Honeywell Aerospaces Aktie

Okay. You got me. Okay. Great. Good morning, everyone. My name is Peter Arment, Senior Aerospace pens analyst here at Baird. We are delighted to have with us Honeywell Aerospace and with -- joining us from Honeywell Aerospace, we have Jim Carrier, who is the President and Chief Executive Officer. Welcome, Jim. Thanks for your continued support for the conference. Really great to see you. And yes, there's a lot going on in your world, but let's kick it off.

I guess, this is the first time you hear as a new independent Honeywell Aerospace. So maybe let's just talk about kind of state of the state and how you're seeing things as an inpendent company to kick things out.

So we're 4.5 months in as a stand-alone. A lot of changes happening across the organization. We had our first earnings report coming out here very recently as our first quarter is independent. I would tell you, obviously, we've talked about a lot around our demand that we're seeing in the portfolio for our products and our technologies. And we talked a lot about what's metering our ability to drive output out of the factories within Honeywell Aerospace, and it really is around the supply base across the organization. So we're actually very fortuitous with our products and our technology to be in a high-growth environment. We've seen it now for some time in aerospace and defense for our products. We're continuing to see it today. And we're going to continue to see that for the future as well.

Yes. Are you -- when you think about just kind of the efforts around the supply chain, you guys have talked a lot about that on the first earnings call. I guess maybe think about, I guess, what are the things we should be watching for and how you're doing there? I know you guys had some charts on that. Maybe talk a little bit about that?

Yes. So we've provided a heightened level of transparency around the supply base. And as we've talked about beforehand, I mean, Honeywell air space with the broad breadth of our portfolio and products. We have over 3,000 suppliers that support us, and 3,000 of them are doing just fine. We've talked about the 70 or so that are critical or constrained, 10 of them being absolutely capacity constrained, which are driving and metering the ability to grow the business. And so -- as a result of that, we thought it was exceptionally prudent to be very transparent relative to how we're handling those 10 suppliers and particularly across 4 main commodity groups, whether it's bearings, complex machining and castings and forgings.

And so what we've done with those 70 is we kind of like depending upon how they're impacting the portfolio, certain executives on staff, inclusive of myself, will actually own those suppliers day-to-day, week-to-week in terms of driving improvements, needs, escalations and ultimately, the resolution. So I own the top 10 across that peer group of 70.

In fact, I'll be leaving later on today to go visit 3 out of those 10 tomorrow. And again, it's around really truly what are the constraints, what are the issues, how are we going to unlock those, whether that's going to be through capital investments within their 4 walls outside of our 4 walls, whether it's going to be insourcing, bringing stuff back into our factories, multisourcing, dual sourcing and the like across those main commodity groups. -- and a significant amount of investment that we continue to do in that space to unlock and drive output to support the demand that we're seeing for our products and our technologies.

Well, so given all that, though, you still reiterated your 2030 kind of plan, and so reiterated 6% to 8% CAGR kind of framework between 26% and 30%. Maybe I guess when we're thinking about the milestones over the next 12 to 18 months along that path? How are we thinking about that?

Yes. So we are fully committed to that 2030 financial framework agreement that we put up. What I would tell you is that the demand is, again, exceptionally robust, that's feeding into that 2030 framework model. We've secured $90 billion of lifetime value wins over the last 4 years, year-to-date, another $20 billion on top of that, $5 billion occurring just in the last third quarter of this year alone.

And so we continue to see that heavy emphasis and the like. And what I would say in terms of 3 things to really be watching for relative to how we're performing against that is clearly that the commercial aspects of the business maintain the health and robustness of them, right? The orders are still coming in. Our book-to-bill is still greater than 1.0.

In fact, it was 1.3 in the defense business, 1.1 overall. Commercial air transport orders were up 12%. And quarter-on-quarter for the third quarter, again, very indicative to short-cycle demand for the business. So commercial health of the business is something I would watch very closely relative to that.

First and foremost, as we're going into 2027, as you think about the 12, 18 months as we're building that foundation for sustained resiliency, robustness and growth of the supply base, that quarter-over-quarter output from our suppliers that's translating into output from our factories and sales growth to make '27 look very different than what 2026 has been for us going through this transitionary period.

And the third thing that I would say that underlines all of that are the KPIs, the key performance indicators across our supply base specifically around those 4 commodity groups continuing to see the quarter-over-quarter, month-over-month, week-over-week improvements across those commodities. That's going to be laying the foundation for the growth for I think, I mean, you talked about, I think, was it the bearings that we were already going to have -- you're going to have a second source potentially, right?

Correct. Correct. So we have a second source online. They've been building out their capacity as a result. -- we'll have them fully closing out all of their past due to us by the end of -- we actually have another third source coming online as well in that bearing area that is 1 of the most constrained aspects of the portfolio within Honeywell Aerospace.

And so a third source will be coming online in 2027, they're already making the investments for capacity expansion. We're also making the investments in terms of tooling and machining capability as well to bring that third source online for us.

So you're a 20-year Honeywell Aerospace or Honeywell veteran and -- did you had you always had visibility as deep as you do now in the supply chain? Or did you guys really go much to?

No, the transparency and visibility is at a level we've never had before across the portfolio. And part of that is attributable to what I mentioned a little bit earlier, all 70 of those constrained or critical suppliers are all owned by executives on our stack.

And so as we place additional labor in those factories of our supply base, as we put employees in those factories as well doing the hypervigilance and oversight of those factories oversight of their production capabilities. The conversations that we're having with the suppliers are very, very different. It's much more of a partnering arrangement. Where do you need to invest? How can we help you invest? Where do we buy tooling for you in a proactive manner additional tooling. So that when tools wear, we can bring in the new tooling, send the old tooling out, get it refurbished and bring it back online to address any yield or a quality issue. So that level of intimacy with the supply base is at a level that I've never seen in the 20 years of Honeywell Aerospace.

But you're not only just partnering with those suppliers. You're also making an investment the Tempe facility announcement that you guys had $500 million Talk a little bit about that because you've got some exciting things there, whether it's your sure acquisition. You've got the Attune cooling systems. You've got -- and it sounds like it's a lot more than just you're adding complex machining. You're doing a lot of Talk a little bit about that investment. -- super exciting announcement that we were able to do relative to the temporary facility. In my 20 years, again at Honeywell Aerospace, I've never seen an opportunity present itself where we are actually building a brand-new greenfield factor. -- from scratch.

It's going to be state-of-the-art factory of the future, robotic automation within the factory, AI, digital twins, is truly going to be the foundational footprint of how we look at any factory expansions that we do across Honeywell Aerospace. And this was actually part of our plans originally, even before we had separated the we're going to do, and the reason being is threefold. I would say on primary and 2 quarter sort of secondary benefits that come out of this. The primary benefit is this really is driven by the amount of wins across the 2 product lines, Peter, that you mentioned a moment ago, Assure for electromechanical actuation and attuned for vapor cycle cooling systems.

Those 2 product lines alone have secured multiple positions across multiple aircraft platforms and Missile Systems as well to the tune of about $15 billion of lifetime value in -- there was no way with that explosive growth across those 2 product lines that we were going to be able to do that within the existing footprint of Honeywell Aerospace.

So it actually drove us and was part of the plans to increase and expand our Tempe facility today to add 300,000 square feet of this factory of the future program. So that was the primary reason, but the secondary benefits that come out of that is that it does allow us an ability to also now in-source additional machining capability as well into that factory. So that provides us an additional source for manufacturing as part of the in-sourcing process, which drives resiliency and robustness, again, in that complex machining portion of the portfolio that is one of those critically constrained areas within Honeywell Aerospace and our supply base.

That's exciting for you guys. We look forward to that. So that comes online at the end of '28?

End of '28.

Got it. Okay. Let's switch over to talk a little bit more about the end markets a little bit, just because a lot going on there, you had commercial after micro orders up 12% in the quarter -- but sales are only growing. You said, I think it was 2%, but because it's a little still supply constrained as we just talked about, all those different things. But how are you seeing about the underlying demand versus kind of the pent-up demand that we're seeing?

So the first comment I would make about what you mentioned a moment ago about commercial air transport orders being at 12% and the output only being 2% growth in there was a very difficult comp that I think Q3 right, on a year-over-year. I mean, Q3 of 2025 our commercial aftermarket business grew over 20%.

So it was a very difficult comp relative to that. But if you look at it along a longer continuum over about a 2-year period of time, the 2-year stack, the growth coming out of our commercial aftermarket business is double-digit growth, right? So we just had that 1 very, very difficult comp. But the underlying demand across the portfolio is exceptionally strong.

You mentioned commercial air transport, up 12%. Our defense business orders are up 18%. Book-to-bill in the defense aftermarket or I'm sorry, in the international defense, 1.3 across the board, where as you know, 30% of our defense business is international defense.

But I think the 1 area I would also highlight relative to this is business aviation. So I think it's an underappreciated aspect of our business overall. And what do I mean by that? When you look at business aviation and flight hour growth across that market segment, you're looking at everything from small biz jets all the way up to ultra-long-range aircraft.

And across that continuum of platforms and business aviation, it grows at about 5% this year. Where we play with our products and our technologies is going to be in that midsize, super midsized and above to ultra long range. That segment is growing at 8% for us. So we are outgrowing the overall market because of what's happening in that market segment.

And if you even take that piece of it and you break it down even further into the super midsized category, which is largely being fueled by fractional growth rational companies, the acquisition of aircraft and the like. That is a high-growth environment for Honeywell Aerospace, where our HTF engine, our Turbo jet engine is on 5 of the 6 aircraft platforms relative to that. And why is that exceptionally important? And why do I hone in on that so much? It's because in the fractional space, an aircraft will fly 3x the amount of hours per year as a traditional corporate operator.

It is amazing. The usage of these aircraft on a regular basis. So we can see sort of how that drives a lot of growth in terms of maintenance and the like for the HTF family of engines, APUs and other avionic systems that we have across that segment. And that segment alone over the next decade is going to grow about 40% because of the demand for fractional growth going forward, whereas the rest of the Business Aviation segment will actually grow at about 29%.

The other underlying factor is not just about the flight hours, the fact that they're flying those aircraft 3x as much as they would fly a corporate aircraft as an example, but the economics the economics behind business aviation for us are very, very different than the economics for air transport aircraft.

Whereas for every hour that you fly on a bizav aircraft, you actually secure for Honeywell Aerospace 10x the revenue that you would see for every hour that you fly in the air transport market. And so for us, it's a very, very lucrative portion of the portfolio. It's a significant portion of our commercial aftermarket, and therefore, I think it's underappreciated because when we think about commercial -- we focus on the -- we're very, very focused on commercial or transfer, which we should be -- but there's also this asset here within Honeywell Aerospace, that's very valuable.

Yes, absolutely. And you guys have dominated that higher-end category for a while.

We have.

Yes. It's great. Well, within the commercial air transport, but you also have a lot of pressure to support your OE customers -- so you're kind of balancing supporting the aftermarket and the OE. Can you maybe talk a little bit about that?

So we do make sure that we prioritize production flow, new factories with OE customers, whether that's in the commercial air transport space or whether that's in business aviation as well because they both draw on the same industrial supply base. But we also prioritize our aftermarket customers to ensure that scenarios around aircraft on ground or what's referred to as -- as do not materialize.

We want to keep your aircraft line, and we want to keep the production flowing through factories. And so that is a priority that we put within the organization. Those are the top 2 priorities. And that because we are supply constrained, it does limit somewhat our ability as we allocate more to those facets of the business to support those markets. It does limit some of our capability to support other portions of highly profitable aftermarket portions of the portfolio.

So we do prioritize in that manner for the commercial market as a result. But ultimately, we stay very much in close contact with our customers. We know exactly what their production plans are on the OE side. They know exactly where our supply base constraints are. We know what the priorities are. So it's through that level, of customer intimacy, both with the OE customer and airline operators that were able to fulfill the needs for them on a prioritized basis.

So we may not be able to fulfill the top 10 priorities for an airline. But tell me what your top 5 are to keep you operational, and we will make sure that those are addressed. And then priorities 6 through 10 as our supply base continues to unlock, and we start to see that quarter-over-quarter-over-quarter growth coming from that, from the investments that we are making. It allows us then to open the aperture and then fulfill the needs of the rest of the market, which tends to be more of a higher value, higher-margin portions of the portfolio.

Yes. The unlocking of the supply base for you is is just the critical because it's going to drive so much of your top line volume?

Foundational. It is absolutely foundational, which is why as an organization and now being as a stand-alone we are hyper focused the entire team, the entire organization around supply-based unlock, whether that's attention to what's happening, as I mentioned, ownership of these suppliers across the executive team as well as how we invest and the priorities of our investments to drive organic growth for the business.

Before I ask for your crystal ball about defense budgets or anything like that. One quick 1 on just the level set investors around oil and the price of oil around your business, the commercial aftermarket for air transport. How have you seen kind of the impacts there or any impacts associated?

I mean, as you hear, I mean, as everyone is -- in the airlines are reporting their earnings as having a substantial impact on airlines in terms of cost across the portfolio and across their businesses as a result. You're starting to see a little bit of some tempering of some of the flight hour traffic in commercial or transport.

But for us, we're rather insulated from that. And the reason being that we're rather insulated from that twofold. One, we continue to see the brand. But we also have a significant amount of backlog. Overall, for Honeywell Aerospace, we have $19 billion of backlog across the business.

And that is up very significantly for us on a year-over-year basis, high singles for us across the portfolio. And that has insulated us. And plus, in addition, because of our inability to unlock the supply base fully across to fulfill all of the needs of the aftermarket, we do have considerable past due. That's in there as well.

So even if we see some tempering of the commercial air transport flight hour traffic, -- we do have this powder keg I will call it, of past due that is going to allow us to continue to flow and it keeps us insulated from that. Now in terms of the oil pricing and the like, but we have not seen is any decrease in flight hour traffic in business aviation. They have been solely insulated from that, and we continue to see that grow substantially.

All right. Let's -- no 1 has a crystal ball, you ask 10 people, you get 10 different opinions about what's going to happen with the budgets. But what matters to Honeywell? Obviously, 30% international, as you talked about, but let's talk about the domestic piece first, I guess. Do you -- does a short CR impact you? Or how are you thinking about just kind of the setup as we think about fiscal '27.

Yes. I think a $1.5 trillion budget is not really in the cards if you were to apply a little bit of a crystal ball to that. What I will tell you, however, is that as we were building out our financial framework, and growth projections for our defense business and looking all the way out to 2030, we never assumed a $1.5 trillion budget as part of the mix. We were very prudent and cautious about that because we recognize there was a substantial amount of risk around reconciliation on the $350 billion associated with that.

But then when you take it out and you look at what's in the $1.1 trillion and you look at what's in the reconciliation bill? What I would say to you is that we would anticipate that there is such strong bipartisan support for rearming missiles and munitions across the United States arsenal that you're going to see a lot of what's sitting in reconciliation ultimately move down into the base. and things that are lower priority in the base probably get pushed out.

And what I would say is as we look at the priorities of what's in the $1.1 trillion and the missiles ammunitions and the rearmament that is necessary and fully understood with strong bipartisan support for that. And I look at what platforms are being funded and what's a high priority, I anticipate to see minimal nonmaterial impact to anything that we're doing across Honeywell Aerospace.

Our products are on these platforms. We're on every single -- nearly every single precision-guided missile ammunition. We're actually starting to see the acceleration of multiyear procurement for these missiles ammunitions, we actually, as part of that $5 billion that I mentioned a moment ago that we secured in Q3 in terms of firming of orders and the like, $2 billion of that was directly attributable to the framework agreement that we had signed for missiles ammunitions earlier this year.

So we're actually starting to see the conversion of the framework agreement turning into actually now contracts for us and it will afford us an opportunity to actually accelerate some of that work into the second half of 2027 as it pertains to PAC-3s, as an example, FAS and also MRAMs as well. So my takeaway, ultimately from all of that is where we are positioned, where the priorities are with strong bipartisan support. We don't see an impact happening in the Honeywell Aerospace, and we are actually already prudent and conservative in terms of how we forecasted the defense business because we never fully realized or fully baked in or didn't bake in anything around $1.5 trillion.

Okay. That's great to hear. So domestic solid and a lot of good opportunities for growth. Talk a little bit about then the international piece because 30%, and I've spent of time talking to Sean about this in the past, just that I don't think everyone truly understands that these are more of a commercial margin kind of where -- it's a very favorable margin for you when you think about your international defense mix. Maybe talk a little bit about what you're seeing in the defense and then obviously, you made some investments with acquisitions there as well.

Yes. So just to kind of provide a couple of context around that a little bit. Yes, 30% of our defense business is international defense. And to add absolute clarity around this, this is not about foreign military sales. Any foreign military sales that are done that come through the prime, we treat those as domestic transactions because we just don't know when we deliver that product to the prime for inclusion on a missile system or an aircraft platform or on a helo as an example, whether that's going to stay in the domestic market or whether that's going to go overseas to fulfill an FMS sale or a foreign military sale -- when we talk about international defense, it is pure direct commercial sales from Honeywell Aerospace to NATO allies to ministries of defense and also to international defense primes. And those are all done at commercial transactions ultimately.

And so we are embedded within franchise programs because we get some questioning around where are you concerned about that that demand sort of eroding over time. These are critical platforms, and we are on these franchise platforms with our products and our technologies and interoperability with the U.S. systems is key to enabling fulfillment of missions as a result.

So this is very, very sticky, sticky demand for us going forward. The reference that you made to our 2 acquisitions that are very defense-centric in case for electronic warfare, in Sivitanavi for our navigational products out of Italy.

And so I'll to highlight a little bit of that, those 2 businesses for us are doing exceptionally well. They're growing double digit this past year, and we expect that to continue going forward. Sivitinavi is a navigational portfolio of products and non-IT and also operate in a resilient environment and GPS-denied environments as well. And so they have a strong, strong need within the European Union and international applications for that type of product. And so as I mentioned, they've grown double digit this year.

And in fact, they've secured orders from existing Honeywell Aerospace customers that actually fulfill their entire order book -- so they're pretty much locked up for 2027 at this point in time. And similarly, we're seeing the same thing with Case through the acquisition that we did there. Strong technology, strong positioning on platforms. It's all electronic warfare capability and the needs, and we're also seeing strong double-digit growth in that regard.

So the end markets are certainly are supporting a lot of your growth plan. You're making a lot of investments in your supply chain to unlock the top line. making investments your own, but you're also investing in a lot of new technologies, too. I think there's a Skyshot was something that was mentioned, right -- and a few Anthem is out there. Can you talk maybe for a minute or so about the -- some of your new technology investments that are bets for 5 years out.

Yes. So good segue into where we're investing heavily -- and so we invest at a total absolute basis, about 10% of our total revenue is reinvested in new products and new technologies. Of that, about 6% to 7% of it is actually customer funded. So net-net, we invest just north of 4% of our own dollars into new research and development and new products and new technologies.

Anthem is our sixth generation cockpit, modular, scalable, something architected very differently than anything that we've done before or anything else that you see out there in the marketplace. It has been selected on 5 different platforms. It has secured over $10 billion of wins associated with those 5 platforms, full-blown development, qualification forthcoming and certification, and you'll start to see a material ramp of that product from the investments that we have made as the product gets certified in and around the latter part of this decade going into 2030 and beyond. Sky shot 1,600 a completely different portion of the portfolio. It's a small aircraft engine use for combat collaborative aircraft truly necessitated in a force multiplier when you think about fighter aircraft in concert with combat collaborative aircraft operating in unison -- and so what we've done there is an existing engine that we've had that we've resurrected incorporating modular technologies, scalable technologies to be able to mass produce that engine to support what we anticipate will be the growth that is necessary there. and we've been selected by the U.S. Air Force to provide that engine in the next round of discussions and development activities.

Terrific. And then the last 2 minutes, maybe just talk a little bit about you guys feeling about where your margin levels kind of are exiting this year. I think you kind of described around the 23% level or just you're going to have volume leverage you're making the investments in the supply chain to unlock the top line. How are you just thinking about kind of the exit rate and where we go from here?

That mid-23% range, I think, is a good jumping off point going into 2027 for us. I mean, to your point, as we continue to unlock the supply base as we continue to drive more factory throughput through our own factories, you'll start to see benefits around volume leverage, increased productivity through the incorporation of our Honeywell Aerospace operating system in concert with the volume leverage that we'll be receiving, which will drive efficiency across our factories as well.

You'll start to see some OE price kicking in as well. as some of our long-term agreements are coming to conclusion and incorporating those into 2027 and beyond. Again, as we've talked about, we talked about this allocation decision that we need to make. OE and aftermarket -- by the way, that same sort of conversation you could apply in the defense space, allocating to national security for domestic defense needs versus international, dynamic is a little bit the same there across the commercial and the market.

So that will continue to be something that we're going to have to monitor very closely because as that mix shifts depending upon the output from the factories and the supply base will kind of indicate exactly how that's going to play going forward. But again, our anticipation is 27 will be very different than 26 of this transitionary period. And we've got a lot of tailwinds to benefit Russ, going forward. And we've got some headwinds that we're going to have to address as we look about that mix.

But it goes back to something that you had said a moment ago. Unlocking the supply base is foundational to actually unlocking a substantial amount of value of Honeywell Aerospace, both along the lines of what we're describing in margins. most importantly, along the lines of driving additional growth.

And when we think about that 2030 framework agreement -- or I'm sorry, the 2030 financial targets that we set out, we did not assume any significant past due reduction. -- to be able to do. That's really just demand coming from the markets driving that. If you were to think about our ability to significantly reduce the past due that we have in our books through the unlocking of the supply base, it becomes an accelerant on top of that framework financial model that we've set up for 2030.

Well, we look forward to tracking that. That's a great way to end. But thank you, Jim.

I appreciate it. or for the conference. Thank you, everyone.

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

I'll now turn the call over to Sean Meakim, Vice President of Investor Relations.

Please go ahead.

Thank you. Good afternoon, and welcome to Honeywell Aerospace's Third Quarter 2026 Earnings Call. On the call with me today are Chief Executive Officer, Jim Currier; and Chief Financial Officer, Josh Jepsen.

Some statements in today's presentation, including those regarding our outlook and expectations, are forward-looking in nature, and our actual results may differ materially. Please see the cautionary statement on Slide 2 and the risk factors in our Form 10-Q available on our Investor Relations website for more information on these factors. This webcast and the presentation materials, including non-GAAP reconciliations, are also available on our website.

This afternoon, we will review our financial results for the third quarter, provide an update on full year 2026 and then open it up for questions.

Now I'll turn the call over to our CEO, Jim Currier.

Thanks, Sean. Good afternoon, everyone. We appreciate you joining us today. We'll start our presentation on Slide 3. In Honeywell Aerospace's first quarter operating independently, we finished ahead of the expectations we shared with you in August. Sales increased 3% sequentially, led by commercial aftermarket as our mechanical output improved from the second quarter. Accelerating output to better serve our customers and drive our organic growth remains my number one priority.

Progress against our supply chain transformation initiatives continues to be the focus for our management team, and I'll provide a detailed supply chain progress report later in this presentation. We are dedicated to using our increased financial and operational flexibility to accelerate investments and to build stronger partnerships with all our suppliers. With an increasing number of Honeywell Aerospace employees present at supplier sites globally, we are sharing the core pillars of our operating system focused on driving productivity and output growth. I have personally visited facilities and met with the management teams of each of the 10 suppliers that are most essential to deliver against the robust demand we continue to see for our solutions.

In the third quarter, we grew orders across all end markets compared to the prior year with Defense & Space and commercial aftermarket up double digits. Book-to-bill was 1.3 in the quarter and 1.1 over the last 12 months. Our priority and commitment to improve supply will unlock our ability to convert these orders into faster sales growth in 2027 and beyond. Consistent with the capital allocation framework we laid out at our June Investor Day, paying a competitive dividend is amongst our priorities. Today, we announced that Honeywell Aerospace's Board has declared the company's first quarterly cash dividend of $0.40 per share, which will be payable in December, and we expect to increase that payment over time as the business grows.

The dividend demonstrates our confidence in the path ahead. We expect to generate durable free cash flow based on our visibility into demand in the coming years, and we are executing on a supply chain transformation we believe to be largely within our control. In today's presentation, Josh and I will discuss our performance in the quarter, progress against strategic priorities, outlook for the fourth quarter and initial thoughts on 2027.

Let's turn to Slide 4 to discuss how we're creating value through a consistent innovation-led growth strategy. Led by the same 3 strategic priorities in each of our segments and end markets, our organization is generating ongoing customer demand and progressing operational improvement initiatives.

First, expand leadership in attractive end markets. We continuously develop new retrofit, mods and upgrades, or RMUs, for our installed base around the world. At any given time, we are working on 40 or more solutions that provide added performance, efficiency and safety to the global commercial and defense fleets. RMU sales rely primarily on our innovation flywheel's ability to deliver value to our customer base rather than fleet growth or utilization.

During the third quarter, Omni Taxi Aereo, a leading offshore helicopter operator in Brazil, selected our industry-leading weather radar system for its entire AW139 base to improve both the reliability of its operations and the safety of its crews and passengers. This system gives pilots earlier, clearer warnings and operates automatically to reduce workload during high-tempo operations. Feature updates are downloaded over the air without additional downtime, increasing aircraft availability and customer returns on investment.

Second, invest in differentiated technology platforms. We are advancing our capabilities in resilient navigation and autonomy, both of which are increasingly necessary because of growing geographies in which satellite signals are degraded, jammed or spoofed. In September, we successfully demonstrated our Kestrel navigation system designed specifically for unmanned drones. Military forces are relying more and more on these rapidly deployable platforms for a variety of missions. 40% smaller and lighter than Honeywell Aerospace's traditional military-grade navigation system, Kestrel delivers reliable navigation in challenging environments. The flight test of an off-the-shelf Group 2 drone validated the system's unique capabilities with initial deliveries planned for 2027.

Third, strengthen operational capabilities to unlock further growth. In order to build the resiliency and throughput in our supply base necessary to deliver more consistently for our customers, we are increasing investments in in-sourcing, multi-sourcing and supplier tooling initiatives. 2026 marks a significant milestone in our multi-sourcing journey that began in earnest when I assumed leadership of this business just over 3 years ago. At that time, less than 15% of our annual material spend had more than one active source. Reducing dependence on sole source suppliers reduces risk of disruptions while also adding to our overall capacity as our growing demand dictates.

By year-end, we expect to have doubled the percentage of multisource spend from 2023 to north of 30%. We're not only adding qualifying new suppliers in constrained mechanical components, we're also adding suppliers in advance of increasing demand for electrical components such as semiconductors and printed wire boards. We expect growing investments over the next couple of years will take multi-sourcing to more than half of our material spend by the end of the decade.

On Slide 5, I'll provide a broader update on our supply chain transformation. Last month, we presented a scorecard for our supply base to outline where we have significant bottlenecks, their root causes and the actions we are taking to alleviate them. We promised to regularly share our progress with you. And today, I'll provide an overview of our supplier performance in the third quarter. I would like to remind you that the vast majority of our more than 3,000 suppliers are delivering to us on plan. Only about 70 critical and constrained suppliers have not been consistently meeting our needs, and we have designated that group to receive additional management attention and individualized action plans. Of that group, around 10 have been most responsible for pacing output growth.

Our roughly 70 watch list suppliers are concentrated into 4 mechanical component categories: complex machining, castings, forgings and bearings. We are tracking each on a number of KPIs with a couple of the most critical being supplier output gap to need and supplier output growth. Driving improvements in these KPIs will unlock our output to customers and accelerate sales. On the left-hand side of the page, you can see that our suppliers produced more of what we needed from them across the 4 combined categories compared to last quarter, shrinking their output gap to our need.

On the right-hand side of this page, you'll see that this improvement has not yet moved up our color-coded ratings, but we are clearly moving in the right direction. In complex machining, we have deployed our own labor force into supplier facilities and also supported hiring, which drove higher year-over-year growth compared to the prior quarter. we grew a key supplier's workforce by over 20% from the middle of the third quarter to the beginning of the fourth, which led to record weekly shipments beginning in October.

In castings, our current suppliers are increasing their deliveries to us as we qualify new sources. Though their growth slowed a little from the prior quarter due to production scheduling, pushing us barely into yellow territory in 3Q, nothing has fundamentally changed, and we are encouraged by recent actions. In forgings, year-to-date output is up double digits with those suppliers making significant strides towards producing at the level we need. We also secured additional forging supply for years to come.

Finally, in bearings, which has been the most difficult category for us this year, a second source supplier ramped its production considerably quarter-over-quarter after difficulty starting up its manufacturing lines. We now have line of sight to this supplier eliminating its past dues to us by early 2027. While we are making progress against our supply chain transformation plans, we know that we need to move faster to fulfill our commitments to our customers. We are exploring every avenue for doing so and look forward to sharing developments with you in the coming quarters.

Now let's turn to Slide 6 to discuss our strong commercial momentum that's creating the ongoing need for more supply. Since we reported our second quarter results in early August, our business has generated over $5 billion in incremental customer lifetime wins, bringing our year-to-date total to more than $20 billion on top of the more than $90 billion from the prior 4 years. We are seeing success through our commercial and defense portfolios across all of our business segments, focusing on our core innovation pillars of electrification, autonomy and safety.

Our defense solutions are poised to drive significant content growth in advanced combat platforms such as the Collaborative Combat Aircraft, or CCA. In September, we announced that the U.S. Air Force down selected our SkyShot 1600 engine for its autonomous collaborative platform program. This small thrust engine is designed to meet all of the mission-critical needs of the CCA and unmanned aircraft systems, while also offering the low-cost modular design necessary to produce, install and maintain a fleet at the scale and speed demanded by today's militaries. It's versatile and flexible architecture can serve multiple platform classes, demonstrating the efficiency of our develop once, deploy everywhere approach to technology development.

During the quarter, our defense business also secured new awards exceeding $2 billion in lifetime value for multiple missiles and munitions platforms. The supplier framework agreement we signed with the Department of War in March and growing global demand are leading to firm contracts with more expected to come.

Lastly, our aftermarket team continues to advance commercial opportunities for our SURF-A surface alert solution, which sends real-time alerts using GPS data, existing equipment and advanced software analytics to prevent runway collisions. We have entered into a new agreement with our hometown Phoenix Aviation Department to explore taking our technology beyond the cockpit where it supports pilots to ground vehicle operators. This represents a new frontier in runway safety that would further reduce the risk of runway incursions and accidents. At the same time, we are expecting FAA certification of SURF-A for certain Boeing aircraft this quarter, following the announced Aeromexico agreement to install the solution across more than 100 of its aircraft.

To service our increasing number of wins and those to come, we are committed to investing in growing our supply and manufacturing base. Please turn to Slide 7 for an overview of a project set to benefit our control systems customers. For decades, Arizona has been the hub of our innovation and manufacturing capabilities. Today, we announced a major expansion of our existing Tempe campus with state-of-the-art new facility that reinforces our commitment to our customers around the world, who depend on Honeywell Aerospace solutions every day. The $500 million, 300,000 square foot space is set to open in late 2028 and will allow us to serve current production and future demand for control systems technologies.

Our next-generation products, including Assure Advanced Actuation and Attune Vapor Cycle cooling with over $15 billion of customer wins to date require new capacity for both contracted business and the pursuit of new commercial and defense platforms, such as next-generation narrow-bodies and sixth-generation fighter jets. The cutting-edge facility will set the standard for future Honeywell Aerospace manufacturing capabilities. It will include modular robotics, automated inspection, AI-enabled production optimization, digital twins and other productivity-enhancing technologies.

The extra capacity will add supply chain resiliency, supporting increased production and providing room for more vertically integrated operations, which will reduce supplier dependencies in complex machining. This financially attractive project demonstrates that we are prioritizing investments to drive organic growth in alignment with our disciplined capital allocation strategy. And with that, I'll turn it over to Josh to discuss our quarterly results and updated outlook beginning on Slide 8.

Thanks, Jim. Honeywell Aerospace third quarter sales grew 2.4% organically from the prior year to $4.6 billion. Growth exceeded our expectations for sales to be flat to up slightly as mechanical output lifted quarter-over-quarter due to the efforts Jim described earlier in the presentation. We also closed a few deals earlier than anticipated worth about 1 point. Customer demand growth continued to significantly outpace the capabilities of our supply base with trailing 12-month orders increasing 9% and a book-to-bill of 1.1.

Our backlog increased 12% from a year ago to more than $19 billion. During the quarter, constraints had a larger impact on our Defense & Space end market, particularly the international defense business as a result of prioritizing the domestic market, which was up about 3% in the quarter. Our overall manufacturing output grew 5% versus the prior quarter and 2% versus the prior year. Improvements in our critical and constrained supplier KPIs will lead to stronger output over time, though the relationship will not always be linear as we need every mechanical component to ship one of our systems. Third quarter adjusted EBIT was $1.2 billion, growing 4% against pro forma standalone adjusted EBIT in the prior year.

We consider this comparison the most relevant to evaluate our performance as it incorporates the estimated stand-alone cost of the business from a year ago. Adjusted EBIT benefited from approximately $50 million of net IEEPA tariff refunds that added over 100 basis points to our margin. Note that the benefit of these tariff refunds was already reflected in the second half guidance that we provided in August. Like last quarter, supply shortages led to a higher percentage of our output going to our rapidly growing commercial OE and domestic defense customers, leading to unfavorable mix year-over-year. You can find additional details of changes to our adjusted EBIT in a bridge in the appendix of this presentation. Adjusted earnings per share was $2.21, and free cash flow was $0.5 billion. We do not consider prior year comparisons for these financial metrics to be meaningful because of separation-related impacts.

Today, we announced that our Board of Directors has declared Honeywell Aerospace's first quarterly cash dividend payment of $0.40 per share. The annualized payout ratio of approximately 20% of our estimated 2026 pro forma standalone adjusted EPS offers shareholders a competitive dividend rate, fulfilling a commitment we made at Investor Day. It also allows the company continued financial flexibility to pursue our capital allocation priorities while maintaining a strong balance sheet.

First and foremost, we need to invest more to drive organic growth by increasing CapEx into our supply and manufacturing bases. Second, we want to increase our dividend over time, supported by continued growth in our earnings. Third, we're looking to selectively pursue acquisitions with our current focus on small deals that could quickly bolster the capacity and resilience of our supply chain as well as evaluating ways to further optimize our portfolio. Lastly, we seek to opportunistically repurchase our shares.

Please turn to Slide 9, where I'll discuss third quarter performance by end market. Commercial OE sales were up 8% organically versus the prior year as commercial air transport customers grew their monthly build rates substantially, while business aviation customers pursued steady delivery growth. Additionally, our selectable equipment volumes increased, consistent with our higher capture rate of selectable content value during the past several years.

Third quarter sales to commercial aftermarket grew 2% year-over-year. Despite slower global revenue passenger mile growth in commercial air transport in recent months, aftermarket demand remains robust with aircraft retirements staying at low levels and business aviation flight activity remaining resilient in the face of higher fuel prices. Third quarter orders increased 12% from the previous year, though supply constraints did not allow us to fulfill all of that demand. As a reminder, we were up against a particularly difficult comp in 2025 when sales increased 23%. Partially offsetting this impact, a few deals we had anticipated closing later this year ended up being completed during the quarter, which pushed growth into positive territory.

Defense & Space sales increased 1% compared to the prior year. CAES and Civitanavi led with strong double-digit growth as we are delivering on the synergies from these acquisitions. Civitanavi recently received a large order from an existing European Honeywell Aerospace customer, which will generate robust performance through 2027. Defense demand continues to outpace our supply with trailing 12-month orders up 18%. The strength of our domestic defense demand is intensifying supply constraints in this end market and deferring accretive international sales, which declined in the quarter. A non-aerospace restricted program also continues to wind down as anticipated, presenting a couple of points of year-over-year headwind to Defense & Space.

Now let's flip to Slide 10 to review our updated 2026 outlook. We are maintaining our organic growth guidance for the year of 4% to 5% as well as the growth expectations across each of our end markets. Our expectations for sales growth in the second half of 2026 remain intact. While we're encouraged by the progress on our supply chain, continued orders growth and modest outperformance in 3Q, we believe it's prudent to maintain our guidance range. This implies our fourth quarter organic sales will be modestly below the full year range. Our definition of organic growth excludes the contra revenue impact of the Flexjet-related settlements in our Engine and Power Systems aftermarket business in the prior year.

We expect fourth quarter output growth to be consistent with levels seen in the first 3 quarters of the year as the benefits of our supply chain actions will step up in 2027. Similarly, we still anticipate mix headwinds will continue from a higher portion of our supply going to commercial OE customers versus commercial aftermarket and to domestic defense customers versus international.

Moving to pro forma standalone adjusted EBIT, we are narrowing our guidance range for the year around the same midpoint of $4.4 billion. For the fourth quarter, we do not currently anticipate any IEEPA tariff refunds, presenting a more than 100 basis point sequential margin headwind compared to the third quarter. As a result, fourth quarter margin should be more similar to the first half of the year. We are increasing our 2026 pro forma standalone adjusted EPS guidance range to $7.85 to $8, attributable to lower below-the-line expenses than previously expected as a new public company. In the appendix of the presentation, you'll find our updated full year assumptions for the pro forma below-the-line expenses, adjusted effective tax rate and shares outstanding.

We're also raising the guidance for our second half free cash flow to $1.2 billion to $1.4 billion. We continue to expect capital expenditures of about $650 million for the year. These investments are within our control and have quick payback periods and are expected to drive significant value creation for years to come. Stepping back, we're keeping our second half guidance intact as we seek to build a track record of delivering on our financial commitments. We're pulling forward investments into our supply chain that should unlock deliveries across all our end markets. Importantly, converting strong demand into sales will serve as an idiosyncratic growth driver for Honeywell Aerospace in the future.

Looking forward to 2027, we expect output growth to ramp throughout the year as various supply chain actions we've discussed today increasingly take hold. Higher output growth will translate to accelerating sales growth and will also allow for healthier allocations across all our end markets. To accelerate our supply chain transformation, we anticipate pulling forward investments that will run through our P&L and CapEx.

I'll now turn it over to Jim for some concluding remarks, starting on Slide 11.

