale required us to build a centralized services model. And that realization came, we have centralized execution of R&D under Suresh's leadership, a common R&D team of almost 7,000 people.

They were the first one to use AI at scale to do software testing and gave us substantial productivity. That gave us a ring bell to say, if you want to use AI, you have to centralize your function. It's as simple as that. There's no way you can have a disparate function like in case of Mike, he has finance team in the center. He has an FP&A, then he has people in the businesses. There's no way you don't have any scale to do AI to make a meaningful P&L impact. which made us now to pivot towards a shared services model to say corporate will be light. We are a public company. Of course, we need a corporate function to behave like a public company. But everything else we do should be a shared service so that we can reimagine that service using AI.

So there should be Agentic versions in that when we do procurement, when we do finance, when we do other functions, customer service, that's our journey. So I would say that how much that number should be, it probably is going to be greater than what we all expect. But it's hard for us to put a number on the table to say it's going to be 30 basis points or 10% or nothing. But it absolutely is greater than 0%, and we are very bullish about that.

On the external customer side, I think the -- our innovation adoption has to match with the customer's ability to do change management. Because these offering we are launching of Agentic system, building an Agentic system for buildings, building an Agentic system for process industry or plants. When a customer adopts it, they have to make an organization structural change. They have to hire different type of people. So can they do it in two months? Unlikely. Can they do that in two years? Probably. So we are shifting our discussion not only limited to Agentic system.

When I talk to my peer group, they talk about it, how are you dealing with it? Are you making org changes? And they are really dealing with that issue because Agentic system means the skills are getting automated at the bottom of the pyramid. And the skills are moving in the middle of the pyramid. Suresh showed to you, he's going to eliminate all the nuisance alarms, okay? So there are a lot of people who are doing this punching the key to deal with nuisance alarm in different kind of system. But given they're eliminated, somebody needs to do something about it. Those people are different.

So who's going to make the org change to say, all these people are left and we need something in the middle. So our scaling is more dependent upon customer adoption of their own org change. And more quickly they do it, I think the rate of change here could be quite different in any new technology, and we're absolutely working with our customers on that.

Okay. Let's go back to Andy Kaplowitz in the center.

Vimal, like I think you've run all the businesses in the past. So I'm just curious, like what do you think the biggest unlock is? Because you talked in the beginning of the conversation about getting the other segments to look like BA. So what do you think the biggest unlock is? And if you think about something like process, for instance, it is bigger customers, it's different markets. So how do you sort of deal with the different businesses to get them to look like BA?

I think the biggest unlock is for us, the next innings for Honeywell Technologies is going to be building a vertical-oriented offerings. What industrial companies do well is to build businesses by product line, process automation, life safety, gas detection. But the people are trained to sell their product to a customer. But if you pivot the problem by end market to say we are serving life sciences, we are serving semiconductor, we are serving grid infrastructure. Those are -- you have not solved a problem, which will need to sell products from multiple businesses, that to me is the biggest unlock.

In today's revenue stream and all the numbers we presented to you, we don't have any meaningful number of cross-sell built in because we haven't proven anything. But if you ask me and all my SPG colleagues and Mike, that's what we are most excited about because this is a real scenario. And as we execute that, that to me is the biggest unlock because within the segments, I think each business leader is very capable to grow the strategy which we really presented. My job and Mike's job is really to imagine now how do we solve this vertical orientation because that's a relatively unique concept to build cross-sell of by each end market. In process, it's easy because both Jim and Ken, they sell to the same customer.

There's a high amount of interrelation. Now I do it beyond, it just makes it harder, and that to me is the biggest unlock we have to solve it. 200 basis point of growth in there is possible? Absolutely. That's my incoming thesis. Have we delivered on that? Answer is no, but that's an upside, which is not in our numbers right now.

And then you probably deserve a little vacation after June 29, and you've been pretty busy. But assuming you don't take one, like where do you reprioritize your time? Because you will have a little more time, right? So where are you going to focus?

I mean, if you -- it looks -- how we executed the separation, it's a bit interesting to spend a minute on that. I think the separation team was done as a separate team under Anne's leadership. And we separated -- created a separate separation management office to really drive execution of Solstice and Aero separation. My time actually spent was not as significant as it appears from outside. I had to make a few difficult decisions, how to hire leadership team for Solstice and for Aerospace and create Board of Directors, of course. But time required is less, implication of decision is very big. So I did not really went away from the core of spending about 1/3 of my time externally. That has been my principle.

It means be it with your salespeople and be it with your customer because that really gives you the insight on the businesses they are moving in. And -- but to your question, it's going to be a vertical thinking. The segments where we have a lesser penetration, I'm spending more time with life sciences customer. I'm spending more time with semiconductor customer, getting to know them, what are their pain points and what offerings we can make. It's interesting that I met with one of the large life sciences customer earlier this year or the largest company. And his comment was, I'm surprised I'm meeting a Honeywell CEO for the first time. But you're the biggest automation company, and I don't know why we don't have a relationship with you.

My takeaway was our brand value is so high in his mind, and we've not done a good job to create value for them. And then we talk about our cross-sell solution, they really get excited about it because they said, this is new. We haven't heard this before. So that's where the time will get spent more in terms of organic growth, creating more opportunities and of course, building pipeline for M&A. I see my job continues to be more growth coming from organic and inorganic actions, and that's where I should spend more -- a lot of my time.

But just to the point of how focused we are, tomorrow morning, we'll have all day of business review.

Business review.

To focus on the second quarter.

For quarter 2.

We're serious.

We need to deliver.

Okay. Let's go to Nicole DeBlase with Deutsche Bank.

Just on the topic of M&A, does the $2 billion to $4 billion bolt-on range mean that large deals are completely off the table? And then a follow-up to Mike, you talked about the legal entities. You talked about the ERPs and you talked about shared services, but you didn't talk about facilities. Is that an opportunity? Or do you think that the size or the number of facilities that you have is right?

Do you want to answer M&A? I can talk about the facilities.

Yes. I mean -- look, our strategy is -- we have worked really well for us as a bolt-on acquisition. So what works well don't mess around with that. So I think fundamentally, we want to stay focused on that enterprise. And you never say no to everything. There's never say we won't do this and we won't do that. Things change. But principally speaking, we don't see any necessity to go away from our fundamental strategy of grow your installed base, mine your installed base, this strategy will work for us and do some meaningful addition in M&A where necessary, specifically to on what I mentioned, verticals and frontier technologies.

On your question on facilities, we are already 85% local for local, if you will, on region for region. We're optimizing things. Especially in IA. So you'll see more consolidation, but this is more just really to drive scale in our facilities. And that won't require any, I would say, incremental repositioning funds. I'm assuming about $70 million to $80 million of repositioning for Honeywell on a go-forward basis. But largely, we have a footprint that we want and we can grow on it.

Actually, Scott is here is our VP for ISC built a very clean strategy. We have about 80 factories, 80 facilities manufacturing as in Honeywell Technologies. He wants to build 25 facilities will produce 80% of our revenue, 80-20. We still need 80% because there are some nuances of localization, some of unique product line.

But if we turn our focus to 25, that's where you invest capital, that's where you build scale, that's build your Honeywell operating system. And I think really his strategy is really smart to execute it that way. And that's going to give us leverage like Billal talked about it. We don't think Honeywell needs any new factory with one exception, LNG. If somebody has more LNG capacity, give me a phone call. We have so much of business. We can't serve it because it is unexpected business which is coming our way. But outside that, I think we have a good capacity to serve the entire company and scaling a few factories is our strategy.

Okay. Let's go to Alex Virgo from Evercore.

I wondered if you could talk a little bit to the context of the decision to have a fixed date, i.e., 3-year targets as opposed to through cycle targets? And maybe talk a little bit about, I guess, the lift in the acceleration near term and the confidence that you clearly have on the next 3 years, I totally get that, but the transition to, I guess, building habit to be growing faster in the NPI, et cetera, et cetera.

I think the 3-year number is just to illustrate for everybody in this room to give something which is tangible. Our strategy is more longer term and new durable. We don't think we are going to come back to you in 2 or 3 years from time to say we don't think we're going to change our strategy. So fundamental strategy of having mission-critical segments, serving building, industrial and process, growing through new products, that's going to remain very robust. But as a public company, we need to give you some commitment you can hold ourselves accountable to. But then as Mike said very well, we think every day, how do we beat that $6 commitment we are making because that really is what will excite you and what will excite us.

We operate on the 3-year cycles in Honeywell. And if someone comes to me with a plan that has 10% CAGR like that, and it's linear, it's not believable. So really, I always discount the last year, but really focus on the first 2 years because if you can get that growth and the margin expansion in the first 2 years, you're pretty sure you get it on the back end. So it's really about next 18 months. And once we instrument the next 18 months, in 6 months increments, we can then talk about rolling forward the forecast. But that's our general, I would say, construct of financially, and we're quite convicted on what we're going to deliver here in the early cycle of that.

Let's squeeze 1 or 2 more questions, Mark, before we...

Yes. Let's go back to Julian for a final question.

Maybe one for Vimal, just because of your background in the process business. I remember you used to talk about positioning the portfolio differently there. But when we look at it now, it's still almost half petrochem and refining. So I guess when you -- how do you think about the growth profile of that piece of it? And kind of how -- in 5 years' time, let's say, how much of that segment should be petrochem and refining?

Yes. I mean, clearly, Julian, the actions we have taken on LNG was thoughtful to derisk our business, which is concerning refining petrochemicals. So I think that certainly has helped. And the outside growth in that is certainly going to change. And then we are equally focused to grow our business on the process side of the business in life sciences and in grid infrastructure.

On the core, we believe the biggest opportunity is OpEx leverage. There may not be a lot of capacity coming for refining petrochemicals, but nobody is shutting down any plant. So it means the money being spent on OpEx in terms of running these facilities better. That's why our mining installed base strategy is very critical. So I think that's going to enable our growth. A case in point is Ken's business never had any services. They licensed the technology and then sold the catalyst.

Now Ken believe he can create several hundred million dollars of services business from ground zero. He never had any. So all that for us is incremental growth. We're displacing somebody else who was providing those services, maybe small system integrators, small EPCs, maybe customers' in-house team. So getting the maximum share of demand in our core but pivoting towards some of these higher-growth markets like LNG, grid infrastructure and life sciences. That's why vertical strategy is important. We have called out life sciences and grid infrastructure as our priority verticals. We'll do organic growth. Nothing stops us to look at inorganic opportunities there to continue to build our business more diversity there. So more to come.

Great. We'll leave it there. A couple of points before we wrap up. Lucky for all of you. We have nice warm pullovers to put on, on your way out the door and great timing. And we're going to watch the second half of the customer video from before, and then Vimal will join us for closing remarks. So thank you again.

[Presentation]

Please welcome back Vimal Kapur.

All right. So again, I just wanted to thank everyone. I wanted to make sure that we start the day with the customer and end the day with the customer because I believe that customers drive our future. And you heard from several segment CEOs and how they're partnering with us every day to drive shape our future. I think this slide is a summary of where I started my day in the morning. Why own Honeywell Technologies, everybody has a lot of choices. But we have built a portfolio which is transformed as a pure-play global automation company.

And the portfolio mix and the business model really give us an optionality to have more than 10% earnings growth through cycle. And then AI is an optionality. I truly believe that this industry is going to transform itself. The timing is near term versus long term, and we are going to be leading that whole move of automation to autonomy. And finally, execution is in our DNA, whether it's our operating system or it's in our team.

So there's no -- this -- I've been in this segment, automation segment for 40 years. I just realized yesterday that I started working on 10th of June 1986. Today is 11th June. So I completed 40 years only in one segment. And I've never been excited about the future of automation industry, not because I'm CEO of the company, but the opportunities which is ahead of us. I'm really excited. I think this moment is a great moment for Honeywell Technologies. And I feel you all are excited in terms of future which falls ahead for us.

So thank you very much for being here. We have a great set of demos put together for you on the site. So do stop by for reception, and have a good rest of your day. Thank you very much.

Thank you for standing by, and welcome to the Honeywell 2026 Guidance Update Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to turn the call over to Mark Macaluso, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to Honeywell's 2026 Guidance Update Conference Call. Joining me today are Senior Vice President and Chief Financial Officer, Mike Stepniak; and Vice President of Financial Planning and Analysis, Rajiv Reddy.

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 on this website that may be of interest or material to our investors.

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 certain risks and uncertainties, including those described in our recent SEC filings.

This morning, we will review our guidance for 2026 ahead of our Investor Day later this week on Thursday, June 11. Last week, Honeywell Aerospace hosted their inaugural Investor Day and provided a pro forma financial outlook for 2026.

Today, we will provide a similar framework for the RemainCo entity, which will be named Honeywell Technologies. We'll provide a bridge for investors from our previous guidance to the RemainCo figures as well as provide additional color on the second half outlook post spin. As always, we'll leave time for your questions at the end with Mike, Rajiv and myself.

With that, it's my pleasure to turn the call over to Mike, who will begin on Slide 3.

Thank you, Mark, and good morning. We're nearing the end of Honeywell's multiyear transformation, and we're excited about what's ahead for Honeywell Technologies. To begin, today, we are reaffirming our prior full year outlook for Honeywell that we provided in our first quarter earnings call.

Importantly, the second quarter remains on track. Through May, demand remains strong, particularly in our building and process technology businesses, and we continue to see short-cycle recovery in Industrial Automation that began in the first quarter.

A few other points to highlight. We now expect the impact from the Middle East conflict to be roughly $50 million to $75 million of revenue, although we continue to monitor the situation closely for signs of further escalation. Segment margin is also trending in line with our guidance, and we continue to expect an acceleration in free cash flow in the second half after a slow start to the year.

As we plan for the spin-off of Aerospace on June 29, we are introducing a simpler reporting framework with three key changes. First, we removed the estimated implied results for Aerospace that were included in the former Honeywell's full-year outlook for revenue, earnings and free cash flow. We have also included the benefit of the Honeywell Aerospace framework license agreement, which will partially offset the temporary [ stranded ] cost impact.

Second, our guidance now removes financial estimates for Productivity Solutions and Services, and Warehouse and Workflow Solutions businesses beginning in the fourth quarter, which is the assumed closing date for both divestitures, while also adding estimates for the pending acquisition of Johnson Matthey Catalyst Technologies business, which is assumed to close in the third quarter.

Finally, we are removing the P&L impact of our overfunded pension and the full impact of our investment in Quantinuum from our adjusted results from prior and future periods to provide a clearer and more simple presentation of our performance.

I will talk more about each of these items in the coming pages. This outlook for Honeywell Technologies will also form the basis from which we will introduce new 3-year targets at our Investor Day on June 11.