Thanks, Josh. Honeywell Aerospace's journey as a public company is now 4 months old, and I've seen firsthand how our leadership team has rallied around the mission of boosting supplier production and our factory output. We are spending our time where it matters most to deliver on our commitments to our customers, which will lead to greater value creation for our shareholders. Backed by strong secular trends across aerospace and defense end markets, customer demand for our mission-critical solutions continues to grow. We're generating new wins at an accelerating rate as our unique approach to innovation is resonating well in the marketplace from additional platform wins to operator selections for our equipment on new aircraft to RMUs for the existing fleet. Our backlog sits at a record level.

To deliver above-market growth going forward, we need our supply and manufacturing base to catch up. We are following a well-worn path to transform and enable attractive growth. We have been investing to add new sources of supply and are now accelerating that effort. Key new suppliers for constrained mechanical components are coming online and will continue to do so over the next several quarters. We have approved new in-sourcing projects for over $100 million of material spend annually with more to come. These projects will add needed throughput and give us better control of our own future. Finally, we are proactively replacing and updating supplier tooling to drive better yields and productivity.

We are starting to see the results of our actions. Our watch list suppliers delivered more of what we needed than we did last quarter, and we expect to see continued improvement. Consistently, higher supplier output will increase deliveries to our customers in 2027 and beyond. With this ramp in mind, we remain committed to our 2030 targets and excited about the long-term outlook for Honeywell Aerospace. As we invest in driving better organic growth, our strong cash generation also supports regular capital returns to shareholders. We have declared our first regular quarterly cash dividend, which we expect to increase over time.

To finish up, please turn to Slide 12 for a brief recap of why Honeywell Aerospace remains a compelling long-term investment opportunity. The fundamentals of our business and how we create value for customers are very clear. We are a premier provider of mission-critical systems across commercial air transport, business aviation, Defense & Space markets. Our core technologies are platform agnostic, allowing us to efficiently innovate and participate broadly in a multiyear aerospace and defense up cycle. We have a large diversified global installed base, which underpins a resilient and growing aftermarket business and provides visibility into recurring revenue and cash flow. At the same time, we are investing in helping our original equipment customers solve increasingly complex challenges from greater electrification to higher levels of safety and autonomy.

Our Honeywell Aerospace operating system drives execution, productivity and continuous improvement, supporting profitable long-term growth and directing our investments, including those into our supply chain. Backed by a strong balance sheet and disciplined capital allocation, Honeywell Aerospace is positioned to create long-term value for its stakeholders.

With that, Sean, let's go to Q&A.

Thank you, Jim. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Kristine Liwag with Morgan Stanley.

Jim, Josh, Sean, thank you for the content on suppliers. So I think I wanted to follow up on this a little bit more. Jim, you mentioned that you have roughly 10 suppliers that are pacing output growth and you're seeing the step-up in 2027. So how much visibility do you have into these supplier KPIs improving? Do you have more of a heads up? Or are you finding out still on a quarterly basis regarding what you're getting in the door? And also, when do you expect to see the acceleration in organic growth?

And on a follow-up to that, you still highlighted bearings as a red area for the supply chain. You've talked about bringing on a second supplier. But on bearings, there's also a supplier that won the Boeing Supplier of the Year award in 2022 that doesn't appear to be a major supplier to you today. I guess what's preventing you from bringing on more established, potentially more expensive suppliers so you could aggressively address some of these issues? And where are you on that journey?

Kristine, thank you for your question. I mean, indeed, we are seeing overall that our supplier KPIs across those 4 most constrained categories are improving in the third quarter, particularly as compared to the second quarter. And that gap to our need is narrowing year-to-date. The bottom line, we are getting more of what we need and the stronger KPIs will lead to higher 2027 sales growth. The level of visibility that we have within those 4 most constrained products and commodities against across those 10 individual suppliers where I am personally engaged with them is actually lending a level of visibility that we had not seen before and a level of transparency that they are providing, which we had not seen beforehand either.

And what we expect is that the supplier output will continue to build quarter-over-quarter from the fourth quarter of 2026 throughout the year of 2027. And the timing of some of those benefits will vary somewhat depending upon the source of the issue. Now you mentioned bearings as an example of 1 of those 4 highly constrained commodity groups. And indeed, as indicated in the presentation deck, that is the most constrained supplier or supply capacity constraint that exists in that particular commodity.

What I'll tell you is though is that we are seeing encouraging progress in that particular commodity group of bearings. We've got a second source that is now ramping output for one of the categories of a very high-volume component, and we've seen that now from Q2 to Q3 and carrying forward now into Q4. But one has to remember, there are several types of bearings that we source across over 350 different SKUs, and we are addressing those constraints in a few other areas and expect more progress in the coming quarters.

The other thing I would add relative to that, as I mentioned, the second supplier coming online and ramping in 2026. We expect them to actually be current to their past due in early 2027. And we have a third supplier that is investing in capacity and workforce to come online in the second quarter of 2027. My point being, recognizing that is a highly constrained commodity within the 4 groups, we are doubling down in increasing supply base, suppliers, and we're starting to see that progress materializing.

Maybe one thing I'd add, Kristine, when you think about that, these actions we're taking will layer upon themselves as we step forward. So it's not one fell swoop, but we'll see these actions, like Jim mentioned, start to stack up, which lead to more output as we go forward. Jim alluded to output growth. When we look at output growth from a COGS perspective, 2Q to 3Q, we saw a 5% increase, which is good and positive. And we expect more than that as we go forward into 4Q. So that trend and trajectory, I think, is really positive as we step into '27 with higher levels of output and as noted, these actions beginning to unlock more output coming through the supply chain as we go forward.

Your next question comes from the line of Robert Stallard at Vertical Research Partners.

James, it's a question for you. Focusing on that Slide 5, and thanks for the additional detail here. The question I have is, although you've seen this sequential progress coming through in these problem areas in the supply chain, are you closing the gap relative to what your OEM customers are requiring? I know they're the priority at the moment. But is there a risk to OEM build rates because of the supply chain issues you're having?

What I would tell you, Robert, is we are deeply aligned very intimately with every single one of our OEM customers, whether that's on the commercial air transport side or whether that is also on the business aviation OEM side, which both are ramping in their output of aircraft deliveries. As you know, as we get more supply, we are focused on OEM fulfillment versus aftermarket fulfillment to ensure that the production lines are not impacted as a result.

And as we continue to see more of that supply coming through, it allows us that flexibility to start allocating some of those parts back over into the aftermarket, which provides tangential and additional benefits for the business, both in terms of revenue and margin expansion. But the hyper focus that we have around these critical 10 and the additional 60 that we talk about that are critical. However, they have the capacity, but they're not delivering consistently and reliably, that level of focus and attention that we're applying is going to allow us to continue to meet the OEM rates and the growth rates in the OEM market segments as well, both commercial and BizAv.

Okay. As a quick follow-up in relation to that. You mentioned that in the defense market, you've been prioritizing the Pentagon effectively and deferring some of your export orders. Has that had any ramifications? I mean do these non-U.S. customers have alternative suppliers that they could go to or they just have to wait?

What I would tell you is you are right. We have been allocating more to national security needs with our defense primes and the order book that we have there versus the international customers. So very, very similar analogy as we think about the commercial market, where more is being allocated to OEM versus the aftermarket. Similarly, more is being allocated to the defense domestic industry versus the international market. However, having said that, we are still seeing exceptionally strong order growth in the defense international markets as well. We have not seen any decline in the order book. And in fact, the defense business has been growing on the order book double digits for us, again, led by what we're seeing in the international defense market segments.

Rob, maybe one thing to add to that is just we've talked some in the past about Civitanavi, an acquisition we did with Europe-based, a lot of defense business. So that's been growing. We've talked about it nearly doubling this year. And we've got order visibility that covers much of '27 to feed that demand. So I think it also speaks to the synergies that we've seen, but also the opportunity to keep growing and building upon that footprint to enable more of that international defense business, which lots of appetite, and we know it's accretive to our overall business as well.

Your next question comes from Ken Herbert at RBC Capital Markets.

Maybe if I could, just to start on the commercial aftermarket, up 2%. You indicated that you saw some benefit of timing on some shipments that otherwise, maybe it would have been down year-over-year. Can you provide a little bit finer point on the timing benefit in the quarter? And then underlying the 2% growth, can you provide any color or granularity on how we should think about that in terms of commercial transport versus business jet?

Thanks, Ken. Yes, we had about 1 point of top line kind of move from 3Q to -- or excuse me, from 4Q to 3Q that shifted and drove a little bit of growth, as we mentioned, up 2% for commercial aftermarket. The quarter, it was pretty balanced between commercial air transport and BizAv from a growth perspective. We're not changing our full year guide there. So relatively unchanged, really just more timing between the quarters. I think the positive is that we continue to see really strong demand in commercial aftermarket. Orders were up 12% year-over-year in that segment and both driven by the continued growth in commercial air transport, but I think also just the stability and resilience that we're seeing in business aviation. That part is roughly 50% of the commercial business. And we're seeing flight hours there compared to our own forecast were stronger in the quarter and revised up for the full year. And when you look at the segments that we play in, they're actually outperforming flight hours from the broader business aviation. So driving stability and resilience in that area as well.

And I would just emphasize the point that Josh is making on the BizAv and the resiliency of that market segment from an aftermarket perspective. As you know, we play in what's called the midsized category to the ultra-long range. And if you look at business aviation holistically, the market is growing in terms of flight hours at about 5%. For the products and services that we provide, again, in that super midsized category and above, we're actually growing at 8% in terms of BGA flight hours. So it is definitely a tailwind for the business as it pertains to the commercial aftermarket for us. And we anticipate that is going to continue going forward. As you may have seen, we released our global forecast for business aviation at NBAA, our 35th annual edition of that going forward.

We actually noted in that report that we issued that 9 of the 10 operators that are currently flying aircraft today will actually fly more in business aviation next year than what they've done this year and focusing in on that one segment, that midsized to super midsized segment, where we have engines, APUs, avionics systems, cabin pressurization control systems and environmental control systems those flight hours are actually expected to grow 40% over the next decade compared to the rest of the business aviation marketplace. So it's just indicative of why we invest in that super midsize and above category with our products and services because it is outgrowing the rest of the business aviation market.

Jim, appreciate all the color and detail on the business jet side. And just to be clear, on commercial transport, you're not seeing any change in backlogs or customer behavior as a result of, obviously, the higher crude prices.

We have not seen that whatsoever in the commercial air transport market. As Josh made mention a moment ago, our demand remains exceptionally robust with the third quarter orders in commercial aftermarket actually up 12% year-on-year. So we have not seen that flow through the system yet. And on top of that, we also have a substantial amount of commercial aftermarket, air transport specific backlog in our system as well, which insulates us somewhat from many perturbations that may be occurring. But foundationally, we're not seeing any of those perturbations yet, and we don't anticipate to see them in the air transport aftermarket segment.

And Ken, this is Sean. One small reminder for the group is that this was our toughest comp for aftermarket and commercial last year, we grew 23%. So while the growth rate is modest here on a 2-year stack, we're still talking low double digits, and that long-term trajectory is very robust.

Your next question comes from the line of Scott Mikus with Melius Research.

The supply chain issues you've been dealing with have mainly been on the mechanical side. We've seen a lot of defense companies talk about extended lead times for memory, semiconductors and to a lesser extent, rare earths. I'm just curious, how are you feeling about the electrical supply chain? Are there any issues popping up there maybe that you didn't see 3 or 6 months ago that could impact either the fourth quarter or the ramp into '27?

Scott, it's an excellent question. As we have been, as you know, very focused on the mechanical side of the business and the mechanical portion of the supply base. We are aware of those shortages that most folks are talking about and they have been increasing and lead times have been increasing for certain electronic components throughout the industry. But we have not seen any material impact to our operations. And we are planning appropriately to ensure that we have the appropriate supply to support the robust demand that we're seeing in the Electronic Solutions business, which actually saw orders up strong double digits in the third quarter.

And so the same sort of approach that we have in terms of going down into the details of the mechanical side, make no mistake, we do the same thing on the electronics side of the portfolio as well, all the way down to printed circuit cards and printed boards themselves. And so it's the same sort of operating system that's being applied. We focus very heavily on the mechanical side because that's had the biggest impact in the portfolio. But that same robustness of the operating system that we have deployed there, we do in the electronics business. And therefore, we feel confident in terms of our supply that will be supporting the strong growth that we see in Electronic Solutions.

And your next question comes from the line of Myles Walton at Wolfe Research.

You teed up accelerating growth into 2027 and then also mentioned pulling forward investments in the P&L and CapEx. And I know, Jim, you had mentioned in your opening remarks, providing some initial thoughts on '27. So maybe if you can flesh out the rate of acceleration you're anticipating in '27, Josh, and what the P&L investments mean for margin and also the CapEx profile?

Thanks, Myles. This is Josh. I would say, from starting point, it's early. We're working through our process in terms of what we expect to see for '27. I think importantly, very, very focused on the supply chain and the actions we're taking to drive output growth quarter-on-quarter. We talked about this, Jim alluded to it a little bit, but by those categories, we've got different actions that we're taking bearings, we covered well. Complex machining, we're getting labor into some of our constrained suppliers. We're already starting. In October, we saw some lift after getting folks in and trained, and we think that continues to build. And we're taking additional actions in complex machining where we're actually taking control over sourcing forgings and castings for our supply base in complex machining just to ensure continuity and stability of supply, and we're qualifying additional machine shops to do more of that work.

So net adding capacity. I think on castings and forgings, we're taking actions to drive improvements. Some of these are a little -- take some time. Mid-'27, we see more of them coming through. We have capacity lined up for '27. We're seeing a higher level of spend to update tools that will help drive better yield on that capacity that we have. And then we're continuing to drive multi-sourcing activities. So I think all of those things help grow output at a higher rate in '27 as we step forward. I think as to what does it mean for margins, again, we're working through that. So I won't say here's exactly what it looks like. But I'd say here's the things to consider the drivers as we step into '27.

One, higher volumes will improve leverage for us, but you need those volumes to come through. Ultimately, we need to be able to operate more sustainably at high levels to drive productivity. So that is an opportunity for us. Pricing, we've seen good momentum in '26. We expect that to continue in '27. At the same time, we do think mix continues to be a headwind, given what we're seeing from a backlog and orders perspective, OE and defense, we'll take some precedence there, and we think that puts pressure on us. And we're going to continue investing in innovation.

The wins that we're stacking up today, $20 billion year-to-date, we did $5 billion over the quarter. I think that gives us continued confidence and assurance into why we want to be investing in the portfolio for the long term. These are long-lived products and life cycles. So we're going to keep investing there. And then I'd say lastly, the last piece is really around the operating system and enhancing productivity. As we update the operating system, we'll drive more focus on productivity in addition to continued diligence on how we manage cost overall as an enterprise.

And your next question comes from the line of Sheila Kahyaoglu with Jefferies.

I have 2 questions. One is a follow-up to Myles. But my first question, I guess, is when you look at your margins in Q, year-to-date, they're about 24%. That includes obviously the tariff refund and then implied for Q4 is a step down. Slide 5 has bearings now yellow. I guess, how do we think about what normalized margin looks for the business as we exit '26 and head into '27? And the follow-up to Myles' question, is that $500 million Arizona facility going to be funded out of free cash flow or is it supported by the Department of War?

Maybe starting with the first part of that. We'll exit this year in the mid-23s. I think that's a good jumping off point. If you adjust some of the onetime things we saw 2Q, 3Q, that's more or less where we're operating. So I think that's a starting point. Maybe just to walk through those pieces a little bit. As we've kept the second half intact, we talked a little bit about the movement between 4Q and 3Q on the top line, margins, 25% in 3Q. That has about 110 bps of the tariffs impact. We've got a little bit of mix headwind in 4Q. So that gets you right in the mid-23s. So I think that's a reasonable place to think about where we operate from a jumping off point.

Your question on the $500 million, I think you were referring to the new project that we announced, is that correct?

Yes, exactly, the Arizona facility?

Yes. So we've been planning that for a few years and really executing that based on the wins we've seen in control systems on Assure and Attune. Portions of that will go to Department of War to the framework agreement to the products that we serve in that. There's also a fair bit of commercial. So this ranges from 737s to 320s to GMLRS and many, many others. So there's a lot of different products that this will source. It gives us more capacity. It gives us the ability to be more vertically integrated, control our own destiny a bit more. And then we're investing in what really is kind of what will be for us our state-of-the-art manufacturing, like what do we want this to look like going forward.

So we've got that, that's embedded in our plans. We're working through exactly how we'll fund that and finance that, but we feel good about the plans and the ability to continue to generate strong cash to be able to drive both organic investments in the business, return to shareholders. And I think increasingly, as we think about the M&A side, really what do we do to bolster the manufacturing base and the supply base as well.

And the only thing I would add to that, Sheila, is this is about fulfilling $15 billion of wins that the Control Systems business has realized over the last few years, specifically around 2 areas of advancement of innovation that has been focus areas for Honeywell Aerospace, and that is around electromechanical actuation and vapor cycle cooling systems. So as we talk about Assure, which is around electromechanical actuation and Attune, which is vapor cycle cooling systems and then some of the other products within the control systems portfolio, this is really about the substantial amount of wins, the $15 billion I referenced a moment ago and enabling the ability to not only add robustness and resiliency to the supply base, but to deliver against the $15 billion of wins that, that business has had across primarily those 2 pieces of their portfolio.

That's super helpful. Just can I clarify? So how do I think about CapEx, I guess, next year?

I mean we'll certainly have a guide. We're talking $650 million this year. I would expect to step up next year as we think about the priorities, whether this project being one of them, what we've talked about for other Department of War in our electronic solutions, we're seeing significant demand in navigational sensor products. So we've got a few big priorities as we think about growth opportunity. And some of that, as I mentioned, with the Arizona project, also drives some in-sourcing and vertical integration, which we think is beneficial for a number of reasons.

Your next question comes from the line of Seth Seifman with JPMorgan.

I wanted to ask a follow-up about the 2027 outlook. And so you guys put out an FAQ recently and talked about the incrementals being lighter over the next couple of years than the 30% average. And I think that makes sense given the journey that you're on. But I think given the low level of this year's margin, I think based on the consensus expectations, it seemed like maybe there was some -- as a product just coming off a low base, maybe there were some expectation that next year didn't necessarily have to be below that. If you could give us any more color on how you're thinking about it? Was that meant to be versus what you reported? Was that meant to be versus some kind of adjusted number maybe for charges or benefits? Or was that more of a qualitative, as the business improves from a supply side and execution standpoint we'll be able to expand margin faster?

Thanks, Seth. I would say we talked about this going back to June. We don't think this is a linear path from where we are to 2030 in terms of EBIT dollar growth or margin expansion. I think the near term and maybe highlighted even further the need -- the things we can do today to invest to drive growth, I think, are both going to be high return and quick payback. But there's costs associated. We'll see depreciation. We'll see some of the cost as we work through some of the challenges and invest OpEx dollars as well into the supply base to drive output near term. I think we still feel confident over the time horizon to 2030 that will drive the EBIT growth and the margin growth. But I think the near term, the ability to invest to drive higher levels of growth and unpack that, I think, is really important.

I mean and maybe to put this in perspective, we've seen our past due backlog grow this year. And had we had the output, the supply output to be able to just maintain that level, not see that grow, it would have been worth about 4 points of growth. So if you think about 4% to 5% growth this year as our forecast, if we were able to have -- if we had the output just to maintain and not build that backlog -- past due backlog, we would have been 8-plus percent growth. So I think it puts into perspective how critical these investments are and what they can unlock as we go forward.

The only thing I would mention there, and this is now maybe forward-looking a little further into 2030 and the framework that we had laid out at Investor Day. First and foremost, we remain confident and fully committed to those 2030 targets. 2026 has been somewhat of a transition year. And as such, we are accelerating our supply chain transformation. And next year, we expect to see more benefits in sales growth and begin to see that unlock. To Josh's point, the demand picture remains exceptionally robust and resilient for the business.

As I mentioned, we have $20 billion of sales, lifetime wins year-to-date, $5 billion occurring in the third quarter. And the last thing I'd say, all of that combined, as we've said, the key to all of this being delivered is the supply chain unlock. And hence, the growing investments that we're making in in-sourcing, multi-sourcing, supplier tooling, CapEx deployment, whether that's internal CapEx deployment or external and dedicating new capacity will come online over the next several quarters.

Our final question comes from the line of David Strauss at Wells Fargo.

Josh, I wanted to revisit one of the comments that you made. I think it was to Myles's question around mix in '27, where you said mix would be a headwind. Were you speaking to the fact that you think just broad market OE is going to outgrow aftermarket or that you're not going to have enough of a supply chain recovery to kind of make up for what you're missing this year, it would appear like on the aftermarket side.

David, I would say it's probably a combination of the two. But first and foremost, I think we do see the OE side growing at a faster rate. We were seeing that this year, and I think we see that as we go forward. So that is one issue. And the growth that we're seeing on the defense side also, as mentioned, our trailing 12-month orders on Defense & Space was 18%. So it's robust as well. So there's that component, just the demand drivers that you mentioned will impact mix. And then as we continue to work through the supply, as we talked about this, there's a lot of actions that will come in, in different increments here as we step forward that will have some impact as well. So I think the combination of the 2 that you mentioned will have or provide some headwind from a mix point of view.

Okay. Got it. And then Jim, the repricing opportunity kind of can you talk about where that stands, kind of maybe any sort of sizing of what that could mean and how far you're actually through that opportunity in terms of what's coming through to you today?

Yes. I won't provide any specificity around pricing percentages or what we're going to see in terms of price cost. What I would tell you, and I think what you're referring to is some of our long-term agreements that occasionally from time to time, we have OE customers where those contracts will expire, and they create those opportunities to reset pricing to current levels. We have some ongoing across multiple OEMs. And I would say those negotiations on these upcoming renewals are going as expected, which will allow us to achieve better alignment of our pricing to cost, particularly as our costs have increased in recent years and pressured margins in the business due to inflationary aspects that has been occurring within the marketplace. But these new agreements will help alleviate some of that pressure over time. We'll start to see some of those benefits materializing in 2027 and then more in future years.

And I would now like to turn the call back over to Jim Currier for closing remarks.

Thank you. I sincerely appreciate everyone taking the time to listen to Honeywell Aerospace's earnings call today. Building on a proud history of aviation leadership, we continuously innovate to protect and advance the promise of flight to create a safer, more connected world. We are diligently investing at pace in our future. Thank you to our customers, our employees, our suppliers and our investors for supporting our mission. Have a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Okay. Great. Good morning, everyone. So lots of exciting things in industrial world at Morgan Stanley, but things are looking up for sure.

So I'm Kristine Liwag, Morgan Stanley's Head of Aerospace and Defense Equity Research. I'm very excited to host our next panel. And for our next panel, we have Jim Currier, CEO of Honeywell Aerospace.

But before we get started, we'll do the standard disclosure for easy -- you'll probably memorize them by end of day. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, and I'm not sure anybody ever actually did have questions, but please reach out to your Morgan Stanley sales representative.

So with that, very excited to have Jim here with me. Jim, good morning.

Good morning. How are you today?

So you've now been the CEO of Honeywell Aerospace as a stand-alone company for about 2.5 months. Can you share with us what have been the biggest surprises, either positive or negative that you've come across in your tenure?

Yes. I mean, first thing -- first and foremost, I'll hit on the negative. I mean it's undoubtedly very clear. The most negative thing that has happened since the separation was the fact that we had to revise our guidance on a full year basis for 2026. Some of the things that we were expecting from a supply base standpoint to unlock and some of the transformation initiatives that we had in works were not materializing at the pace that we had expected them to.

And it's as largely attributable to a couple of things, some delays in transitions that were occurring, some delays in second sources that were coming online and then also some yield and quality issues that were occurring with those transitions and/or those second sources. And so as a result of those moving to the right, it required us to do an adjustment to our guide for 2026. And I would say, understandably, and that is the most negative thing coming out of the spin relative for us in the first couple of months.

On a positive note, coming out of that revised guide, it's really kind of reflective of the speed at which we can move as well as a stand-alone as opposed to being a part of the conglomerate. So the way we've reacted as a result of that issue that we have encountered with our supply base and the fact that some of those transitions we were moving to the right is the speed at which we were able to change the operating system, the speed at which we've been able to change some of the ways we wanted to invest in the supply base to continue to unlock more going forward.

Those are things whereby without the layers of the conglomerate to have to go back and sort of see how we want to invest and where we want to move capital and the like, that allows us that ability with none of those layers in place to be able to move at speed. And so that's actually been a very positive as a reaction from this.

And I think the second positive I would make mention of is the resiliency of the demand that we have coming into Honeywell Aerospace. I mean, even though we've had an inability to meet the current demand profile as required by our customers, whether it's commercial or whether it's defense, what we've noted is that the resiliency of that demand, the resiliency of the order book, the resiliency of the backlog that we have has been untouched and is actually at record levels for us on a go-forward basis.

So I think those are the two that I would say are very positives, but obviously offset by the major negative that we had to do.

Yes, super helpful, Jim. And so now that you're a stand-alone company with the separation, has anything changed in your thinking about your top 3 priorities in the next 12 to 18 months?

From a priority standpoint, I don't think anything has changed. The way we attack those priorities is changing as a result. And I'll go back to the supply chain issue that I mentioned a moment ago.

How we were addressing it, the level of focus that was being applied to it, the operating system that we have built around that is changing. Case in point is that as a result of what transpired here, we have roughly 10 or so suppliers that we consider to be constrained. Those are suppliers that just cannot meet the demands for our products and our portfolio across both commercial and defense.

And so I personally spend my time with them as a result of that, going to their facilities, working with my counterparts at those sites, looking at the root causes, identifying the action plans associated with resolution and then a weekly cadence of follow-ups with them, making sure that we're on plan. And we're seeing the benefits of that materializing as well as a result.

We have sunrise meetings, sunset meetings. Sunrise meetings are associated with truly what is needed for this week, next week, the following week. The sunset meetings are strategically around the transformation initiatives that we have in place. And so that's how we're reenergized and refocused around the operating system to attack those particular issues.

The priorities are the same. It's just the way we are going after them with a much higher sense of urgency and speed and reinvestment profiles is really what has changed.

Super helpful. And supply chain has clearly been a pain point, and this pain is more acute for you versus some of your competitors today. Can you take us back in time for some of the investors who may not have followed Honeywell before the spin? What is the root cause of the supply chain? Why is your supply chain more fragile than peers? And any sort of tangible examples of what's really happening in these watch suppliers?

Yes, it's a really good question. And I think we have to go on a little bit of a historical journey here as part of the conglomerate of Honeywell as we were operating within.

It really goes starts back in about the 2010 time frame. From 2010 to 2019, as the industry for A&D was not growing at the levels that we see today there was an initiative that was launched around maximizing our supply chain efficiency, maximizing the productivity. So we went very heavy in single sourcing across the supply base. We went very heavy on outsourcing across our supply base.

And I'm not saying that others in the A&D industry did not do that, but I would argue did they do it at the same scale at which we were doing it. And the way I kind of look at that as the data point, if you look at how our margins were growing over that period of time compared to our peers, is sort of indicative of the scale upon which we exercised that operating playbook and the depth and the breadth that we did across that playbook.

Now you pivot into like the 2020, 2022 time frame, COVID hit, that was really a huge distinguishing moment between ourselves and the rest of our A&D peer group.

Now again, as part of the conglomerate of Honeywell, the focus was preserving margins at all costs. And so there was a substantial amount of cost cutting that was occurring across the organization and doubling down on that supply chain initiative that I mentioned a moment ago.

In the aerospace part of the business, we fully recognized that demand was going to come back. The difference was our A&D peers did not follow that same sort of mantra around deep cost cutting. And therefore, they were preparing over that 2-year period for when the demand cycle was going to come back.

And so you think about, you know, where we are, and when I came into this role back in 2023, I pivoted around to now, we are going to invest back into our supply base. We're not going to continue what we were doing from 2020 to 2022. And put in over $1 billion over the last couple of years, we've been unlocking the supply base as a result of doing that across our entire breadth of our portfolio of electronics and mechanical. And we've been continuing on that path for quite some time.

The net-net of all of that is that we're running about 18 to 24 months in, that period of time between 2020 and 2022, where we were deep cutting where others were not. So we're running about 18 to 24 months behind our peer group. But now as a separated entity and a stand-alone, we control our ability to continue to invest and at the CapEx levels that are necessary for the business, and we'll continue to do that in the manner that we've been doing it over the last couple of years under my tenure.

So Jim, it's great to hear that some of these progress initiatives have started in 2023. So why is it that forecasting the recovery has been more difficult?

And when you think about what drives your confidence in your ability to meet your forecast, what has changed? Did it change regarding the approach, your inventory approach? Any sort of change within your expectations that will help drive some of that confidence?

It's the complexity of the transformations that we are underway at the moment, which tends to have a little bit of more ambiguity around the completion thereof and then the eventual ramp.

So last week, we put out a scorecard. We kind of provided a lot more detail and granularity as to what is happening within our supply base across Honeywell Aerospace. And if you would have looked at that scorecard at the start of 2023, it would have looked very different.

I mean, today, we have about 70 suppliers that we consider to be critical or constrained. Critical being you have the capacity to deliver to our needs, but you just have an inability to do it reliably and consistently and you have an undue impact on our revenue for the cost of the commodity that you provide to us.

A constraint being those 10 that I mentioned a moment ago, kind of fall into the four categories of complex machining, castings, forgings and bearings, right? That's kind of been where we're at this particular moment in time. That scorecard that we put out, if we would have recreated that scorecard back in 2022, the 70 that we're talking about would have been in the hundreds of suppliers that we were dealing with at the time. Those investments that we've made from 2023 have whittled that down to resolving our electronics portion of our supply base, a large portion of the mechanical portion of the supply base, and now we're down to these four commodities.

And these four become very, very complex. And it's not like we're starting that journey now. We've been on this journey for some time. But when these start to materialize from the moment that you initiate them can take anywhere from a couple of months to a couple of quarters, depending upon if it's CapEx-related, tooling-related and the like.

And so these become very complex. And so even though we started some of these about a year ago for these high critical areas, the point in time where they're materializing because they are incredibly complex. And as you ramp, we started to see yield and quality issues at the supply base, it ended up pushing that to the right as a result.

So because of that yield and quality that we were dealing with as part of the transitions, either from supplier going from site A to site B or bringing on a second source has made the predictability of that to be much more complicated than what we had envisioned it to be just a few months ago.

However, the action plans that we have launched as a result of what has transpired, we're starting to see the benefits of those, particularly across those four commodities.

Jim, it's really helpful to get these KPIs from you going from 100 to 70. That's a clear measure of progress. And now down to these 10 companies, four commodities.

I guess, are there additional detailed KPIs that you could share with us to see your progress in addressing these four constrained areas? And can you share what you've seen in the most recent data to give confidence for your outlook for the rest of the year?

Of course. And so some of it was in the KPIs that we shared a little bit last week in the presentation that we've put out there and it's available to everyone. It kind of focuses around, as you would imagine, supplier output. Are they growing year-on-year? Are they meeting the demands of our business?

So not only are you growing. So if you're growing 5%, that's interesting. But are you growing 10%, 15%, 20%, which is what we need out of the supply base to drive the growth and for the demand that we have coming in within the business. But how is your yield looking? How is the quality? How is the scrap? How are your detailed plans coming together relative to that?

So those are all a set of KPIs that we track on a regular and recurring basis, particularly around these key four areas of constraint that exist within our supply base.

Now what have we seen in terms of some benefits that have been realized here as we have focused around these four, they have different problem statements associated with them.

When you think about complex machining, we have two very specific suppliers within our supply base where we represent a very disproportionate amount of their business overall, and their constraint is skilled labor. They have no issues of getting the material. We have no issues of getting the material to them. It's just critical skilled labor that they're unable to recruit in the areas that they're at to meet the demands.

And so what we have done is we've actually taken dozens of our own skilled labor, moved them out of our factories, and we have embedded them within these suppliers as a result, therefore, enabling a second shift operation to be realized or a third shift or weekend shifts. And the output transition that we've seen over the last 30 to 45 days, just off of that low-hanging fruit of just injecting the right skilled labor has been about a 30% increase year-on-year as what we've seen over the last 30 to 45 days.

If you pivot down to castings and forgings, our tooling is now that we had invested in is starting to come online. And so we're starting to see the benefits of capacity output increases because the tooling that we're putting in place is to replace older tooling that has worn and started creating yield and quality issues as a result. Now we've been able to get rid of some of the quality issues, get rid of some of the yield issues and then by natural effect of that is the output increases as a result of doing that.

And then in the area of bearings as an example, one of our suppliers did a transition from within one of their facilities has had additional capacity at one location, so they wanted to move one of our products over there. And we had a second source come online as well. Well, now they're coming online. That transition is materializing. The second source is materializing. And what we've seen on the bearings side is that 35% of our total annual demand that is necessary for bearings has all come in the last 90 days. So in 1 quarter, it's all come in.

And so we're seeing that progression of increases in output from them as a result of these investments that we're making. And that's going to set us up very well for 2027 because as the supply base is unlocking, under those critical commodities as a result, it will set us up so that our 2027 looks very different than 2026.

Great. Thanks, Jim. One of the key areas of focus for investors right now has been air traffic flattening. But at the same time, when you look at the spares market, the constrained supply really provides very scarce supply coming into that market.

Can you give us a level set us in terms of where are you able to ship today versus where that demand is? And what does that demand curve look like, especially as air traffic flattens this year as a result of what's happening in the Middle East?

Yes. I think it's important to understand our commercial aftermarket a little bit here and just our commercial business overall because there is -- tends to be over-indexed onto the air transport market for a moment. And I think that's where Honeywell Aerospace is somewhat unique.

If you look at our commercial OE business, half of that business is air transport, half of that business is business aviation, with two completely different sets of economics associated with them.

Now pivoting to the commercial aftermarket, as you mentioned a moment ago, 60% of our commercial aftermarket is air transport. 40% of our commercial aftermarket is BizAv. And where we are positioned in business aviation is exceptionally well in the high-growth aspects of the market segments within business aviation that are growing. That's going to be anywhere from super midsized category to long range to ultra-long-range aircraft, where we have our HTF engines and our APUs and our avionics and environmental control systems and cabin pressurization control systems.

So albeit we're seeing some pressure globally in the industry around the air transport, we've seen 0 decline in our entitlement relative to that as we measure that on a month-over-month basis as well as what we're seeing is this continued growth in business aviation, which has been highly resilient, particularly in the categories of aircraft that I'm mentioning a moment ago. So our demand in commercial aftermarket has been exceptionally strong and is actually above what our entitlement is in that particular business.

So as we look, however, around supply output. As the OE is growing and our aftermarket is growing, if we're not getting the supply output that is necessary to support both, we have to make some decisions at that point in time.

And one of the key tenets within Honeywell Aerospace is that we will not allow an aircraft to go out of the production site missing any Honeywell parts at the end of the day. So if that means we need to allocate more to the OE, which is what we've been having to do here over the last few months, particularly in Q2, that means less goes to spares for the aftermarket that, hence, it creates a little bit of a depression for us in that transitory period that we're going through.

But you don't need a tremendous amount of additional output to be able to feed the aftermarket side and get a nice lift in your revenue because, as you know, the economics in the aftermarket are very, very different than the OE, particularly as it pertains to spares.

And Jim, do you think when supply comes back online and you're able to deliver, do you expect a catch-up period for spares? Or is this kind of period more of a lost revenue and you go back to a more normalized trajectory? How do we think about that curve?

Yes. I think I would anchor it first on 2030 for a moment. We are still committed to our 2030 financial targets that we had set out at Investor Day, which was that 6% to 8% CAGR between 2026 through 2030.

Now clearly, with the reset of our guide to 4% to 5% that we've had to do for 2026, what that means is there will be a period of catch up. And that period of catch up will start in 2027 as we get more output from the supply base due to the initiatives that I mentioned a moment ago.

And then our ability to now start allocating more to the aftermarket, which again has those different set of economics. And therefore, that's why we say '27 is going to look very different than 2026.

Super helpful. Going back to margins, you called out earlier with the actions that Honeywell has taken from that 2010 to 2019 period, that yielded in significant margin expansion. So when we think about the supplier initiatives that you have to do today in order to increase output, how do we think about the balance of margins for those components because presumably, they could cost more than the previous strategy?

And then also the balances of additional initiatives you have for reducing costs and also you have significant volume as well. How do we balance these items? And where should margin trajectory be in the next few years?

Yes. So it's still going to be on that path that we committed to our 2030 targets that we mentioned at Investor Day. Now granted, going through this transitory period, it does create some margin pressures as a result through the investments that we are making through the fact that we're not able to allocate as much to the aftermarket, which again has those very different set of economics associated with them. It does create those pressures.

But as we look upon 2027 and beyond, the unlock of just having more supply going in through our factories and the productivity efficiency that is enabled, productivity enhancements that are enabled, the fixed cost leverage that we get, the volume leverage that we get from that more than offset through our analysis more than offset the costs that we are incurring at the moment.

At present, our factories are operating very inefficiently due to the disruptions that are coming in. When we stabilize that, and as that output increases, it drives a tremendous amount of productivity and volume leverage for us that's going to be able to mitigate those concerns going forward.

And then there's the element around price. I mean price will change for us starting in 2027 and through that 2030 period of time, which also becomes an enabler for us as well. So we're still very confident on our 2030 algorithm for the financial targets, both top line and bottom line.

Going back to the supply chain, we've seen a major competitor of yours acquire a large casting house. When you think about the pain points that you have in your supply chain, you've talked about the actions you're taking and some in-sourcing. But do you see the need of potentially buying additional suppliers, taking them in-house? And can you share some sort of magnitude of the pain points that you have and what it takes to just buy machines yourself versus buying additional companies?

Yes. I think just one point of clarification, the acquisition, the acquirer of CPP is not necessarily a competitor to Honeywell. We don't have any overlap within the portfolio. And actually, I view that as being a positive for the industry overall.

The type of parts that we receive from CPP are very different than the type of parts that GE receives from them as a result. And so the product portfolio for those product sets do not overlap in any way, shape or form. At the end of the day, I view that as a very positive for A&D that, that acquisition transacts and goes forward.