Let's now turn to Slide 4 to discuss our latest outlook in our business segments. Here, we show a full year organic growth outlook for each segment and total Honeywell Technologies.

To start, Building Automation is continuing to outperform with strength in all regions across both products and solutions. As you will hear later this week from Bilal and team, the business is leading the charge with new innovative products that are driving share gains and continued growth above market.

We continue to expect PA&T sales to be roughly flat organically for the year, although we remain confident in a high single-digit growth outlook for this business in the second half due to the strength in orders and expected ramp in the conversion of backlog despite the transitory impact from the Middle East conflict. We're also starting to see stronger short-cycle catalyst demand.

We have raised our full year expectations for Industrial Automation from down low single digits to flat for the year as the short-cycle demand recovery continues, particularly in Europe and Asia, which we previously thought would be headwinds in 2026.

And last, strong pricing execution and discipline are meaningfully contributing to top line growth across the portfolio, more than offsetting rising inflation. Overall, we expect Honeywell Technologies to deliver 2% to 3% organic growth in 2026, with stronger growth expected in the second half.

Let me turn to Slide 5 to talk more about the details of Honeywell Technologies guidance. On this slide, we lay out the impact of each of the moving pieces that take us from our prior guidance for Honeywell to the Honeywell Technologies guide we are providing today.

First, the decision to exclude pension income from adjusted earnings removes $0.85 of EPS from prior guidance, which includes the impact from both Aerospace and Honeywell Technologies. We believe the separation is the right time to make the change and the exclusion of this nonoperational income from our adjusted earnings should reduce earnings volatility, increase visibility and improve free cash flow conversion.

While we are excluding pension income from our operational results, our roughly $5 billion overfunded pension represents real value to Honeywell shareholders. We're actively evaluating ways to monetize this surplus, and we will provide more details on our plans at a later date.

The next and most significant adjustment is the removal of Honeywell Aerospace, which represents approximately $5.50 of earnings. This includes roughly $19.2 billion of sales and $5 billion of segment profit at the midpoint of our prior expectations with roughly $3.3 billion of free cash flow prior to any stand-alone cost and cargo adjustments, but including a partial allocation for interest expense and below-the-line items.

Next, following Quantinuum initial public offering on June 4, we're removing the financial impact of our investment in business from earnings, a decision that aligns with our other efforts to simplify Honeywell Technologies results for investors. Notably, this removal improves our segment profit by approximately $300 million, which translates to roughly $0.19 of earnings and $100 million of free cash flow.

The teams and I also have been very focused on the elimination of stranded costs, and I recently shared that we have reduced our estimate of these costs on day 1 to less than $300 million, a roughly $0.38 impact to full year earnings. And I am pleased to share that roughly 75% of this total will be held by year-end, a sharp acceleration from where we began. I look forward to sharing more on this topic on Thursday.

Partially offsetting stranded costs is the benefit of the Aerospace trademark license, which amounts to $146 million to segment profit, a half year impact of $73 million in 2026 or $0.09 of EPS. The difference between the $225 million cash impact that Honeywell Aerospace cites in their Form 10 and Investor Day materials and the $146 million segment profit benefit you see here is due to the accounting treatment governing license expense on Aerospace books and license income on ours.

However, from a free cash flow perspective, the $91 million we show here represents a $225 million of cash prorated for half year and net of tax. Thus, our guidance now incorporates the expected exit of PSS and WWS from Industrial Automation and the Johnson Matthey Catalyst acquisition in PA&T.

We expect the dilution from these portfolio moves to be partially offset by a stronger-than-anticipated outlook in our Automation segment in the second half. All in, these items bring it to the midpoint of our initial Honeywell Technologies guidance for 2026.

Now let's turn to Slide 6. This page illustrates the walk of our 2026 guidance midpoint for Honeywell Technologies from the Honeywell guidance issued in April. One point to mention is that the basis point impact is calculated of the revised base after removing Aerospace sales and segment profit. The endpoint will be the starting point from which we issue our 3-year financial targets at our Investor Day on Thursday.

With all of these pieces in place, let's turn to Slide 7 for a summary of our full year and second half 2026 guidance for Honeywell Technologies. As previously mentioned, our 2026 Honeywell Technologies guidance excludes results from Honeywell Aerospace following the spin-off and subsequent reclassification of the business into discontinued ops.

Additionally, the guidance now assumes the divestiture of Productivity Solutions and Services, and Warehouse and Workflow Solutions businesses as of October 1 and assumes the acquisition of Johnson Matthey Catalyst Technologies as of July 1 for the purposes of your model.

And last, pension income and continuing results have been removed from our full year 2026 guidance entirely and in prior periods for comparison purposes.

Following these updates, Honeywell Technologies expects organic sales growth in the range of 2% to 3% for the year, including 3% to 5% in the second half. We expect full year segment margin expansion of 220 to 270 basis points, reflecting the prior year margin impact of stranded costs and our significant progress to date on the elimination of these costs as well as accretion related to the sale of PSS and WWS.

Importantly, we expect Honeywell Technologies will exit 2026 at approximately 22% segment margin. Full-year adjusted earnings per share should be $4.05 at the midpoint or up 22% to 28% versus prior year. Similar to segment margin, the strong year-over-year EPS growth reflects our rapid removal of Aerospace stranded costs.

Finally, we expect free cash flow of roughly $2 billion in 2026, with the majority of this coming in during the second half at an approximately 95% conversion rate. On a pro forma basis, we expect Honeywell Technologies to deliver 90%-plus conversion annually.

In the second half of the year, organic sales growth should increase to 3% to 5%, led by a sharp acceleration in Process Automation & Technology as our strong backlog begins to convert and demand for catalyst shipments materializes.

Margin dynamics should also improve in the second half, given the stranded cost and portfolio dynamics we discussed. And as a result, we expect second half segment margin of roughly 21.3% at the midpoint, up 350 basis points year-over-year.

Finally, earnings per share in the second half is expected to be in the range of $2.20 to $2.35, up 22% to 31%. Please note that our earnings per share guidance and 3-year targets to be issued on Thursday do not reflect the impact of the planned 1-for-2 reverse stock split, which was approved by our shareholders last week and is expected to take effect on June 29 at the time of the Aerospace spin.

We will provide more color on that final step closer to the effective date. You can also find details of the simplified below-the-line structure in the supplemental information section of our presentation, which includes estimates of our go-forward corporate and other below-the-line items, which will continue to decline in 2027.

Now let's move on to Slide 8 to wrap up. We hope you found the information presented in this call helpful in laying the foundation for Honeywell Technologies outlook ahead of our Investor Day. We believe the changes we are making today will provide a cleaner and more simple presentation of our performance going forward.

We are tracking ahead of schedule on our separation milestone with the Aerospace spin-off now expected to be completed on June 29, and I am very excited to see these 2 leading pure-play companies in option.

I also want to take a minute to congratulate Raj, [ Nitesh ] and the entire Quantinuum team on an incredibly successful IPO last week. We remain shareholders and supporters and look forward to partnering with Quantinuum on their continued success.

We also look forward to hosting everyone at our Investor Day on June 11 in New York City. This event will provide an excellent opportunity to share our strategy and long-term growth expectations.

With that, Mark, let's take the questions.

Mike, Rajiv and I are now available to answer your questions. We kindly ask that you please be mindful of others in the queue by asking one question and one related follow-up. Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research.