In terms of how we look at our own supply base, and I kind of go back to what we were doing during that 2010 to 2019 time period, where we're doing a substantial amount of outsourcing. But the typical process is you kind of look at what's core capability, what's noncore capability, what's noncore capability, you move out. We did that very, very quickly in that period of time that I was referencing. The question came back, "Is that really core? Can that line move to the right a little bit more? And so that we kind of pushed a lot of core out."

With that understanding, it does beg the question, do you start becoming more vertically integrated? And we've done some of that already. Some of those core technologies and capabilities that we had outsourced over the years. Over the last 2 years, we've been bringing those back in-house.

But is there more to be done relative to that? Absolutely. And I think there's an ability for us to be able to do that short term and longer term as well. As we think about driving more output and as we think about driving more resiliency and robustness of our supply base across the industry.

Thanks, Jim. Now we've covered our commercial aerospace quite a bit. Maybe pivoting to Defense and Space. Defense and Space is also showing significant robust demand and supply also has constrained that environment. Can you talk about milestones that you're watching to convert the backlog faster? And also how to think about the demand signals from the U.S. versus international customers?

That's a really good question. And I think everyone knows that 40% of our business within Honeywell Aerospace is defense. And I think it's important to also characterize a little bit what that 40% represents. About 1/3 or about 30% of our total defense business is international defense. And the bulk of what we provide into the international defense market is at commercial pricing.

So I think it's important to understand that landscape a little bit. And what we have seen is incredibly strong demand, both domestically and internationally for our products. Internationally, our book-to-bill is about 1.5 and growing double digit in that regard.

Now to your earlier comment about supply output, there's a similar parallel when we talk about commercial markets, OE and aftermarket and then having to allocate to the OE side versus the aftermarket. Remember, the supply base within our industry is one and the same. There's no such thing as a commercial industrial supply base or a defense industrial supply base. Particularly for a company like Honeywell Aerospace, where most of our products are commercial that we end up selling into the defense market.

My point around that is that if there is limited output coming from our suppliers, we make that same sort of decision on the defense side of the portfolio, and we will always prioritize national security as the #1 priority in terms of allocation of parts. And so we do allocate more to the domestic defense market than we are doing in the international market.

And that became very acute in Q2 as an example. So our overall growth in Q2 on the defense side of our business was about 3%, rather anemic, of course, in this high demand environment.

But if you click one layer down relative to that, our defense domestic growth was about 10% year-on-year. Our international had declined about high singles overall, net-net, the 3%. And that, again, was attributable to the limited output from our suppliers and us having to make the decision to prioritize national security versus our international defense partners.

Thanks, Jim. And I think part of the separation of Honeywell Aerospace, the big question from investors were the market share losses that the company has had for new Boeing and Airbus programs.

Maybe looking in -- likely this is beyond 2030 for the new clean sheet airplane. But can you talk about how you think about the opportunity set when that new clean sheet airplane comes? Also when you'd have to spend money on R&D, what level of commitment that you're willing to invest and how we think about that opportunity set?

So it's actually a really good question as we think about the future as well and where we are investing our R&D dollars.

To be very clear, about 10% to 11% of total revenue is actually invested in new product innovations and technologies. Of which about 6% of that is customer funded and just north of 4% is actually internally funded. So you can see that we're spending a lot of money on innovation and technology, point one.

Point two that I would say relative to that is an understanding of our process or the way we approach the investment of our money. There is nothing that we design, develop or innovate that is bespoke for an end market, whether it's air transport, BizAv or defense. And there's nothing that is bespoke for a particular aircraft platform. So we do this mantra of like we develop it once, and we're going to deploy it everywhere.

And the reason why that is very important, particularly for a company like Honeywell Aerospace, where we operate in three very large end market segments of air transport, BizAv and defense is that the investment cycles for new aircraft and new platforms were different. The timelines are very different across those three end market segments.

My point being is that the technologies that are going to be required on next-gen single-aisle are going to be founded upon bleedless architecture systems from engines that change the entire infrastructure and architecture of the aircraft. You're going to move away from hydromechanical actuation systems to electromechanical actuation systems, those are all technologies that we are already developing today and technologies for which we've already been selected for said technologies onto other platforms, non-commercial air transport because there's nothing being developed in commercial air transport today.

So if you think about vapor cycle cooling systems, electric pressurization systems, electromechanical actuation systems, hybrid systems as well, our technologies that are under development will be certified on other platforms, noncommercial air transport in BizAv and defense and be at the ready for when the selections are made on next-gen single aisle.

The reason why that is hyper important is because it substantially reduces the risk of incorporating those technologies on a next-gen single-aisle aircraft. One of the biggest concerns that an OEM is going to have is "What is the technical maturity of these products that I am selecting to put onto my next-gen single-aisle aircraft?" Well, they're already certified. They're already qualified. They've already got a production plan in place and a manufacturing line in place producing for other end market segments. And so we develop it once and then we deploy it everywhere.

So not only are you reducing the technological risk associated with introducing that technology on next-gen single-aisle, you're also reducing what we have all come to realize as a pain point is the manufacturability at scale to support the demand.

So as we are developing these technologies, it's not just about technology differentiation. It's not just about reliability of the product. It's not just about performance of the product. We are hyper focused on the manufacturability of the product at scale so that all of these issues that have been occurring within our supply base that become mitigated as we think about the future for new products that we are developing today that are going to be highly manufacturable at volume to support all of the end markets.

And so with this product portfolio that you have today, when you think about your content share on the next-gen programs today versus your content in the previous generation, do you think you can get back to where you were with the previous generation? Or is it somewhere in between?

No, I think we can get back to where we were. And I think it's important to understand, though, some of the economics around some of those earlier selections that were made. I mean those were decisions that were made 15-plus years ago relative to that.

And it wasn't a question of the technology because I get asked a lot of questions, "Have you underinvested in innovation? Is that why you lost perceived market share on the platforms?" I can tell you categorically, that is not what we have done within Honeywell Aerospace.

Have we underinvested in other portions of the business? We talk about CapEx, we talk about factories and the like. I would say there's an argument to be made about that, that has happened over the last 15 to 20 years as a result.

But those were economic decisions that were made at that time, whereby the products are being looked as commodities, prices are being driven down, and it just did not make economic sense to continue forward with said selection on a platform. So there were economic decisions that were made as a result of that, not technologically driven.

Super helpful, Jim. I mean I'm sure you get that question a lot.

I do, actually. I do get that question a lot.

You'll probably get it more until the next program. So prepare for the next decade of the same question.

Stepping back from the end markets, looking at your you've got significant exposure across avionics, navigation, engines, power systems, control systems. What part of the portfolio are you most excited about? And which technology do you think you've advanced that the market underappreciates?

It's a hard question because the breadth of the portfolio makes it difficult to say, "Is there one technology that I'm more excited about than another technology?"

But if I break it down into the three businesses of Electronic Solutions is one, very excited about our sixth-gen Anthem avionics cockpit solution that started the qualification phase on other platforms relative to that. And the ability of what that new cockpit system represents for the future of aviation.

I mean, this system is architected and designed completely different than any other avionics platform that we have designed before, such that it's scalable and applicable everything down from a smaller aircraft through a Bizjet, through an air transport and defense platforms because it's so modular and scalable and how it's done. So that's exciting. When I think about the avionics Anthem cockpit that we are developing.

If I look at our Engines and Power Systems business, I mean, what we've been doing on [ HTF ] for [ biz jet ] and the technology that we're developing for our next-gen version of [ HTF ] is always very exciting. We think about what we're doing on APUs, auxiliary power units for commercial air transport going forward is very exciting. What we do in our control systems business with our Honeywell Assure technology, which is that electromechanical actuation system or vapor cycle cooling with Honeywell Attune are all very exciting.

So I think the point that I would make is that there isn't anywhere within the portfolio that we are not investing and not investing heavily because that's one of the things that I've always realized in my 20 years at Honeywell Aerospace, as a key differentiator for why customers want our products is because of the technology and the capability that we enable on these aircraft platforms.

The one I did not mention though, which I would say is probably one of the more underappreciated technologies within Honeywell Aerospace is our navigation technology. I mean, it's commercial technology that is universally applied across air transport, business aviation and defense. It is across every single precision-guided missile ammunition system in the U.S. arsenal, across almost every single precision-guided missile system internationally as well.

The capability that is afforded by that technology is unbelievable in terms of its performance and capability. And the fact that we make over 100,000 NAV products per year is just indicative of the robustness of the supply chain, the robustness of the manufacturing lines and the ability to take that and address the current issues that are affecting the industry around resilient navigation, addressing spoofing and jamming issues that are occurring and then developing alternate navigation technologies to address those issues.

And I think that's one thing that I would say within the portfolio is probably one of the more underappreciated assets.

I tend to agree. I mean, the spoofing and the anti-jamming capabilities, I mean, seems like it could also be applicable to the aerospace world commercial from the defense business.

Absolutely.

Unfortunately. With that, how do you think about priorities for capital deployment? You're making investments for the supply chain, you're making investments in R&D. So you've got a lot of organic things to focus on. How do you think about that balancing with reducing leverage and also potentially doing buybacks or increasing dividends?

Number 1 priority for us is driving output growth, right? And so as we look about every investment dollar, the highest ROI that we're going to see is the more that we continue to invest in our own factories and in our suppliers to drive more output growth is the best benefit that we're going to realize. And then part of that is also continuing that innovation machine that I mentioned a moment ago.

Second priority would be around dividends and being comparable with our peers as we go forward as a stand-alone publicly traded company.

Third priority would be around bolt-on M&As and maybe looking at more vertical integration that we can do relative to that.

And then the fourth priority from a capital allocation perspective is going to be share buyback.

And lastly, as you look at the next 2 quarters, what 2 or 3 proof points would you guide investors to know that the transition for the supply chain is being successful and things are going well?

Tracking our KPIs. The KPIs that we were showing last week that's available. We will continue to show those on a go-forward basis. You'll be able to see the transition from suppliers that have been red that are moving into yellows and the output that we're realizing from there. So that is a key set of KPIs that we will be very transparent with and share to be indicative of what the future growth of the business is going to be.

And the second part that I would say is just around commercialization. The continued capture of new business, new opportunities. What we did in securing the largest ever win in selectables when secured the IndiGo win with 800 aircraft. The continued winning and securing of those platforms building off of the $105 billion worth of wins that we've had over the last 4 years, $15 billion of wins year-to-date and seeing that commercialization engine continuing to go forward. For me, I think are the two critical things or the most important things that investors should be looking at.

Well, great. Well, thank you very much, Jim. This concludes our presentation with Honeywell Aerospace.

Thank you.

All right. We'll kick it off. Thank you so much, everyone, for being here. For those on the webcast, I'm Sheila Kahyaoglu with the Jefferies Aerospace Defense and Airlines Equity Research team. We have the entire Honeywell Aerospace team here, but Jim Currier on stage, who's President and CEO; Josh Jepsen, who's CFO; Sean Meakim, who I won't forget Investor Relations; and Mike Ritzer, who is also on the IR team. Jim has a few slides for us, and then we'll go into Q&A. Thank you, Jim.

Thank you so much. Feels good to take an opportunity here in the first couple of minutes of our fireside chat. Just to give a little bit of background in context, particularly what's transpired here over the last month or so as we've been transitioning and obviously becoming an independent publicly traded company as of the 29th of June. So with that a little bit, I think a little bit of context, again, to kind of level set about Honeywell Aerospace for a moment.

So as we've noted here, we are a critical mission system provider of high-value content across the entire aerospace and defense ecosystem, both in commercial and defense applications, whether that's commercial or transport, business aviation and/or defense, both domestically and internationally. Last year, over $17.5 billion in sales. We've secured over $105 billion worth of lifetime contract wins over the last couple of years. Backlog is sitting at over $18 billion, 90% of all the aircraft flying in the free world today have Honeywell content on board. The point being is that with the demand that we are seeing and the framework that is set up here, it really does create in combination with being a stand-alone, independent, totally focused on the A&D industry and what we do to support that going forward, a really compelling value proposition long term for all of our stakeholders.

So the landscape and the framework is set up to be able to enable that to happen for us on a go-forward. And if you think a little bit about the demand aspect and where we're sitting here today, I mean, one of the things that we look at in terms of the value of a business and what brings a lot of intrinsic value is your demand that you are seeing across the industry. And we are seeing unprecedented demand for our products and our services and our technologies. And what I would make mention of is that we kind of look at this in terms of short cycle, long cycle orders, the order book itself, backlog is up over 9% year-on-year. Our book-to-bill is over 1.1 across the portfolio. We're not seeing any erosion to our demand going forward.

So essentially, fundamentally the issue that we are experiencing and we've been very vocal about this, is our ability to execute out of the supply base to deliver on said demand. And essentially, it's just deferring the sales revenue for us because we're not seeing any erosion in terms of our products and our portfolios and the order book itself specifically. But then you have to kind of ask yourself, well, how did you end up in this position that you're in right now? And I tend to look at how Honeywell was operated in. Honeywell Aerospace was operated in as part of the conglomerate from 2010 to 2019. And we really maximized the supply base to be running at a highly efficient type of an operation going forward.

And what does that mean? We moved away from multiple sources to single sources of supply. We got into a move where we were outsourcing a lot of the core competencies. And so therefore, the setup was such that we were very, very single sourced in many regards across the supply base. And in an environment that really demand was not very strong within the A&D community over that period of time. If you pivot to 2020 and above, you can see where the demand has increased substantially within the A&D industry. And that's not just across Commercial Air Transport. It's across business aviation, defense and space, again, the three end markets that we serve that are all growing exceptionally well. And then you think about where are we as part of that.

We were obviously a single sourced, lacked vertical integration because of the outsourcing that we were doing, and also, there was limited investments that were made in terms of tooling and CapEx over that period of time. We were a little late. I'll be very honest with you, in pivoting the organization as part of the conglomerate to be able to capture that demand that we were seeing coming out of the pandemic. The point there being is that when I came in, in August of 2023, we pivoted that. We started investing very heavily back into the supply base. We put in over $1 billion into the supply base. Our situation at the time was constraints across the electronics portfolio, the mechanical portfolio. And what we see now is that our electronics portion of our business, which represents 40% of the portfolio has recovered.

We're doing fine relative to that. Mechanical side, we fixed a lot of issues that existed there, and now we're focusing on the critical few that remain to go get addressed. And that sort of translates into the sort of a pseudo scorecard that we would share with you. Over 3,000 of our suppliers are actually performing exceptionally well. They're meeting our plan. They're growing year-on-year. We have no issues with them whatsoever. We're down to -- out of that 3,000. We're down to about 70 that we would categorize as either being critical and/or constrained. The definition between the two being as follows: critical are those suppliers that are not performing in terms of consistency in terms of their output and their deliveries to us. They have the capability to hit the output demand that is necessary, but they're just not doing it consistently. So they're on a watch list for us and have a lot of senior management engagement with them directly as a result.

Of that 70, there's about 10 that we would call constrained suppliers within the supply base. These are the 10 that are not delivering to our plan, not growing year-on-year to the levels that are necessary and hence, become the bottleneck in the organization to be able to unlock fully our supply base. And they really fall under four specific commodity categories that we would look at. It's going to be either complex machining, castings, forgings and bearings. So you can see the pie chart on the right-hand side, what that represents is the amount of spend that we have within those commodities and the proportionate impact that those four commodity categories, therefore, then have within the portfolio.

And this is where I personally am spending most of my time working directly with those most critically constrained suppliers visiting them face-to-face, at their sites, going through the issues, going through the problems, going through the action plans that are necessary to resolve what they are incurring and what they are exhibiting in terms of not demonstrating the performance that is required for the business and that includes a follow-up every single week sitting with them as we're trying to unlock that portion of the supply base. Then when you double-click a little bit into that. It's kind of get a better view of those four commodities and how they are performing relative to -- are they delivering to our plan and/or are they delivering to a growth algorithm associated with their particular business. And you'll see that the most constrained areas in the bearings at the moment, not delivering to plan, not delivering to the growth that is expected.

We're seeing growth in castings and forgings, just not to the plan that is necessitated to drive the output that we are desiring across Honeywell Aerospace on a go-forward basis. And then similarly, in complex machining. Now what I would tell you is that you can look at that as you double-clicked into it, we really truly understand what are the critical root causes of the issues that these individual companies are experiencing, whether it's skilled labor, tooling, CapEx, just constrained supply as it may be. And we've got the action plans in place to go address those on an individual basis. And we'll talk a little bit about what we're doing relative to that as a point.

So when we look at this particular chart, the point that I would make on this one here is that we truly now with the plans in place and the execution that we're seeing across these constrained providers, we're very confident in our ability to demonstrate improved output growth in 2027 and beyond going forward for us. We're building on the foundation of what we have done in terms of our investments from '23 to '25. We're doing additional investments in 2026. We're accelerating capital expenditures into 2026 for improvements on tooling and the like, which drives significant improvements on quality and yield for the products that are going through these particular factories and those continued investments that we will make in the coming years as well in driving the output growth of the business gives us that level of confidence that we have across the portfolio.

And then ultimately, at the end, what matters are the proof points from all of the efforts we are embarking upon here. And again, this has been a journey that we've been on for some time. And I would give you three proof points around this. specifically around the four commodity categories that we are specifically referring to, bearings being one of those as an example. So what we have seen over the last 3 months in particular is that 35% of the total yearly output that is necessitated for us across our bearing portfolio for high-volume bearings that are proliferated across most of our products within Honeywell Aerospace, we have seen 35% of the yearly demand actually delivered in the last 3 months and primarily in the last 6 weeks, to be very honest with you.

So what we're seeing is that second source of supply kicking in and now starting to deliver to our necessitated needs, and we're going to see the continued burn down of our past due that will continue to unlock revenue growth for us on a go-forward basis. You pivot to castings and forgings a little bit. The proof points around there is we are locking up additional capacity. We're providing long-term stable demand profiles to the supply base. We've invested in tooling that is coming online now that is improving quality and yield for those set products going forward, which gives you an immediate output and boost. And therefore, as we see the plans going forward, very confident as we look at the past due burn down that is occurring across that commodity group as well.

And then lastly, the final proof point would be around complex machining. We have two very critical complex machining facilities within the supply base that are highly constrained, primarily from a skilled labor standpoint. And what we have done over the last 30 to 45 days that we've inserted dozens of our own skilled labor into those operations across the board as well as bringing in additional skilled labor outside of Honeywell and basically taking over some of those factories in terms of those operations that they have with our skilled labor in place. The result that we're seeing here over the last 30 days is about a 20% year-on-year improvement in output growth and the committed capital plans that we are seeing as well along with the burn down of past due across those particular suppliers as well.

So we're definitely seeing the fruits of these efforts that we are embarking upon. And the last thing I would say is that for me and my management team, we know the impact that we have caused our investors as a result of adjusting our guide. We've taken the feedback very seriously. We've adjusted our operational plans going forward. And I will tell you, I'm very confident in what we're seeing in these early stages of the changes that we have been making and the details that we're digging into in terms of what we're going to be able to deliver in terms of improved output growth for 2027 and beyond.

Thank you, Jim. That was so comprehensive. Last time -- I have about 35 questions that all seem irrelevant given all the info you put out there. So I may change the questions I have set up here if that's okay. If you head-on address the elephant in the room. You had some really great color. As we think about the 70 critical or constrained suppliers, how are you managing them? Is there like a head of supply chain you've put in? Is it you and Josh just reaching out to them? How are you thinking about holding them accountable and what happens from there?

So every single leader of my management team owns a certain subset of these suppliers. So even my business leaders, my presidents and CEOs of the three businesses with Honeywell Aerospace, if there is a supplier, that is constrained that is impacting their business directly, they own that supply base. So it's a combination of Kathy, who owns the entire supply chain organization. But across the management team, and this is the reflection and understanding of the criticality of this singular issue that is affecting our ability to grow at levels that we desire to grow at and expect to grow at, they are all intimately engaged to the point that every single day, 7 days a week, there's a sunrise meeting that looks at the tactical execution of the business and then a sunset meeting, which is focused on the strategic aspects of how we're going to continue to unlock the supply base.

For me personally, I am literally flying to every single one of these suppliers and spending time with the CEOs and owners of those businesses, looking at the details of their plan, challenging the details of their plan and then coming away with a high level of confidence that we do have the right actions. And some of that is actually self-reflecting a little bit as well as an organization. We have not been the best customer to our suppliers over the years. And so it's truly developing a framework and a partnership with our suppliers, where we have misstepped that are impacting them and addressing those real time for them as well.

Maybe a follow-up on that. How do we think about what's required whether you have to invest in them with like your employee base being at their sites and helping them manage or investing in them from a working capital perspective? How do you think about that?

We actually address all facets of that depending upon where the root cause of the issue is. So if it's a tooling issue, we'll go in and we'll fund the tooling to drive improved quality improved yield and/or an additional sets of tools that as a tool wears down, you have resiliency of a new tool coming in place. With this capital expansion requirements necessary as well if there's an unwillingness on their part or affordability on their part to be able to do that, we will do the capital expansion projects for them as well. And also it means inserting the skilled labor.

And not just touch labor, it's how do you run your factories more efficiently? How do you run your factories with higher productivity to drive more output as well? Then the receptiveness that we're seeing from the supply base to all of these things that we are doing is truly being demonstrative of the partnership that we are developing with them as a result of embarking upon this endeavor, and they've been very receptive to this, ultimately, and that we're seeing the benefits of that playing out. So whether it's CapEx needs, people needs, skill set needs, factory productivity needs across the board, additional tooling.

And by the way, it's also looking inside our own four walls as well because as the supply base continues to expand and drive growth, we're staying ahead of that with our own four walls and investing as necessary to ensure that we don't become a bottleneck with our own four walls as well. So we look at that entire end-to-end value chain.

Maybe if you don't mind, can I go back to that slide where you mentioned the 10 critical suppliers or the constrained suppliers how do you think about what the size of them are, how you match them? If you could dive a little bit more into those buckets, if you don't mind.

Yes. I mean so the size of them will vary. If you're talking about a complex machining operation, you think about how Honeywell Aerospace maximize the efficiency of the supply base, we actually have a tremendous amount of small suppliers in the complex machining part of the portfolio, family-owned business, 50-person operation, 100-person operation. So it's a very different level of engagement in terms of how we have it with them. That's direct one-on-one where they have the needs going forward where, again, it's primarily skilled labor and tool sets that are necessary for them.

If you start moving up that value chain a little bit into like bearings as an example, there's kind of a bifurcation in terms of the supply base that we work with in bearings. Some of them are smaller operations, some of them are much larger that we brought on board. And so we're seeing that investment that they're doing on without us necessitating to do that and setting up dedicated production lines for Honeywell Aerospace products within their facilities as well. And then as you move into castings and forgings, it's highly concentrated amongst a top four or five casting and forging providers. And again, it's working directly with them and understanding where the capacity constraints are and how we can help unlock them as well.

Just on that last bucket, obviously, news in the last 10 days from both SpaceX and GE buying CPP. How do you think about the castings and forgings market and how you're watching that, maybe a little bit more closely.

So we've always watched it very closely in terms of what's happening in terms of vertical integration and the like. This latest acquisition announcement regarding GE and CPP. The one thing that I would tell you is where our business is with CPP today does not overlap anything that GE does with them as well. So we're kind of separated in that context. And the investments that we're making into CPP to drive more output across the board, again, tooling and the like and improvements on yield and quality. I don't see the impact or the concern, although we stay very close to what's transpiring there. and we look at our long-term contracts that we have with CPP in place. I'm convinced that as that transaction goes through, that GE acquiring CPP is going to be a great benefit to the industry and to ourselves.

You mentioned $1 billion of investments since you took over in August '23. How do we think about what that investment was spent on? And how do you think about it going forward?

Yes. So on a go-forward basis, I would tell you it's going to be equal in dollar amount, probably over the next couple of years, but on an accelerated time line. So we're moving some of those investments forward into 2026 and from '28 into 2027 as we continue along that journey. The $1 billion that has been done thus far has covered across the portfolio completely, whether it's in the electronics portion of the business or the mechanical portion of the business has been within our own four walls of expansion that we have done.

I think we had announced a year or 2 ago about expanding our production capabilities in our electronics business by putting a dedicated circuit card assembly line in our Olathe facility for $100 million as part of that investment that we've done to again, to kind of in-source some of that work going forward. So it has been within and it has been external as well. I would say it's probably more of a 70% of that has gone externally then 30% of it has been internal investments that we've done to continue to drive capacity ability.

We're halfway through the fireside, so I'll get to my first original question. I guess how do we think about the 6% to 8% framework you laid out in the different buckets as we think about commercial OE, aftermarket and defense.

Yes. So I'll break apart those three end market segments for a moment. So I think about commercial aftermarket. I think it's important to also realize on our commercial aftermarket business, 60% of that business is Commercial Air Transport, 40% of that business is business aviation. And what we are seeing is still strong, resilient demand for flight hour traffic across those portfolios and for where we're positioned with our products and so we're seeing that continued growth that is occurring there as well and particularly in business aviation, where the certain segments of business aviation that are growing significantly are in that super midsized category all the way up to ultra long range.

And that's the sweet spot for which were Honeywell Aerospace plays with our products and technologies, whether it's engines, APUs or avionic systems as well. You pivot over to the commercial OEM market for a second. I mean it's very clear and well understood that both in commercial transport and in Commercial Business Aviation, there are record backlog level at all of the OEMs in both of those end market segments within commercial OE. You're seeing the ramps that are occurring across the board. What I would tell you relative to that is obviously, where you are standard equipment on board an aircraft, you will rise with that production ramp, but there's also selectables that occur on those platforms, and that becomes a differentiator for you in terms of can you grow faster than how that production rate is growing and selectables being things like on commercial or transport auxiliary power units and avionics systems as an example of products within Honeywell Aerospace.

Again, the backlog that we're seeing in the high growth and business aviation, again, in those market segments is a strong tailwind for us going forward. And if you pivot to defense for a moment, clearly, the high-growth areas of defense that are occurring, whether it's production, fighter aircraft production, missiles, munitions, rearmament, sustainment, electronic warfare capabilities, all places where Honeywell Aerospace plays considerably are all growing substantially given budget increases that are happening not just domestically, but internationally as well. And so we see the tailwinds of that demand remaining very strong and remaining strong for years to come.

You mentioned that you became a stand-alone company on June 29. How do we think about the supply chain from 2010 to 2019 was very different in how it was managed. How else is Honeywell as a stand-alone company different today versus 3 months ago?

It's a very good question. So not being part of the conglomerate. It allows us to be hyper focused on everything that we do is specifically for the Honeywell Aerospace business as a pure-play company going forward. So whether it is the management team, the strategy, the incentives for our team on a go-forward basis, it's all built around what is necessitated to drive the growth of the business and for the betterment of Honeywell Aerospace without having to consider all of the other businesses within Honeywell. The other added dimension is that with that laser focus and a laser focus on strategy and execution and a singular operating system that is purpose-built for Honeywell Aerospace instead of being purpose-built for a conglomerate.

The speed at which we can make decisions is accelerated as being a stand-alone and being very focused on the business itself. When it comes to making decisions on CapEx, when we decide, you know what, we're going to accelerate $50 million of CapEx from '27 into '26 to drive the business. We make those decisions very quickly. Everyone on the management team is a very exceptional and experienced. They understand the market, they understand the business. They understand the dynamics, the revenue models, business models. So those decisions happen at a cadence and at a speed that never could have happened as part of the conglomerate going forward.

So those are two very, very unique differences happening. And then the third element would be the Board. It's a purpose-built board that is built for the needs of Honeywell Aerospace, not for the needs of a conglomerate with multiple businesses within.

Yes. Maybe I'll follow up to that later if I have time, but I don't think I will. Maybe two more on top line, and I'll go back to supply chain. How do we think about your top line growth in commercial OE as you mentioned, lots of selectable products, whether it's APUs and avionics that your market share is pretty high there. You had the 800 aircraft, A320 order, the IndiGo win. How do we think about your commercial OE outlook as you try to balance that with supply chain at the same time?

It's a very good question. And so clearly, as the OE market is growing. If our supply output is not growing in excess of how the OE market is growing, it does put pressure on our ability to support and move product over into the aftermarket, which is the highly profitable portion of the portfolio. And we've had to do that a little bit here is focused more. I mean, our commitment is to OE production. Our commitment is to address any aircraft that are on ground at airlines. Those are two top, top priorities for us on a go-forward basis.

But you mentioned a very interesting thing here about the landmark win that we had with Indigo on 800 aircraft for selectables. I think it's really important to understand that in the Commercial Air Transport space, their standard equipment and selectables. And where you differentiate on selectable to outgrow the OE market is very important. And so if you think and you look back on historically, how much value selectables represent in terms of the competitions that have happened over the years. Our win rate in terms of capturing that value historically has been around 40%.

So if you had 100 worth of value that you could secure as part of a selectable. Honeywell Aerospace was winning about $40 of the $100. That has pivoted we are now over the last 4,000 aircraft wins that we've had, 60% of the value we are capturing now. IndiGo is a great example of that. So it is the largest win at 800 aircraft. Second behind that was a United win from a couple of years ago of 600 aircraft. But over the last few years, over 4,000 aircraft and 60% of the value that is out there to be competed on commercial or transport, Honeywell Aerospace has been able to secure.

So it is an important part of the growth algorithm.

Commercial aftermarket represents over 40% of your sales. How do you think about commercial aftermarket progressing from here given the muted growth given the supply chain constraints that you had in the second quarter?

Yes. So I think for us, it's sort of a transitional period here as we're trying to get and we will get our supply-based output to the level that is necessary. It actually provides a couple of benefits by doing that. I mean, obviously, serving the aftermarket. It is 40% of the business that we have and being able to drive more output allows us to allocate more into the aftermarket and we still see very strong demand across the product and the portfolio. As we mentioned beforehand, flight hour growth is growing in Business Aviation where we are positioned very, very well on those platforms and we continue to see the same sort of robustness. And we look at it in terms of entitlement.

Like what is your entitlement in terms of the aftermarket. And that really is highly dependent upon flight hour growth. So the more you fly, the more that breaks, the more that needs to come in for repair and overhaul, there are options within airline customers and business aviation customers to have their aircraft service with our parts. But we look at flight hours. We know exactly which airlines are flying, how many hours where our equipment is on board and what the mean time between repair is for those -- that equipment. You can easily discern from that exactly what is your entitlement relative to the aftermarket space. And what we're seeing is that we're seeing our entitlement coming through in demand and more on top of that.

The recognition of the value of bringing your products into an OEM in order to have your parts serviced. And the last piece that I would say relative to that is our retrofit mods and upgrades. The fact that we have over 90% of the aircraft flying have our equipment on board is that fertile ground for retrofit mods and upgrades for us. And it's about 10% of the business growing at double digit. And this is really that opportunity where we bring new enhancements, new features, new capability, reliability improvements into the market as these aircraft need to fly for 20 and 30 years. And how do you introduce new technologies as part of that.

That's one of our growth algorithms within the commercial aftermarket are those retrofit mods and upgrades.

Outside of that 10%, that's mods and upgrades, how do we think about your aftermarket business growing on a cycle basis or hourly basis because it's a little bit different than an engine OEM might be?

It is slightly different than engine OEM would be. I mean -- so a lot of our contracts are under power-by-the-hour programs, particularly in the business aviation space. So the more you fly, the more you recover in terms of revenue, there are some of that happening in the Commercial Air Transport space as well. But a lot of this work is also being done on time and material or on a quoted basis, fixed price quote. So again, it's one of these things that you have coupled revenue, which is that revenue that's tied to flight hour growth. And then you have that decoupled revenue, which are those retrofit mods and upgrades that is over on top of that.

So we expect and we will see our commercial aftermarket business growing in excess of what you see in terms of flight hours because of those dynamics.

Can I ask one on margins? I know you're trying to look at EBIT growth rather than EBIT margins going forward. How do we think about EBIT margins though? What's the right level to start off at? And as you think about the investment that you have to make in base and some of the duplicity that you have to put in place, how do we think about that impacting profitability?

It's a really good question. And what I would tell you is that getting more output from the supply base solves a lot of issues in terms of margin and profitability across the board. A, it drives more productivity and more efficiency and more fixed cost absorption within the operation itself. So that is a lever that will get unlocked as a result of doing that. Also, more the supply base delivering for us allows us to allocate more over into the aftermarket, which is a very, very much a profitable portion of the portfolio as well.

And so as we look at it, yes, we are incurring more costs by going multi-sourcing across the board in many regards in those highly constrained areas and the investments that we are making as a result but the unlock in productivity, the unlock in efficiency, the unlock in absorbing more of that fixed cost within the business and not having to spend as much on expedite fees and the labor that we've had in the supply base as the supply base becomes more healthy, some of those people come back and the amount of oversight and surveillance and all of those costs start to reduce accordingly.

So then it kind of goes back to at the very onset of our conversation, our issue is not demand. Our issue is not orders. It's really focused 100% on unlocking the supply base because that fixes many of these issues, growth issues, margin expansion opportunities for us on a go-forward.

So as '26 becomes a reset year, how do we -- can we quantify some of those buckets as we think about the '27 margins? What are those buckets because you have OE mix that's unfavorable? You have investment that's unfavorable. You should have volume leverage next year. Or is it another -- how long does the investment take place I guess?

Yes. I mean so I look at across three levels, right? I think of expansion being around volume, I think it around mix and I think about price as well as part of that on a go forward for us. If you think about where the higher percentage of expansion would occur on a percentage basis, it's going to be out of the volume growth that we're going to see for the reasons that I mentioned a moment ago. The secondary benefit of that being now you're allocating more to the aftermarket versus allocating what we have to do today to the OE to keep the production lines running that becomes an unlock in terms of margin expansion. And then there's always price opportunities that present themselves.

So as we continue to go through our long-term agreements and our negotiations around long-term agreements with multiple OEMs across the industry is those opportunities to reset price in concert with where the cost basis is business and becomes a margin expansion opportunity.

I'll have two more questions left with 3 minutes on the clock. So I guess one of the benefits, and I know maybe in the second quarter, this wasn't a focal point of the discussion, clearly, but one of the benefits of having a stand-alone Honeywell is probably your own capital allocation flexibility and understanding of the aerospace business is better. So I guess how do we think about organic investments going forward, supply chain, M&A, debt reduction and dividends and share repurchases with about $16 billion of debt following this up.

Yes, I'd say the priorities would be as follows. First and foremost is unlocking more organic growth in the business. So those are the investments that we are making in the supply base and those investments that we're making in innovation on a go-forward basis as well as new products, new services for the future, where we invest about north of on a percent RD&E investment -- or a percent of revenue north of 4%, which is somewhat best-in-class, not including the funding that we get from customers as well, which puts us at over 10% of revenue is what we invest back into the business and new products and technology.

So that's the #1 priority, is unlocking the supply base, continuing to invest there because that's where we're going to see the best benefit for the organization going forward. Secondarily, on top of that would be dividends in line with what we see in our peer group in the A&D community. Third priority would be bolt-on M&A into the business, similar to what you saw us do with CAES and Civitanavi back in 2023, when those opportunities present themselves, that would be on the list of something we would want to do. Again, three on the list. And the fourth on the list in terms of capital deployment would be opportunistic share repurchases on a go forward. But first and foremost, we know and we recognize that the best return on any investment that we make from a capital allocation is going to be unlocking the output of the organization, the output of the supply base.

I'm sure a lot of your discussions today will be around the supply chain. But as you think about the next 3 years, what do you hope people look to in 2029 and say, "This is the Honeywell story going forward?

I think I would say three things that I would say. One would be that the demand that we are seeing is enduring on a go-forward basis. So a lot of concern that we're losing demand, losing growth opportunities, losing orders, and that is just not true and being able to demonstrate that is important. Second thing that I would say is our supply-based transformation. This is going to be a lasting capability within the business. This is not a fix. This is going to be something that we're doing end-to-end across the portfolio. And when you sit here 3 years from now, you're going to see an industrial supply base within Honeywell Aerospace that is going to be able to double the size of our business within the next 10 years, just off of the capacity that we're building within the supply base and the growth accordingly.

So this is going to be a lasting and enduring change that we're making, not just a temporary fix. And the third thing that I would say is that truly the unlock that happens as a stand-alone independent company, not part of a conglomerate and the ability that, that enables and the capability to be able to do the things that we're saying that truly, there is value in that occurring.

That's great. Well, thank you so much, Jim. Thanks for the Honeywell team and everybody listening in.

Thank you.

Thank you, Jim.

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

I'll now turn the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Honeywell Aerospace's Second Quarter 2026 Earnings Call. On the call with me today are Chief Executive Officer, Jim Currier; and Chief Financial Officer, Josh Jepsen.

This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. Our forward-looking statements are based on our best view of the world and our business as we see it today, and subject to risks and uncertainties, including the ones described in our SEC filings. This afternoon, we will review our financial results for the second quarter, provide an update on full year 2026 and then open it up for questions.

Now I'll turn the call over to our CEO, Jim Currier.

Thanks, Sean. Good afternoon, everyone, and thank you for joining us. We'll begin our presentation on Slide 3. 18 months ago, Honeywell announced its intention to separate its aerospace business into a stand-alone public company. 9 months ago, the Honeywell Board chose me to be CEO. And today, I have the honor of leading our first dedicated earnings call since we completed our spin-off on June 29. I could not be more energized for the road ahead of us.

We've assembled a great management team, blended together decades of experience at Honeywell Aerospace with a healthy dose of outside industry perspective, as exemplified by Josh here right beside me. We have a purpose-built board dedicated to the aerospace and defense industry. From top to bottom, this organization is now singularly focused and incentivized to innovate and grow to better serve our customers, shareholders and all stakeholders. Today, we'll walk through our performance in the quarter, progress against our value creation strategy and outlook for the remainder of the year.

In the final quarter, as part of Honeywell, we continued to see extraordinary demand across our entire business, driven by our compelling technologies and alignment to secular growing end markets. Orders increased by 8% over the past year, and we recently secured the largest selectable win in company history, bringing the lifetime value of year-to-date customer wins to $15 billion.

Against this backdrop of increasing demand, however, our supply base has not been able to ramp in the manner we were expecting earlier this year. After a few years of double-digit output growth, we faced supply chain constraints in the first quarter that resulted in factory volume growth below expectations. At the time, we guided you to expect a steady ramp in our output through the first half, accelerating into the back half.

While we are seeing progress, the ramp has not come through at the pace we had initially laid out. Frankly, I underestimated how long it would take to implement and see traction from the corrective measures we had taken and are taking. Importantly, the issues remain contained to a handful of material and supplier bottlenecks. Critical and constrained suppliers represent roughly 2% of our supply base, and the vast majority of our thousands of suppliers are delivering as expected. The issue is not reflective of an underlying health of our operations. And while we have more to do, we have invested over $1 billion in recent years, and we'll continue to invest to increase our resiliency.

Equally important, we are moving with tremendous urgency to address near-term bottlenecks. While we didn't see traction as quickly as expected earlier this year, we are making real tangible progress. We will walk through the specific actions we are taking in more detail later in the presentation.

One of my top priorities as CEO is to ensure we execute on our promises to investors. Obviously, today is a far cry from this standard. Going forward, we want to ensure we deliver on our promises, and we are issuing a revised outlook with that in mind.

Despite near-term supply chain disruptions, we have a portfolio of truly market-leading technologies that provide us unprecedented visibility into future sales that will enable us to scale our business to multiples of historical levels. We are making the necessary process improvements to deliver incremental production capacity. And as our supply chain constraints resolve, we will unlock our ability to service significant pent-up demand, leading to accelerating sales and profit growth in 2027.

With this in mind, we are reiterating our 2030 targets. We remain incredibly excited about the long-term outlook for Honeywell Aerospace and confident in our future financial performance. Josh will provide additional details on our outlook later in the presentation, and we'll spend more time on our supply chain strategy in a moment.

But first, let's turn to Slide 4, and I'll discuss how we're delivering on our strategic priorities. Our strategy is centered on 3 pillars. We have embedded them across our organization, and they guide our decision-making process, including how we allocate capital.

First, expand leadership in attractive end markets. We are going to grow where there is increasing profit opportunity and where we have a strong right to win because of our differentiated technology and deeply embedded positions. Our Defense and Space business is helping customers around the world who are seeking to ensure national security. Much of the worldwide defense fleet and stockpiles have suffered underinvestment for several decades and are now being called upon more often because of changing global realities. These dynamics require investments in modernizing for today's combat environment and sustaining operational readiness.

We are upgrading our solutions on marquee platforms where we have substantial content such as the F-35. At the same time, we are supporting nontraditional defense primes, introducing new solutions with our ability to manufacture at scale and our proven commercial technologies, including navigation and electronic warfare.

Second, invest in differentiated technology platforms. We are advancing our innovation leadership with R&D spending of roughly 10% of our sales, the majority of which is being funded by our customers for collaborative development efforts. Our develop once, deploy everywhere approach to innovation, where we focus on technologies that are scalable across platforms and end markets, means that we maximize the returns on that spending. Our next-generation Anthem avionics perfectly exemplifies our innovation strategy.

This fully integrated flight deck was built using modular architecture so that it can scale all the way from smaller unmanned aircraft to large commercial air transport platforms. It offers increased safety and efficiency by capturing real-time data through a connected software-defined and AI-capable platform. This greatly reduces pilot workload, which is a significant step on the path towards greater autonomy. During the second quarter, Anthem advanced formal qualification on major subsystems, taking it one step closer to commercialization and demonstrating leadership on forward-fit platforms.

Third, strengthen operational capabilities to unlock further growth. Converting the strong, highly visible demand for our solutions into sales requires supply resiliency, factory throughput, planning discipline and service capacity. Our Honeywell Aerospace Operating System, with a framework designed specifically for our industry, operationalizes the strategy across the organization and drives clear priorities, actions and outcomes as well as accountability.

As an example of investment priority, we are growing our own manufacturing capacity with new production lines at our existing facilities. Recently, a new line in Arizona delivered initial operational test units for Assure, our advanced electromechanical actuation system. We are also progressing expansion at our Minnesota facility for critical inertial sensing components for our leading navigational systems.

Now let's move to Slide 5 to dive into our supply chain transformation a bit further. As an independent company, we are deploying an aerospace-specific operating system rooted in continuous improvement, operational excellence and disciplined execution. It will drive standardized planning, decision-making and improved long-term performance. As perhaps the most significant benefit of our separation, we now have additional management focus, capital flexibility and organizational agility to use this framework to strategically transform how we operate from our factory floor through our supply chain.

Our actions thus far just have not been good enough. They have not led to the output inflection that I expected only a few months ago. As we work urgently to address near-term bottlenecks and return to robust output growth as quickly as possible, we believe the strategic actions underway will create a foundation for greater visibility and performance in 2027 and beyond.

First, we're improving our planning processes. Our senior leaders have been working closely with our suppliers to provide them with better visibility into our future demand. I've met personally with several suppliers in recent weeks and months, and the response has been remarkably positive to the increased transparency and management attention. We are also better tying our inventory planning to our delivery schedules, which has increased customer confidence and our ability to meet our timing commitments.

Second, we're gaining better control over our supply base to increase the inflow of components. In the first half of the year, we added new sources for over 50 constrained parts, and we plan to add another 50 in the second half of 2026, increasing the number of multi-sourced components by 15% this year alone. The additional sources will enable capacity expansion for specific critical materials and position the company for strong output growth in 2027. At the same time, we've embedded resources at critical suppliers with labor bottlenecks, which, as an example, led to a 20% quarter-over-quarter output increase at one key supplier.

Third, we're very focused on increased factory throughput. We introduced a new schedule attainment system as part of our operating framework, which has begun to show operational gains with attainment percentages doubling year-over-year, and repair and overhaul turnaround times decreasing materially. In the second half, we're aggressively targeting additional improvement with increased ability to track progress.

And finally, we're integrating our overall approach to operate as one system. Throughout our largest global facilities, we staff dedicated lean experts to support site-level adoption. They're filling in any capability gaps compared to our system-wide standards by utilizing standardized methods and problem-solving tools.

Josh, why don't you add a few comments given you're newer to the organization?

Thanks, Jim. I've had the pleasure of walking the lines of many of our facilities since starting with Honeywell Aerospace about 5 months ago. And I can say that I have seen, firsthand, how incremental investments will boost output at the site level. From improvements in air and thermal control production in the U.K. to navigation and sensors in Florida, we're taking positive steps that will support material and sustainable increases.

One new initiative is increasing our investment in supplier tooling, 70% of which is going to constrained castings. That will strengthen our supply base. In 2026, we have stepped up our spend in this critical area, which offers fast paybacks. I've also been personally involved in launching the Honeywell Aerospace Operating System, and it will provide the focus and toolset to take successes in certain areas of our organization to our entire footprint.

While we're seeing early improvements and encouraging signs with certain constrained parts, we acknowledge that our progress is coming more gradually than we anticipated earlier this year. After only a few quarters under Chief Integrated Supply Chain Officer, Kathy Worthen, we are building the foundation for future growth in 2027 and beyond. Kathy's leadership is enabling us to take a more strategic approach to building a more resilient supply base. And while it's early days, the initial impact has been encouraging. We are confident that the steps we're taking, while challenging in the short term, will position the company for sustainable growth longer term.

With that, I'll hand it back to Jim on Slide 6 to discuss some of our recent business highlights.

Thanks, Josh. At our Investor Day in June, we discussed how we're accelerating growth through platform content wins, RMUs and international defense. In selectable equipment, where aircraft operators choose content for their new aircraft, we've won approximately 60% of the value of potential content on over 4,000 narrow-body aircraft in the last 4 years. We are continuing that momentum in 2026 with a record award.

Last month, IndiGo, India's largest carrier, selected Honeywell Aerospace avionics and APUs for more than 800 future Airbus A320 family aircraft it has on order. It was the largest selectable equipment win in our company's history, and we'll expand our platform content in one of the fastest-growing commercial aviation markets in the world. Wins like this show how we're accelerating commercial OE momentum even as awards for next-generation air transport platforms are several years away.

At the same time, we're also gaining additional content for the in-service fleet. Customers select our many RMU offerings to improve aircraft safety, efficiency and capabilities. Recently, Aeromexico announced that it will adopt our Surface Alerts solution known as SURF-A across its entire Boeing 737 fleet of more than 100 aircraft. SURF-A advances safety by sending pilots aural and visual alerts during taxi, takeoff and landing, far faster than current technology, if they are on a trajectory to collide with an aircraft or a vehicle on the runway.

We continue to see strong momentum for this product as more airlines adopt this innovative safety technology. And as software upgrades to existing Honeywell Aerospace equipment, SURF-A can be rolled out efficiently without disruption to ongoing operations.

In addition to our commercial momentum, we're also seeing growing demand in our international defense business, which is approximately 30% of our total Defense and Space end market, and where we anticipate high single-digit annual growth through 2030. International defense budgets are expected to grow quickly amongst U.S. allies in response to new threats.

Our recent acquisition of Civitanavi, a technology tuck-in based in Italy, expands our European manufacturing footprint as customers seek EU-origin technology to build up regional capabilities. Civitanavi's navigation solutions, including its ARGO 4000 inertial measurement unit, can provide precise location for missile programs, unmanned platforms, and maritime vessels and land vehicles, even when GPS or other satellite signals are jammed or spoofed. The combination of these features with Honeywell Aerospace's complementary navigation technology, program speed and scale are expected to drive a doubling of Civitanavi sales in 2026 versus the prior year.

We've won over $15 billion in lifetime value year-to-date, adding to the more than $90 billion in commercial and defense platform content wins that we've collected in the prior 4 years, demonstrating continued momentum for our systems and technologies.

Now I'll turn it back over to Josh on Slide 7 to discuss our quarterly results and updated outlook.

Thanks, Jim. Honeywell Aerospace sales increased 5% organically from the prior period to $4.5 billion. Demand for our innovative solutions remains robust, as Jim detailed earlier, and supportive of a significantly higher growth rate. Orders over the past year increased 8% from the prior year for a book-to-bill of 1.1.

Supply constraints are continuing to limit our ability to convert demand into sales across all our end markets with year-over-year output growth increasing 3% in the first quarter to 4% in the second quarter. We had anticipated a faster ramp, which is pushed to the right, resulting in sales growth being below our own expectations embedded in our prior 2026 outlook.

I'll discuss our profit metrics on a pro forma stand-alone basis, as if we had been operating independently for the full quarter and comparable period because we believe these numbers are the most representative of our future performance. However, pro forma stand-alone adjustments contain estimates for run rate costs, which could vary from our actual experience as a stand-alone business. In the appendix of this presentation, we have provided historical quarterly adjusted EBIT by segment.

Second quarter adjusted EBIT was $1 billion. Adjusted EBIT declined 2% and trailed sales growth as a result of unfavorable mix as well as an inventory obsolescence charge of approximately $50 million in the quarter. Excluding the charge, adjusted EBIT would have grown 3% year-over-year.

Supply constraints shifted the allocation of shipments to our domestic defense and Engines & Power Systems OE businesses, which experienced strong growth and have lower than group average margins. While margin dilutive in the near term, these sales increase our installed base for future aftermarket services and RMUs. Adjusted earnings per share was $1.78, down from the prior period due to higher taxes as we were separating and lower adjusted EBIT.

On the next slide, I'll discuss the second quarter performance by end market. Commercial OE sales increased 6% year-over-year, led by double-digit growth in commercial air transport, where customers' build rates increased and our shipments continued to recouple to those rates. Sales in the commercial aftermarket grew 8% from the prior year with strength in both commercial air transport and business aviation. The conflict in the Middle East and higher fuel prices did not have a material impact on the aftermarket demand in the second quarter. Business aviation flight hours growth has been particularly robust, growing at a high single-digit rate.

Defense and Space sales were up 3% versus the prior year. Continued strong demand drove U.S. sales up a high single digit despite the wind down of a long-term non-aero restricted defense program in the Control Systems segment, which we had previously contemplated in our guide.

Domestic performance was partially offset by material shortages that led to a decline in international sales as we were unable to meet the exceptional demand for our products. International defense budgets are still increasing, driving second quarter orders up strong double-digit rate with a book-to-bill of 1.5, which provides a strong runway for the future.

Let me now turn to our 2026 outlook on Slide 9. We revised our guidance ranges to align our expectations for the remainder of the year to similar year-over-year output growth levels attained in the first half. Importantly, the allocation of that output to our various end markets also significantly impacts our top line and margin performance. While we have confidence in all the actions we're taking to accelerate output near term, we believe it is prudent to set short-term financial guidance that is achievable without dramatic improvement in supply chain performance.

We firmly believe that the changes being implemented today will have a more material benefit on our financial performance in 2027 and beyond. Although some of our output challenges are more unique to Honeywell Aerospace, as we unlock the business from these constraints, they will act as a source of differentiated growth that is largely within our control.

With that backdrop, we now anticipate organic sales to increase 4% to 5% for the full year. Breaking that down by end market, we expect Commercial OE to grow at mid-single-digit rate with commercial air transport continuing to lead while business aviation remains steady. We anticipate commercial aftermarket growth of low to mid-single digits as we navigate continued constraints in the mechanical supply base. We see this impact most acutely in the spares market as the reduction in available supply at a time when OE build rates are ramping, disproportionately impacts our aftermarket volumes.

We would also note that the aftermarket comparison versus the third quarter of 2025, which was up 23%, is significantly more challenging than in the first half. Critically, aftermarket demand remains robust, and we expect to drive solid growth in this end market longer term as our supply chain initiatives begin to yield results and drive output growth. We expect Defense and Space sales to be up mid-single digits with domestic growth continuing to outpace international as we push to meet obligations to our U.S. customer base.

We now anticipate pro forma stand-alone adjusted EBIT to be $4.35 billion to $4.45 billion. The reduction relative to our prior guidance reflects 2 items: $50 million from inventory obsolescence charges and the remainder from our decision to allocate our limited inventory from higher-margin aftermarket international defense to lower-margin OE and domestic defense.

While both growth and margin will be constrained by a lower mix of commercial aftermarket and international defense sales, we expect these headwinds to abate over time as output improves. We will continue to work on efficiency and productivity efforts to offset near-term margin pressures.

We are introducing pro forma stand-alone earnings per share guidance of $7.60 to $7.90. You can find the details of the below-the-line expense, tax rate and share count assumptions supporting this range in the appendix of this deck.

Our second half free cash flow expectations remain unchanged at $1 billion to $1.5 billion, a range which covers potential shifts in working capital timing and policies as a result of separation. The midpoint of that range on an annualized basis is consistent with pro forma stand-alone 2025 free cash flow of $2.5 billion and continues to be a good launching point for future free cash flow growth. We anticipate capital expenditures of approximately $650 million.

Our new guidance ranges offers a prudent view of the back half of the year as we build a more resilient supply base that can support higher growth in 2027 and beyond. Actions are already underway, including a 4x larger investment this year in multi-sourcing and in-sourcing compared to last year. The teams are moving with the necessary speed and urgency, and we expect to accelerate growth next year. We recognize some of these investments will dampen near-term financial performance in the back half, but we believe these will drive significant value creation for years to come. This unlock is within our control, and we are committed to delivering on it and meeting our 2030 financial targets.

Looking forward, we expect the actions we're taking today to drive a meaningful step-up in output as our multi-sourcing, in-sourcing, and supplier tooling investments begin to deliver results. That output recovery is the primary lever for both growth and margin next year. Higher volumes will drive top line and margins. And critically, as we relieve component constraints, we can direct more supply to commercial aftermarket. The spares market will feel the impact of these constraints in the back half of this year. And as those components free up, we expect the aftermarket to return to strong growth.

On top of this volume and mix recovery, we're pursuing additional cost and pricing actions through our operating system that we expect to contribute to margins in 2027 and beyond. Together, these dynamics give us confidence that improved 2027 performance will help us achieve our long-term framework.

With that, I'll turn it over to Jim for some closing comments beginning on Slide 10.

Thank you, Josh. Honeywell Aerospace is barely a month into its first quarter as an independent company, and we have a tremendous runway ahead of us to create shareholder value. Being on our own, we now have the resources, incentive alignment and flexibility to drive sustainable above-market growth, supported by $15 billion of wins this year across all end markets and building on the $90 billion of commercial and defense wins during the past 4 years.

We have a proud legacy of operational excellence, combined with a purpose-built enterprise-wide system, that will guide this process through a culture of continuous improvement and disciplined decision-making. We are making progress against the strategic priorities that will integrate supplier capacity, factory operations and customer delivery to create predictable, growing throughput. The mission is exceptionally clear and straightforward. We must and will improve our execution and performance. We have reset our 2026 guidance at the level our current supply base can deliver, while our long-term targets are unchanged.

We have many reasons to believe that both 2027 and beyond will offer accelerated profitable growth on top of the items Josh mentioned earlier to drive output. First, our recent investments in the supply base and innovation will increasingly generate attractive returns as internal and external capacity comes online and new offerings go to market.

Second, we should begin to see the incremental benefit to missiles and munitions sales from our framework agreement with the Department of War. Third, we continue to progress on repricing long-term agreements to align with significant historical cost inflation over the past 5 to 10 years. Fourth, our RMU strategy, such as our upgrades for radio altimeters that meet the FAA's recent mandate for 5G tolerant equipment, provide growth incremental to and uncorrelated to the end market demand. And finally, our 2024 acquisitions of CAES and Civitanavi, which are not supply limited and are growing at accretive rates, while demonstrating commercial synergies and margin expansion opportunities.

To conclude on Slide 11, I'd like to zoom out as to why Honeywell Aerospace presents a compelling long-term investment opportunity. We are a premier provider of mission-critical systems across all forms of aircraft with deep, long-standing customer relationships that span commercial air transport, business aviation, defense and space. Our portfolio is intentionally platform-agnostic, which allows us to participate broadly across aircraft types, cycles and programs, while continuing to innovate at the system level.

We have a large diversified installed base, which underpins a resilient and growing aftermarket business and provides strong visibility into recurring revenue and cash flow. That installed base, combined with our technology leadership, positions us exceptionally well as the industry evolves. At the same time, we are helping our customers solve increasingly complex challenges from greater electrification to higher levels of safety and autonomy. These secular trends are not short term in nature. They represent multi-decade opportunities where our capabilities and investments truly differentiate us.

Importantly, we are operating amid a multiyear aerospace and defense upcycle with revenue streams that are increasingly decoupled across OEM, aftermarket and defense markets. This diversification enhances resilience and supports consistent profitable growth. All of this is enabled by the Honeywell Aerospace Operating System that drives execution, productivity and continuous improvement, supporting both organic sales and free cash flow growth. It also directs our investments, including the substantial spending on our supply chain to boost output.

Combined with a strong balance sheet and disciplined capital allocation framework, these strengths position Honeywell Aerospace to create long-term value as a leading independent aerospace and defense company with the scale, technology and discipline to advance the future of aviation.

Lastly, we understand that we have something to prove as a leadership team, and the 2026 reset adds to that challenge. We appreciate your patience and willingness to stick with us through 2026 as we set up the business for a strong 2027 and beyond.

And with that, Sean, let's move to Q&A.

Thanks, Jim. Let's cover a couple of topics in more detail before we go to those on the line. Josh, let's start with you. Could you maybe walk us from the 2026 guide we provided at Investor Day to the updated outlook we're offering today?

Yes, Sean, I will. I'd start by saying, structurally, as we've mentioned, nothing has really changed from a structural perspective. Demand remains quite strong and robust. I've had more time to better understand the drivers of the business and our current positioning, and there's 2 things that I would highlight there. I think, first, we expect acceleration of output from 1Q to 2Q, 2Q to 3Q and 3Q to 4Q. We saw an increase in 2Q versus 1Q, but it wasn't what we expected. We saw a lower ramp in particular in June. As a result, we're resetting our guidance to provide a more prudent baseline that we can deliver if output remains the same from a growth perspective over the rest of the year, as what we saw in the first half.

And the second thing is we remain committed. We're steadfast in our commitments to the 2030 targets. If we turn to the guide change, specifically, sales growth is down 3% to 4% at the midpoint from the prior guide. The vast majority of that is a result of lower mechanical supply and mix and a little bit of impact from lower output for international defense.

On the EBIT side, down about $300 million at the midpoint from the prior guide. As mentioned in the second quarter, we saw a $50 million impact from an inventory obsolescence. And then in the second half, it's really a mix shift and volume leverage, which contribute to a higher decremental. And that mix shift is important as we see a shift from aftermarket to OE and from international defense to domestic, both of those weighing on that. I think these mix headwinds will abate over time and as supply chain capacity improves, and we're going to keep working on that. We've got a lot of actions underway as we speak.

And then how do we see the guide playing out for the back half of the year?

Certainly helpful to look at the back half, over the last 2 years. Last year, we grew in the back half about 12%. And when you combine that with this year's outlook for the second half, that's a normalized CAGR of about 7% to 8% for the last 2, which is in line with our long-term framework. The guide assumes year-over-year output growth in 3Q and 4Q, similar to what we saw in 2Q. It is worth noting the toughest comp of the year is in the third quarter with a more normalized comp in 4Q. As a result of all that, we'd expect 3Q to be flat to up slightly versus last year, and fourth quarter to be more in line with the fiscal year guide.

Thanks, Josh. Jim, over to you. Can you help us unpack the drivers of the slower anticipated growth in commercial aftermarket and defense and space? Just trying to unpack how much of this is supply versus demand? What's being driven by the market versus what's specific to Honeywell Aerospace?

Yes. To emphasize the point here, this is clearly a supply issue and not a demand issue. We mentioned earlier our orders are up 8% on a rolling 12 months. All 3 end markets have contributed to that 8% order growth that we have seen. Defense and Space has led the order growth due to continued geopolitical conflicts, sustainment procurement, budget increases that are occurring both domestically and internationally. So again, it goes back to what we've been saying. Our growth is constrained by our supply base, which is our singular area of focus to unlock and drive value and growth for the business. To identify specifically where we're in, as we've talked about beforehand, it's the mechanical supply base.

But to that end, I think it's a little important here to provide a little bit of context around our supply base and to emphasize a few points here. We have over 3,000 suppliers that support Honeywell Aerospace. 98% of them are performing exceptionally well. What I will tell you, the significant improvement -- that's a significant improvement from where we were 3 years ago to when I came into the role. So we've seen a lot of progression throughout our supply base as evidenced by our double-digit output growth that we've seen over the last couple of years. So a tremendous amount of effort, investments that were made and we've seen the benefit thereof.

This remaining 2%, I would categorize them as follows, into 2 very distinct categories. There are those that are constrained, those that simply are not providing the output that we need, but that represents literally a handful of suppliers. The balance, I would call them critical. These are those suppliers that have yet to demonstrate a level of robustness and consistency that is aligned to my expectations. So we enhance our surveillance and engagement with them as well as a result. But I'll tell you, with the strategic actions we have underway, we are creating that foundation of greater visibility and improved performance in 2027 and beyond, Sean.

Thanks, Jim. Alicia, let's please open the line for questions.

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

Maybe just to start to drill down on that comment, the change in the supply chain performance from what you were seeing in early June to today seems, I think, a little more -- obviously, more drastic than I think lack of improvement would imply. Can you talk, maybe, Jim, just in a little more detail, what gives you confidence now that you will see some improvement into the back half? And within the mechanical components piece, anything in particular that took a step back maybe in the last few months that contributed to the lower-than-expected improvement that you saw across the supply chain?

What I would tell you is, and emphasizing a point that was made earlier, structurally, nothing has changed that is causing the revised guide that we're seeing. Frankly speaking, overestimating the pace of the output improvement and pushing that to the right is what we're seeing, is really what is driving the revised guide that we have. Again, we were expecting a significant amount of ramp in the third month of the quarter. In this case, it was June when we provided our guide at the investor event in early June. Our typical profile has always been that the third month of the quarter, we see a very high percentage of the total quarterly revenue materialize.

And even though we were seeing improvement in the early parts of Q2, and that expectation of the growth in that third month of June, it was not at the rate that we had expected to see going forward. So we're taking a very prudent baseline view when we decided to reset that. That even if the supply chain output remains the same, that was a contributor to the revised guide. And I know it's a very big disappointment, but I will tell you, we are exceptionally confident that we're going to see significant output that is sustainable for stronger growth in 2027.

And I'll add another little point here as well. When I came into this role in August of 2023, leading Honeywell Aerospace, I spent a significant amount of my time with customers, rebuilding relationships, establishing partnerships, and I believe that has gone very well for us going forward. This is the second phase of that activity of where we need to pivot and where I have pivoted my personal time in spending time with these suppliers.

It's one ecosystem that I talk about when I talk about Honeywell Aerospace. There's the customer segment, the internal piece and then the suppliers. So spending time with suppliers, reestablishing those partnerships in like manner to what I did with customers coming into the role is where we're focusing that time and attention.

And I will tell you, from those personal engagements face-to-face at the supplier locations, we've seen the confidence building through the transparency that we have been providing to them and the visibility that we are providing to them, this improved output that we are expecting in the second half of the year, albeit delayed from what we had anticipated when we gave our guide in early June.

Ken, this is Josh. Maybe one thing I'd add is just this is a pivot to from -- and we've said this, from pure brute force to strategic actions and really thinking about what are the things we need to do to build this sustainably going forward. And one of the things, and this is the benefit of separation, is capital allocation and be able to put more CapEx into this area. So we talked about it, 4x the amount of investment going to in-sourcing and multi-sourcing.

We're doubling the amount of supplier tooling that we're buying between '25 and '27. So those are things where we're putting capital into those, that some of those aren't quick, some of them are long lead times, but we think will drive sustainable output growth as we go forward, which we think are really, really critical.

And maybe just a follow-up on that. Can you just be maybe a little bit more explicit on what the guide for the second half of this year implies in terms of sort of sequential supply chain improvement from second to third and third to fourth quarters?

From an output perspective, we're essentially expecting 3Q and 4Q to have the same amount of growth that we saw in 2Q, so call it, roughly 4%. That's essentially what we carried forward. If you went back, our previous guide would have seen a step up, 1 to 2 and then again 2 to 3 and 3 to 4. We think based on what we've seen, we're resetting this to say we think this is flatter in terms of a growth perspective across the year, and that's why we're accelerating some of these investments and other things to try to drive further output.

And Ken, this is Sean, just one nuance I'd highlight. Given the seasonality in the business throughout the year, output is higher in the guide second half versus first half. But as Josh said, the year-over-year output growth is comparable between the 2 halves.

Our next question comes from the line of Sheila Kahyaoglu Jefferies.

Maybe you guys discussed this a bunch, but how do we, I guess, think about the guidance cut? How much of the top line and EBIT cut is coming from supply chain? And maybe just to put a finer point on it, like what are 3 things that we should look for in the next 6 months as you look to fix the supply chain and resurrect growth in '27?

Yes. Thanks, Sheila. I would say the vast majority, if you think back half of the year, it's all predominantly -- top line is really driven by the supply side. We've seen demand continue to be really robust, so that's not the challenge. So if you think top line, it is essentially limited supply. And then importantly, the mix amongst the businesses. So as supply gets tighter, given the ramp in OE, we're pushing more of our available output to the OE side, which puts downward pressure on aftermarket. And given the dynamics around aftermarket, it has an outsized impact on that business. So top line, that's really the main driver.

If you think about the EBIT reduction, again, a little bit of that is the $50 million of inventory obsolescence that we took in 2Q. And then the remainder is mix, which I just described, and then volume leverage, just volume coming in. So those are really the 2 big components that impacts the guide in the back half of the year and the change overall.

And one point I would add on top of that, Sheila, if I may. Kind of following up on the commentary around the personal visits that we've been making, I'll kind of conceptualize and put some texture around this a little bit. As one of these key suppliers that is constrained for us, one of those categories that I described a moment ago, the past due of this particular supplier is roughly $15 million, $16 million. And you would think that's not a significant amount of past due on a business that's $18 billion in revenue, that's the size of Honeywell Aerospace, but the reality is that one component coming from this one supplier at being about $15 million of past due actually unlocks hundreds of millions of dollars of revenue output for Honeywell Aerospace, so it is disproportionate.

And so even though it's a small group of constrained suppliers, they have a very disproportionate impact on our output volume growth going forward, and that's where we're hyper focused with the team spending personal time.

Got it. Can I follow up on the supply chain? Like, at the supplier, who makes the decision to allocate that part to you, that $15 million to you rather than someone else because others might not be seeing the same issue? And how can we thing about that?

Yes. I would characterize, I mean, the industry overall is supply constrained. And we, within the industry, are all working to increase output across the board. And there's -- but these are some very specific issues with this handful that are truly limiting our output, revenue and profitability, which creates challenges, obviously, but also opportunities to unlock. And this is where we insert ourselves as well through supplier investments that we make with respect to some of these constrained suppliers, tooling investments that we make for these special parts that they make for us, doubling that amount of investment that we're doing.

It increases yield throughput for some of these suppliers. It reduces the rework cost associated with these suppliers, and provides us a very, very high ROI and a fast payback as a result of that. And so that's where we're continuing to invest more, that's going to unlock within that supply base as well for these specific ones for Honeywell Aerospace.

One thing I'd add, too, is investment, not only in dollars but also in partnership and working together in clarity, visibility and the like is really critical. And the team has been leaning in there.

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

Jim, in the opening remarks, there was a lot of talks about dual sourcing critical components. You currently have more than 3,000 suppliers. If we look at that today, how many are sole source? And if we were to look 3 to 5 years from now, how many of the suppliers will still be sole source?

Yes. So we focus our dual sourcing, multi-sourcing and in-sourcing strategy on those that are most constrained within the supply base. And so as I mentioned, 3,000 of our suppliers are performing exceptionally well. It doesn't mean we're not going to continue to dual source and multi-source them because as we see the continued growth within the business, we need to continue to augment the supply that is available to us to capitalize on the demand and the growth that we are seeing.

Year-to-date, to kind of put it -- conceptualize it a little bit, year-to-date, we have actually second sourced 50 suppliers, and we plan on doing another 50 suppliers through the second half of this year as well on top of sourcing, dual sourcing and in-sourcing that we had done in the prior years. So ultimately, it's that progression of what we're doing. The intent is not to dual source every single part of the tens and hundreds of thousands of SKUs that we buy. But in those areas where we are constrained, in those areas where there are critical suppliers and in those areas that we have suppliers that are performing, yet we know there's additional investment that needs to happen for the growth that we are planning for in the business to support the demand, we will continue to dual, multi and in-source.

Okay. And then you had the $50 million inventory obsolescence charge. Are your supply chain issues causing your airline customers to turn to DER repairs and PMAs to alleviate some of the supply chain issues?

Yes, there's no correlation to the inventory obsolescence issue that we did in the second quarter. What I would tell you is we are still seeing significant demand in the commercial aftermarket, both in terms of repair and overhaul and in spares. And so we're not seeing a demand shortfall versus what we would have expected that is aligned to our entitlement and that is aligned to the flight hours that are occurring within the commercial air transport market. So we're not seeing a shift away from bringing those products for repair and overhaul and/or spares away from Honeywell Aerospace.

Our next question comes from the line of Myles Walton with Wolfe Research.

Josh, I think I heard you give the back half of the year guidance by quarter. I just want to make sure I got that correct that you're looking for a flat sequential in the third, more or less, and then a 10% sequential growth in the fourth quarter. So I guess the question is, is the guidance really derisked if there's that much of a sequential hockey stick into the fourth quarter?

Yes. So if we compare 3Q to 3Q, yes, we do think that's relatively flat year-over-year, and that's really driven by, as I mentioned, that's the toughest comp. Just for perspective, commercial aftermarket last year, 3Q was up like 23%. So that puts the most pressure on that one from a comp perspective. 4Q versus 4Q, we would expect to be up kind of in line with our full year guide, so call it in that 4% to 5% range.

And then, Myles, to your point on sequentials, we do see our strongest sequential move in the fourth quarter every year, so I wouldn't view that seasonality as outsized relative to prior years as you can see in the historical financials.

Have you ever had a double-digit sequential growth in 4Q?

I would say that if you go back, look to the historicals, the biggest sequential move has always been 3Q to 4Q, and then we see a natural step down 4Q to 1Q. And so I don't view this as outsized relative to historical precedent for the business.

Okay. And then, Jim, on the guidance cut, does the difference just drop into delinquencies, so you'll end the year at $2.6 billion plus of delinquency? And then, I guess, what's the drawdown of that delinquency from a time frame?

Myles, it's Josh. Yes, I think given the shift and change, we -- our backlog grew as we pointed out, and probably a little bit of growth in the past due side. Again, that's why so much of the focus, you hear us, and we're putting our dollars to work from a capital perspective, is on driving additional output, additional capacity through the supply chain, through our manufacturing footprint, to be able to start to work that down and to reduce those past dues over time.

And the only other point that I would add relative to that is, the added comment would be, the days that the parts were sitting in the past due, the churn of those parts going into the past due is accelerating coming back out. So we're reducing the overall turn times for the past due that we have on the books right now. But to Josh's point, the strong exceptional demand that we have, the lack of the unlock and the reallocation to OE versus aftermarket that we've had to do, it does create a modest past due backlog increase.

Our next question comes from the line of Robert Stallard with Vertical Research Partners.

Jim, this might be a question for you. Given these supply chain issues that you're experiencing, are you in any way jeopardizing the OEM ramp plans? And have any of these delays that you've experienced led to any compensation discussions with your customers?

Yes. I mean we're delivering for our OE customers and ramping our shipments with the build schedules, Rob. We stay intimately tied out with our OE customers. And what I would tell you is our supply plans, our commitments are aligned to their published production rates that they are experiencing and driving. Ultimately, that is the conundrum though. As you get more -- as the output is the way it is right now, we end up driving more towards the OE to be able to support that.

But I think it's important to understand a little bit of the commercial OE makeup of Honeywell Aerospace. It is not just one customer. It is not just one end market. It's the commercial air transport market and the business aviation market, and they do bifurcate one another, whereby 50% of our OE business is commercial air transport, 50% of that OE business is business aviation. And so even though in aggregate, you kind of saw what we saw -- where we were demonstrating the first half of being 5%, you could clearly expect that, that growth that is occurring in the commercial air transport portion of that is in line with what we're seeing in terms of growth from our commercial air transport customers and supporting them accordingly.

Our next question comes from the line of Seth Seifman with JPMorgan.

I wanted to ask the emphasis that you put on castings a little bit earlier. Should we infer that that's the place where you have sort of the most pressure in the supply chain? And to the extent that, that's true, do we think of that as being in kind of the bigger casting houses, and therefore, it's about maybe their priorities or elsewhere and there's a need to recalibrate that? Or is it in some of the maybe smaller places that might be struggling?

Seth, it's Josh. We talked about this, and it is kind of some of the things you'd expect. Castings are definitely one of them, and we pointed out we're putting significant portion of our CapEx that's going to supplier tooling into castings to drive additional capacity, as well as new tools to drive higher yields and less rework and those sorts of things. But we also see forgings. We see it in complex machining. We see it in bearings. So it's a few of those categories. In the mechanical side, this is unique -- much more unique to the mechanical side versus the electronic side. But those are the areas that we're really focused on.

Okay. And then I saw you kind of maintain that second half free cash flow outlook, reduced outlook for earnings, I'm not sure if the level of investment that you're making in the supply chain is greater than previously planned, given some of these headwinds that have popped up. Should we think about that cash flow now being more at the lower end?

I think the range we maintained, again, is somewhat wide intentionally given kind of all the moving pieces coming through separation. We do have a little bit lower EBIT, which impacts that. But I think at the same time, we're seeing maybe a little bit of improvement on the working capital side. So we were -- we would have said in the middle of that range, and I think that's still reasonable based on how we're operating. But again, a lot of moving pieces, and that's why we kept intentionally wide here as we work through the back half of the year.

And just to add a comment on top of that. I think that is actually one of the benefits of being a stand-alone that we're realizing here as well, is that we're able to think within the business more strategically, particularly around where we want to accelerate capital investments to drive the highest ROI outcome for the business. And so being able to be agile and being able to move quickly where necessary to drive those investments and then be able to balance that across the portfolio where we need to as necessary, is actually a strong benefit for us as being a stand-alone.

Our next question comes from the line of David Strauss with Wells Fargo.

Jim, so high level, the question I get from a lot of investors is why are you, disproportionately -- this far into kind of the ramp-up, why are you seeing such a disproportionate impact from supply chain issues? I mean I can't really cite anyone else that's putting up mid-single-digit growth at this point. I mean everyone's kind of solidly double-digit growth. So just your perspective on why these supply chain issues are unique to you? And how did we kind of -- or how did you guys kind of end up here a couple of years into the ramp?

What I would say, David, is this is a multiyear journey. We started this journey a couple of years ago when I came into the role. As I mentioned, over 3,000 suppliers support our business. We're down to those critical ones and the constrained ones that I mentioned, which is about 2%, which means that 98% of that supply base is functioning well. But what I would say is the journey to get to where we are to the 2% was not 98%, 2%. It was substantially worse over that journey. And so we were focusing a tremendous amount of attention pan-aero supply base within Honeywell Aerospace to be addressing those issues to get to this part of the journey where it's 98% is functioning well and these critical very difficult to solve, very time-consuming are causing us the most pain at the moment.

And these are the ones that are difficult in the sense that it kind of goes back to our earlier comment, where I overestimated the pace at which we were going to be able to solve some of these issues, and that is the result in down that we did on the revised guide that came forward.

Okay. And a quick follow-up. In terms of recoupling to kind of industry growth in '27 or maybe even getting to the point where you outgrow, like you outlined in at the Investor Day, how much of that you're getting there do you feel like is just these critical suppliers getting healthy, getting better versus kind of improvement in your own house and improvement driving the Honeywell Operating System?

David, it's Josh. By and large, it is output driven. The more output that we were able to get through the supply chain and through our facilities, I think that is what unlocks this. Given the backlogs we have, given the order books that we've seen, we've got tremendous runway of demand to fulfill. So I think that's the biggest piece. Again, it's 2 pieces, getting the material and I think continuing then to drive efficiency. We talked about our Honeywell Aerospace Operating System. And I think both driving productivity and efficiency becomes really, really critical.