This is really helpful. Just on the free cash flow conversion comments, Mike, I think the $2 billion represents about 80% of adjusted net income for this year. Just wondering, are there some one-timers in the free cash this year? And then going forward, the 90% plus, now that we've got pension income adjusted out, what are the barriers to getting towards 100% or close to 100%?

Nigel, I think if I just step from a first half to second half, first half for us was slower. A few reasons for it. Obviously, Middle East impacted us. Second half, we should be north of 95%. We have a lot of collections coming in. Demand is very strong.

And structurally, a few things are happening. Obviously, our tax rate is getting better going into the second half and the cash -- with that cash taxes, same for next year. And we're paying down debt aggressively. That's going to help us as well with better free cash flow conversion. And structurally, our portfolio is getting better.

So I wouldn't say 100% free cash flow conversion is not out of the realm of expectations for us, but something that we have to work our way through. And that's what I'm working for in the second half, but I cannot commit to it yet. Just a lot of moving pieces.

Okay. That's great. And then just a quick one on the net interest expense. You've got the dividend coming from Aerospace. Just wondering, what your plans are in terms of paying down debt? And what is the cash and debt balance driving that net interest?

Sure. So we -- in the short term, we're focusing on debt repayment, and we're targeting our leverage ratio below 3 by year-end. And from there, we'll see where we go. We obviously, like I said, expect much stronger free cash flow conversion in the second half. And our commitment is to get the debt lower this year and continue to do that next year.

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

Maybe just wanted to start with the segment margin guidance. I just wanted to sort of check. I think previously, you talked about a flattish segment margin kind of year-on-year in the second quarter on the old basis. Just wondered if that was still on track.

And when we look at second half margins, is the way to think about it, it's sort of a 20% margin in the third quarter, 22% in the fourth quarter. Is that how you're thinking about the second half?

Julian, thank you for the question. Great question. So maybe first, I take us back to what we guided at the beginning of the year. So we guided 50 to 90 bps expansion operationally, then we had about 30 bps of [ Quantinuum drag ]. So if you take that out, we should be at 50 to 90. I would tell you that operationally, we'll probably expand north of 100 bps in this year.

And to your question on the second half then, I would expect third quarter to be around 21% and the fourth quarter about 22%. So really good story on margin expansion. I would say we're getting good mix, we're getting good volume leverage. We aggressively are taking out stranded costs. All of that is showing up in the margin rate.

That's great. And just one follow-up on the free cash point. Do you have -- maybe I missed it, but did you provide maybe what last year's number was on free cash flow for Honeywell Tech or the conversion rate? Just to give us some context to understand kind of how one-off the headwinds are this year on the free cash flow number.

I would say we were about 80% and moving to 90%. So I think that last year, we finished about 80%.

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

I appreciate all the details. Maybe we start with what are your options for the overfunded pension plan? Just kind of set expectations here.

So look, I mean, there are multiple options. The pension is overfunded by about $2 billion. And we're obviously considering various options, and there are numerous ways you can structure the pension benefits on a go-forward basis. And it's an option for us.

Right now, in this year, we -- I don't have any significant or further plans on pension. That's something that we're definitely considering next year and look at it. But like I said, those are -- there are numerous ways to access this overfunding.

Great. And then can you just give us a sense of how the dollar amount on the Aero license was derived? Was this a negotiation? Just kind of how do you land on this number?

That's really -- it's really based on the fair market valuation, and we had a lot of advisers and third parties to help us with that. That's how we derive at the number. It's not really a point of negotiation. We wanted to leave Aerospace in the best possible shape go forward, and that's just how the fair market value played out for trademark.

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

Maybe just starting with the Middle East impact, the $50 million to $75 million in 2Q, I guess what's the level of conviction that, that kind of moves to zero in the back half of the year? And if you could give us a little bit of an update on what you're seeing with respect to impact to the Middle East today?

Sure. So I would say the very high level of conviction, obviously, for this quarter, assuming there is no significant re-escalation, if you will and the conflict continues to progress to deescalation and ramp up, we don't see any significant impact in terms of pressure for us in the Middle East. In fact, I would say we would see probably incremental demand showing up from Middle East.

Generally, I think with the conflict, what it generated is just a lot of demand globally as people are thinking through their own energy security. So our business is predominantly PA&T is seeing a lot more incremental demand outside of Middle East.

So I would say net for Honeywell and for our guide, I would say this is -- will end up being a tailwind or incremental volume that will have to contend with, as you know, in many of our places, we're already sold out in the business. So we're working our way through that.

So I would say that if the conflict kind of remains the way it is, we can absorb it in our guide for the rest of the year. I don't see any big red flags right now, assuming things continue to deescalate.

Okay. And then just a follow-up on stranded costs. You said you'd be kind of 75% of the way through that by year-end 2026, which is impressive progress. What about the remaining 25%? Is that something that can be fully eliminated in 2027?

Yes. So our goal is to fully eliminate in the first half of next year. The 75% of the $290 million that we're talking about, that cost is already actioned through repositioning programs, et cetera. And it just needs to show up in our run rate.

And then we are essentially resetting the bars for the teams, and that incremental cost that is going to be taken out by really in two areas. First, just a broader adoption of shared services, and we're simplifying beyond stranded costs. So there's some additional simplification we're pushing in the first half of next year. 100% confident we'll be able to eliminate that stranded cost and then some.

Our next question comes from the line of Andrew Obin with Bank of America.

Congratulations. Just a question on pricing. What kind of pricing is now embedded in the stand-alone Honeywell Technologies?

Yes. So I would say pricing is progressing well for us. We see -- first, maybe I'll start with that.

We have just -- see a lot of demand. Our orders are high. May quarter-to-date, our orders are in the range of about high single digits, potentially double digits for the quarter. So we feel really good about that. With that, what's happening, the pricing is falling. So I think we'll finish second quarter about 4% pricing and the second half should be around that range, so 3.5% to 4.5%.

Fantastic. And just maybe a little bit -- sort of Building Automation continues to be strong. Can you just sort of provide a little bit more visibility what's happening inside there? Maybe just looking building solutions, fire solutions, security and access, building management, power infrastructure; any color as to why this remains so good for so long?

Sure. So Bilal will talk about it on Thursday. And I think we have a great story on Building Automation. Building Automation has been introducing new products at a very high rate for the last 2 years. We have a lot of exciting offerings coming into the market. We feel like we're taking share. And globally, if you think about Europe, Asia, China, these regions are growing for us as well. So there's a multitude of factors that's helping us.

And I would say Forge is maturing. And you'll hear on Thursday a lot about Forge and our connected offering. And I think it's just outstanding story. So Building Automation orders this quarter, I've been with Honeywell for 6 years, I haven't seen orders that strong yet in the company. So we definitely are taking share. At least that's my view based on what we see in order rates, and this is driven by the number of offerings and solutions that we're providing into the market.

Our next question comes from the line of Andy Kaplowitz with Citigroup.

I was intrigued by your comments on improving short-cycle catalyst demand. And as you know, catalyst has continued to be a bit of a drag or at least lumpy. So maybe you can talk about that. And then what are you seeing at Johnson Matthey as it comes into the fold?

Sure. So short cycle, I think your question was on Industrial Automation?

On catalyst demand.

On catalyst, I'm sorry. On catalyst, we -- so as you know, we talk about a lot over the last several quarters that there is still oversupply and not a lot of demand, et cetera. As crack spreads got better and our customers realize they have opportunity to really improve their yields and get that better price, we're starting to see a lot of orders on catalyst.