Yes, I think, a couple of things I would add on to that as to why I feel confident about our 2027 performance expectations. Being on the road, face-to-face with our suppliers and looking at the plans and looking at the burn down that is occurring and where we are investing, where 70% of our capital investments are external outside of our 4 walls, 30% of it is internally improving our capacity. We talked about a new line that we put in Arizona for our Assure product line. What we're doing in Minneapolis and investing there in terms of capital to expand capacity for our navigational business. So that is single handedly the biggest driver, and we will get improved output from our suppliers. That's one key point.

Second key point around the 2027 performance expectations and why I'm confident is that as more output comes from our supply base, it allows us to be able to fulfill more of the commercial aftermarket and more of the international defense business as well, which is very positive revenue, higher margins for us across the board. And then secondarily, pricing. As with every year, we're making progress on our long-term contract renewals that are going to recouple price that is aligned with the cost that we've been incurring across the business and across the portfolio. That will start to materialize in 2027 and beyond, which is why I have a lot of confidence in our 2027 performance expectations.

Our last question comes from the line of Gautam Khanna with TD Cowen.

Thanks for the time on the earnings call here, going a little longer. I was curious, in the arrears, the delinquencies, can you remind us the mix of OE versus aftermarket versus defense and space? And is there any economic consequence? Is there any pricing concession or penalty associated with one of those submarkets for being late versus the others?

Yes, I think the general makeup of our past due backlog is roughly in line with what you see the revenue is associated with the business, generally speaking, in terms of commercial and defense. You could believe -- and there is the possibility where these delinquencies transcend themselves into penalties.

But the fact of the matter is, based upon what we have done over the last couple of years, meaning the time that we've spent with customers, the time we have spent partnering with them, the time we have been transparent with all of the investments that we have been making into the supply base to unlock and provide more product to them, they are most interested in keeping those investments flowing at the levels that we're keeping them to flow because any penalties associated with late deliveries pale in comparison to the benefits that they realize with more output from Honeywell Aerospace.

And so it's that partnering and transparency and being able to continue to invest in the way that we are into the supply base, kind of negates these issues around potential penalties on late delivery.

And just as a follow-up, with respect to the inventory obsolescence, a, is that something that could occur again in Q3? I didn't quite understand why in Q2. Is it done every quarter? And is there some cascading dynamic to where it could be repeated? And then secondly, if you could give us some flavor by segment of where that inventory write-down occurred? It sounds like it was bigger at E&PS, but I'd appreciate it if you gave us some flavor by segment.

First, we would not expect that that's recurring. I mean we're always looking at that, but we think that was -- as we dug in, as we're going through pre-separation, we looked at that and there were a few areas where we saw that. So yes, I would not expect to see that on a quarter-on-quarter basis. You're right in terms of the mix of that. The vast majority of that was in Engines and Power Systems, maybe a very little bit in Electronic Solutions, but the vast, vast majority was sitting in E&PS.

I would now like to turn the call back over to Jim Currier for closing remarks.

Thank you. I'd like to express my deepest appreciation to the 36,000 Honeywell Aerospace employees around the world for your dedication, your focus and your perseverance as we have set off on our own. To our customers, we never take for granted your trust in our ability to deliver to the highest standards. To our suppliers, we are committed to further strengthening our partnerships and growing together. And finally, to the investors joining us today, we have the utmost confidence in our strategy to create substantial value going forward, and I look forward to sharing our progress with you in the coming quarters. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Please welcome Vice President, Investor Relations, Sean Meakim.

Good morning. Thank you all for joining us today, those of you in the room as well as those tuning in on the webcast for our inaugural Investor Day. It feels good to say that. We're very pleased to have so many of you here with us in Old Town Scottsdale. We're just north of our global headquarters in Phoenix, as we prepare for one of the most important milestones in the history of our company, the launching of Honeywell Aerospace as an independent company.

For those of you who joined us yesterday at the Engine Facilities tour as well as the welcome reception at the Honeywell Aerospace Hangar, thank you for spending the afternoon with us. We hope the experience, including the dozen-plus technology demonstrations as well as our full fleet of test aircraft, really give you a sense of what differentiates our business, the depth of our engineering talent, the scale of our installed base and the way our technology comes to life across commercial aircraft, defense and space platforms every day for the customers that depend on it. So today, we're going to build on that experience, and we're going to bring the investment story come in to sharper focus.

So just a few reminders before we start. First, the materials we have today have been posted on the Honeywell IR website. For an event like this, as you would imagine, some of the statements we're making are forward-looking in nature and based on our best view of the world and our businesses as we see them today, including the anticipated separation from Honeywell at the end of the month.

We'll also reference some non-GAAP metrics, and recs for those are in the back of the presentation. As described on Honeywell's IR website and in our SEC filings, including the latest Honeywell Aerospace Form 10, those elements may change as the world changes. So please refer to those materials for more detail.

Okay. Now, let's preview the agenda and cover a few administrative items. We plan to go until about noon Phoenix time today, and we have a break scheduled a little over halfway through. For those in the room, if you need a drink or a snack, refreshments are in the hall, restrooms around the corner. In 2026, it's fair to say that everyone in this room has at least one device that they're working on today. So now is the moment where we ask you to kindly just double check and make sure that's on silent.

We have a great lineup of speakers for you today. Honeywell Aerospace CEO, Jim Currier, will kick things off shortly with his visit -- vision for the future of the business and its value creation potential. You'll hear from a number of our leaders, including our segment leaders, leaders of key end markets, strategy, innovation, supply chain. You'll hear directly from some of our customers as well. And then, of course, CFO, Josh Jepsen, will come on to synthesize all that information into our financial expectations, both near term and long term as well as our path to long-term value creation. We'll also leave a couple of opportunities for Q&A.

After we conclude the webcasted portion, those here in the room will have the opportunity to go next door to the ballroom and spend some more time with our technology demonstrations, several of which investors have never seen before. And of course then, you also have a chance to engage directly with our leadership team after today's discussion.

All right. That's enough for the perfunctory. Let's get started.

[Presentation]

Please welcome Chief Executive Officer, Jim Currier.

All right. Super excited about that video and being able to tell our story today about Honeywell Aerospace. So good morning, everyone. Welcome to Phoenix. We are very pleased to have you here for our inaugural Investor Day. This city has long been the home of Honeywell Aerospace. It is where we build, test, service and innovate new technologies that support the future of aviation. It is also home to about 1/4 of our workforce as well. So it is the right place to truly launch our story as an independent company and explain how we create substantial long-term value for our stakeholders.

We've invited you here to bring the value creation strategy to life. And we want you to experience our technologies firsthand, meet our deep bench of first-class leaders and share in our excitement and passion for what we do every single day. It will start with the presentation by highlighting the unique strength and quality of our portfolio, explain a little bit about our strategy and how that will translate into durable profitable growth and cash generation.

Honeywell Aerospace has built a powerful franchise by designing highly complex systems that deliver tremendous value to our customers in the most critical aspects of their business. We supply our innovative solutions around the world and across aerospace and defense end markets from the commercial aircraft that carry millions of passengers each day to the fighter jets and munitions that enable national security. As these markets with durable positive secular trends, long platform lives and demanding customer requirements, we are well positioned to deliver profitable long-term growth.

Our technology development model drives a differentiated impact for our business. We don't create bespoke solutions. Rather, we develop once and we deploy everywhere. You will hear that a lot today throughout the presentation material, as it explains the ubiquity of our systems throughout an aircraft and across platforms. We build technologies that can move across commercial air transport, business aviation, defense and space and emerging sectors. This approach accelerates the time to get our innovations to market, improves the returns we generate on our R&D spending and it grows the size of the market that we can address.

We have continuously invested in the areas necessary to shape both today's fleet and the future fleet that is forging the path to more electrification, autonomy and safety. These initiatives are tied to very specific customer priorities, product roadmaps and growth opportunities. As a result, we have strong visibility into the future demand of our solutions. Seeing clearly what's ahead, we are investing in the transformation of our entire supply chain, seeking to increase output to levels to efficiently convert unprecedented demand into deliveries.

We will support our path forward with a fit-for-purpose aerospace operating system built from a strong Honeywell legacy. And it will be executed by an experienced and motivated leadership team, many of whom you will hear from today. Taken together, this combination of innovation-led growth, best-in-class execution serves the foundation for a portfolio that is constructed to compound value. Backed by an investment-grade balance sheet, we will accelerate the value creation over time by deploying the capital generated by our businesses to the highest return strategic opportunities.

Now let me take a step back just for one moment here and talk a little bit about our heritage and our legacy. What many people may not fully appreciate is that Honeywell Aerospace has been operating at the forefront of aviation for more than 100 years. Throughout our history, we have delivered some of the industry's most groundbreaking technologies. And along the way, we have been part of many firsts. From the first autopilot in 1914 to the first auxiliary power units in the 1950s to the first humans in space in the 1960s.

As you can see, many other milestones that have shaped the future of flight and modern flight today. That heritage carries a significant weight because aerospace and defense companies put a lot of faith in their partners. They demand reliability, certification expertise, safety, execution, and most importantly, trust. We have earned that trust over generations, and we do not take it lightly, and we will continue to build upon that.

Today, Honeywell Aerospace is a well-recognized leader in the industry with 36,000 employees, including 12,000 engineers at 120 facilities around the world. In 2025, we generated more than $17 billion in sales growing at a double-digit rate and translated those sales dollars into more than $4 billion of adjusted EBIT.

Our portfolio is balanced across 3 segments organized by our core technologies: Electronic Solutions, Engines and Power Systems and Control Systems, each representing between 30% to 40% of sales. We also have a very diversified portfolio by end-market application with roughly 60% of our business being commercial original equipment and commercial aftermarket and 40% of our business being defense and space.

Commercial OE gives us the access to new platform growth. The aftermarket provides recurring high-value life cycle revenue and Defense & Space gives us the exposure to fleet modernization, rearmament and advanced mission profiles. The size and diversity of our portfolio creates a highly visible, profitable, resilient sales stream.

In the past 4 years, we have won over $90 billion in new business, which supports a backlog of greater than 1 year of sales. You'll find our solutions on almost all active aircraft as our history of innovation and dependability makes us a supplier of choice. Our results are powered by leading strategic business units, each with attractive market positions and clear growth opportunities.

Electronic Solutions, our largest segment by sales with a presence on almost all global aircraft, sits at the intersection of safety, navigation, connectivity and mission excellence. It provides high-value electronic systems ranging from integrated cockpits to precision inertial navigational units to electronic warfare and to space components that operate in the most extreme and harsh environments.

Engines and Power Systems, our next largest segment by sales, leads the industry in producing engines for super mid-sized business jets. It is also the global leader in all end markets for auxiliary power units, which supply that critical engine power and electrical power without reliance on an aircraft engine. Our massive global installed base provides a long runway of aftermarket support and upgrade potential.

Last but not least, Control Systems. It builds upon the Honeywell legacy for designing complex, integrated distributed controls. Its offerings were at the intersection of electronics, software, mechanical hardware, and it manages the climate and pressurization of the cabin as well as ensuring precise movement across the aircraft from the engines to the brakes. Our technological presence throughout the aircraft provides a deeper relationship with our customers as we work together to create system-based solutions far beyond single components.

Honeywell Aerospace's current portfolio, which is poised for significant growth is the result of deliberate effort over many years. In the 2010s, as the industry grew at a modest pace in the face of U.S. budget sequestration and the hangover from the global financial crisis, we optimized the business to be more focused and more profitable. We sold or we spun off structurally challenged units while also turning down contracts that did not meet our financial return hurdles, even if that meant sacrificing potential top line growth. We also made our operations during that period of time more efficient, reducing our footprint and the complexity of our IT systems. And over that period, our profit grew at a high single-digit annual rate and margin expanded by nearly 50%.

With a more focused and profitable portfolio now laying the foundation and in place, we have shifted from optimization to building a stronger base for future growth. We've increased our capabilities to sell Retrofit, Mods and Upgrades of what we call RMUs, which add growth that is completely uncorrelated to build schedules and flight hours.

We have selectively partnered with well-funded developers of all-electric aircraft, which sparked a wave of innovation for products and technologies and applications for our traditional customer base. We also deployed capital for strategic growth accretive technology acquisitions for which we believe we are the best owner.

And finally, the recovery from the pandemic and increased focus on national security around the world has put the wind at our back. Net sales grew at a 9% annualized rate during that time period, while profit grew faster still. More recently, during the time that I've had the pleasure of leading this business, we have sought to improve in 3 critical areas to promote above-market profitable growth over time.

First, customer focus. We have strengthened our relationships with the leading equipment manufacturers, defense primes and airlines by improving reliability and partnering together to deliver the next generation of aircraft. We've also increased our ability to serve through the acquisition of CAES and Civitanavi in 2024, truly our first sizable deals in quite some time for Honeywell Aerospace. As a result, we've seen signature wins and material backlog growth. And that backlog enhances the visibility to reinforce the relevance of our portfolio.

Second, innovation. We have grown our company-funded investment in research and development in absolute terms and relative to peers. This has been done to support recent wins and position us for future wins as well as creating a portfolio of attractive upgrade options for operators. While we continue to spend more to spur high-return future growth, a majority of our innovation efforts are funded by our customers, demonstrating clear and precise alignment with their future roadmaps and allowing us to invest at scale.

Third, operational excellence. Supply chain output grew at 17% CAGR from 2023 to 2025 as we invested over $1 billion to meet customer demand and improve delivery. This investment has taken on many forms, in-sourcing, talent support, multi-sourcing and even select capital investments that we have made in our suppliers as well as in our own operations. Overall, we are building momentum in this business, growing sales at double-digit rate over the past 2 years. But we also know we have more work to do to ensure we continue to meet the future needs of our customers.

As a stand-alone aerospace and defense company, we believe Honeywell Aerospace will be even better positioned to thrive. Strategically, we see incredible power in having a dedicated industry focus rather than competing for the attention against unrelated opportunities and threats. Across the entire organization, we will have 100% alignment in our purpose, one sole purpose, and we will be compensated based on achieving those goals that are fit for that purpose. For instance, we know that over the coming years, we must stay dedicated to reinventing our supply chain to support the buoyant life cycle demand for our technologies.

Operationally, the separation removes layers between key stakeholders and leadership, which creates improved and expedient decision-making as the world quickly changes. Improved responsiveness will allow even greater customer focus. We have formed a world-class Board of Directors with expertise that is specifically designed to support the needs of Honeywell Aerospace.

Financially, we will have the ability to allocate capital for our top strategic priorities and target returns that are competitive versus our relevant peers. Our spending will go to the most attractive opportunities, both internally and externally. We also expect to more effectively compete for shareholder capital as a simpler pure-play company. We will create value for our stakeholders across 3 pillars, and you will hear a lot from the team today about how we are activating these efforts across the businesses.

First, expanding leadership in attractive end markets. We want to grow in spaces where we have the right to compete and with deeply embedded competitive advantages and a significant profit opportunity. We have entrenched positions in commercial OE, commercial aftermarket and defense and space. Each of those markets have durable, secular growth drivers. And we will ensure our portfolio is positioned in the most attractive areas of demand.

Second, we will invest in differentiated technology platforms. We are an innovation-driven systems leader. Through our Develop once, Deploy everywhere approach, our technologies are scalable across platforms, across end markets, and that allows us to generate strong R&D returns and address customer needs with speed and efficiency. These new offerings will further expand our installed base.

And third, continue to strengthen our operation capabilities to unlock future growth. Demand in our markets is strong. By converting that demand into revenue, however, requires supply resiliency, factory throughput, planning discipline and service capacity. The Honeywell Aerospace operating system and our supply chain transformation are critical for increasing sales and profits.

We operate in markets that are expected to grow significantly over the coming 5 years with a high degree of visibility given the long-cycle nature of our business. We expect the commercial OE market to grow at mid to high single-digit rate annually between 2025 and 2030. And the drivers are quite clear. It's multiyear backlogs across all Commercial Air Transport and Business Aviation customers.

Aircraft deliveries are increasing to pre-pandemic levels and beyond as supply chains recover and new business jet platforms are entering into service. Nearly half of our OE wins over the last 4 years have come from Business Aviation, which reinforces the breadth of our opportunity beyond large commercial aircraft.

Commercial aftermarket, again, expected to grow at mid to high single-digit annual rate. That growth is supported by an aging fleet as OE production has not been able to keep up with the demand from an increasingly mobile global middle class and the delay of aircraft retirements. Older aircraft have higher demand for routine maintenance as well as upgrades. Strong demographic tailwinds have supported above GDP growth in air travel almost -- over almost all historical time periods, and that is expected to continue going forward.

Defense and Space should grow at mid-single-digit rate. Global budgets and spending are expected to increase as governments look to bolster national defense efforts in a more volatile geopolitical climate. Internationally, multiple decades of underinvestment in defense needs have pushed the requirements to modernize, rearm and rebuild. At the same time, the nature of combat has shifted, driving the need for advanced space systems to defend against new threats.

Honeywell Aerospace delivers systems spanning, again, Commercial Air Transport, Defense and Space, Business Aviation from nose to tail on more than 250 in-production platforms. In Commercial Air Transport, we provide systems such as flight management, precision navigation, APUs and engine controls among many additional flight-ready capabilities. Similarly, in Business Aviation, we have high-value content that we have established on generations of leading aircraft platforms, including integrated flight decks, cockpit and flight data recorders, propulsion engines, cabin pressure and cooling among many others. And in Defense and Space, we supply those critical systems to customers, including the U.S. government, Lockheed Martin, RTX and many other defense primes. You'll find these systems across fighter jets, helicopters, missiles, satellites and mission-ready content, including navigation, connectivity, electronic warfare componentry, propulsion engines, power and thermal management systems and many others.

I gave a few examples. But as this slide shows, we are everywhere on Aerospace and Defense platforms and embedded in the ecosystem of the Aerospace and Defense industry. That breadth creates 2 very distinct advantages. It gives customers integrated systems capability from a trusted supplier, and it gives Honeywell Aerospace recurring sales opportunities across long platform lives from OE content to spares to repair and overhaul to RMUs, software upgrades and future platform enhancements, multiple opportunities across multiple revenue streams.

With that context, let me tell you why we are well positioned to drive meaningful growth across 3 priority vectors. First, new platform wins. As I mentioned earlier, we have more than $90 billion in Commercial and Defense wins from 2022 to 2025. These wins expand platform content and support in-service fleet for the future. At the same time, we're strengthening our supply chain capabilities so we can accelerate aftermarket and OE output to meet that demand.

We have more than 40 new major RMU programs in process and is a very mature part of our innovation and operating rhythm. These are tied to existing products and newer technologies aligned to increased demand for autonomy, electrification, safety, efficiency, platform life extension. RMUs are an attractive business. They create growth that is not solely dependent on aircraft production and usage.

And third, International Defense. We expect to grow International Defense business at a high single-digit rate from 2025 to 2030. As our global footprint and technology leadership positions us to capitalize on higher budgets, particularly in countries where modernization and local defense capabilities are needed. A stand-alone structure should help us execute more sharply across these 3 vectors: OE, Aftermarket and International Defense.

Our OE momentum is very visible on this chart in recent wins across Commercial Air Transport and Business Aviation. And just let me touch briefly on a few of them. At Airbus, multi-platform work includes flight management systems, radars, surveillance, safety systems and air systems on the A350 Freighter and an upgraded APU on the A320neo.

While most of our platform content comes standard on new aircraft, there are some important commercial air transport systems that are selectable by the airline carrier. As an indication of the strength of the demand for our leading technologies, we've won roughly 60% of the value of selectable content chosen on more than 4,000 Boeing and Airbus narrow-body aircraft over the last 4 years.

In Business Aviation, the Gulfstream G300 includes our Epic-based Harmony avionics, environmental control systems and our HTF7250G engines. It's a strong example of how we bring multiple Honeywell Aerospace capabilities onto a single platform.

And with Bombardier, we signed a landmark $17 billion lifetime value agreement, and we are pursuing multi-platform collaboration R&D centered on Anthem avionics and the HTF7K engine. This reflects the type of relationship we want to build with our customers, not just supplying components, but partnering on future platform capability.

This next slide really highlights the depth of our content on key commercial OE platforms. You can see the significant content we have on large commercial narrow-body and wide-body platforms across Boeing and Airbus. And in Business Aviation, we have high-valued positions on leading mid-sized and super mid-sized aircraft. These are representative examples, but they illustrate the breadth of our role. The significance is not simply the number of products. It is the role that these products play on these aircraft platforms. They are central to performance, safety, reliability, passenger experience and operating efficiency. And because these are certified into long-lived platforms, they support recurring life cycle revenue.

As I mentioned before, a core part of our strategy is to develop once and deploy everywhere, the R&D model I introduced a little earlier. In fiscal year 2025, we invested approximately $1.8 billion in research and development. And that investment supports disruptive innovation that is deployed at scale across our business. The model is straightforward. But make no mistake, it is not easy to execute with consistency, but it has become a meaningful competitive advantage for Honeywell Aerospace.

We develop common technologies that we can then apply broadly. We continuously invest to adapt those solutions for customers across platforms, verticals and end markets. We design with commonality in mind across our manufacturing and supply chain, which helps maximize the return on that investment. And we are committing consistent resources to company-funded research and development with more than 4% of sales planned in 2026 and over 10% of sales overall when you include the customer funding. The right side of the slide illustrates this particular point.

Precision navigation, auxiliary power units, air and thermal management technologies that serve Commercial Air Transport, Business Aviation, Defense and Space, all with common core technology, and that commonality creates scale and speed. It lets us use learnings from one market to improve performance in another. It also gives customers access to mature proven technologies that can be adapted to new requirements. This is core to how Honeywell Aerospace generates a high return on innovation.

In looking ahead, our technology road map is organized around 3 powerful themes: electrification, autonomy and safety, all rooted in creating value for our customers. In electrification, we are developing technologies such as the 1-megawatt turbogenerator power system, Attune vapor cycle cooling, Assure mechanical actuation systems and next-generation engine starters. As aircraft become more electric, they require more advanced power generation, thermal management and actuation. We are investing directly in those needs.

In Autonomy, we are advancing our Anthem integrated flight deck, Counter-UAS solutions, DARWIN digital copilot aids and multimodal alternative navigation solutions. These technologies support the movement towards smarter, more automated and more resilient aircraft operations.

And in Safety, we are developing AI-driven predictive maintenance, pilot state monitoring, quantum key protective communications and increasing pilot situational awareness with our SURF-A surface alert technology. Safety has always been a defining theme for Honeywell Aerospace, and we continue to bring new tools to help pilots, operators and defense customers manage complexity and reduce risk.

But technology leadership alone is not enough. Execution is what turns opportunity into results. That is why the Honeywell Aerospace Operating System is central to our strategy. We are evolving from a Honeywell Accelerator framework, which has been a proven world-class management and operating system for more than 20 years, into one that is purpose built for Honeywell Aerospace, the Honeywell Aerospace Operating System. We are starting with a strong foundation that's rooted in a culture of continuous improvement, operational excellence, disciplined execution, but really focusing this now on efficiency, manufacturing productivity, value-based pricing, customer problem solving and innovation.

As a stand-alone company, we are building a single enterprise-wide operating system that drives standardized planning, decision-making, execution and performance. We will embed the continuous improvement mindset across supply chain, planning and manufacturing, supporting predictable outcomes that are focused on delivery, quality, cost and cash generation.

Our Honeywell Aerospace Operating System will underpin our supply chain transformation, which is one of the most important enablers of growth. Our objective is to build an end-to-end supply chain that can cover the future of Honeywell Aerospace. That starts with aligning capacity with planning to reduce volatility, to improve delivery and execution. It also means strengthening supply to increase control, output and resiliency. We are advancing AI tools to integrate and standardize operations, driving visibility, speed, most importantly, accountability.

These tools help us see constraints earlier, improve decision-making and operate with greater consistency across the enterprise. The 4 enablers are very clear, each tied directly to a customer outcome and our mantra of being customer-obsessed, stabilize the planning to improve delivery, drive factory throughput that supports growth, control and expand supply to increase resiliency and operate as one system to improve accountability.

Our strategy translates into an attractive outlook through 2030. We are targeting 6% to 8% organic sales CAGR with an adjusted EBIT that's growing faster than top line and free cash flow growing faster still. Josh will go into much more detail later on regarding our long-term financial framework. We view these targets as achievable and grounded in the fundamentals of the business. We have a large installed base and a very meaningful backlog. We have differentiated technologies that are generating customer-funded and company-funded innovation at scale. And finally, we have the operating system that is designed to drive predictable performance.

We are committed to creating value for shareholders while maintaining a strong investment-grade credit rating and financial flexibility. Capital allocation will be disciplined and dynamic, supported by robust and consistent free cash flow. Our framework has 3 priorities: first, invest to boost organic growth. We will support innovation, our supply base, a growing manufacturing footprint with associated competencies, global commercialization and enhancing service capabilities. These are the investments that expand our installed base, improve customer outcomes and strengthen the life cycle revenue.

Second, complement organic growth with select acquisitions that accelerate our strategic road map. We have an inorganic playbook that includes opportunistic bolt-ons, technology tuck-ins and partnerships, all with proven execution and integration capabilities. Recent acquisitions like CAES and Civitanavi show how we targeted M&A that can add technology, expand platforms in attractive markets and strengthen our global footprint.

Third, return capital to shareholders. We expect to deliver a competitive dividend while opportunistically repurchasing shares. We will remain disciplined and balanced. We want to invest in the business, preserve financial flexibility and return capital in a way that supports durable value creation.

We also have an experienced team with a strong track record of execution. This team combines deep aerospace expertise with functional leadership. You will hear from several of these leaders today, and I'm excited for you to see the depth of our bench within Honeywell Aerospace. This is a group that understands the products, the customers, the supply chain, the aftermarket model and the mission requirements that define Aerospace and Defense. This team is aligned around a high-performance culture and a shared objective, advancing the future of aviation while delivering for customers and shareholders.

As we move towards operating as a stand-alone entity, that alignment matters. It gives us the leadership capacity to execute our plan, make faster decisions, and most importantly, again, hold ourselves accountable. One of the benefits of becoming an independent company is a Board of Directors that is fit for purpose. It brings a compelling mix of aerospace and defense capabilities, leadership expertise and financial and capital markets backgrounds. That range of perspectives is important for a company like Honeywell Aerospace because we operate at the intersection of advanced technology, manufacturing, services, global customers, public markets and national security priorities.

But I want to close with our mission. We protect and advance the promise of flight to create a safer, more connected world. That is a powerful purpose that captures the important role that Honeywell Aerospace plays. Our technologies help aircraft fly safely, efficiently, reliably, and they help navigate, communicate and make better decisions. They help airlines and operators maintain fleets and improve performance. They help defense customers protect national security. They help support space missions and emerging platforms that will define the next era of flight.

And with that, thank you for joining us. I am excited for you to hear from the rest of the leadership team as we go deeper into the businesses. We'll show you why we are confident that Honeywell Aerospace is positioned to deliver durable, profitable growth and create substantial long-term value. Thank you.

[Presentation]

Please welcome President, Electronic Solutions, Bob Buddecke.

All right. I love that video. All right. Hello, everyone, joining us here in person and virtually. I'm Bob Buddecke, President of our Electronic Solutions business.

More than 30 years ago, I joined this company as a young engineer right out of college. Like many early in their careers, I was just hoping to find a place where I could learn and grow, but what I found was something much bigger. I've had a front row seat to decades of change across technologies, markets and business models, but I can honestly say that this is the most exciting time of my career. And this momentum is shaping how we're thinking about the future and the opportunities ahead. Today, I have the pleasure of kicking off our in-depth look at Honeywell Aerospace's business segments with Electronic Solutions, a technology-driven portfolio that has attractive exposure across all 3 of our end markets.

Electronic Solutions is a scaled, high-profit franchise centered on mission-critical electronics embedded across the global fleet. We have a broad portfolio of leading solutions designed to drive best-in-class performance, safety and mission success. Our customers include a healthy mix of OEMs, airlines and operators, aftermarket service providers, governments, defense prime contractors and space system integrators.

In 2025, the business expanded sales to nearly $7 billion and delivered $2 billion in adjusted EBIT, reflecting strong market demand for increasingly connected, integrated and software-driven capabilities as well as clear customer recognition of the value of our content. Our installed base underscores that position. Our technology is present on most of the global fleet, much of it as a sole source provider. You can find our navigation systems and sensors on more than 60,000 in-service aircraft. That scale creates a durable foundation for long-term aftermarket growth.

Let me take a moment to walk through our product portfolio, which is organized into 4 offerings: Avionics, Navigation and Sensors, Electromagnetic Defensive Solutions or EDS and Space. In Avionics, our largest offering, we provide fully integrated cockpits, flight controls and flight management as well as radar, radio and surveillance capabilities. These systems span Commercial Air Transport, Business Aviation and Defense platforms. Our Epic cockpit has served as the benchmark in the industry for more than 3 decades, having gone through many upgrade cycles. Anthem, our next-generation platform, which I'll discuss later, is poised to set the standard as we move into the coming decade and beyond.

Our Navigation and Sensors offering includes air data modules, inertial measurement units, inertial navigation systems, atmospheric sensors and precision timing systems. Our solutions in this area are largely recognized as the most accurate in industry, providing incredibly precise direction in the air, on land and over the seas.

In EDS, which is the CAES business we acquired in 2024, we enable complex sensing, protection, targeting and communication operations in the electromagnetic spectrum. Our solutions go across national security missions and war fighting domains. In a world with increasing prevalence of drones and automation, these capabilities are becoming a necessity in the marketplace.

Lastly, in Space, we deliver radiation-hardened, radiation-tolerant inertial systems, momentum controls, microelectronics and payload solutions to defense and commercial customers. What's clear are the broad applications for our core technologies. Across end markets, our systems are embedded throughout the platform from the cockpit and flight controls to navigation, connectivity and mission systems. That level of integration is important. It reflects our position not as a point solution provider, but as a systems partner, delivering highly integrated mission-critical capabilities.

Our portfolio is built on a common technology foundation, and that foundation allows us to scale innovation efficiently across end markets. You'll see several of our system present on each of the pictures on this page guiding and securing flight. Finally, I would be remiss if I did not mention how our exquisite systems, that you can see on this slide, played a significant role in the successful Artemis II launch with 14 of our different product types on board.

Our value creation strategy aligned to the company as a whole is centered on 3 priorities. First, we are growing our share on next-generation platforms with advanced, differentiated and integrated electronic solutions while also increasing value for customers on legacy platforms by improving safety, efficiency and performance. We win because we can deploy innovation across a broader installed base and end markets.

Second, we are accelerating the development of autonomous, software-defined and AI capable technologies to enhance pilot, situational awareness, decision-making and next-gen flight capabilities. Technological change empowers our business and creates many new opportunities to create value for our broad customer base.

And third, we're expanding manufacturing capacity, accelerating production, enhancing our supply chain and improving growth with productivity and localization initiatives. Our demand tailwinds are incredibly strong, and we will ensure that we have the supply to convert that demand. These priorities will further enable us to win new programs, expand content presence and deliver sustained growth.

To illustrate the scale of the business, let's look at our Avionics portfolio across the commercial fleet. On over 15,000 aircraft today, across Commercial Air Transport and Business Aviation, we're selected for our system breadth, connectivity-based software and integration compatibility for full flight deck solutions. We expect our Avionics installed base to grow at a 5% annualized rate from 2020 to 2030. Platforms like Anthem will accelerate this growth, enabling us to capture new programs and expand our position on next-generation aircraft. This large installed base supports a meaningful aftermarket opportunity where software-driven upgrades and enhancements generate recurring, high-margin revenue over the life of the platform.

We are also broadening our scope with Epic on thousands of aircraft and growing. We continue to extend beyond the flight deck into adjacent systems such as radios, radar and surveillance, increasing our content per aircraft. Taken together, we're capturing share on next-generation platforms while expanding value across the life cycle.

As Jim mentioned earlier, we're focused on enhancing our technology portfolio through targeted bolt-on acquisitions that strengthen our capability in high-growth areas. CAES and Civitanavi, acquired in 2024, are examples of that strategy in action, adding new international defense navigation and electronic warfare abilities.

CAES brings high reliability radio frequency technologies, amplifying our presence on critical defense platforms and franchise missile systems while also providing an opportunity for international expansion. Civitanavi adds complementary gyroscope technology, improving our position in autonomous and next-generation defense applications. It also bolsters our European manufacturing footprint and advances our localization strategy.

These acquisitions are aligned to markets with strong underlying growth. We see our business growing at even stronger rates as we leverage our international presence and scale to accelerate the path forward for these best-in-class solutions. We expect that both acquisitions will be accretive to our growth in the coming years while strengthening our technology portfolio in key strategic areas.

As Jim mentioned earlier in our presentation, one example of our Develop once, Deploy everywhere R&D model is our precision navigation portfolio. For our inertial navigation systems, each uses a gyroscope to measure rotation and an accelerometer to track acceleration so that we can provide position, velocity and orientation in any environment. Because of their accuracy and resiliency, these commercially developed and produced technologies have many defense applications, including positions on almost every major precision-guided munitions program. Examples include THAAD, SM-3 and Tomahawk.

Our GPS Inertial Navigation System, or EGI, which is found on fighter jet uses the same core as our air data inertial reference unit, or ADIRU, which is found on commercial jets. That standardization is a key advantage. It facilitates efficient system integration and production, optimizing supply chain operations and enhancing profitability. Simultaneously, it enables us to drive the maximum benefit from our research and development dollars, sustaining our leadership in inertial sensors and navigation while enabling the introduction of new differentiated technologies.

A major advantage of our installed base is the ability to monetize innovation rapidly through RMUs. RMUs allow us to provide customers with the most up-to-date features without the cost and weight for new aircraft. They offer high returns on capital, adherence to the latest standards, driving very strong rates of adoption, and our broad end market exposure results in resilient multi-cycle growth.

In Electronic Solutions, our modular software-driven approach creates scaled, high-margin upgrade opportunities across the installed base. At the same time, our integrated hardware and software ecosystem cultivates a sticky customer relationship, reinforcing our platform positions and delivering the most value for operators. These mission-critical upgrades are also aligned with key secular trends.

Safety concerns push strong upgrade demand. You've seen news stories about runway accidents and close calls. Our surface alerts product helps reduce these incidents by substantially increasing the time for pilots to react in response to runway incursions. It provides a direct warning without the need for communication from the air traffic control tower.

In defense, the evolving nature of combat and new threats are increasing demand for anti-jamming, anti-spoofing and electronic warfare retrofits. Recently, this technology has been used extensively by the United States military to maintain national security. Across commercial and defense, the focus on efficiency and autonomy is driving upgrades in flight management, connectivity and alternative navigation. These dynamics support a durable software-led aftermarket growth engine.

The same innovation engine driving RMU adoption has built Anthem, our next-generation flight deck. It is a fully integrated cockpit designed to improve safety, efficiency and operations as aviation shifts towards connected software-defined platforms. Anthem's modular architecture makes it adaptable across aircraft and end markets. It also captures real-time data on the cloud. As a result, it reduces pilot workload while increasing safety and situational awareness, a big step on the path towards greater autonomy.

Lastly, it supports third-party applications, allowing for OEM-specified functionality, delivery of a customized experience and AI readiness. For those of you in the room, I would strongly encourage you to test it out on one of the demonstrators in the neighboring ballroom. As you'll see, it is a surprisingly simple way to fly compared to traditional cockpit.

Demand continues to build for Anthem. We've secured 5 platform wins to date in multiple end markets, representing more than $10 billion in lifetime value. And we see more momentum underway. Our 2024 agreement with Bombardier includes collaborative R&D centered on Anthem to push forward the next generation of aircraft.

And our deepening engineering collaboration with NXP through a partnership signed in 2025, integrates their architecture to drive high computing power. This allows for larger format displays, advancing safety and efficiency and greater value for pilots and operators. Delivering a more intuitive, connected flying experience with Anthem positions us at the center of the future of flight.

To recap, our business is a clear leader in highly engineered electronic systems used throughout the aerospace and defense industry. We pair a scaled installed base with our differentiated technology to capture growth opportunities while delivering safety, precision and reliability in critical mission environments. Our recent acquisitions have strengthened our technology portfolio and expanded our geographical reach across commercial and defense markets. And as the industry moves towards connected, autonomous and software-defined aircraft, our Develop once and Deploy everywhere approach positions to guide us in that transition.

Thank you for your time and attention.

[Presentation]

Please welcome President, Engines and Power Systems, Dave Marinick.

Good morning, all. I'm Dave Marinick, President of Engines and Power Systems, or E&PS. I'm the third generation of my family in aerospace. My grandfather was born in 1898 before the advent of powered flight. And together, our family has been able to witness continuous and awe-inspiring innovations in aviation. I consider myself to be an absolute aerospace enthusiast, and I'm delighted to be with you here this morning.

E&PS is a leading provider of aircraft propulsion, auxiliary power units, or APUs, and electric power solutions. These are mission-critical systems for aircraft across Commercial Air Transport, Business Aviation and Defense end markets. We've built a leading franchise around delivering best-in-class reliability and efficiency across all the categories and platforms we serve.

In 2025, the business produced over $5 billion of sales, growing 12% organically from the prior year and generating north of $1 billion of adjusted EBIT. Our sizable installed base spans roughly 20,000 propulsion engines and approximately 47,000 APUs with our systems placed roughly across 120 different aircraft types. That breadth gives our technologies exposure to multiple end markets and creates a very long aftermarket tail, which is responsible for the majority of our sales. These products operate for decades, and customers rely on Honeywell Aerospace to support them through parts, service, upgrades and life cycle solutions. Overall, it's this powerful combination of a strong installed base, attractive end market exposure and differentiated mission-critical technology that supports durable growth over time.

Turning to the product portfolio. Our expertise in axial-centrifugal compressor technology and small engine architectures gives us enduring competitive advantages and has informed our technology development over the past several decades. Put simply, it's why we win in the markets where we choose to compete. E&PS is organized around 2 major offerings, propulsion engines and power systems.

On the engine side, we bring proven performance, strong power-to-cost efficiency and a digitally enabled maintenance ecosystem. We produce propulsion systems for both business aviation and defense. On midsize and super-midsized business jets, we have a leading market position. Our flagship product is the HTF7000, which is the super midsized business jet engine choice with industry-leading reliability, low maintenance costs and end-to-end market support that extends the value of platforms over time.

In defense, our T55 engine has powered the military helicopters since the 1960s with more than 12 million flight hours. And the 124 has logged more than 1 million flight hours for light combat and training aircraft missions with the highest thrust-to-weight ratio in its class.

Moving to the Power Systems side of the business.

Our exposure is balanced across Commercial Air Transport, Defense and Business Aviation. We also have one of the industry's largest APU installed bases, supported by an integrated approach to the supply chain and our intellectual property. The 131 series is one of the most successful APUs in the industry with more than 100 million hours of in-service use on commercial single-aisle aircraft.

It is this APU that allowed Captain Sully Sullenberger to perform the miracle on the Hudson landing in 2009. It powered the aircraft's avionics and flight control surfaces after the aircraft had both engines subject to a bird strike, saving the lives of 155 crew members and passengers, including a Honeywell employee.

In the Defense and Business Jet markets, the 36-150 family includes more than 20 variants tailored to specific aircraft applications. We're also raising the industry bar in electric power systems, including the 1-megawatt generator, which sets a new standard for compact continuous power and efficiency.

Now let me walk through how E&PS will create value across the 3 strategic pillars we've discussed today. First, we will expand leadership in attractive end markets by continuing to power industry-leading propulsion and APU platforms. Our products are selected because of unrivaled performance and reliability in the areas where they compete, and that has created a vast installed base to service across Commercial Air Transport, Business Aviation and Defense platforms. We keep that installed base at peak productivity with connected offerings such as Ensemble, which I'll discuss more later.

Second, we're investing substantially in the next generation of differentiated technology platforms with a focus on propulsion and power technologies that further improve fuel efficiency, power density and life cycle economics. These investments drive enhanced aircraft performance for our customers in the near-term while creating additional long-term growth opportunities for Honeywell Aerospace.

Third, we're strengthening operational capabilities and increasing vertical integration in areas such as precision machining and electronic controls to unlock further growth. We benefit from a shared production footprint for engines and APUs and an operating approach focused on supply chain stability, productivity and output growth.

Supply chain is a critical focus area, where we're partnering closely with our suppliers to ensure we're delivering for our customers and meeting demand in both the near term and long term. Together, these actions will support ramping OE build schedules, capturing aftermarket pull-through and continuing to build a stronger, more resilient E&PS business.

Turning to the next slide. You can see that we have a large and growing installed base, which translates into recurring high-margin aftermarket revenue. Within Business Aviation, we expect the number of aircraft that have our HTF7000 engine to grow at approximately a 9% annualized growth rate from 2020 to 2030. This engine's market leadership is reflected in roughly 13 million flight hours of life since 2004, a 99.997 dispatch reliability and leading fuel efficiency at a lower cost of operation.

That performance matters because reliability and life cycle costs are central to how customers evaluate propulsion systems. Once the engine is installed, our aftermarket opportunity extends over decades through maintenance, parts, service programs and upgrades. A similar dynamic exists in APUs. Our commercial APU installed base is expected to grow at approximately a 5% CAGR between 2020 and 2030 off a very strong base with solid performance across both commercial air transport and business aviation.

We are winning APU installations on new builds and also replacing competitor units on the in-service fleet because of the strength of our value proposition to operators. All in, this installed base growth creates durable aftermarket pull-through and ultimately drives an increasing high-quality, predictable revenue stream.

RMUs are another important growth lever for E&PS because our products are high-value complex systems with operating lives that can extend more than 30 years. Across the installed base, customers are looking for better fuel economy, higher reliability, improved range and lower life cycle cost. RMUs allow us to deliver those benefits to existing customers and in production platforms with very strong returns on investment. On top of that, it often allows customers to achieve necessary performance without purchasing a new aircraft or a new vehicle.

The 131-9 APU high-efficiency mode, as an example, has saved narrow-body operators almost 5 million gallons of fuel since it entered service less than 6 years ago. It's also improved on-wing time by as much as 1,500 hours, which translates into 1 to 2 fewer shop visits over the lifespan of the APU.

In Defense, the AGT 1500 Total InteGrated Engine Revitalization, or TIGER program, for the M1 Abrams enhances reliability and fuel efficiency and improves operational range. It also increases power-to-weight performance, enabling the vehicle to accelerate from 0 to 20 miles per hour in roughly 6 seconds and reach speeds above 40 miles per hour, which for a vehicle that weighs 60 tons is quite impressive. Importantly, many of these upgrades can be completed during major service center events without additional downtime, adding to an already strong value proposition for customers and attractive aftermarket growth for Honeywell Aerospace.

Let me spend a moment on Ensemble because it's a great example of how we're incorporating digital capabilities to strengthen the E&PS aftermarket model. Ensemble elevates engine monitoring by using data and predictive insights to reduce cost and increase aircraft uptime. The platform enables near real-time automatic engine data downloads after every flight, supporting faster analysis, easier compliance and better visibility into engine health.

It also provides early warning through predictive AI detection, which helps enhance safety and minimize operational disruptions before they become an issue for the customer. Ensemble has been effective at predicting failures up to 3 months before they would have occurred in front of the customer. And Ensemble enhances recordkeeping, offering one of the first searchable digital logbooks in Business Aviation, which creates a more efficient, transparent and useful maintenance record for operators.

Ensemble is also an important strategic lever as digital monitoring creates powerful incentive for operators to utilize our maintenance service plan. It improves outcomes, it strengthens relationships and it positions Honeywell to capture demand for predictive maintenance, RMUs and life cycle support over time.

Shifting to where our industry is heading. E&PS is poised to play a critical role as aircraft architectures become more electric and power demand increases across both commercial and defense applications. This is a sizable growth opportunity driven by 2 trends. First, customers are looking for more electric aircraft designs and more sustainably oriented products. Second, innovation is reshaping propulsion, power management and system design across current and next-generation aircraft.

Honeywell Aerospace is a global leader in electric power generation and conversion. We're developing a new family of high-power density generators that demonstrates our commitment to innovation and builds on our existing expertise in power systems. The 1-megawatt turbo generator is a great example of that. It was designed as a new power source for hybrid electric aircraft with the highest power density generator in the industry. This system is efficient, safe and lightweight, supporting advanced performance and lower costs. This is a natural extension of E&PS capabilities, leveraging proven power generation expertise and applying it to the next generation of aircraft.

Taking a step back, E&PS is a large-scale differentiated business with strong positions in propulsion, APUs and electric power. We have a leading and diversified installed base across key end markets, which creates recurring aftermarket opportunities over the life cycle of the programs we support. We're also leveraging our history of innovation with our Develop once, Deploy everywhere approach. Whether in engines, APUs, electric power or digital monitoring, we are focused on technologies that improve performance, reliability and life cycle economics.

Finally, we are strengthening our supply chain and operational capabilities with efforts such as multi-mode manufacturing to meet robust customer demand across both OE and aftermarket. That combination of installed base, technological differentiation, execution discipline positions E&PS to be a meaningful contributor to Honeywell Aerospace growth.

Thank you for joining us today.

[Presentation]

Please welcome President, Control Systems, Rich DeGraff.

Hello. I'm Rich DeGraff, President of our Control Systems business. I'm in my 18th year at Honeywell Aerospace. Consistent with most of my life-defining moments, my wife had a lot to do with me being here today. I was first introduced to Honeywell Aerospace by my wife's uncle, a veteran engineer. He spoke glowingly about the company, how they treated their employees, the innovation, the global experiences and the list goes on. Finding my way into Honeywell Aerospace became my top priority.

My persistence paid off when I was hired in as a second shift operations supervisor in our repair and overhaul facility here in Phoenix. There, I earned my Six Sigma Green Belt and my Lean Expert certification. That was the beginning of a flywheel of opportunity to scale my leadership in different roles focused on customer engagement, P&L ownership and business growth.

To be standing here today is an improbable story at many companies, but not Honeywell Aerospace. Control Systems has nearly a century of pioneering innovation from the 1929 invention of the 4-wheel braking system to the addition of lights on an exterior of a plane, to the first all-aluminum aircraft intercooler system, to the first cabin pressurization system allowing for high-altitude flight and the first air-turbine start system capable of unlimited main engine starts. Our legacy of innovation is undeniable, which is why it's an honor for me to be leading this business given its strong legacy and the growth in front of us.

As a leading provider of mission-critical thermal and motion control systems, we've established a strong and consistent financial profile by supporting our customers across all end markets. Honeywell Aerospace Control Systems generated over $5 billion in sales last year, growing organically at 10%, and it delivered $1.5 billion in adjusted EBIT. What differentiates this business is how deeply embedded our systems are in daily flight operations.

Almost all of you boarded a flight to get here to this event. The airplane you flew began with the start of the main engines. You flew at an altitude above 30,000 feet, withstood weather and concluded with a safe landing. Like many of you, millions of passengers every day rely on Honeywell Aerospace Control Systems to play a critical role in enabling flight, life support and enhanced safety.

And importantly, demand for our mission-critical products is well diversified across end markets and programs. So let's take a look at how the portfolio comes together. We organized the business around 2 core system domains. Air and thermal control and motion control. Air and thermal control systems are focused on managing the aircraft environment and energy, including temperature and pressure, which is why it feels like you're on the ground when, in fact, you're 40,000 feet above it.

Another key domain is overall thermal efficiency, which becomes increasingly more important as platforms continue to electrify. Motion control systems are responsible for controlling movement across the aircraft, including propulsion-related functions and flight surface actuation, enabling precise and reliable operation. Across those domains, we support a broad range of mission-critical functions, including air supply, cooling, mechanical engine control, flight control actuation and braking.

Now, our complementary portfolio allows us to utilize model-based systems engineering to leverage common subsystem technologies across the entire business. What underpins all of this is our ability to design and deliver complex integrated control systems at the aircraft and the subsystem level. It's about bringing together hardware, software, electronics and advanced materials into a fully certified system-level solutions. That capability allows us to be deeply embedded in the aircraft's core architecture with positions that last the full life of the platform.

Now, as you can see here, we've established that integrated position across each of our end markets. Our highly engineered, high-performance systems help improve capacity, efficiency and range and can be deployed across platforms. And importantly, we support our customers across the full life cycle, from the initial design and certification to retrofits, upgrades and connected services extending value well beyond the original installation.

Building on the strength of the portfolio, our strategy is focused on 3 clear priorities to drive substantial value creation. First, we're expanding our leadership by remaining deeply engaged with our customers to grow our mission-critical thermal and motion control systems content. This will become increasingly important as our customers demand solutions to more complex challenges across both commercial and defense aircraft.

Second, we're investing in differentiated electrification technology platforms through the design of highly integrated systems that sit at the intersection of mechanical, electrical and software.

And third, we're strengthening our operational capabilities to further unlock growth. We're modernizing our supply base and our production system to ensure we can scale efficiently to capitalize on the strong demand for our current and new innovative solutions. Taken together, these priorities position us to expand our content on next-generation platforms and deliver sustained long-term growth.

Now, I want to take a moment to highlight our advantaged portfolio and our strategy in action with our F-35 Power & Thermal Management Systems, or PTMS. PTMS is a highly integrated system that brings together air and thermal control with motion-related capabilities into a single system that satisfies 14 mission and safety critical functions on the F-35. With more than 1 million flight hours and approximately 1,800 systems delivered to support OE production and sustainment, the PTMS is the trusted solution on the platform, delivering clear results.

With a 10-year aircraft CAGR of 10%, the installed base growth drives long-term content and aftermarket sustainment opportunity. Beyond line fit, PTMS also represents a meaningful retrofit opportunity for the existing F-35 fleet to satisfy new and emerging customer needs. So this is not just a strong OE position, but a platform that supports recurring value over time.

Overall, PTMS is a great example of how our high-performance systems enable next-generation aircraft, driving growth and life cycle value for our customers and Honeywell Aerospace. Another key lever of growth in our Control Systems business is RMUs. RMUs allow us to address critical customer pain points while delivering improvements in performance, reliability and overall life cycle costs.

We are concentrating our efforts on 3 strategic focus areas: enhanced safety, increased cooling and overall system efficiency. Now, on the bottom of the slide, you can see a number of key product investments where we are delivering across those 3 strategic areas of focus. You just heard me talk about the RMU opportunity with our PTMS program. And here, you can see an example of how we're investing in software and hardware modifications and upgrades to increase cooling capacity for the F-35 while lowering operating costs. Each of these solutions is designed to address a specific customer need. And importantly, they can be deployed across a large installed base of various platforms. That scalability is what enables RMUs to be meaningful and predictable growth over time.

Now, electrification is one of the most important drivers of growth across our end markets. Through our market-leading position, we've secured approximately $15 billion of net new wins from our next-generation electrification products, scaling to more than $1 billion in annual run rate revenue over time. The Develop once, Deploy everywhere R&D approach allows us to move faster and leverage common technologies to deliver tangible results. These innovative advancements are integral to delivering the efficiency standards required on next-generation platforms.

Before I close, I'd like to share 2 examples of the impact we're having through our innovative solutions. Let me start with Assure, our advanced electromechanical actuation system. This is a high-demand system with strong exposure across both defense and commercial platforms. Assure is the most precise and speed responsive system available for critical control surface application. What differentiates it is the architecture. It's modular, scalable, enabling thinner flight control surfaces, resulting in systems that are approximately 10% to 15% lighter and more compact, translating directly into aircraft efficiency and performance. It's seeing strong momentum in high-growth applications.

Assure is already being deployed in missile platforms such as the guided multiple launch rocket system, or GMLRS, where production is expected to double by 2028. And more broadly, this technology supports the shift away from traditional hydraulics towards integrated electromechanical actuation and autonomy. That shift is critical for next-generation aviation, enabling more efficient and increasingly more sustainable aircraft architectures. Assure is building momentum with 8 recent platform wins, a clear example of how we scale technologies to drive growth across both defense and commercial markets.

Next is Attune, our premier compact high-density cooling solution designed to support aircraft cabins, cockpits, batteries and onboard electronics where thermal demands are increasing rapidly. Attune stands out because of its design and efficiency. It was developed for a wide range of aircraft, but particularly optimized for no bleed and low bleed systems, which are becoming more common in next-generation platforms.

From a performance standpoint, Attune delivers a weight reduction of up to 35% and 20% greater efficiency, contributing to overall aircraft efficiency improvement. And importantly, this solution is one that scales with applicability across civil, military and advanced air mobility platforms, positioning it well for broad adoption. Attune has a strong start with multiple wins across defense and commercial platforms.

Both Assure and Attune reflect how technologies -- how our technologies are aligned with key industry trends and customer needs supporting both near-term growth and long-term platform opportunities.

Now stepping back, Control Systems is a leader in mission-critical thermal and motion control systems across both commercial and defense platforms. We are well positioned to continue to expand that leadership, growing our content across platforms. When customers need solutions to more complex thermal and motion control challenges, our systems become even more critical.

We are investing in differentiated technology platforms, bringing together mechanical, electrical and software capabilities to enable more electric and more efficient aircraft. And we're continuing to invest in expanding our supply capacity through automation of our factories to support our customers' current and future needs.

Thank you.

Please welcome Vice President, Investor Relations, Sean Meakim; Chief Commercial and Strategy Officer, Ben Driggs; Chief Digital Technology Officer, Krista Dixon; and Chief Technology Officer, Todd Giles.

All right. Excited to talk about innovation here this morning. We've shown in some of our materials in the past that historically, Honeywell Aerospace has spent more than its peers on a percent of sales basis in the form of R&D, but it's not just how much you spend, it's how you spend it. So Todd, we'll kick it over you to start, but let's just talk about our approach to innovation, how we go about allocating dollars and how we think about taking all the things we heard from our segment leaders and then bring it to life through the engineering group.

Yes, absolutely. So from an innovation standpoint, we kind of think of innovation at the intersection of customer and market needs with cutting-edge technology and how we look at that over the near term and the long term. We have implemented this thought process with kind of a symbiotic relationship between the business teams and the technology teams, right? And we do this through robust strategic planning of taking that market back need to create product road maps, very robust long-range product road maps that we then look at with the technology organization, and we apply that technology of what needs to be developed by when to the right technology readiness level so that we can bring those products to market.

One of the other things we leverage as part of this process is co-innovation, right? We partner with our customers. We partner with suppliers, other companies and even universities to bring this technology forward into our products. One of the best examples, for those of you that had the pleasure to be with us yesterday afternoon at the hangar, you got to see our helo inside the hangar. It's our AW139. We partnered directly with Near Earth Autonomy to take their technology, combine it with our integrated cockpit technology and do the first-ever autonomous flight of an AW139. And so this is how we leverage and try to be extremely efficient and thoughtful about what we invest in and try to bring to market.

Ben, any other thoughts on the overall portfolio?

Yes. So our R&D efforts are about 10% of our overall revenue. So that equates to over $5 billion that we put in R&D over the last 3 years. About 60% of that is customer-funded, which is, of course, a great source. We try to make sure that those sources are from a variety of places so that we can ensure IP control and we can maximize the value we get from that. And then, about 40% is funded by Honeywell. And so that's well over 4% of our revenue is internally funded.

With the revenue growth that we've had and will have, that's a pretty significant absolute dollar amount increase going forward. But it's not just how much you spend, it's also how you spend it. And this is a rough breakdown of how we spend our R&D. We spend about 65% on new products that have customer commitments. We have about 15% related to RMUs, these upgrades that you've talked about that bring the latest technology into the existing fleet. And then, we maintain about 10% in advanced technology because it's critical to make sure you're doing enough in technology to be there on next generation on things that are Horizon 2 or 3. And then, we have about 10% that's on strategic initiatives that maybe is ahead of a customer commitment. And we feel really good about that sort of breakdown, and that's giving us a robust pipeline of innovation going forward.

Krista, maybe you can talk about, we also want to spend that efficiently and our digital tools help us to do that.

Well, I think of IP as being the digital backbone that brings all of this together and enables Todd's organization to execute on the innovation. We stand up the technologies that digitize the engineering processes. We implement high-performance computing so that we can promote engineering efficiency. And then, we are scaling AI across the entirety of the engineering design life cycle. And we do this not only to be able to design faster, but to eliminate rework and then improve our ability to get to first-pass certification rates. It's our mission to make sure our responsibility really to ensure engineering organization has the right data, tools, system capability to execute on their product strategy.

Now, let's maybe shift to Develop once, Deploy everywhere. We've heard it throughout the presentations this morning. It's a key way in which we go about developing new technology. Let's maybe just talk about how we start with our core capabilities and then how we build out from there, just taking not a singular platform approach, but more of a horizontal lens across these end markets. Maybe you guys can give some more detail there.

To really execute this approach, there are 2 fundamental things that you need to do. One, you have to be solving the complex challenges that exist across the end markets and across platforms. And that's Honeywell -- that's something that Honeywell Aerospace does very well. We're on the complex challenging things that need solutions across the entire industry.

And then, the second thing you need is you need the credibility, experience and capability to do certification, installation and have trust of customers across all end markets. And that's another thing Honeywell Aerospace has in a very significant way, great experience in Defense, great experience in Business Aviation, great experience in Commercial Air Transport and understanding how to get those things certified.

And when you think about some just examples of that, the navigation is a great example. The core innovation was in the navigation sensors, and all aircraft need precision navigation. And what enabled us -- what that enabled us to do is take that core sensor technology, do different packaging, different installations, different certifications. And now, there's 900,000 of those sensors throughout the fleet in all 3 end markets.

APUs is another great example. Every aircraft needs reliable power generation. Every aircraft needs reliable backup power. So we took one innovation in those small turbine engines, and it's on well over 100 platforms. There's 45,000 aircraft flying with our APUs.

Air Turbine Start, Rich mentioned this, is another great example. We figured out how to do that reliably, how to do that with durability. Now, 75% of commercial flights use our Air Turbine Starter. Over 20 military platforms use our Air Turbine Starter. So those are the things you really need to be able to execute this.

And maybe, Todd, you can talk about how the engineering organization puts that into practice.

Yes. And so I would say we are kind of purpose-built to do this, right? We are structured from a technology organization by products and systems. So this allows us, as we kind of talked about strategically, to look at all of the needs across different end markets, synthesize those needs and come up with either a core technology that goes into a core product that we can then reapply in many, many different areas. So it allows us to be extremely efficient here in the deployment of capital.

One of the things you just heard Rich talk about, our Attune product, right, our vapor cycle system, the cooling product. The one thing between the business and the technology organizations is we developed a strategy on how can we go after all these markets, how do we do development differently. And so we broke this product down into a modular building block sort of system where we can develop technologies, components, subsystems that can be glued together or kind of LEGO brick together to solve different needs across different markets. When Rich was talking, there's applications now in advanced air mobility, the defense market, and we're poised well for next-gen single-aisle and a number of other applications. So it's this thought process and strategic alignment that allows us to do this appropriately.

Okay. So now we talked about strategically how we go about spending the dollars. We're in a room full of investors and analysts. And so of course, they want that money spent well, and they want proof points. So maybe let's talk a little bit about how we can -- all of that effort is translating into commercial momentum. Jim certainly touched on this in his opening comments. Let's talk about commercial momentum and how we are now seeing that flywheel really work for us.

Yes. So there's been $90 billion of lifetime wins over the last 4 years. And about over 1/3 of that are actually new positions. And so we feel really good about the momentum that we're seeing across all the end markets. When you just sort of go through those, think of business aviation, the collaborative agreement with Bombardier in avionics and engines, that's a great growth driver. The G300 having avionics as well as engines from Honeywell, it's a great growth driver. You think of Cessna and Embraer jets powered by Honeywell, where the previous version either didn't exist or they were not powered by Honeywell. So great commercial momentum there.

You think of commercial air transport, on the narrow-body fleet on 4,000 aircraft, 60% of the possible value that they could have selected from Honeywell they chose Honeywell. That's great momentum. We have the next-generation flight management system on Airbus platforms and upgraded APU. Again, great progress there. And then, when you think about defense, on almost every major new platform in defense, there's excellent Honeywell Aerospace positions and maybe missiles is one example to talk about.

You think of the major drivers in missiles, AMRAAM, GMLRS, Standard Missile 3, Tomahawk, you think of Anduril Barracuda, all of the latest versions of these missiles have expanded Honeywell content across several of our different product areas. So really exciting commercial momentum, I think, that we're seeing in adoption of our technologies.

Maybe, Todd, you can add a little bit more on some of the examples in the areas.

Yes. And I would say, if we just kind of double-click down into the safety side of what we're looking at and what we're looking at kind of going forward, a number of years ago, between the teams and the organization, we noticed increasing runway incidents, right? You guys are hearing about these kind of all too often, I guess, I'll say. And so we recognized an impending need in the marketplace, and we quickly jumped in to develop what Bob talked about is our surface alerts product, right? We're currently going through certification on this product. And it's a software-only product that brings much greater situational awareness to the flight crew on very critical phases of operations, including taxi, takeoff and landing.

In doing so, we were able to develop this product. We can take it to the current market, and we can drive it forward into current production and even stage it for next-gen platforms and applications that are coming down the road. So we continue to develop this. And one of the ways that I'd like to highlight is kind of our unique capability that Honeywell Aerospace has is our flight test organization, right? We have 9 aircraft ranging from general aviation to biz aviation to air transport, regional, and even the helo that I mentioned earlier, right?

This capability allows us to take existing technology and products, demonstrate it to customers, demonstrate it to regulators, do iterations of design and development on our own and then eventually take it through the certification. So it allows us to look into any areas of the market where we have our products and technology under development and want to move with speed and agility, we can leverage this capability just like we're doing with our surface alerts products and a number of other products across the organization.

So we're talking about innovation, and we haven't spent much time on AI. So Krista, maybe this is a chance to go a little bit deeper there. I thought maybe we could talk about the global aftermarket business as a good case study for what your org is doing inside of Honeywell Aerospace. Maybe talk about actions that are underway where we're already doing the things, say, like 12 to 24 months where we're seeing real traction. And then, also, as you talk through that, let's also go a bit further out on the horizon and what -- like what could be as we think like 36 months and beyond.

Yes. So first and foremost, we are deploying AI and AI agents everywhere across the company. We're using it to automate processes and get to greater productivity. We use it to get to faster data insights, where we can be predicting and optimizing our decisions. In our aftermarket space, we're utilizing AI to be able to look for white space opportunity and where we could have potential new revenue streams. We look at it across the entirety of our maintenance, repair and overhaul business and how we can utilize data that's coming off of our products, out of our systems and analyze that to predict where we could have either repairs or maintenance, and then, in turn, how we use that to minimize aircraft on ground. We'll also use it within our contract space and how we accelerate our ability to move faster on requests for proposals.

And then, looking 12 to 24 months down the road, we'll continue to mature all of the AI solutions we have in place today to be able to further optimize, but I'll be partnering with Ben's commercial organization. We'll be looking at how we accelerate the sales processes, and we'll be looking to optimize and use AI in our pricing optimization. We'll be looking at how we can extract data from static documents like text and e-mails and voice mails and automate putting that into our sales system to get faster data insights, but also to eliminate manual work for your sales team.

And then, going back to engineering and even thinking beyond just the design process, we'll be utilizing many, many forms of engineering data so that we can move faster on engineering requirement documents and engineering knowledge articles. So we have a very accelerated AI road map, and we're very excited about the value that it's not only going to bring to Honeywell Aerospace, but also to our customers.

Given the volume of transactions and information in the aftermarket, it's just a great application that our teams are working on together to really optimize that.

Let's talk about decoupled growth for a minute. So the official term is retrofits, modifications and upgrades, RMUs. We've heard it again. It's been a theme throughout the presentation so far. It seems like a relatively unique capability for Honeywell, at least in terms of the maturity, the scale, the intention to which we prosecute that. Maybe you guys could just tell us a little bit more about from each of your perspective, how RMUs not only help solve customer challenges in the aftermarket and the installed base, but also how there is a different form of innovation that helps us think ahead to future platforms.

Yes. When you think about the life cycle of any aircraft, it's really long, right? It's years to develop. It's built for 20 years. Each aircraft flies for 20 to 30 years, sometimes 40 years in the military. So these are very long life cycle products. And you don't want to wait for the new aircraft to get the latest technology. Just think about safety. You don't want to wait for a brand-new aircraft to get the latest safety technology on the existing fleet.

So the real objective that Honeywell has here is work with operators, identify what they can do to actually improve their existing fleet. And then, given our engineering expertise, our installed base, go and make those things happen and bring them in. And they generally fall into 3 categories. One is safety. Think of our Epic cockpit. So in business jets, there are 6,000 Epic cockpits out there.

We are -- we've now gone from [ Cert Bravo ], and now, we're working on [ Cert India ]. So you can see all of these sort of 7 different upgrade cycles where there's software-only upgrades offering things like synthetic vision, advanced approaches, other safety improvements. And we're actually getting a very high penetration for every wave of these upgrades, and having that existing sort of cockpit enables you to do that.

Another category is efficiency. Think of improved reliability for starters, high-efficiency APU, big desire for that. And then performance, fundamentally changing the performance is kind of the last category. Dave talked about the Chinook helicopter. That same engine envelope in size, the current engine is 3x as powerful as the original engine. We've gone through waves of upgrade cycles that have enabled the war fighter and the soldier to actually do brand-new things with the Chinook that they couldn't before because of these power upgrades. So it's really across the board, that's what you try to do given the long life cycle of these platforms.

Krista, I know you've been helping us a ton on the RMU business in identifying those.

Well, I think the way that I think of IT helping RMU business is how we utilize the data that we're getting from our operators and then how we take that data and analyze it to see where we could have upgrade potential and then what the resulting value would be for our customers.

Additionally, much of our RMU work is around software-only upgrades. And so it's very important for my organization to enable the right digital infrastructure back to that high-performance computing to make sure that, that is a very efficient process.

And Todd, you and I have no shortage of conversations on high-performance computing and what it does for the engineering organization. So maybe you want to expand a little more.

Yes. From a -- Ben hit a bunch on the retrofits, mods, upgrades equation here and how we really look at that. From an engineering standpoint, our installed base allows us to continuously innovate, right? We can think of new things. We react to the market. We look at the market, and we understand what's going on in the market, and we can be proactive and develop new technologies, new features, new functions, whether they're software only or some hardware upgrades as we can go to market.

One of the great things that Bob brought up is our resilient navigation portfolio, right? We all have heard about GPS denied and GNSS denied from jamming, spoofing and a number of issues. This affects anyone flying anywhere at any point in time across advanced air mobility, commercial aerospace, defense, right? And so we proactively have been investing for a number of years on different modalities of sensing, and then, we figure out how to bring those to market through various installed base applications, as Ben mentioned. And so that's just one area to highlight.

I love the Chinook example. It's always a super good one, especially even with Epic and everything else. And so we do all this activity, and it just allows us to continually iterate and invest in new technology, new value-added features and functions.

I think that transitions pretty nicely to talk about advanced technology and going further out on the time horizon. We've been making the case today that Honeywell Aerospace is going to push the industry forward in terms of greater forms of electrification, further pathway towards autonomy, lots of new forms of safety. As we think about those vectors, what are we seeing in terms of the customer demand for those types of opportunities and future next-generation platforms? Kris, maybe you want to comment?

Sure. Well, our AI strategy, it truly goes beyond just productivity, and we fundamentally see it as customer-facing. And I think a great example of this is what we do with engineering on new product development and the implementation of digital twins. And a digital twin is a high-fidelity replica of our product in an aircraft operating environment. And we can use the data coming off of the digital twins to analyze against real-world conditions and then predict the performance of our product, which in turn helps us with our product strategy. We can also use digital twin within our autonomy product, and we do that by utilizing it for the see, think, act, communicate processes, which in turn drives greater innovation and product strategy for us.

And Todd, that is near and dear to your heart. So maybe you want to talk a little bit more about our path to autonomy.

Yes. How much time we got left? We could talk about this all day. From the standpoint -- Krista hit on it, pretty much hit the nail on the head, right? So we look at autonomy, speaking about autonomy, right, through the principles of robotics, right, see, think, act, communicate. And if you know aviation and you think about the golden rule of aviation, aviate, navigate, communicate, all of those things really overlay very nicely with a lot of our products.

We leverage the tools and capability infrastructure developed in partnership with Krista and her team to be able to simulate these environments and stitch these products together to create much greater automation potential across our integrated cockpits, whether it's Epic or the new Anthem cockpit that Bob talked about or whether it's just developing pilot aids to assist from an AI standpoint, developing digital copilot that we talked about and any number of other points of automation to really reduce crew workload and create a much safer experience for the war fighter and commercial air transport passengers, right?

Additionally, this plays down into the safety side of the equation. And if we look at autonomy, safety and electrification, on the safety front, we've talked a lot about SURF-A and a number of other products, resilient navigation, but we have advances in weather radar to detect numerous other forms of weather conditions in the flight path and be able to react accordingly. We can talk about flight data recorder advancements that are -- that we're investing in and bringing out and a number of other areas.

You could also talk about different autonomous operations as we go into the advanced air mobility market and even into the defense space for collaborative combat aircraft. So we take all of our installed base. We take the technology we have. We leverage our IT infrastructure, stitch that together and create value-added features and functions and offerings for the marketplace, as we move forward in the future.

Ben, what are your thoughts on electrification?

The heart of what electrification is trying to get at is next-generation platforms want to be 15% plus more efficient, lower cost. And so one of the things that you really need in that is go to a lower bleed or a no bleed engine, really enabling more efficiency. And the question is, how does the rest of the aircraft function, what's the electrification needed there? But what Honeywell Aerospace has is really a lot of the key building blocks for that.

One, we're the leaders in power generation with our APU business. You heard Dave talk about the turbo generators. That's a space where you got to generate the electricity. And then, once you generate this electricity, you've got to cool it and manage the thermal loads in a really efficient manner. And that's what Attune does. Attune is a step change in more efficient cooling, high-density cooling in the smaller footprint and using less energy itself. And that's already winning and already being proven on certain platforms that's going to be able to continue to larger platforms and other things going forward.

And then, when you think about what do you do with all this electricity, one of the things you need to do is have better actuation systems, control all the flying surfaces of whatever platform it is more precisely, better and more efficiently. And that's what the Assure product line does. It's had 8 wins already. It's proving this in the missile environment, proving this in other environments. And that kind of gives you all these building blocks.

And you're not just betting on something that hasn't been fielded, you're actually doing things that have been fielded, that have proven and then you can build that electrification story, which is sort of unlocking this 15% plus improvements going forward. So I think overall, we feel really good about the positioning we have against these long-term trends.

That's all the time we have. Great discussion. Thank you.

Please welcome Chief Integrated Supply Chain Officer, Kathy Worthen; and Chief Financial Officer, Josh Jepsen.

Good morning. I'm Josh Jepsen, Chief Financial Officer. I joined Honeywell Aerospace in February, and I cannot be more excited. What stood out to me about Honeywell Aerospace is the breadth and quality of the portfolio, Jim, the culture and the caliber of the leadership team assembled and the opportunity to help scale a business with incredible momentum and long-term growth potential.

Today, I'll focus on how our comprehensive operating system is a differentiator for Honeywell Aerospace, enabling consistent, profitable growth and strong cash generation. I'm joined on stage by Kathy Worthen, our Chief Integrated Supply Chain Officer. She comes with a ton of experience in leading supply chain transformations across multiple industries, and we are very lucky to have her on the team. I'm excited to partner with her, as we move on this journey to fully unlock our growth potential. Kathy?

Thanks, Josh. Good morning. I'm Kathy Worthen, Chief Integrated Supply Chain Officer. I joined Honeywell Aerospace in September 2025 with over 25 years of supply chain experience across industry with companies such as General Motors, GE and Magna International. And like Josh, I couldn't be more excited to be in this industry as a leader as part of this transformational moment in everything, in all of the significant opportunity we have ahead. So what attracted me to this business was not only that scale of that opportunity, but the ability to build a more integrated, resilient and scalable operating model to support our long-term growth. Josh?

Thanks, Kathy. To start, I want to provide some historical context. Over time, our business has generated healthy profits. However, some of those strong results came at the expense of investments in certain areas of the supply chain and operations. Therefore, as demand has accelerated, it uncovered opportunities to better align supplier capacity, planning and execution required to meet that demand. We are laser-focused on addressing this dynamic with deliberate actions to better support an integrated end-to-end supply chain and deliver stronger output growth.

To help advance these efforts, today, we're introducing the Honeywell Aerospace Operating System. Building on a strong foundation, this operating system is designed to drive consistency, improve execution with differentiated performance and support profitable growth. It is anchored in four key principles. First, a single enterprise-wide system, which empowers teams with standardized ways of problem-solving, decision-making and communicating.

Second, it builds a culture of continuous improvement. This will unlock efficiency by driving performance and cross-functional collaboration. Third, it enables predictable, profitable growth underpinned by our team's focus on customers as we deliver enhancements to safety, quality, delivery, cost and cash flow. And fourth, it affirms disciplined capital allocation and investment decisions aligned with our strategic priorities.

Over the past 2 decades, Honeywell Accelerator has been responsible for promoting a consistent growth mindset, operational excellence and disciplined execution. As a stand-alone aerospace company, Honeywell Aerospace, we are evolving the legacy from the Honeywell operating system into a custom lean system designed to unlock additional gains for a long-cycle business.

We aim to deliver meaningful impact with the most significant enhancements from our integrated supply chain focused on bolstering capacity to meet demand and generating output growth. For instance, the Honeywell Aerospace Operating System will deliver better enterprise-wide alignment by providing increased transparency, cross-functional collaboration, which will, in turn, improve quality and on-time delivery.

The operating system also accelerates digital and AI-enabled planning to strengthen supply, which will support end-to-end supply chain. Planner agents will be created to identify supply chain bottlenecks proactively, highlight critical part shortages and ensure clear-to-build readiness through AI-driven prioritization and automated triage. This is a critical component, especially as we work to address the supplier constraints that we flagged earlier this year. In parallel, these efforts enhance manufacturing excellence to increase throughput, quality and real-time performance visibility.

With that, I'll hand it over to Kathy to provide some color on where the supply chain is today, where we're going and how this operating system drives tangible impact and output growth.

Thanks, Josh. So today, I'll walk through how we are improving our execution predictability, strengthening supplier and factory coordination and converting strong aerospace demand into scalable, more reliable growth. Honeywell Aerospace operates a large and diversified global supply chain network, supported by more than 16,000 supply chain employees and over 3,000 production suppliers. Our regional footprint across the Americas, Europe and Asia Pacific strengthen resiliency, support localization and enable closer alignment to customer demand.

In 2025, we delivered 16% year-over-year output growth, driving high supply and throughput demands across several constrained categories, particularly mechanical components and repair flows. As a result, we identified opportunities to improve execution predictability, have planning stability and also synchronize our supply across the network. That is where the Honeywell Aerospace operating system becomes critical.

Before outlining where we're going, it's important to frame the environment we're operating in. Externally, the aerospace industry experienced significant supply chain disruption beginning with the post-pandemic demand recovery. Mechanical components, castings, forgings and precision machined parts became constrained across multiple supplier tiers. At the same time, labor shortages and operational instability at certain suppliers impacted consistency, yield and throughput. Internally, we identified opportunities to better align our planning, supplier capacity and the factory execution across the network.

As demand accelerated, variability in schedules and fragmented coordination created inefficiencies that impacted throughput and our delivery predictability. The last 4 years could be characterized as more brute force efforts with a focus on tactical actions to navigate that high constrained environment. However, that brute force won't get us to where we need to go. We need to meet more robust customer demands. We are now shifting towards a more strategic approach, partnering with our suppliers to improve the resiliency and predictability of our supply chain to meet the long-term growth potential.

I have led similar transformations before, and we're progressing well towards achieving these goals. Over the last several months, we've taken deliberate steps to improve execution. We increased direct engagement and collaboration with critical suppliers. We are confirming supplier capacity and introduced more stable planning windows. These actions are improving our supplier commitment reliability, strengthening material input trends and creating more predictable delivery conversions across constrained areas of the network.

Importantly, this is not about the entire supply base. We have identified a focused subset of pacing suppliers in constrained categories where targeted actions can have the greatest impact. To support that effort, the Honeywell Aerospace Operating System is focused on 4 strategic priorities designed to improve the visibility, reduce the variability and increase throughput.