So net-net for the year, I think the catalyst sales will still be low single-digit growth, but we see a significant step-up in the second half, double-digit step-up in catalyst demand out there. So we really feel good about the progression. And with that also, we feel better, obviously, with about our cash flow position as this business is going to generate a lot of cash flow for us in the second half.

And Mike, maybe same question on IA. I mean, Europe and China getting better, which you did not expect. Are you seeing the same in the U.S. too, given the improvement here in PMI as well?

Yes. I think IA is a little bit different for us. There's another factor there, which is the self-help factor with [ Pete ] coming onboard, spend a lot of time just simplifying the business, focusing the business; that business now is really pure-play measurement and sensing.

We're doing much better on supply chain. That allows us to do better on pricing. We're driving volume. We simplified this business significantly structurally, which helps margin expansion.

And then there is -- with our end markets, there is some reshoring going on that's helping the business grow as well as China, we thought it was going to be a drag for us this year, and it isn't. So we just have a lot of tailwinds.

Generally, I would say, for the whole business, if you look at our three segments, all our three segments have momentum right now going into the second half. So I feel really, really good about the setup.

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

Just thinking about getting the model together, any chance you can tell us what Q1 '26 EPS is on this basis?

We can, but probably -- I don't have my notes on this right now with me. But I'll come back to you on this.

Okay. Great. And then can you just come back to PSS and WSS? We got obviously the net here with Johnson Matthey. But thinking about rolling this into '27, what is the actual kind of segment profit contribution or lack thereof in the guide separate and apart from Johnson Matthey?

To answer your first question, and then we can follow up after the call, but the 1Q actual should be $0.89. That's the 1Q EPS.

Can you just ask your second question again? Sorry, we were looking for...

Yes. I just wanted to get -- so we've got kind of the net effect in portfolio actions, right, between WWS, PSS and Johnson Matthey. Can we just isolate what the contribution for PSS and WWS are inside that number?

Yes. Jeff, for at least part of those, we haven't said. And obviously, it's the sum of those 3 plus an estimates for JM, which, again, we don't want to get ahead of ourselves seeing the deal hasn't closed yet. So I would just think of it as you have the two businesses coming out, a small addition for JM.

And then on top of that, you have the stronger outlook in the base business. So it's just a little bit splitting hair, [indiscernible] had said, some of that we just haven't disclosed for agreements with the sellers and buyers.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

My first question, just to clarify, the stranded cost of $290 million, that's a full year number. So what does the split look like for stranded costs in the second half of the year?

$200 million, $290 million for the year, we'll give a little bit more color on Thursday. So you'll see it on Thursday when we talk. But like I said, majority of this cost is already actioned. It just needs to show in our run rate, meaning the restructuring actions, et cetera, were taken, the people that we had to take out those people already exited.

So it's just a matter of that showing up in our run rate. And like I said earlier, we should end first quarter about 21% segment margin. And in the fourth quarter, it will be about 22%.

Okay. All right. Great. And then just lastly, the Quantinuum exit, how are you guys thinking about monetizing your remaining stake? Any comments around that would be helpful.

So I would say, first, once again, I'd like to congratulate the team on the raise through the IPO. I think that the business now is extremely well positioned as far as having capital. We're making a lot of progress commercially as well as from a strategy execution standpoint, and we'll stay in the business for a while. But it is an optionality for us that we'll definitely consider down the road. But we don't have the urgency to get out, given that the business is such a good position commercially and where it's going.

And then look, we will have a book adjustment coming up, obviously, as part of the deconsolidation, et cetera, we'll update our valuation of the business and reflect on our books. So it's going to be $5 billion plus pickup in terms of the value of the business and that's reflected on the books. So you can from there infer how much potential cash -- incremental cash flow might come through any modernization down there.

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

I guess when you guys were building the first half to back half plan, this acceleration or step-up in organic growth; maybe just help us bridge the confidence level there between backlog conversion, the order momentum that you're seeing, short-cycle recovery, comps, whatever.

Just curious in terms of the confidence level in that step-up and where is that coming from, is it already within the backlog? Or is it some extrapolation of the order trends you're seeing now?

Sure. So let me maybe just level set on where we are here for the quarter and how we're thinking about the second half. So May quarter-to-date, our orders across the board are high single digits. Building automation is closer to double digits. So we see strong orders, both on short cycle and long cycle.

Let me just maybe talk through various segments and start with PA&T. In PA&T, as you remember, we always talked about us having a record backlog and that backlog building. This quarter, this backlog is starting to convert. Why do I say that? I start seeing cash, customers are paying us advances, we're mobilizing our people to go work on these projects and start the engineering work.

We see significant pickup in the second half from that project work, and we are 100% confident in the volume coming. On top of that, you have the increased catalyst demand that's coming as well, and that's short cycle. And -- but I think that given where the oil prices are today and just the general demand, we will continue to see strong performance in PA&T.

On Building Automation, Building Automation now has been delivering 7 quarters high single-digit growth. We continue to guide them at mid-single-digit plus, and the orders are extremely strong. We're seeing a lot of volume from our products, but we also see volume in projects and services.

There is a little bit of pull in, if you will, from a second half to the first half, the customers are driving because we did announce price increases, so people want to lock in their pricing. That said, that gives me confidence this accelerated demand, it gives me confidence that the projects that people have in their pipeline are going.

And then finally, on the Industrial Automation, a lot of it has been self-help story. But the team is, again, starting to introduce NPI. Volume is better as far as demand. We're able to satisfy that demand. So the business is going to grow in the second half, low single digit. And based on everything I see, it should grow mid-single digit next year.

And then Pete is definitely taking advantage of reshoring happening and pivoting the business to being more focused. So across the board, like I said earlier, all three segments have momentum.

Great. That's very helpful. And then just a separate question on profit trends. So obviously, the back half guidance is helpful. There's a few moving pieces like the trademark license economics, I think, is helping maybe $145 or so million, and then you've got WWS and PSS leaving.

So on the trademark licenses, is that -- should we think about that as kind of sustainable as we exit this year? And then I assume PSS and WWS, there's obviously some margin and growth mix dynamic. Maybe you can talk about what those businesses exiting does from a mix perspective.

The trademark income is just helping us with stranding cost. And then obviously, it will subside over a period of time, but we're going to be continuing to simplify and drive margin expansion operationally. So over the next few years, this will offset.

What I said earlier, operationally versus the guide that we gave at the beginning of the year, so the 50 to 90 bps operationally, right now, we're more like 100 to 120 bps of margin expansion operationally on top of everything else that's happening structurally as far as the portfolio adjustments, et cetera.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I know you talked about better Industrial Automation growth this year and now expecting flat because of maybe better performance in Asia and Europe, I believe. But can you just maybe talk about which categories or product verticals are driving that better-than-expected outlook?

I would prefer just Pete talk to it. He has a lot of material that he's going to share, and it's only a few days away. So I wouldn't do it justice, and I'd prefer Pete talk about it.

Appreciate that. Fair enough. And then maybe just, I guess, to follow up, it seems like Q4 is really the first quarter where we kind of have a real, I guess, pro forma for all the portfolio movement that's happened with some coming in, some going out.

So I guess, how do we think about that 22% margin rate in Q4 as we look into '27? It seems like there will still be some stranded cost out coming out of there. And anything else just to call out from that Q4 jumping off point?

So in fourth quarter, we still have about -- like we said, about $85 million of stranded costs that will take out in the first half of the year. We we will finish the year about 22% margin. And then we'll talk about 2027 when we get to the beginning of the year.

But we have implemented a multiyear margin expansion framework that is based on operational improvement. So it's price, it's mix, it's leverage on fixed cost. And structurally, we're continuing to simplify the business significantly, and I'll talk about it later this week.

Yes. And Chris, I would just add, don't forget, just to think about the seasonality too. Yes, we are exiting '22, but Q4 is always the strongest for this business. Obviously, we have a limited history of just this group of assets, but you shouldn't think of this as goes up into perpetuity. Obviously, Michal will say a lot more about the long-term targets in a couple of days. But just remember, Q4 is also historically the strongest quarter of the year.

Our next question comes from the line of Andrew Buscaglia with BNP Paribas.

I just wanted to check on -- you made the comment that you had some large orders in the Process segment. Do you mind adding some color to that? Like what's incremental that you're seeing this quarter? And I know last quarter, you cited some strength in LNG. Can you talk a little bit about that [ market ] specifically?

Sure. So it's the orders coming from two areas. A lot of the orders are coming from LNG. And we obviously, like I said, we have the tales orders, et cetera. You'll hear more about it here as we go through the quarter, make the announcements, but we have some orders in Africa, we have some orders in Middle East. So generally, we feel good about the backdrop here and our commercial pursuits and how they're starting to materialize in terms of firm orders.

Okay. Got it. And then in the call, you cited Q2 tracking in line. You did raise a little bit on your Industrial Automation front. So wondering, should we assume midpoint or maybe slightly better than the midpoint?

For the second quarter?

Just Q2, yes.

Yes. I should say it's in line. I mean it's rounding at this stage. I would say that everything indicates that the quarter is going to be good, but it's within our guide.

Our next question comes from the line of Jairam Nathan with Daiwa Capital Markets.

So just wanted to understand for Honeywell Technologies, the CapEx percentage of sales, R&D run rate, yes, that would be great.

Sure. So I would say -- from a CapEx standpoint, everything we've done with the portfolio makes us a bit CapEx lighter. Our CapEx over the next few years should be around 3% of revenue, and that's with investment in capacity, incremental investment in capacity in LNG. So feel good about CapEx.

And R&D, our R&D as a percentage of sales should be north of 4.5%, probably this year will be 4.8%. As if you remember, we stepped up our R&D spend last couple of years. And we feel that at 4.8% -- north of 4.5%, it's appropriate level of R&D spend. And it's not pressure to us for margin expansion. We continue to take out fixed costs down despite taking up our R&D investment.

And finally, in terms of -- you talked about on HPS, you talked about Middle East in terms of energy diversification. But is there -- are you seeing any reconstruction benefit? And -- or if not, what do you think the timing there would be?

Any -- sorry...

The reconstruction of facilities that have been damaged and things like that.

Yes, 100%. I mean we're actively talking to our customers. We're on the ground with our customers. Dan was there on the ground a couple of times, Bilal, Jim. So the whole leadership team has been in the Middle East since the conflict, and we're working through it. And over the next -- this quarter and quarter after, you should see some announcements on orders, but the reconstruction has already begun.

Our final question comes from the line of Chigusa Katoku with JPMorgan.

Just starting with IA, I was curious, so the fourth quarter is when you'll have the steady-state portfolio at IA. So I was curious your thoughts on what the fourth quarter exit rate for organic growth would be.

Yes. So look, I would tell you that it will be low single digits to mid-single digits. I have a high level of confidence that next year, the business is going to grow mid-single digits. We obviously right now, we are guiding low single digits, but the team is having momentum and mid-single digit in the fourth quarter is not out of realm of possibility, but we'll continue to be cautious.

Okay. Sounds good. And then similarly, for PA&T, do you expect Johnson Matthey to grow in line with the high single digit? And kind of what kind of exit rate do you expect there in the fourth quarter?

I would say, like I said earlier, we have a good momentum going to the second half in PA&T. And I'll just leave it at that for now. We'll have more to say when we report second quarter.

I would now like to turn the call back over to Mike Stepniak for any closing comments.

Thank you all for joining us today. We really appreciate your time and support, and we are looking forward to seeing many of you in New York later in the week. And I just want to say, have a great day.

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

I think before we kick off the conference, I thought I'd make a few opening remarks. For those of you who don't know me, my name is Nigel Coe. I lead coverage of the U.S. industrial sector here at Wolfe Research. And it's my pleasure to welcome you to the -- first of all, on behalf of the Scott Group, Myles Walton, the sales team, corporate access teams and also our founder, Ed Wolfe. I do -- I want to give you a warm welcome to the 19th Annual Wolfe Industrials and Transports Conference.

I use the word warmly because today is going to be a warm one. Temperature outside today is going to be over 90 degrees. The first day in New York, over 90 degrees this year. So what a great day to be in this small confined room with 400 people. So, so far, the air conditioning is working. We've got some cold air coming through and long may that continue. So as you'd expect for a U.S. industrials conference, we're going to be running the AC really hard. We're going to have CEOs on the stage, and we've got AC come out of the vents. So we'll endeavor to keep you guys as cool and comfortable as possible.

We've got another really great lineup of corporates this year. We've got 106 corporates attending for one-on-ones and presentations. We've got 577 investors registered, and we're hosting 526 one-on-one meetings. So that's a really good lineup, new records for the conference. And I'd like to really thank all of you for both corporates and investors for supporting this conference. It's not easy to pull us off. So I do want to say a big thank you to our corporate access teams for really just the dedication and hard work of making sure all the logistics line up.

And finally, I do want to just remind you, we've got a cocktail event this evening, kicks off at 5:00 p.m. I would love to see as many of you there as possible, just to mingle and in a sort of very casual environment at 5:00 p.m., but we'll see if we can get the bar track to open a little bit earlier than that. So that's it for my prepared remarks. Once again, thank you for being here. And yes, okay, we're good to start. It's 8:00 a.m. So it's time to get into the conference.

And it's -- I've got 4 fireside chats to kick off the conference, and it's my great pleasure to welcome Honeywell. I can't think of a better way to start the conference than with Honeywell. And it's my pleasure to welcome Mike Stepniak, CFO and SVP of Honeywell, to the stage. So Mike, thank you for being here.

Thank you. Thank you for having us today. Really appreciate it. Good morning, everybody. Maybe before we get to Q&A, I'll just give you a quick update on what's going on in Honeywell, where we're at. But as we announced, separation will take place on June 29. That's the first day of the third quarter. And we are in the final stages of separating, I would say, all green lights as far as we go. Aero Analyst Day, just once again, it will be in Phoenix on June 3. There will be a couple of events on June 2 as a prelude to that. And the Analyst Day for RemainCo will be here in New York City on June 11. So obviously, everybody is welcome, and we have great events lined up. Operationally, things are going well. We'll talk about it today, but I would say, obviously, we're reconfirming our forecast for the year and the guide and a lot of, I would say, positivity in the markets generally.

Great. Thanks, Mike. We're going to spend today talking predominantly about Honeywell Automation, I think. But you mentioned all green lights for the spin. Any remaining hurdles to cross here? Or are you pretty much good to go at this point?

We're clear to go. We're obviously all the way to the end, there are some activities and post spin, you have some transitional services, TSAs, things like that. But operationally, we're ready. So I don't foresee any issues as far as the 29th.