First, we're stabilizing planning by strengthening execution through that tighter alignment between demand signals, supplier capacity, inventory positioning and factory schedules. To sustain execution, we have implemented more disciplined planning governance, including stabilizing those planning windows with our critical suppliers. This provides suppliers with clear demand signals, improving their commitment reliability and reducing disruption across the network.

Second, we're strengthening and expanding supply focus on those constrained categories with the highest impact of throughput conversion. That includes increasing supplier capacity agreements, improving dual sourcing, expanding strategic in-sourcing where appropriate and strengthening engagement with critical pacing suppliers.

Third, we're driving factory throughput by improving execution discipline, improving factory flow, reducing work-in-process inventory and increasing throughput conversion across constrained platforms.

And fourth, we are operating as one integrated system, creating enterprise-wide visibility, faster decision-making and stronger accountability across procurement, planning, manufacturing and supplier management. Together, these actions are improving transparency, accountability and throughput predictability across the network.

As those disciplines have been implemented, we are beginning to see measurable operational improvements across several portions of the portfolio. The progress we are seeing today is not just isolated to a single site or supplier recovery. It reflects a broader improvement in pacing visibility, supplier coordination, throughput management and execution discipline across that network.

Trying to see if I need water or not. A lot of words. I want to make sure everybody understands those pieces. For example, material input trends across our constrained categories improved during the quarter, while several pacing suppliers demonstrated sequential improvement in throughput and shipment conversion. While recovery across the aerospace supply chains remains a multi-quarter journey, the operational indicators are moving in the right direction, and they provide greater confidence in our ability to scale output more predictably over time.

This slide outlines how we're executing those priorities through an integrated operating model. We start by improving execution predictability through better alignment between demand, supplier capacity and factory schedules. The focus today is reducing variability, improving commitment reliability and increasing throughput across constrained portions of the supply chain.

I'm going to grab water. Thank you.

We are strengthening coordination across suppliers, procurement, planning and manufacturing to improve speed, accountability and visibility across the network. As we continue to scale, we are also leveraging digital capabilities to support faster decision-making and better operational visibility. This phased approach moves us from tactical recovery toward a more scalable and resilient execution across capable supporting suppliers and supporting our long-term growth.

Compared to earlier in the year, we now operate with greater visibility in executing that supply within the quarter, including supply confirmed pacing, shipping conversion tracking and platform level throughput governance. As execution discipline and supplier coordination improves, we will start to see stabilization across several constrained portions of the network, including our stronger throughput, improved shipment pacing and more predictable operational conversion.

Those indicators are important because they demonstrate better execution consistency, not simply short-term recovery actions. While aerospace supply chains remain constrained in certain categories, we believe these operational improvements position us to scale output more predictably over time.

To illustrate how we are stabilizing performance and converting demand into output, I want to share a few examples across the portfolio. These examples reflect how we are applying our operating system to remove constraints, to improve the flow and also increase throughput across our portfolio. In Electronic Systems, circuit card assembly is a critical input into avionics systems.

To improve testing efficiency and reduce dependency on external repair loops, we invested in advanced diagnostic testing and machine learning capabilities that allow us -- that allow repairs to occur prior to installation. This improved testing productivity by approximately 30% while increasing throughput and reducing reliance on outside suppliers. This increased conversion efficiency while also reducing dependency on those external repair loops.

Similarly, within Engines & Power Systems, we implemented automated welding technology to transform the impeller repair process. The result was meaningful, had productivity improvements, and it included reductions in manual welding and finishing time while improving our quality consistency. These investments improve throughput consistency while increasing scalable repair capacity. And within control systems, we invested in automation capabilities, supporting air turbine starter repair processes. These improvements streamline multiple activities into a simplified process flow, increasing uptime and supporting approximately $95 million in incremental revenue over 2.5 years.

While improving uptime, reducing process variability and accelerating flow through constrained repair operations, we'll continue to see the optimization and the production throughput. These are examples of how we are applying disciplined operational improvements to convert our strong demand into executable output across the network. In parallel, we have also deployed targeted operational recovery and supplier operational improvements across our network, our supply network, especially where we see constraints in our global integrated supply chain network.

These efforts have been focusing on improving execution visibility, standardizing workflows, stabilizing our schedule practices in alignment with our supply base and removing bottlenecks that were limiting throughput and what were driving some of our extended lead times. In practice, that means moving from manual and reactive execution processes to a more disciplined, data-driven operational management. It also improves our material flow, increases our decision speed and creating more predictable execution across both our sites and our critical suppliers.

We are already seeing measurable improvements in operational performance across several constrained areas of our business. Supplier commit rates have improved, schedule stability is stabilizing. Supplier delivery pacing is becoming more consistent, and we're seeing open execution aging of our WIP have all improved.

To sum it up, we are encouraged by the momentum we are seeing at the beginning of this new phase in our supply chain transformation. We have a clear, achievable plan in place to capture the significant financial opportunity from growing output and ramping efficiency in the years ahead.

With that, I will turn it back to Josh.

Thanks, Kathy. Our operating system will help advance outcome-based results with consistency, repeatability and scalability. We measure our success across 4 key indicators: delivery, quality, cost and cash. On delivery, we're improving lead times, including engines and APUs as examples. On quality, we're reducing defect rates. On cost, we're optimizing repair and overhaul to shorten turnaround times. And on cash, we're focusing on inventory turns. This focus is delivering early progress, but we know there is much work to be done to continue driving each of these measures to where we want them to be.

With that in mind, I want to highlight how faster inventory turns will support cash flow growth. As shown here on the slide, inventory turns have trended lower since 2018, below 3 turns since 2018, as we came through the pandemic due to supply chain constraints that Kathy mentioned earlier, combined with robust demand that required us to carry more inventory compared to historical standards. We see a path to return to pre-COVID levels through disciplined planning and execution.

First, enhancing end-to-end demand visibility and AI-enabled planning to better align supply, reducing excess and obsolete inventory. Next, improving supplier coordination and reducing lead times to lower safety stock requirements and increase throughput velocity. We have planned and are executing over 1,000 discrete actions to drive supply improvements. This includes supplier staffing, yield enhancements, supplier transitions, increased dual sourcing and AI-enabled planning. As executed, these efforts will allow for consumption of inventory, which is built up over time. And third, driving disciplined new product introduction and life cycle management processes to avoid inventory build during these phases.

With a return to our pre-pandemic level of inventory turns representing approximately $1 billion in cash flow, it's clear that consistent execution across these milestones will drive meaningful impact. To bring this all to life, I'd like to share an example of how we are applying the Honeywell Aerospace Operating System to remove constraints and unlock capacity within our supply chain.

We recently partnered with a key supplier conducting the Kaizen event across their multisite footprint focused on eliminating waste through continuous improvement. This helps identify issues in flow, quality and inspection. In particular, limited overall process visibility, machining bottlenecks and planning variability are driving rework and extended cycle times. By applying our operating system tools, we streamlined data capture, stabilized execution and optimize existing inspection capacity.

The impact was immediate. First pass yield improved by roughly 25%, and we reduced non-value-added work by about 50%. This is just one example of how we're removing waste with continuous improvement and converting constraints into capacity to drive output growth. In summary, the Honeywell Aerospace Operating System is integral to how we translate demand into output. We're taking a back-to-basics approach to leverage the best of Honeywell Accelerator and tailoring it to meet unique needs as a standalone aerospace company.

We are embedding a culture of continuous improvement with supplier capacity aligned to demand, enhancing predictability and resilience. We are strengthening alignment across R&D, supply chain and manufacturing operating as one system to increase output, delivery and quality for our customers. And we're driving measurable results with backlog conversion and inventory reduction supporting higher sales, profit and cash flow through disciplined investments. Together, this positions us to accelerate growth with consistent scalable execution.

Kathy and I both thank you for joining us today.

Now, I'd like to ask Jim and Sean to join me here for Q&A.

I think it's -- we get some audience participation typically at this point in the show. Kristine?

Okay. Great. Standing up to. I'm Kristine Liwag, Morgan Stanley. Thank you for the presentation this morning. So maybe just with the last question, Josh, you talked about the Honeywell Operating System. Just want to understand a little bit better, how much of that was already part of the Honeywell Operating System? What's new? And where is that incremental change coming from? And how do we think about measuring results from that change? Because it seems like you guys have been around for over 100 years and profitable. So just understanding where that rate of change could be would be really helpful.

Jim, maybe you could start given you've been through the transition.

Yes. So a couple of things I would add relative to that. And so yes, the existing Honeywell Accelerator System that's been in place, which is something that is foundational, does provide a substantial amount of benefit that has been realized over the years. The one thing I would say specific to that plan, though, is if you think about where we were pre-COVID and now coming out of COVID, that plan was really more centered around driving productivity and efficiency, rooftop consolidation, and the output metric from that, that was driving Honeywell Aerospace was about expanding margins at the end of the day. And we talked about that a little bit earlier during my portion of the opening comments about our profits grew by 50%.

That operating system, however, was not built and/or structured as part of Honeywell Aerospace pre-COVID to be around a growth-minded culture and a growth-minded organization. That is the major unlock when we're making this system to be very purpose-built for Honeywell Aerospace in the direction that we're taking the company, which is to have a growth-minded culture, meeting the demand that our customers are providing for or requesting for our products and services, and therefore, making that purpose-built operating system to be very, very specific around driving growth, profitable growth, but that's the focus to drive the value for the company and drive value for our shareholders.

Yes. And maybe just to add, the only thing I'd say on top of that, Kristine, as you think about the metrics, I mean, we talked about some of them. So what are we seeing from an output growth perspective? Are we converting backlog into deliveries? And that's obvious. I think over time, what are we doing from a margin perspective, we're driving EBIT, but also very specifically, what are we doing to drive inventory. And we talk about the cash unlock potential in driving increased efficiency as we drive that throughput, that is significant in terms of what we can deliver there.

Peter?

Peter Arment, Baird. You talked about supply chain unlock. A lot of us -- we've heard a lot about that. Is it more -- do you view it more of an external or internal heavy lift effort? And if you are successful outside of kind of the baseline assumptions that you have for your top line, is it going to lead to a faster growth top line? Or should we think of this more of a margin opportunity?

Yes, I'll take it, and you will add on to that. If I were to just bifurcate a little bit between your comment about external and internal, I would say probably about 70% of it is external, 30% is internal. We went through, as I was describing earlier, massive transformation of the supply chain strategy pre-COVID, which was again built around productivity efficiency, reducing rooftops and the like. With that constraint that exists in terms of reducing rooftops, obviously, now in a high-growth environment that we're operating in, the growth trajectory that we are planning going forward, we need to look internally. So that is -- again, that is definitely part of the calculus. But it's also -- it's externally as well, right, within the supply base.

We have an exceptionally complex integrated supply chain, as described by Kathy. It's an electronic supply chain. It's a mechanical supply chain, 3,000 suppliers across the board and the like. Many of them were smaller family-owned operations, 100-person, 200-person, 300-person shops, that don't necessarily have been structured and built for a growth environment that we are experiencing right now. And so we spend a significant amount of time with them, how do you get more capacity out of your factory? How do you increase productivity and efficiency to drive more output? How do you address yield issues? How do you address quality issues? And then, what CapEx do you need to grow with us and to grow as part of Honeywell Aerospace? And then, we will inject -- in many cases, we will inject capital into those facilities of those companies, again, as an enabler for growth. So it is both elements. It's both an external view and an internal view. But I would say the focus on a percentage basis is a little bit higher on the external, but we are definitely investing internally as well.

Yes. What I'd add, Peter, is I think there's a component on the external piece that Jim mentioned, which is the approach of partnering, like taking a very strategic relationship approach with the supply base. And I think that's been an important pivot that we've made here over the last 6 months or so and really working. I was just on a supplier call with 150 suppliers, and that's what we were talking about, like how are we partnering to grow together. This isn't just we want to grow at their expense. How do we grow together? We're only successful if we work together. So I think strategically, that's critical.

And on the internal side, and I think we may have had some of this conversation last night, what are the things that we should potentially be doing in-house? Like how do we think about what are our core competencies, where do we have the ability to do that, things that are strategic, that are important, mission-critical to the system and also drive margin for us. So I think there will be more and more opportunities that we'll continue to look at there as well.

Sheila?

Sheila Kahyaoglu with Jefferies. Maybe on the 6% to 8% revenue growth guidance, can you give us a bottoms up how you think about the different end markets? I think aftermarket, you're expecting an improvement there. How do you think about pricing and new contract wins adding to that?

Do you want to take that one?

Yes. I mean, across the end market segments, and Jim laid out what we think those segments look like, if you look at commercial OE and aftermarket, mid-single to high single digits. Defense and Space, we think are more like mid-single, as you get out to 2030. So those are kind of the big -- how do we see end markets coming together, as we move here. Now, clearly, we've got the unique opportunity on the backlog. So as we talk about how do we unlock that. That for us has been the thing that's metered or tempered our ability to grow. So the improvement there allows us to not only grow -- we already think we can outpace the market, but that gives us more upside on top of that.

David?

David Strauss from Wells Fargo. So you highlighted one of the keys for outgrowing new platform wins. Can you just highlight what you view -- I'm sure there's some you can't talk about yet, but can you just highlight what you see as the key new platform wins that will come through? And when do you think that those really manifesting that time frame from '26 to '30? When do they really manifest in the number and maybe accelerate your growth relative to peers?

So many of them, I can't speak about specifically. They are undisclosed in many regards, but they apply whether we're talking business aviation and defense as well as applications that we're putting on newer OE platforms as well as introducing technologies that are displacing other competitors on OE platforms in the commercial air transport market.

In terms of entry into service relative to these opportunities, it can be anywhere from the late '20s timeframe, so think of '28, '29 and then moving into the early '30s. But most importantly is ensuring that we're positioning where we are investing in electrification, autonomy and safety, developing those innovative technologies in other end markets, certifying them, introducing them for low risk in anticipation for what's going to be necessary for next-gen single-aisle and that competitive landscape that's in the future going forward.

Maybe one thing to add to is if you think about Defense and Space, a lot of conversation about multiyear framework agreements and the like, missiles and munitions. Some of that, we would expect maybe late '27, but those are 7-year agreements. So those have a long, long tail. But earliest end is probably in the latter half of '27. But again, that then extends into the mid-2030s.

Seth?

Seth Seifman from JPMorgan. Just wanted to dig in with an additional question on the end market outlook. I guess, if we look at a year ago-ish in Paris, I think the outlook for commercial OE has come down somewhat. Outlook for the aftermarket has gotten a little better and the outlook for defense is kind of the same. I guess, if I thought about it, I might have thought that defense had gotten better over the past year. And so maybe is there a reason why that hasn't improved? And then, with regard to the OE and aftermarket, I think when people think we're kind of in the midst of a very long OE cycle here and kind of why that growth rate came down. And then for the aftermarket, what kind of retirements you expect to underlie that growth rate that you have?

Yes. So I think as we've indicated, mid- to high singles for commercial OE I think it is in line with what we see in terms of the ability of the commercial OE customers to be able to ramp as they look across the entire supply chain that is required to be able to produce and ramp those aircraft accordingly. So it's pretty more mathematical and formulaic in terms of being able to determine that, and it's really going to be dependent upon how they grow accordingly, and we are aligned because we have the visibility into their production plans on a go-forward basis, not just for current year, next year, but on a 5-year horizon for sure, relative to that.

We still see strong growth in the aftermarket, commercial aftermarket. And an element behind that, that is important for us, and we talk about this all the time, is our retrofit, mods and upgrades and capitalizing on the fact that we can go in and introduce new technologies, new innovation, increase the reliability and efficiency and add safety into those existing platforms. I think it's also an element that's an added kicker into our ability to be able to grow in the commercial aftermarket side.

The Defense and Space, I mean, it is an element. There is substantial funding that is going into that realm, both in the domestic and on the international front. What I would say is that we've taken a little bit more of a conservative view. We do recognize that there are substantial hurdles that still need to be overcome in terms of budgetary requirements and the like, congressionally speaking. And so we've actually taken a little bit of a conservative view.

But then again, we also fully understand exactly where we are positioned, how those budgets are aligning, what does it represent in terms of our content on said platforms, similarly on missiles and munition programs that Josh was mentioning a moment ago. All of it is done with a view because you've gotten to be so integrated with our OE customers in terms of what their plans are and then similarly now the visibility that we're getting out of the Department of War that allows us to be able to frame those type of growth rates for the business.

Seth, maybe one thing just to add on the aftermarket side is business aviation has been really resilient. Like we -- even in a year like this with some of everything going on in the world, we're actually seeing flight hours move up. And we see strong, strong aftermarket activity from business aviation. So that exposure for us is different than many, and that also helps from -- to remain or keep that buoyancy in aftermarket.

Noah?

You've talked about the challenge of being able to, inside of the conglomerate, invest as much as you want and with the efficacy that you want. I guess, if we look at the last kind of decade or just current gen versus prior gen, was Honeywell a share gainer or share loser? And in the places where there was a minus, are there a handful you could highlight that you really want to attack now?

So for us, the unlock that really happens is really around a singular strategy and a singular mission for a pure-play company. As part of a conglomerate, and if you look about the various divisions within Honeywell today, our strategy was differentiated from the other strategies of the other businesses. Our root cause of issues, where we needed to capitalize the organization, was very different than the other parts of the organization.

So ultimately then as Honeywell, as Honeywell is making decisions around capital deployment, you end up a little bit in a suboptimized realm in terms of how you want to allocate that capital to meet the needs of the various businesses going forward. So for us, that big unlock is that we're going to have one mission, one strategy, one focus, one purpose-built management team. Every single one of my leaders with the exception of one that runs our commercial aftermarket business, who you'll hear from later today, they all sit within 150 feet of me.

We are all centralized in our ability to be mission-centric and focused in executing the strategy and driving shareholder value ultimately. And that unlock around how do we want to deploy capital is not then going to be subpar across the businesses because all the strategies are single-minded and single-focused on one desired outcome.

Ken?

Ken Herbert with RBC. I wanted to see if I could just follow up on the question earlier. If we look within commercial OE versus aftermarket, can you talk about the growth and the assumptions on pricing between those 2 markets, if they're the same or where you're seeing differences? And then maybe, Jim, just to drill down on the RMU opportunity, can you give us any data maybe around how many new products or opportunities you're bringing to market maybe this year or expect you next year, maybe how that changed from a few years ago to just help frame that sort of opportunity for us?

You hit on price. I'll take RMU. You want to do that?

Yes.

Yes. I'll hit on the RMUs, and Josh will address the pricing aspect of the commercial OE and the commercial aftermarket. What I would say is 10% of all of our organic investments that we do are centered around the development of retrofit, mods and upgrades. Now, that number has increased as of late versus what we had seen in prior years.

On any given day, there can be up to 30 to 40 different products that are out there that our sales team is developing and/or selling and demonstrating value prop to customers for incorporation onto their aircraft and into their fleets. That is a cycle, however, to be very clear, that is a cycle that's about a 3-year cycle. You kind of get -- you introduce a product, you have about a 3-year window upon which that product will be introduced onto an aircraft, and then, you got to be into your next product going forward.

So that is like an innovation fly machine for us, where we're constantly innovating, constantly developing new technologies, addressing the needs of our customers and driving tremendous value for them going forward. On any given day, we're developing 20 to 30 new ones and 40 in the flywheel of that innovation machine going forward and whether that's going to be commercial or transport applications, business aviation and/or defense applications as well. And so what we have to do, though, is we identify an issue, we identify a concern, we identify a problem statement, work intimately with the customers to understand what is the value that can be created and what is the ROI for you as a customer that makes sense.

In the commercial or transport market, that ROI has to be 18 months or less. So when we look at the value of what we can bring, ultimately, then that drives the adoption rate across the board. And we don't look forward, we don't anticipate and we don't define success as 100% adoption of an RMU onto a particular platform for a particular group of customers. If we can get to 2/3 adoption, we're happy with that across the board, right?

And so as we continue, again, that's that innovation flywheel that we have to constantly be innovating. And the nice element around that, that adds value into the organization is that culturally, you have to innovate to create this RMU engine. And culturally within the engineering organization as part of Todd's group and a part of the business leaders group, that culture of innovation and speed ends up driving itself into the rest of the businesses as well in terms of new product development, even if it's not for an RMU.

Yes. Ken, maybe to follow up on your question on price. Certainly, we've come through a period of high inflation, right? And that's put pressure on margin for us over the last few years. As we think about price, certainly, we've -- the teams have been working, and we want to recouple and go forward. How do we get closer? How do we close some of that gap that we've seen over time? Now, where does it come from, which is kind of the root of your question? Where do you get that?

It's a little bit different OE versus aftermarket, contractually, what can we do? So we've probably seen a little more of that come through aftermarket. But as we have those opportunities, we're going to continue to work to try to close some of the gap that's occurred over the last few years as it relates to the inflationary pressure, whether that's pure inflation just coming through post-pandemic or things like tariffs or other things that have driven higher input costs.

Myles Walton, Wolfe Research. Can you talk about the margin opportunity by segment? You talked about EBIT growing faster than the top line, but you didn't talk about it opportunistically by each of the segments. And then, just based on the end market buildup, are you suggesting ES is slowest of the 3 growth just because it has the highest proportion to defense as an end market?

From a margin perspective, I think we see margin potential and increase in across the businesses. So I wouldn't say it's necessarily skewed to one individual business. I think a lot of the things we're talking about that drive margin for us benefit all of our businesses. ES has a little bit less aftermarket just given kind of their mix, but we see tremendous growth in that portfolio.

Nav and Sens, Bob talked about nav and sens, where we see tremendous growth, and that's been very good business for us, strong margin as well. So, I wouldn't say it's outsized to any 1 of the 3. I think we expect improvements across them and particularly just driven by what unlocks it is not unique or -- it is more ubiquitous across all 3 of the businesses.

And in terms of growth across the 3 businesses, we don't anticipate one business outgrowing another business proportionately at some level that looks a little odd. I mean, they are all -- all these products are on the same platforms going forward, a lot of synergies across the technologies that we're developing across those same platforms. It may ebb and flow quarter-to-quarter within the year. But if you look at it on a long-cycle horizon, which this business is, it's a long-cycle business, you would expect all 3 businesses over the horizon of a long cycle to be growing within 1% or 2% of one another on that horizon, regardless of whether they're primarily a commercial business or have more defense content versus another portion of the portfolio.

I think that's a good place to leave it for now. But as a reminder, we'll have more Q&A at the end of the session. This is now time we're going to take a 15-minute break. Before we do that, I want to make one comment to folks on the webcast. We're aware of some of the challenges our webcast partners having with the performance. We're going to continue to work on that. Thanks for your patience as we work towards getting a great outcome for those not in the room. About 15 minutes here, and then, we'll start back up. Thank you very much.

[Break]

Please welcome back Chief Executive Officer, Jim Currier.

All right. Welcome back, everyone, from the break. Before we get started with the regular programming, which we're going to bring up Anthony Florian to talk a little bit as he runs our commercial aftermarket, that portion of Honeywell Aerospace.

I think all of you know since I came into the role back in August of 2023, that I am absolutely obsessed with customer partnerships and customer trust. And so part of that has been spending a significant amount of my time since coming into role with customers, hearing directly from my peers, their sentiment about Honeywell, what we can do together to build partnerships, stronger, longer-lasting partnerships, and of course, that element of trust, which is of most important concern.

So what you're going to hear today are going to have 2 videos to show you. One of them is an engagement that I had with Éric Martel, who's the CEO of Bombardier. Then, we'll have Anthony come up and do his portion on the commercial aftermarket. And the second video you're going to hear is a conversation that I had with Florent Massou, who's the Chief Operating Officer with Airbus. It kind of gives you a flavor of how we are building, how I am personally building relationships with customers because that is, again, as I've mentioned, core to what I believe in terms of success, not only for Honeywell Aerospace, but success for our customers as well.

So if we can roll that video, I'd appreciate it. Thank you.

Gentlemen, maybe let's talk about the relationship between the two of you.

I'll let you start.

It's been amazing. Jim and I have, for all kind of reasons, connected, I would say, day 1, trust is important in that business. It's a big world, aerospace, but it's a small world. We all know each other, and having a partner that you can rely on is very important.

There's no better way to start establishing trust and spending time together. And I think about the criticality of a CEO to CEO relationship is the message that it sends to our collective organizations. And that gets reflected down into an organization. And that just creates a win-win across the board for the partnership. So it's very, very important that CEO to CEO relationship.

I think it would be great for you just to share with us your vision for Bombardier.

It's been a unique moment in time in business aviation over the last probably 5, 6 years. Our customers are people that are flying all around the world. So they need that capability of being able to move around faster. So people are expecting to have the same performance on their computer or doing a video call that they have in the office on the plane. So they would really engage with us to make sure that they have the last technology, what is the fastest, most reliable technology. So those have become very important points. And we made those technology innovation available as soon as possible. So there would be improvement on a yearly basis, as an example, those days.

It's a more global business. It was very much concentrated in North America before, but Europe has become significant. Middle East is growing despite everything happening today. We've seen the hours of flying increasing like by 60% over the last 5, 6 years for every platform, which makes our business also very -- attractive also for the in-service support that we have to provide all these airplanes.

The market really has changed dramatically. The demographic has completely changed, I think, with the business traveler now flying on a business jet. I think it's become much more personal as well and a recognition of its truly enhanced safety and capability of the aircraft. And I know that's foundational from Bombardier that across the board, safety of paramount importance. It's the same for us. But I think also when you think about newer technologies that are coming on, anything around efficiency and improvements because ultimately, driving down operational costs is also a major factor. And I think that's where we've been able to partner greatly in terms of driving that capability and bringing it into the market together.

So that maybe transitions us to talk about the landmark agreement between the 2 companies.

Technology is very important for the ultimate customer that are flying these planes. But I understand what they need, what they want and translate it into new technology development. It gives direction also to our R&D team on both sides to say, this is something important that matters to the customer.

There was a clear recognition that the direction that Éric is taking Bombardier, technologically speaking, with this aircraft and what we have been investing in that there was truly an opportunity to bring that together. There's something really special here that we can do together between the 2 companies and introducing this technology onto the transformative plans that Éric has going forward.

So Éric, maybe let's talk about performance that the customer expects in the future.

I think more and more environmental footprint is going to be important. We know that this is a challenge we're all working on together. We spent Bombardier quite a few -- a big portion of our R&D money on reducing the footprint and everything. And of course, this is in a relationship. People will look for more fuel efficiency, better safety, better enhanced safety. And I think we're working with the authorities, whatever if it's in Europe or in the U.S. or elsewhere in the world to make our airplane always safer. I would say on the more operational front also, fleet operator have become -- they need the airplane to turn faster. This is how they make money. The airplane needs to be available to fly. They don't want the airplane to be in a maintenance center.

It's truly a differentiator that Bombardier provides in terms of that customer service that they provide to the owners and operators of their aircraft. This is really something that you've transformed over the last few years and widely recognized in the industry as such. So combining all of those together ultimately provides that customer experience and the customer knowledge around the safety of the aircraft that becomes vitally important.

That's it. Those are all my questions.

Thank you and awesome. Great job.

And I thank you so very much.

Please welcome President, Commercial Aftermarket, Anthony Florian.

Good morning, everyone. Thank you for being here with us today. My name is Anthony Florian. I'm the President of our Commercial Aftermarket. I've spent the better half of my 15 years in commercial aerospace leading businesses, navigating cycles and developing a deep understanding for what operators truly need to keep their fleets performing.

As you've heard today, Honeywell Aerospace has strong positions with differentiated technology across the commercial market. These operators are amongst the most sophisticated in the world. They manage complex global fleets. They know their cost of ownership down to the component level, and they choose their partners with extraordinary rigor. Earning that trust takes years and keeping it takes even more.

Today, I show you how we expand our aftermarket reach and why Honeywell has built a business that is difficult to replicate. Our commercial aftermarket portfolio stands apart through its scale and breadth. With Honeywell Aerospace content on more than 65,000 commercial aircraft in service, we have broad exposure across platforms, operators and geographies, creating a durable foundation for recurring demand. That installed base supports aftermarket services over the full life of the aircraft and drives both growth and resilience.

In 2025, our commercial aftermarket business generated nearly $8 billion in net sales and delivered 12% in organic growth, reflecting on our ability to create value for the installed base effectively. Our global service footprint further strengthens our model. With 26 repair and overhaul facilities across Americas, EMEA and Asia Pacific, we can serve customers where they operate, improve turnaround times and support fleets consistently across regions.

Our more than 100 commercial air transport and 300 business aviation channel partner locations worldwide bolster our presence. Our installed base, technical expertise and global support network position Honeywell Aerospace as a trusted aftermarket partner with durable, high-value growth opportunities.

Our strategy to drive value is focused on 3 priorities. First, commercial aftermarket is an attractive end market where we're able to innovate and create value for customers with high-value offerings. As platforms stay in operation for extended periods, demand increases for traditional aftermarket support. It also drives the need for solutions and service life extensions that improve performance and reliability of an aircraft.

Second, we're focused on differentiated new technology for our installed base. Our focus on product innovation creates RMUs that enhance safety, connectivity, efficiency and life cycle value for our customers. RMUs are an important part of our portfolio, contributing roughly 10% of net sales across all of Honeywell Aerospace when combined with our defense RMU portfolio and growing at an 18% CAGR since 2021. By developing new products that are designed to be further enhanced over time, we can continuously offer solutions to improve customer outcomes and increase sales throughout the life of the aircraft.

Third, we're strengthening our operational capabilities across our global network by expanding MRO capacity, broadening channel partner networks and advancing our digital service tools. Together, these actions will improve responsiveness, reduce turnaround times and make it easier for customers to access the support, data and service capabilities that they need.

Rising aircraft utilization has driven strong demand across the commercial aftermarket. Two key trends highlight that momentum. First, global revenue passenger kilometers, or RPKs, are growing at mid-single digits, driven by rising mobility, urbanization and the expansion of the global middle class, which supports higher aircraft utilization. While near-term growth has moderated due to geopolitical events in the Middle East, the long-term trend remains attractive in a market with proven resilience.

In Business Aviation, total flight hours have grown at a 6% CAGR since 2019. One of the key drivers of that growth is the expansion of fractional ownership with operator flight hours in this subsegment growing at a double-digit CAGR or nearly doubling since 2019. Growing fractional utilization is contributing to rising demand in the super midsized category where we have a greater share of content.

Our aftermarket business has balanced exposure across commercial end markets with strong positions in commercial air transport in wide-body, narrow-body and regional aircraft as well as in business aviation. That breadth creates substantial opportunity to generate value over the lifetime of the fleet. What makes that opportunity especially attractive is the nature of our products. Our technologies are deeply embedded in platforms operating in one of the most rigorously certified environments in the world.

Many of the aircraft platforms we support remain in service for decades, up to 50 years in some cases. Our content -- once our content is installed, our aftermarket services generate recurring demand for parts, repairs and upgrades and continuing ongoing support.

We capture value through a few key aftermarket service models. The first is spare parts, roughly 30% of our aftermarket revenue, where replacement components are used to maintain aircraft safety, reliability and operational availability. Next is repair and overhaul, which represents nearly half of our aftermarket revenue. This includes services at both Honeywell Aerospace-owned facilities and authorized channel partners, providing repair capacity, technical expertise and customer choice that improves outcomes for operators.

Our repair and overhaul offerings are supplemented by licensing and other services. RMUs provide an additional growth vector that is decoupled from flight hours. And finally, used serviceable material or USM provides -- improves parts availability through OEM certified and reconditioned material, helping customers to reduce cost and turnaround time. Overall, we have a comprehensive aftermarket business model focused on delivering recurring high-value revenue over the decades to come.

On the next slide, we'll highlight the distinct yet complementary difference between our electronic and our mechanical aftermarket models. Electronic products typically generate stronger upfront economics with aftermarket revenue driven predominantly by licenses, software and upgrades more so than physical maintenance. Over time, customers require ongoing updates to enhance functionality, maintain compliance and extend product relevance. This creates an upgrade-driven aftermarket stream that develops earlier in the product life cycle.

Mechanical products have a different profile, generating more recurring revenue through ongoing parts replacement, repair and overhaul activity. Because these systems are subject to wear, servicing intervals and replacement cycles, they naturally create predictable aftermarket demand over time. In mechanical systems, RMUs are typically focused on extending asset life, enhancing performance, maintaining compliance and adding new capabilities over time. As a result, the revenue profile is more maintenance-driven with strong durability and predictability that complements the service cycle in electronics.

Taking a closer look at RMUs, which you've heard plenty about today, we see a meaningful opportunity to create value for our customers and supplement our sales with growth that is decoupled from flight hours. RMUs offer shorter payback periods and align well with current operator focus on platform longevity, safety, efficiency and reliability. They also support airworthiness regulator safety mandates such as our 25-hour cockpit voice recorder. Our Develop once, Deploy everywhere strategy enables us to expand certifications across more aircraft platforms, which broadens the addressable market for our proven offerings.

In addition, we're accelerating customer-led new product introductions so that we can bring right capabilities to the market faster and support adoption more effectively. The examples here reflect that approach, whether it's enhanced cockpit capabilities through Primus Epic Upgrades, improved power and greater fuel efficiency through the 131-9A APU or upgraded longevity from the LEAP air turbine starter. Our RMU offerings position us to outpace overall aftermarket growth for years to come.

Beyond RMUs, we continue to expand our aftermarket capabilities to support above-market growth and are increasing services to capitalize on market expansion. As an example, we expect APU flight hours on the A320neo and the 737 MAX fleets to grow at an 18% annualized rate through 2030. At the same time, we're also expanding initiatives around supply chain improvement, provisioning and digital capabilities that are decoupled from the growth of the fleet. Our go-to-market strategy leverages multiple service models to meet demand in a capital-efficient manner and increasing our proprietary content and data-enabled services.

Lastly, we're building differentiated capabilities in USM to improve parts availability, reduce turnaround time and give customers a cost-effective OEM-certified option. Our aftermarket strategy is deliberately built around the needs of each end market, direct where it creates the most value, channel-led where it improves reach and responsiveness and supported by enhanced MRO capabilities that drive long-term high-margin growth.

To summarize, Honeywell Aerospace is poised to drive consistent aftermarket sales growth. We're a trusted partner against -- across 65,000 aircraft in service with an installed base that generates durable value through parts, repairs and services over decades of aircraft operation. Looking ahead, we're focused on expanding our robust capabilities to grow faster than the market, adding to a foundation that took decades to build and cannot easily be replicated.

Thank you again for joining us today. Have a great rest of the day.

Today, I'm joined by Jim Currier, CEO of Honeywell Aerospace; and Florent Massou, Chief Operating Officer at Airbus. We want to spend some time talking about the long-term relationship between our 2 companies, where the industry is headed and how we're working together as partners to drive the future of flight.

It works well when the relationship are trustful, very close -- being very close to each other and understanding each other's constraints.

To be able to have that trust and then just work in a very open manner, I feel incredibly honored to be able to have that kind of relationship and openness with Florent.

As you both look towards where the industry is headed, how are trends like electrification, autonomy, more integrated systems influencing that next generation of aircraft?

What we need to make sure is to make a real breakthrough in terms of platform to bring more value to our customers, have more safety and then to onboard how many innovations as we can in a very dynamic world.

It really has to be a compelling case around efficiency. All of these elements, all of these different technologies will be enabled by introducing and that efficiency by introducing electrification, autonomy and digital technologies of integrated systems on the aircraft. And I think these tools will be able to drive that efficiency and cost reductions. And as we've collaborated on technology, that's an area where both companies are looking very closely at.

How do you both see aerospace partnerships in the industry developing going forward as we move into this next phase of growth and technology development?

When we develop an aircraft with key suppliers, key partners like Honeywell, we do it for the long run and building progressively a shared view of what will be beneficial for Airbus and for our partners for Honeywell for the future.

It's a full value chain partnership, which is different than prior periods. I look at it as a completely different relationship than just being a technology partner, but now, it's become industrial partnerships that have been developed between the 2 companies as well, particularly over the last few years.

As both companies continue looking towards that next generation of aircraft, how do trends like safety and operational improvement shape those conversations?

Safety is foundational, and it's the crucible of how we operate within Honeywell Aerospace, and I know how Airbus operates as well. It is foundational. It is part of every conversation.

I think there is no rest on the safety front. I'm trying to find each and every angle that can improve the safety of flight and more globally the safety of the ecosystem.

Safety is inherent across any aircraft design of today and clearly aircraft of the future and bringing those technologies and working together with a company like Airbus to drive that safety enhancements across the aircraft.

And we want to generate the maximum value for our companies, but also to share the value properly between Airbus, Honeywell and our airline customers.

With AI, sustainability and efficiency increasingly influencing the industry, how do you see those priorities impacting next-generation aircraft?

The beauty of our business is that by getting more efficient aircraft, actually, they are much more sustainable as well. So the efficiency point of any new future platform is of essence. And that means lighter aircraft, more technology, more efficiency on the way they flight, less fuel consumption. And in a world where we see scarcity of materials, scarcity of many different elements, I think we need also to work the talk on the topic and bring evolutions on our product portfolio that will really make a difference.

Florent, as Honeywell Aerospace moves forward as an independent company, what gives Airbus confidence in the long-term partnership and the future opportunities we have together?

I think when I look at Honeywell as a stand-alone company, for me, it brings different benefits. The first one is that Airbus will be between 15% and 20% that will represent -- we will represent 15% to 20% of the revenues of the civil market of that company. So when we talk about partnership, there is no success of Honeywell and Airbus without being strong on our foundations to drive this partnership, but also to properly drive the good value chain between the different stakeholders. And that remains a key element because that will be based on a trustful partnership, strong understanding of what matters for Honeywell, for Airbus and what will drive the future success.

Jim, Florent, thank you. What a great discussion. Really appreciate the insights and the perspective on where the industry is headed, and of course, the continued partnership between Honeywell Aerospace and Airbus.

Welcome back, Bob Buddecke.

All right. Thank you. I could not be more excited to introduce this next segment. I could almost go as far as saying I'm over the moon, but you'll know in a moment what a bad pun that was. This past April, Artemis II completed its successful crewed flyby around the moon, the first time humans have traveled that far in more than 5 decades. It was an incredible milestone for the nation and an inspiring reminder of what is possible when advanced technology and trusted partnerships come together. For us at Honeywell Aerospace, it's also deeply meaningful.