Great. Sounds good to know. It hasn't exactly been a huge amount of time since you reported results, but we are 2 months into the quarter. Anything to comment in terms of moving pieces around the portfolio, particularly interested in this Middle East headwind that you're forecasting?

Sure. So maybe I'll address that first. Middle East is resilient, and it's -- I would actually say it's better than what we thought it was going to be. Customers are extremely active. We already sent our teams to the region, including all 3 of our general managers have been visiting customers. So works are underway as far as repairs, et cetera. Underlying demand is still there.

So I think we said $100 million to $150 million pressure in the second quarter. That's looking much better. It's going to be ways up $100 million. And customers from order activity, I see customers not only looking for repairs, but also thinking about the future expanding, et cetera. So really good demand, I would say, coming up in the midterm from the region.

Okay. And anything else to highlight across the portfolio?

Sure. So maybe I'll just go through all of our segments. Building Automation sees strength across the board. And as you know, they've been printing high single digits the last 6 quarters. We are guiding to mid-single-digit plus. Based on everything I see in the second quarter, they'll have another outstanding quarter. So that portfolio is performing extremely well. Industrial Automation for us has been a story of self-help. And with Pete Lau coming in and applying some of the knowledge transfer that he brought from Fire and some of his external pursuits, we're seeing a lot of improvement. And we also see green shoots in terms of underlying market.

So I feel like the business stopped losing share and starting to gain share and will be growing into the second half. So a lot of positivity there. And obviously, transformation of the portfolio is helping us a lot as well.

And then on process automation technology, that's a business that has been facing pretty hard dynamics. In the second quarter, they're lapping pretty tough comps from last year, but they're sitting on the record backlog, and they'll have another outstanding quarter from an order standpoint. And there is a significant inflection coming back into the second half that we talked about, and we have a strong visibility to that volume. And orders are extremely, I would say, are picking up both on the catalyst side now on the short cycle and from the projects. Our LNG business is sold out now for 3.5 years. So really good, I would say, tailwind going into the second half. Now I remind you, though, second quarter is a tough quarter for the business. So that's not changing, but we're seeing a lot of inflection in the second half.

Okay. And the backlog, does that give you confidence in that inflection? Do you have that visibility? Or is that more beyond this year?

It's the second half of next year. So it's a very high-quality backlog. What I mean by it, we see projects going to FID. When they go to FID, we start work. So the teams are starting work because they have financing. And then we're having a lot of discussions now with customers on catalyst. So that interest is going to lead to orders as well.

Okay. And we talk about projects. Obviously, LNG is what we have in our minds mostly. But what else beyond LNG, are you seeing that?

Look, I mean, U.S. doesn't talk about ESG a lot. We were just last week in Europe. ESG in Europe is quite alive. There are lots going on, a lot of interest. Same with Latin America and Asia. I think this disruption that happened here in Iran reminded people how fragile the whole ecosystem is that people are looking for energy security. And I'm confident these projects are starting to come back. We had a couple of projects go FID in the second quarter, predominantly in Latin America, but we see ESG coming back.

No, ESG is not quite dead yet.

I actually -- I think it's going to be resurrected.

Right, I think so. And then going back to Building Automation, you mentioned another -- I think the word was outstanding quarter from Building Automation. Maybe just take a step back, we're not seeing too many of your competitors growing at this level. Maybe just unpack what's driving that outgrowth.

We did several strategic shifts over the last couple of years in the Building Automation business. One, we moved many of our teams and the focus in region for region, where we can be more intimate with our customers. We revamped very early our NPI machine and R&D. We talked about it last year. We reinvested into, our R&D and R&D was about 50 bps of margin pressure for us last year. That's about $350 million across the company. Just last year alone, our Fire business had over 30 NPIs come to the market.

And Forge is a big deal for us as far as connected and driving the connected offering. And Bilal and Suresh talked about early in the year, but this is really taking off for us. So we see growth in our verticals, and we'll continue to pivot to high-growth verticals for us, which is for us, it's life sciences, it's hospitality, hospitals, data center as well, although data center is still fairly small for us, but we're seeing growth across the board.

If you had to rank order the NPI versus Forge as a driver of that growth, enabler of that growth, would you say one is more important than the other?

So really, NPI is all about just installing your -- creating installed base and growing your installed base. Where I see most Forge opportunities for us is moving really to autonomous operations, which for us, a lot of it is in the aftermarket. If you think about technicians retiring, not having people to come to service buildings or whatever facility you have. That's where really connected comes in. That's where Forge comes in. That's where cognition comes in, where you can run and operate facilities remotely with fewer people. And that's where we see the benefit of Forge coming in.

Okay. Now Forge has been around for quite some time, but I think it's now starting to reinflect. And I'm just wondering is AI starting to enable some tools that customers are now seeing real value.

Yes. So AI, I think, is alive, obviously. I can tell you in Honeywell, we are deploying AI on the cost side. For us, this is really a productivity tool. And you have to be able -- in order to be effective in it, you have to deploy it at scale. So you need really processes that are scalable and at scale in order to be applied those tools and be cost effective for you. And that's what we're doing from Honeywell standpoint inside the company, if you think about how we are creating NPI, how our engineers work, a lot of the spectrum processes use AI.

On the commercial side, for our line of work, it's a little bit different. You can't just come in and take AI from the street and apply it into a process plant that you have very strict, I would say, operating parameters and you have 40, 50 years of domain expertise in terms of how we design these. So where we're deploying right now, AI is really just for Forge and really focusing on our domain expertise and which is around controls and critical operations.

But in terms of Honeywell, the way you operate Honeywell, you're not seeing big displacement of traditional roles by AI at this point?

No, we don't.

No. Okay. Okay. Aerospace, I do want to just touch on -- maybe just going back to 1Q, the supply chain issues that you saw. Obviously, growth was well below what you expected. Maybe just bring us up to the speed. Well, maybe first of all, just maybe just run through where you're seeing the barriers on the supply chain, what you're doing to overcome those? And how are we tracking through the second quarter?

I would say, maybe first, to talk about the second quarter. So Jim guided mid-single digit to high single digit for the quarter. And I think I'll leave it at that. They'll have their Analyst Day in a couple of weeks. They can talk more about it. As you know, the quarters in that industry are very back-end loaded. So it's really the last month of the quarter where you get majority of your output. And I think that's what the team is instrumenting. Everything I understand, April was encouraging. So it's definitely will print better results than the first quarter, but they still have some work to do.

As far as the supply chain issues in Aerospace, specifically related to Honeywell, it's on the mechanical side. On the mechanical side, we -- I remind you that the business produced 14 quarters in a row, double-digit output growth from factories. First quarter, I think, was unusual, and the team got surprised with a few late-stage decommits from the suppliers. They're working through that. But the supply issues, I would say, continue. We've done a lot in terms of investing in our own supply chain. We've done a lot in terms of investing in our suppliers as far as tooling, testing, et cetera. But right now, the capacity of the supply for us, it's about 10% to 12% year-over-year growth, and we really need something like 15%.

Okay. It seems like it's a lot of the smaller links in the supply chain that's where the pressure points are.

That's right. And that really comes to the nature of the mechanical supply chain. It's more fragmented. It's smaller players. Some of them are not well capitalized, et cetera. So you either have to assist them or you have to in-source it, et cetera. So the team is kind of working through that.

Okay. And when you say mechanical, is it mainly on APUs and engines or is it?