Our technology has been part of every U.S. manned space mission since the dawn of the space age. And while our space portfolio is much broader today, that legacy of reliability and innovation remains at the core of who we are. The video you are about to see offers a great recap of the Artemis II mission and highlights some of the ways Honeywell Aerospace contributed. I'm proud of the role we play, and I hope you enjoy the look back.

[Presentation]

Please welcome President, Defense and Space, Matt Milas.

Well, I think that's the most exciting video of the day, and it's my pleasure to talk to you about the most dynamic end market that we're servicing. So I'm Matt Milas, the President of Defense and Space or D&S for short.

Over my career, I've had the opportunity to work at 6 leading aerospace companies before joining Honeywell Aerospace. My broad industry experience, spanning a variety of roles and functions, affords me a unique perspective into how much opportunity lies ahead for our business. Over my 3.5 years leading D&S, we've accelerated growth, and we expect to continue that trend, thanks to the team that is driven to support our customers' toughest missions.

Defense and Space has many of the same advantages you've heard over the course of the day, mission-critical content, long platform lives, deep customer relationships and new development and upgrade opportunities. Our D&S business is built on a foundation of decades-long franchises with a strong legacy in navigation, power and thermal management, engines, power generation, electronic warfare and advanced controls. These capabilities are critical to all aspects of national security and position Honeywell Aerospace to support evolving global defense priorities.

D&S is a scaled, growing and strategically important part of Honeywell Aerospace. In 2025, we generated over $7 billion in net sales, delivered 9% organic growth and represented 41% of Honeywell Aerospace revenue. We support hundreds of platforms across the Defense and Space ecosystem, giving us broad exposure to aircraft, rotorcraft, missiles and munitions, space, land and maritime applications.

We also have a meaningful and differentiated international exposure with international sales contributing approximately 30% of direct commercial sales. That reflects our global customer base and rising demand for localized sovereign defense capabilities. Finally, Honeywell Aerospace has critical and expanding content on 11 of the major 12 U.S. missile platforms as identified by the Munitions Acceleration Council, a focus area of the current administration. These metrics reflect a business with significant scale, strong momentum and durable growth opportunities aligned with industry trends.

Our strategy to create value in Defense and Space is focused on 3 priorities. First, Defense and Space offers very attractive markets for Honeywell Aerospace Technology. We are well positioned to work with the countries around the world that are modernizing defense capabilities, increasing readiness and investing in next-generation platforms.

Second, we're investing in differentiated technology platforms. As a Tier 1 supplier in the defense market, a core advantage for Honeywell Aerospace is our ability to leverage commercial technologies and adapt them to the unique defense applications. That allows us to move faster and invest efficiently, providing core solutions to both traditional primes and nontraditional new entrants.

Third, we are strengthening operational capabilities to unlock further growth. We are aggressively expanding capacity to meet highly visible demand in missiles, advancing localization in Europe and building export capabilities for international customers. As you've heard today, our model is differentiated by our ability to develop technology once and deploy it across many markets. We have common technologies that serve Commercial Air Transport, Business Aviation and Defense and Space. Precision navigation is a good example.

Our ring laser gyro technology provides high accuracy inertial sensing built on common production lines, and that capability is relevant across all domains and customers. The same is true for APUs, air and thermal management, flight control solutions and connectivity. These systems may be adapted for different mission profiles, but the underlying technology and infrastructure is shared.

That creates 3 benefits. First, it improves our return on R&D investment because we are not developing capabilities for a single application or customer. Second, customers depend on our core technologies with proven performance and manufacturing scale. Third, because these core technologies were commercially developed, we have favorable contracting, especially for international markets.

For Defense and Space, this agile approach aligns closely with the Department of War acquisition transformation strategy that brings high-value solutions to warfighters faster. It's a powerful combination of manufacturing scale, dual-use commercial technology and accretive economics fueling sustained growth. Deploying commercial innovation means our content is extensive across a wide range of platforms. On aircraft, our products span all 3 segments, and we continue to upgrade these products over the long life cycles of these programs.

A major upgrade across the installed base is the deployment of M-code anti-jamming solutions for navigation products with over 40 upgrade programs underway globally. We are leaders in the technology that secures and expands our position for existing and new programs. The same breadth applies to missiles and munitions. We support critical programs with guidance, navigation, inertial measurement, radio frequency, telemetry, radar altimeter, actuation, attitude control and control cards.

The key point is that our Defense and Space business is not dependent on a single product, platform or mission area. We have diverse high-value commercial content across all domains with multiple pathways to accelerate growth wherever it's happening.

Speaking of accelerated growth, international defense is the fastest-growing part of our business and an area of differentiated strength for us. Our international defense sales have grown at a double-digit CAGR from 2020 to 2025, and we expect continued accretive growth through 2030. In 2025, we secured more than $2 billion of direct international wins. This momentum will continue due to several fundamental changes in the global defense market. Countries are building up domestic defense industries in response to shifting geopolitics, and they need proven technology at scale, something we provide to their OEMs.

We are not competing with local industry. We are supporting their growth. The areas receiving the most investment, missiles, fighters, trainers and unmanned systems align well with our portfolio. We are also advancing our localization strategy with presence and partners. Civitanavi, which we acquired in 2024, expands our European footprint and strengthens our high-tech navigation portfolio for global export. We have over 1,000 engineers in the Czech Republic and a second engineering hub in Poland. We have significant international manufacturing and engineering capabilities across the EU, U.K. and India, supported by a dedicated international defense sales force.

We also have in-country partners we've been working with for several decades that build local presence in countries like Japan, South Korea and Singapore. That local presence matters as customers prioritize sovereign capability, domestic production and long-term sustainment. There are also significant U.S. defense opportunities, particularly with an increased emphasis on new layered defense systems like Golden Dome. These systems will leverage existing programs we are currently supporting and new systems that will depend on our core technology.

We are well positioned with our scale, delivery of commercial solutions to all OEMs, both traditional and new. Opportunities span several layers and present a strong indication of growth ahead. Investments are being made to develop the space layer, and we provide space-qualified sensors, navigation and radiation-hardened electronics for satellite constellations. This is an evolving multi-domain opportunity that aligns directly with our differentiated core technologies.

Missiles are the clearest example of robust growth that needs the scale that Honeywell Aerospace can deliver. Global demand is at record levels, driven by escalating security challenges and demand for precision-guided munitions. We have extensive content on more than 50 international missile programs. Not only are we in the exquisite programs working with Lockheed Martin and RTX, but we have strong positions with nontraditional providers like Anduril using our commercial technology and industrial expertise to design and produce affordable solutions at scale. So you might ask, where are we seeing this growth? Everywhere.

First, we have the leading precision navigation technology for tactical and strategic applications, including new fiberoptic gyroscopes from Civitanavi. Second, we have complementary electronic warfare and seeker capabilities from the CAES acquisition that expands our position on franchise missile programs. Third, we are in the top priority missile programs, which are seeing expansion of 2 to 4x, and we have growing roles on strategic programs such as Sentinel. Finally, upgrades with Assure and resilient navigation provide for new extended range and GPS-denied environments.

We recently announced a long-term first-of-its-kind U.S. Department of War framework agreement that supports capacity expansion and provides unprecedented multiyear demand visibility. With $500 million in capital deployed over the next several years, we expect revenue from these programs to exceed $6 billion. Our commercial model flexes across multiple markets and makes us a strong partner for the DoW.

GMLRS is a great example of how Honeywell Aerospace has broad content on high volume of international missile program. Our guidance set is the core navigation system for both standard and extended range missiles. We also provide navigation and pointing capability for the HIMARS and M270 launch vehicles, where we replaced the incumbent in 2021. This critical content for launching performance aligns with our missile guidance systems, and production is ramping for both programs.

We produce control actuation for the extended range GMLRS variant, which doubles its range and our value. With an expansion underway to double the ER output, it will become a higher mix of the total production. Overall, we are capitalizing on the significant global missile demand with production volumes ramping and more international opportunities to expand global capacity and increase localization.

Beyond the explosive missile demand, we are well positioned for the next generation of combat aircraft that will shape the next several decades. Collaborative combat aircraft, uncrewed semiautonomous jets designed to fly alongside crewed fighter jets are an important part of that future. Our investments in advanced air mobility has positioned Honeywell Aerospace as a key partner in autonomous platforms because we can bring off-the-shelf commercial systems and nontraditional defense contractors with scalable architectures and production-ready technologies. These platforms require affordable modular engines built for rapid production and mission flexibility.

The SkyShot 1600 and HON6000 are designed for that market, reliable, efficient, modular and scalable across multiple platforms, both in the U.S. and internationally. We are also positioned for sixth-generation platforms. These aircraft require advanced flight management systems, resilient navigation, efficient cooling, digital electronic warfare and modular APU technology. Those requirements align closely with our internal R&D priorities and our portfolio breadth across all 3 segments.

RMUs are another important decoupled growth vector in Defense and Space. They fuel mission readiness, create additional capabilities for the installed base and support modernization for legacy platforms with strong international traction. The opportunity here is straightforward. Defense platforms remain in service for long periods. Customers need to improve performance, resiliency and readiness over time. That creates recurring opportunities for customer-funded upgrades across our franchise programs.

The example on this slide show the breadth of the opportunity. Proprietary precision navigation upgrades support third-generation military GPS and provide greater resiliency. First fielded more than 6 decades ago on the Chinook, the T55 engine upgrades provide greater power, improved fuel efficiency, enhanced reliability and more sustainment options.

Our advanced actuation for ESSM Block 2 increases maneuverability and agility, improving the ability to intercept maneuvering targets across the globe. These RMUs align with customer priorities of mission readiness, platform life extension and modernization without fielding entirely new platforms. Pulling this all together, we directly align with the Department of War acquisition transformation efforts to accelerate technology to the warfighter by leveraging commercial innovation for Defense and Space.

We have a strong multi-domain and global installed base that creates significant RMU opportunities. Our portfolio is aligned to the fastest-growing global defense priorities and next-generation architectures, including missiles, unmanned systems, sixth-generation platforms, core space enablers and integrated missile defense. With a strong backlog with both traditional and new OEMs, expanding international demand, mission-critical content on hundreds of platforms and a technology portfolio built around the areas where defense spending is moving. Honeywell Aerospace is well positioned to deliver attractive growth in Defense and Space.

Thank you for your time.

Welcome back, Josh Jepsen.

You've heard today about the attractive end markets that we serve and the compelling opportunities ahead. We believe that our differentiated technology and systems provide a significant competitive advantage that creates the potential for sustainably attractive growth for the years ahead. In addition, you've heard about the work underway to build an integrated end-to-end supply chain enabled by the Honeywell Aerospace Operating System, which will unlock top line growth, margin expansion and free cash flow.

I'll begin with our recent performance, then walk through how that momentum carries into 2026. And finally, I'll cover how that execution supports our confidence in our 2030 targets and value creation for all Honeywell Aerospace stakeholders. At its core, the business offers significant underlying demand visibility, and we are executing our strategy with increasing financial flexibility as a stand-alone company, which will accelerate our financial performance as we reach the end of the decade.

Starting with our recent financial performance. Over the past few years, we've delivered consistent growth with an ability to convert that growth into high-quality earnings and free cash flow. Since 2023, sales have grown organically at an 11% CAGR, reaching more than $17 billion. That growth reflects strong demand for our solutions, coupled with our ability to navigate industry-wide supply constraints to deliver for our customers. At the same time, adjusted EBIT has grown at a 9% CAGR to $4.5 billion or $4.3 billion on a stand-alone pro forma basis, demonstrating strong profitability despite inflationary headwinds.

Free cash flow grew faster than adjusted EBIT, resulting in a 13% CAGR. In 2025, we generated $3.3 billion of free cash or $2.5 billion on a pro forma stand-alone basis. Our ability to convert earnings into free cash gives us the flexibility to invest, to unlock growth, return capital and compound value over time. We expect solid performance in 2026, which is a foundational year as we become an independent company.

On a pro forma stand-alone basis, we're expecting organic sales growth of 7% to 9% and adjusted EBIT of $4.65 billion to $4.75 billion. On a stand-alone basis, as we spin, we expect free cash flow in the second half of 2026 to be $1 billion to $1.5 billion. The midpoint of that range is a good run rate as a base for future growth. This allows us, as a stand-alone entity, to take the actions required to set us up to both execute for the long term and reduce seasonality of cash flows to be more consistent throughout the year.

With tailwinds in all 3 of our end markets, this 2026 outlook is underpinned by our ability to deliver on robust customer demand through our supply chain and manufacturing footprint. On the OE side, production rates are improving, and our large backlog provides high visibility into our high single-digit outlook, supporting our high single-digit outlook.

In the aftermarket, air travel demand remains resilient. Airlines continue to invest in maintenance and upgrades, especially as older fleets stay in service longer. Additionally, business aviation remains consistent and resilient. All of this supports our mid- to high single-digit growth trajectory for the year.

In Defense and Space, we're seeing sustained momentum from higher global budgets aimed at increased sustainment and modernization priorities. We expect this end market to grow in the high single-digit range this year. Overall, 2026 reflects a strong demand environment with great visibility into the future.

Now, many of you may ask about 2Q. And as you know, we're 2 months into the quarter, and the third month tends to deliver about half of our shipments for the quarter. So it's still early. That said, we continue to expect mid-single to high single-digit growth in the quarter. As a stand-alone company, our financial priorities are clear, and they're designed to work in tandem with one another. First, we're driving above-market sales growth through continued innovation and supply chain unlock. We will continue to invest in new technologies to increase our content on current and next-generation platforms.

Second, we intend to deliver enhanced profitability with adjusted EBIT growing faster than sales over time with multiple levers to deploy. Our operating system is central to this. It's how we drive alignment, standardize processes, improve efficiency and ensure that, that growth translates into profitability. In short, we will leverage our heritage of executing the Honeywell Accelerator Operating System to tailor and enhance the Honeywell Aerospace Operating System, as we transition to be a focused aerospace company.

Our third priority is to generate robust free cash flow. This is driven by high-quality earnings, disciplined capital spending and active working capital management. Strong cash generation will allow us to execute a dynamic capital allocation strategy, giving us flexibility, whether it's to reinvest in the business, pursue targeted M&A or return capital to shareholders, all the while maintaining a strong investment-grade balance sheet. Together, these priorities position us to compound long-term value.

Longer term, our current momentum and strategy translate into a compelling financial trajectory. As Jim mentioned earlier, we intend to compound organic sales at a 6% to 8% growth rate with adjusted EBIT of at least $6.5 billion and more than $4 billion in free cash flow by 2030. These targets are supported by favorable tailwinds, the significant recent new platform wins that will come online in the next few years as well as investments and focused actions we're taking as a stand-alone company to strengthen and scale the business. This framework underscores our commitment to drive long-term value creation with sustainable, profitable growth and robust cash generation. These figures represent what we expect to deliver by 2030 at a minimum.

Clearly, we're driving to unlock more demand via improved throughput, which will expand our top line and result in higher levels of productivity in our operations, leveraging fixed costs and rooting out inefficiencies to deliver more margin. As we execute on this, we will see working capital improvements above what we have in plan today, leading to opportunities for further cash generation.

Before we get into these targets, I want to take a moment to highlight the robust market growth we're experiencing in each of our end markets in aerospace and defense. In commercial aerospace, we are in a sustained upcycle. Air transport production rates are increasing across narrow-body and wide-body platforms with deliveries expected to grow at a 10% CAGR through 2030. Business Aviation also remains solid, driven by favorable trends, including the rise of fractional ownership.

This robust commercial OE demand is supported by our own record backlog, giving us multiyear visibility. At the same time, global air travel demand continues to expand at a mid-single-digit rate, driven by population growth, urbanization and a rising middle class, particularly in emerging markets, as you heard Anthony discuss earlier. And while growth is normalizing in air transport after several very strong years post pandemic, we see elevated growth continuing as flight hours recouple to the long-term trend.

Meanwhile, Business Aviation flight hours are more than 20% above pre-pandemic levels with much greater resiliency compared to prior periods. As a result, there continues to be strong utilization of the existing fleet, supporting upgrades and maintenance of aging aircraft, all key drivers of aftermarket growth.

And in defense, you've heard this from Matt earlier, U.S. spending is expected to rise at a 5% CAGR through 2030 and international budgets at 7% CAGR over that same time, driven largely by ongoing modernization and rearmament efforts. When we put this all together, we see favorable end market growth on a blended basis of roughly 6% through 2030 based on our own end market exposures.

Importantly, our success is not reliant on a single growth driver as we benefit from multiple structural trends across the industry, each with long-term durability, supporting our confidence in delivering sustained attractive growth. Building on those market tailwinds, we see a clear path to compound our sales at a rate of 6% to 8% through 2030, implying sales dollars in the mid-$20 billion.

A key enabler is improved supply chain performance. And as we execute the priorities that Kathy outlined earlier, we expect to meaningfully increase output and convert backlog into customer deliveries. At the same time, we're expanding our global defense capabilities. The rising defense budgets I just mentioned around the world will drive strong demand for our portfolio, where we have established positions on critical platforms.

Importantly, Honeywell Aerospace also has leading positions in areas such as navigation systems and electronic warfare, which should expand well above budget growth. We're also accelerating the expansion of RMUs with increasing system complexity and more -- in demand for more advanced software and components, we are well positioned to deliver double-digit RMU growth with accretive margins.

In addition, we're increasing our content on current and next-generation aircraft and platforms. As Jim described earlier today, we've secured over $90 billion worth of wins over a 4-year period with landmark agreements that span multiple platforms across Business Aviation and Defense. Securing positions on these platforms strengthens our installed base, supporting both OE growth and future aftermarket opportunities.

While there are a few platforms in air transport where we have ceded positions on current generation aircraft compared to the prior, we are comfortable with those decisions and the choices to remain disciplined. One of the beauties of our approach to innovation is the resulting diversity of our platform exposures, which enables us not to become overly dependent on one platform or aircraft. It gives us lots of shots on goals to deploy our technologies.

Over the time period through 2030 on a net basis, our entire commercial and defense portfolio, we see improvements in our platform positioning given known wins. Taken collectively, these drivers support our confidence in this above-market growth outlook through at least the end of the decade.

Turning to profitability. We expect adjusted EBIT to reach more than $6.5 billion by 2030, which is a roughly 9% CAGR based off 2025. Importantly, we expect adjusted EBIT to grow faster than sales. As we continue to improve operating performance, convert backlog and ramp OE production, higher volumes will enhance fixed cost absorption and drive operating leverage, supporting margin expansion as the business scales. This effect will more than offset the anticipated headwinds from mix, as we deliver on our order backlog, which is much more heavily weighted to commercial OE and Defense and Space.

It's worth noting recent incremental margins have been burdened with supply chain investments, a majority of which has run through the P&L. Leveraging these investments over time represents a significant opportunity as we go forward.

Pricing also plays a key role. Following a period of elevated cost inflation, our commercial teams have taken actions to better align price with cost, which will contribute to profitability over time. Productivity, as I mentioned earlier in Q&A, is another really important contributor. Our ability to outperform top line will translate to benefits and productivity, not embedded in our current algorithm, so they represent upside.

Additionally, we see significant opportunities to invest in the business. Growth-enabling investments in our factories, in-sourcing, vertical integration, the supply base and new product introduction will lead to higher levels of depreciation, and at times, R&D. As a result, we do not expect a perfectly linear progression on EBIT dollars from here to 2030, as we invest in '26, '27 and '28. However, I am very confident that these investments will yield accretive returns.

Let me spend a moment on our commercial mix and how it aligns to our growth projections. Today, the business is weighted toward commercial aftermarket at roughly 3:1 ratio relative to OE. This reflects several factors. Structurally, parts of our portfolio, particularly mechanical systems like APUs or environmental controls, naturally generate greater aftermarket demand over their life cycle. For example, a narrow-body APU can generate more than 20x in lifetime MRO sales than its initial sale to an OE.

RMUs are a growing contributor and skew mix towards aftermarket as well, given they're less tied to traditional aftermarket cycles. Supply chain constraints have limited OE production over the past few years, which has further skewed mix to the aftermarket. As throughput improves and backlog conversion accelerates, we expect OE growth to strengthen. Combined with pricing more aligned to historical cost inflation, this supports profitability across the business.

Over time, we expect that 3:1 ratio to move to a slightly more balanced profile while continuing to benefit from strong aftermarket fundamentals. Importantly, as OE mix increases and put some near-term pressure on margin growth, it also grows the installed base and future aftermarket opportunities, which translate to long-term value delivery.

Turning to free cash flow, a defining strength of this business. In 2025, we generated $3.3 billion of free cash flow or $2.5 billion on a pro forma stand-alone basis, reflecting our earnings quality and disciplined capital management. Looking ahead, we see a path over $4 billion by 2030, which is approximately 10% CAGR, driven primarily by earnings growth with potential benefit from working capital efficiency. To that end, inventory turns have decreased in recent years, representing a significant opportunity to improve -- as we improve execution across the value chain.

We have not baked in significant working capital improvements given the challenges we've experienced of late. But as I mentioned, executing our strategy, aided by the Honeywell Aerospace operating system, will yield upside opportunities for cash generation. In the next 2 years, we expect growth investments to pressure free cash flow conversion below its natural rate, as we capitalize critical areas to deliver profitably on growing demand. However, in the long run, we expect free cash flow conversion of approximately 100% of adjusted earnings.

Moving to the next slide. Our earnings and cash flow strength will enable us to deploy capital as an independent company with discipline, flexibility and a clear focus on shareholder value creation. Let me walk you through our capital allocation priorities. Our first priority is reinvesting in the business to drive organic growth, including innovation and increased output. Our model is capital efficient with maintenance CapEx requirements around 1% to 2%. And on a go-forward basis, we'd expect total CapEx to be around 3%.

Second, we're committed to paying a competitive dividend and growing that dividend over time as our earnings expand. Our ability to deliver on this commitment reflects the consistency and visibility of our cash generation.

Third, we'll pursue disciplined bolt-on acquisitions that enhance and expand our technology capabilities and strengthen our positions in key growth areas.

And next, excess capital will be returned through opportunistic share repurchases, maintaining flexibility to act in line with market conditions and in the best interest of our stakeholders. This capital allocation framework is supported by a strong balance sheet. We expect to have approximately $16 billion of debt and $1 billion of cash at the spin, supported by investment-grade ratings from Moody's, S&P and Fitch.

Over the medium term, we're targeting leverage of approximately 2.5x, balancing financial strength, strategic flexibility and shareholder returns. Ultimately, unlocking value comes down to disciplined capital deployment and a focus on compounding returns over time. And we want to have the flexibility to be opportunistic while we execute on our priorities.

In summary, Honeywell Aerospace is a market leader in mission-critical, high-value systems across end markets. We have an extremely high-quality and broad portfolio as our Develop once, Deploy everywhere approach gives us a unique opportunity to serve markets in a differentiated way. And as a focused stand-alone company, we are well positioned to deliver above-market sales growth through continued investment in innovation, operational execution and expanded service capabilities. We expect adjusted EBIT to grow faster than sales with disciplined execution of the Honeywell Aerospace operating system.

And lastly, we will deliver strong shareholder value, underpinned by robust free cash flow, supporting a dynamic capital allocation strategy and an investment-grade balance sheet. Together, we are confident in our ability to deliver on these 2030 financial targets, 6% to 8% organic sales CAGR, at least $6.5 billion in adjusted EBIT and more than $4 billion in free cash flow.

Now, I'd like Sean and Jim to come back up for another round of Q&A. Thank you.

Again, audience participation is welcome at this point in the session.

Scott, please.

Scott Mikus, Melius Research. Jim, we've seen throughout the commercial aero upcycle, material and labor has been a little bit constrained, and that's created a natural tension between the airframers that depend on the OE channel for their profits and a lot of their suppliers that depend on the aftermarket. Boeing and Airbus, if they launch a next-gen aircraft program, say, within the next 5 years, how do you think the business model will end up changing? And how are you thinking about that as you lead Honeywell Aerospace?

From a manufacturing standpoint, the way we're looking at is we're focusing not only on innovation, but the focus is innovation, speed and scale. And that means we're looking at the entire way we manufacture our products going forward. So as we're thinking about next-gen products that are going to go on the next-gen single-aisle, the focus is really around manufacturability and how do you do that at scale going forward.

I'm very comfortable with where we are investing in the technologies across the board to position us in the most likelihood position to be actually selected on these platforms with our technology, but we're actually now doubling down and tripling down on the manufacturing at scale. That means designing slightly differently, innovating slightly differently. That's what we'll incorporate as part of that.

The business models may look very different as well. I mean, there's a very traditional business model that you see today, particularly on the mechanical side of the portfolio, where you tend to look at more of the longer aftermarket revenue stream, that maintenance, repair and overhaul. As Josh alluded to, on some of these units, it could be 20x what the value is of the OE transaction at the point of sale that occurs. Those business models may look slightly different going forward and where do you position the value within those business models and how do you drive that down into the ecosystem of the supply base or how do you partner with and you share that into the aftermarket. We'll maintain that financial flexibility in terms of how we look at it and where you share that value across the board.

Gavin Parsons, UBS. On RMU, you talked about double-digit growth through the end of the decade. I think previously, you said investing about 10% of your R&D into that category. I mean, are those directly correlated? Could you pull that lever more to accelerate that growth? Or are you kind of limited to those 30 or 40 products at once that you talked about?

Yes, we're not limited to the 30 or 40 products. And I think to add some clarification around that, when I talk about the life cycle of an RMU, from the point in time that RMU enters into service, you have about 3 years before you get to the adoption rate that you're satisfied with the investment that you have made, which means on day 1 that, that RMU entered into service, we're thinking about the next RMU that we need to go off and develop beyond that. So it's constantly innovating around these 30 to 40 RMUs that we have entering into the ecosystem to be deployed on aircraft platforms.

Is there an ability to do more? Ultimately, it's around solving customer issues, solving reliability, efficiency, addressing obsolescence, increasing safety, increasing pilot awareness in the cockpit, adding new other radar systems. I mean, the list goes on and on and on across the portfolio. And ultimately, it's what drives customer value. What's going to drive that ROI.

The ROI from an airline perspective is very different than the ROI expectations coming out of Business Aviation, the macroeconomics associated with an airline versus a corporate fleet operator or a fractional operator. So that's why we also maintain that level of intense customer intimacy to understand, here's the value we can bring, what is the ROI that is necessary for you to adopt said RMU onto your platform on a go-forward basis. And so the difference is the willingness to pay in terms of an airline operator as opposed to a biz jet operator and also in the defense segment because a significant portion of the revenue out of RMUs is actually in the defense segment, we've developed them commercially.

Noah?

Could you guys just spend a minute on the progression of the rest of this year, the specific supply chain issue that you had in the first quarter? When does that need to be resolved to have the acceleration in the back half? And maybe just talk about your confidence in the acceleration in the back half. And then, Josh, just a clarification, you mentioned something about the back half of this year's free cash as a run rate. Can you just specify -- is that dollars or growth rate? Or how did you mean that?

Yes, I'll start there. Noah, that $1 billion to $1.5 billion in the second half, we think that's a good jumping off point from where we go. The first half, there's a lot of noise, spin transaction related, but we think that's a good base point for where we go from here in absolute dollars.

Yes. And from confidence in terms of delivering on the full year, we don't -- we focus on full year deliveries across the board. We're not myopically focused on a singular quarter because this is an exceptionally complex supply chain. The issues encountered in Q1 that we've spoken about at length, it was really an acute issue, and we saw momentum in March coming out of the resolution of that issue and the continued resolution of it carrying forward into the second quarter as well. And we anticipate that trajectory to continue on. So it gives us confidence on a full-year basis and our ability to deliver the numbers that we talked about as part of our outlook.

Matt?

Matt Akers from BNP Paribas. Josh, in your section on growth, you talked a little bit about the one headwind there of the sort of content on next-generation aircraft. Can you talk a little bit about what specifically is in that? How big of a headwind is that to overcome sort of when the timing is of when that would hit?

Yes, we see that. We haven't quantified exactly what that is, but there's impact there, and it really happens here from -- here as we go to 2030. But the combination of new wins that will begin to come online, some of the things we've got going on in other parts of the business, we expect that net change in terms of wins offset by some of that mix that comes through. It's still net positive as we work through this time period. So likely, you said where is the bigger part of the headwind now to 2030, it's '27, '28 nearer term. And I think that probably aligns some also with some of the investments that we're making. So that's my point on kind of the lack of linearity in terms of that margin progression as we go here 2030.

Kristine?

Kristine Liwag, Morgan Stanley. Can we spend a little bit more time on the growth algorithm in your aftermarket business? You called out 4% flight hours and your revenues up at 6% in that same period, 2025 to 2030. I guess like are there incremental headwinds we should consider because there should be some sort of pricing mechanism and then also the RMUs. So just want to understand how that build -- what's embedded in that build.

Yes. So it's basically embedded upon what we anticipate to see flight-hour growth, on what particular platforms. It's a combination of what we see in the Commercial Air Transport market segment in concert with what we see in the Business Aviation market segment and what the projections are for GDP across the board. So GDP will tend to drive a little bit of what happens in terms of flight hour usage across commercial air transport and BizAv. And obviously, we exclude Defense and Space from that aftermarket projection there.

All of those factors run into our algorithm. And then, on top of that, we will outgrow the flight hours that we see in there as a result of driving RMUs and RMU adoption on top of that. So there's multiple revenue streams that make up an aftermarket ultimately, spares, initial provisioning, 777X coming online here in that period of time as well will drive a lot of incremental spares provisioning that's going to be required, which is all part of the calculus of the aftermarket growth.

Yes. I guess as a follow-on to that, right, just to -- it looks like I would have thought that the flight hours would be the floor for revenue growth. And if you add in pricing and RMU, it should be much higher than 6%. So I guess a question on how conservative is that outlook? Or are there incremental headwinds to flight hours we should consider about your aftermarket business in that time frame?

Well, remember, in the commercial aftermarket, we're projecting mid- to high single-digit growth across that. So if you use the floor of flight hours as part of that calculus on top of that is where we're going to be outgrowing the market at the mid- to high single digits across the board.

I think that is a place where you do see mix impacts, like some of this mix on positions where we see that, to Matt's question, that we do see some of that manifest itself in aftermarket versus OE during that time frame as well. So that -- there's a bunch of positive things that Jim mentioned that lift it, and that's probably the one piece that weighs on that outlook.

David?

David Strauss, Wells Fargo. So just to clarify, so you gave your end market forecast and you're saying you're going to outgrow. I think you said total end market is growing 6%, you're growing 6% to 8%. Where do you think most likely by end market, you're outgrowing? I wasn't clear on that. Is it aftermarket and defense versus OE, but just where do you think you're outgrowing the market?

We're seeing strong growth on the commercial OE, but that's tied directly to production rates that we're seeing, right? So that market is going to grow. We're going to grow right along with that market as those rates are continuing going forward. Where we'll see outstrip growth is kind of what we're talking about on the commercial aftermarket side. We have a lot of positives that are increasing our ability to outgrow the market rate in the aftermarket space, offset by a couple of the negatives that Josh just mentioned a moment ago. So that's one area we will outgrow and also what we're seeing overall in Defense and Space on that protracted time line where we're seeing mid-single-digit growth for defense. Short term, we're seeing high single-digit growth in the defense sector right now as a result.

I think the other area, Dave, though, where do we outperform is as we convert backlogs to deliveries, that's something that we should be able to grow above what's happen in the market because we've got that visibility. It's a matter of getting the throughput out and deliveries in the customers' hands.

Okay. Quick follow-up. On corporate costs, it looks like you've got like $200 million or something in there. Is there -- is that the right number? And is there a leverage to that coming down over time potentially?

Yes, that's right. I would say we haven't spun yet. So it will take some time as we work through both standing up everything as a stand-alone entity and then working through efficiency. Yes, we have plans in place. We're going to -- we'll work down some of that cost over time. But that will take a bit to really leverage that.

Myles?

Yes. Just a question on the cumulative cash flow. If you keep a 2.5x leverage ratio through the period, you generate the cash flow you're talking about. Jim, if we look 5 years ahead, the $20 billion you've generated that you didn't deploy to pay down debt, what would the priorities have been? What are the priorities you have now? And then just another one on delinquencies. Can you remind us where we are on past due and where we get to that not being a quantifiable number that's material?

Yes. So in terms of capital allocation priorities, and we've indicated where we intend to invest is to drive the growth output of the organization. We will be opportunistic when we take a look at potential M&A opportunities that keep us within that leverage ratio profile that we're looking for. We talked about earlier about maybe some bolt-ons and some technology innovations coming into the portfolio itself and partnerships that we may intend to embark upon ultimately. So those will be the areas that are going to be all driven around capital deployment across the board.

What I would say in terms of our -- what we quantify as past due. So these are late orders that are in the books right now. We're sitting north of a couple of billion dollars, $2 billion that presents opportunity for us as we continue to unlock the supply chain to deliver that through. I would tell you, it's been flat on an absolute basis so that as a percent of revenue, that number has been coming down dramatically over the last couple of years as we continue to drive output from our factories. So it is additional opportunity for us to capitalize and outgrow, as we continue to unlock the supply base for that.

Myles, maybe one add just on investments. I think we talked about it. We mentioned it, Kathy and I talked about it, too. Just thinking about our manufacturing footprint and supply chain, where do we have opportunities to invest, whether it's in-sourcing, vertical integration. I think those are also priorities because, as Jim mentioned, things that we can do to unlock growth to deliver on whether it's past dues or backlog will pay themselves back very, very quickly.

Ken?

Ken Herbert with RBC. I wanted to ask you on your missile business. Where are you with capacity to support the expected ramp? And what more do you need to spend to get there? Or can just better maybe sort of supply chain and other sort of optimization support that ramp?

And then second, is there any risk that you face maybe incremental cost pressure as you maybe have to negotiate more with the government directly, as they really look to drive cost out of some of these programs or get more involved in supplier negotiations as these frameworks are put in place?

That's an excellent question. So as I think to kind of reiterate the point, we did sign a one-of-a-kind framework agreement with the DoW. It was a 4-party arrangement that we did for all of the products that we provide across the missiles programs, the 11 out of 12 that Matt alluded to beforehand.

With that commitment and the 4-party arrangement being between ourselves, DoW, RTX and Lockheed, was our commitment as well to invest $0.5 billion in facility expansion and capitalization to be able to augment and be able to deliver anywhere between 2x to 4x depending upon the missile class to support those ramps going forward. What I will tell you, though, is that the most high-volume part across that is consistent across all of these missile programs are our navigational units. And those are commercial units.

We produce over 90,000 of these units annually, and we take about the top 5% of those in terms of performance capability, although produced on the exact same commercial manufacturing assembly line. And those actually get stripped off and go to these precision-guided missile systems. So the best of the best of the best that we don't even know until we get to about step 9 of 10 of the manufacturing process and again, on the exact same commercial manufacturing line as to whether or not a particular unit may have the capability based on performance and testing to ultimately end up on a military platform going forward.

So if you think about that, right, if I need to go up by 2x, 3x or 4x in terms of that capability on that IMU, I'm already producing a substantial portion of them already that feed that market. And then the rest of them actually just stay in the commercial segment. So there's not a significant heavy lift on our part in terms of being able to meet the needs of these ramps as it pertains to IMUs. Other portions of the products that we provide, which you saw on one of the screens there of the various products on those missile systems may be slightly different, but they're not unique across all of those, maybe just one particular missile system.

Now, in terms of costs and the like, what I would tell you, the significant benefit to the U.S. government is the fact that these are commercially developed products. We invested our own R&D to develop the product. We invested our own capital to build the manufacturing lines. We produce at volume, which then drives the cost considerably down, as it pertains to an IMU, again, as an example. So we don't get a lot of pressure around it because the costs are so attractive and the pricing is so attractive on these precision missile guided systems.

The second example that I would give around that is if you think of where the Department of War is going and looking at new commercial entrants into the space to maybe produce what's "a less precise" or less exquisite missile system at a fraction of the cost. The comment that we make back is that they still are selecting -- even on the commercial side with these new entrants, they're still selecting our navigational products for low-cost variants that they're going to be producing going forward.

So the comments we've had before is like you don't have to have a less precise or a less capable missile system because of the fact that we produce at scale, at volume commercial products and you move them over into the commercial industry from commercial into defense, you end up ending up at a price point that's attractive, whether it's on an exquisite system or on "what's called a less exquisite low-cost system". You don't lose any capability of the precision that's provided there for that. So we're going to have that ability to do that, and with the committed investments that we've made will enable us to continue to ramp with the U.S. government needs.

That's a good point for us to maybe transition. So need the folks in the room to get a chance to check out some technology and maybe get some calories in their system, too. So Jim, let me turn it over to you just for some closing comments and maybe to end the session.

Yes, if I can. I mean, first off, I just wanted to take a moment and express my deep personal appreciation and gratitude for joining us here this morning. This is a tremendous amount of interest that you have expressed in Honeywell Aerospace, and we take that as great pride as being owners and operators of this business. I also want to thank the entire Honeywell Aerospace team that has supported putting this tremendous event together for us, both of what we did at the hangers and the aircraft that we had on display, the technologies we had on display and what you saw in nextdoor as well, this incredible venue that they've been able to put together for us. They absolutely have worked tirelessly, and they wanted to ensure that the essence, the culture and the foundational innovation that is Honeywell Aerospace was properly represented in this forum, and I think they did an amazing job for that. And I can't thank them enough for what they did relative to that.

For our investors, I would leave you with this. Honeywell Aerospace is a premier provider of mission-critical systems across all major aerospace end markets. And we are poised to continue to expand our leadership positions in attractive end markets by investing in differentiated technology, and we will have a unique opportunity to unleash significant growth in sales, earnings and cash.

And lastly, this is one a little bit on a personal note, I'm incredibly humbled to be leading this organization and representing the 36,000 employees that represent and a part of Honeywell Aerospace globally. We have a very rich and strong 100-year legacy. And on June 29, it will start the next 100 years as Honeywell Aerospace, where we will protect and advance the promise of flight and create a safer, more connected world.

Thank you so much for your time today. Really appreciate it.