It's more engines, more engine pronounced. It's forgings, castings, plates, things like that.

Okay. Nuts and bolts basically.

Exactly.

Yes. Okay. And maybe just before we move on to separation, some of the separation items to consider. Industrial Automation, maybe just bring us to speed in terms of the timing for the PSS and warehouse exits. And then maybe just remind us what's left in IA at this point. We know there's sensing, there's smart meters, anything else to think about there?

Sure. So the business will be post TLW exit, it will be about $3.5 billion, and it's pure-play now measurement and instrumentation business. Quite excited about it. We have a lot of domain expertise. We have good positions, much more focused and that's why I'm so confident in the inflection of the business, both from a top line standpoint, but also very important from a margin expansion standpoint. The business right now is quite dilutive to Honeywell. Over the next 2 years, it's going to lead the margin expansion for the company, and you'll see that at the Investor Day, and you'll see essentially impact immediately as we go through the second half. So I'm quite excited about the inflection of that business.

And any help you can give us in terms of once we extract those 2 businesses, how the margins look for the business?

I would say there -- the businesses are dilutive to overall Honeywell, obviously, but also to IA. I would just ask you to be a little bit more patient with us, and we'll have that information on the 11th.

Do you think that again, this is probably a question for back in June. But do you think these are low to mid-20% type margin businesses because that's obviously where Honeywell is?

The business we're exiting?

No, no. The remaining IA business.

Yes, the business -- look, I mean, it's -- for the business to earn its keep in Honeywell portfolio will have to be north of 20%. So that's what we're working for.

Okay. Okay. And obviously, $3.5 billion makes it a little less scale than the other 2 segments. Is the intention to build -- to refocus acquisition activity within IA?

Sure. So maybe I'll talk about it. And we have a discussion at the investor event about how our acquisitions are doing. But -- when you talk to Pete, what you'll see is that within Industrial Automation, we have a lot of white space and the industry itself is quite fragmented. So there is a lot of opportunity there as far as do M&A, but we obviously will be careful to make sure the assets that we add and when we add them, they continue to be accretive for us, and we see a strong technology fit. I would just leave it at this.

And if you look at our portfolio, process automation technologies are pretty well provisioned with acquisitions. They have a lot to work with as far as organic growth and margin expansion. So is Building Automation. The Access Solutions business is doing extremely well. We'll be looking at maybe some bolt-ons down the road there. And then the focus is really on Industrial Automation at this stage.

Yes. Okay. We do still get questions about the possibility of a big bang transformational acquisition within IA. It seems you've been indicating some a bit more maybe creative and maybe I don't know, tangential is the word, but where do we stand on that?

That's probably a better question for Vimal when we talk to him. But generally, I think where our head is we don't want to bet an enterprise on something big and transformative. We've seen companies that get in trouble with big acquisitions like that. What we find works for us the best is bolt-on, which for us, it's $2 billion to $4 billion ticket type assets. We tend to know how to absorb them quickly and realize commercial synergies in the best way.

Okay. I'll take 1 or 2 more questions, and then I'll throw the Q&A open to the audience. Maybe just think about the Aero separation. You mentioned on track, maybe some TSA agreements to dot i's and cross t's. Maybe just bring us up to speed on the stranded costs. You said $350 million to $400 million stranded costs. That's run to the low end of that range, I think, is what you said. But maybe just where do you expect to be on day 1?

Sure. So we thought stranded costs was going to be around $400 million when we looked at it in January. We obviously went after stranded costs for a while now before Solstice. And by the way, remind you, Solstice is up 70%. I just want to shout out to the team. They're doing extremely well. We will show up in June with probably less than $300 million stranded cost and majority of the stranded cost is already being addressed. So meaning it's related to repositioning, et cetera. And we've already provisioned for it as far as executing the stranded cost.

So by year-end, I'm assuming right now about $100 million of stranded costs. It's a really good story. Team really rallied around this. And given we're going through separation, but we're also trying to grow the business, et cetera, I think it's really strong focus from the team on getting the stranded costs in the box quickly.

Okay. So just to make sure I understand that. So less than $3 million of stranded costs on day 1 of the separation.

On June 29, that's correct.

Right. Okay. That's really impressive. Okay. And then the restructuring actions to accomplish that will be part of the acquisition onetimers, I think?

Most of it is onetime cost, correct.

Yes. Okay. And then pension. Can you talk about pension, any decisions on pension income?

So for people that don't follow our pension discussion is, I'll just remind you, our pension is 40-plus percent overfunded, more like 46% overfunded. We did and we're doing a natural split on the pension between Aerospace and Honeywell. What I mean by that is we're essentially dividing the pension base when employees were and overfunding goes proportionally with that. So Aerospace where we get about 55% of the pension assets, RemainCo will be left with the rest.

With that said, we're still having discussions with our Board on what's the best treatment for the pension. There are 2 schools of thought. One is obviously, you get implicit value for the pension because it is an asset. The second school of thought it's quite volatile. It affects your free cash flow metrics. It skews the quality of earnings, et cetera. So we're finalizing that discussion. Obviously, we'll have more to say on the 11th. Do you have a thought on it?

My free advice and it's free because it's worth is I do think that free cash flow is the key.

That's correct.

And I think the pension just adds noise personally. I'd get just going clean on earnings. Not to say it's not clean. But maybe just going back to the pension surplus. You've sort of referenced the possibility of monetizing the surplus. Any thoughts on that?

There are 2 different ways you can do it. And I don't want to take a lot of time today on that and people can read it. But if you look at what IBM did or what Kodak did or what Nokia is doing, I mean, those are several different options. You can structure it in a way where you open in your defined benefit plans, you can straight up exit it and sell it, which -- but it's very tax inefficient. And there was actually in the One Big Beautiful Bill, there was some legislation proposed where you could fund some of your employee benefits from the, I would say, from the overfunding that didn't pass, but nonetheless, it is being discussed. So maybe we'll see more about it in the future.

Okay. Great. Thanks, Mike. Enough pension. Otherwise, we'll send anyone asleep. Any questions from the audience? Any questions for hand up. Otherwise, I'll keep going. No, -- everyone likes to just listen to me talk and ask questions. So thinking about Quantinuum, I know there's an S-1 on Quantinuum. I know that you're strict in terms of what you can say, but maybe you tell us what can you say about the IPO?

I can't say a lot. I will leave it at that. But what I would say is that there will be a few announcements coming up soon as the team is working through various steps of its strategic journey as well as commercial journey. I'm extremely excited about the commercial progress the team has made on maturation of their technology, and they have a very strong pipeline as far as orders that's going to convert to revenue, which we're excited about. And I think right now it's the right time for them as they're maturing, growing, et cetera. It's a good time to stand up the company.

And you said publicly the $250 million of investment spend or losses that's right now in corporate expenses that deconsolidates. Is that still the case?

That's right. So right now, we're fully consolidated. At some point, we will not fully consolidate. And we will only, I would say, from an EPS standpoint, it won't change anything. But from a segment margin standpoint, it will be a tailwind for us because we will only put above the line the portion of the company that we own. It will be sub 50%. And today, it's 100%. So simple math, today, it's $250 million that goes above the line. Tomorrow, it's $125 million.

Okay. Got it. So it seems to me that when we think about the $250 million from Quantinuum going below the line, you got the $150 million of royalty income from Aero. You've got the $300 million coming in. It seems that net-net, corporate expenses come down on day 1. Is that right?