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

This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information on this website that may be of interest or material to our investors.

Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to certain risks and uncertainties and including those described in our recent SEC filings.

[Presentation]

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

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

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

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

[Presentation]

Please welcome Honeywell Chairman and CEO, Vimal Kapur.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A second question, I forgot...

The white space.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why don't we start with Billal.

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

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

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

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

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

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

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

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

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

Both are good, Jeff, and I can give you a little bit on both. First off, I mean, a great example is one. I don't know if you happen to see it in our demonstration over here or not. But as we're connecting to each of these process units, we're learning a lot more about it. And one example where we're changing the customer outcome is on digital imaging of catalyst.

So as many of you know, Catalyst is something that a customer puts into a refinery every sometimes 1 or 2 years, sometimes 3 to 5 years depending on the product. And it's a very nice cycle for us because it provides a revenue stream.

And in the past, what customers had to do is they had to go pull a sample out of the bottom of that catalyst unit, send it to a lab, analyze it many times, by the time they realize the catalyst was bad. The refinery is already losing efficiency. It's already starting to go down and it has a problem. We're now through our connected solution able to do that every day, let the customer know exactly when they should change the catalyst or if they have a plug somewhere in the system and let them know they should be proactive.

We have another customer that's running a PDH unit. This is a unit that provides plastics from crude oil. And they were having all kinds of problems. In fact, both Vimal and I were down to meet with them. There's a big challenge with it. And we've been connected to that unit, put our engineers down there, been able to fix the problem and showing that we can bring that up. Those are the kind of examples that I can share with folks like Mr. Dangote to be able to drive this integrated growth. So that's kind of the first piece of where we're seeing the customer outcome.

And I'd say it is an exciting time to be in the energy industry right now. We're seeing really almost unprecedented growth in certain areas. The time that we put the investments in place to do LNG. We had done the strategic research ahead of time to understand it was an attractive play, but I don't even think we realized how attractive that was going to be with the need for more power and now particularly with the need to move power between continents. So that's going to continue to unlock that growth and provide better results here, second half and beyond.

Yes. And it's important to mention, a lot of businesses are being disrupted by a lot of the new software capabilities that are coming out, AI, right? So if you think about where we're unlocking this massive value, there's domain depth across all of these businesses. And very uniquely, are Cognite demos over there if you haven't seen it come to me after.

Where we're putting that domain depth directly into our control systems directly into our automation, whether it be building process facility, it doesn't matter. And so the impact we're able to have on our customers' operations, depending on the industry, it's a wide range, but we're often talking tens of millions of dollars of immediate incremental difference for some of our automation solutions that are augmented by this domain depth.

And again, because of that position, a lot of these new compute capabilities are really augmenting our capability. And actually allowing us to get into markets in a way that no one else can. And so it's kind of interesting in the cycle of disruption. And I knew this coming into Honeywell, but it's been pretty incredible to see it play out over the last 11 months. It's driving a lot of value direct to our customers, which is where we're focused.

Okay. Maybe we'll squeeze in two quick ones. We go with Nicole and then end with Kap.

Maybe Nicole DeBlase from Deutsche Bank. Maybe just following on from Jeff's question. You shared that within process automation and technology, the connected systems percentage is kind of around 14%. I think ARR was similar, 13%, 14%. That struck me as a little bit low versus what the potential could be. So could you talk about that opportunity?

And then same segment. Second question is just how often do you guys work together today when it comes to cross-selling with your customer base? And how often could you work together in the future?

I think I speak to Ken more than anybody in my family. My wife is probably watching in life it's constant. It is absolutely constant. And I think Ken can talk a little bit more about how quickly we've been driving these solutions across the business.

Yes, absolutely. I mean I think the nice thing here is, as Jim came on, we were really developing out this kind of joint offering, and it came right at the right time where we were getting the pull on the connected capabilities we were pulled in almost immediately with key customers, many times will travel to the customers together. At times that we'll kind of divide and conquer with the customers as we can kind of show both sides of that. So I do think from a customer point of view and a customer space, it's a single offering.

Now the backbone behind that are very different between the two businesses. And that's why both of us are up here. It's a little bit different how you develop molecules and process technologies versus how you develop the new automation systems. But I think we have the best of both worlds as we bring that together.

And then on that fair to say that mean the time spent together, the pipeline, but the real benefit is still on the come because you guys are working really well together right now, but the benefit is...

It is. And that really gets into the second -- or the first part of the question, which was you're right. That's really low. I mean we connected our 1,000th plant. I think it was on December 17. We're now at 1,075, as you saw. We're connecting plants almost every day. We're just starting to see that ARR ramp up. Customers are now starting to see that benefit.

This has very much changed. A couple of years ago, many customers didn't recognize what that was or what the value really was. They're starting to now. And I do believe this will be exponential.

As more and more customers start to see it, we're also playing into a couple of really important kind of macro trends across the industry. One is labor shortage. Many of our customers just don't have the experience control room operators to continue to run. And they're losing some of their engineering expertise and talent to retirement. We're coming in and helping augment that existing workforce with these capabilities.

So you're dead on. It's going to be a lot of opportunity in the future coming off of that low base, and we're going to be able to solve it together.

Okay. Great. Maybe we'll end with Andy Kaplowitz of Citi.

Got it. So Pete, you talked about 500 basis points of margin improvement in 3 years. As you know, that's not a lot of time. So do you need some of these bigger initiatives to kick in NPI sort of accelerating or focus on high-growth markets? Or can you just get it from operating leverage. So is it back-end loaded or not?

And then maybe just quickly for Billal, you talked about the high-growth regions, 25% of the business. It feels like you kind of talk about it like it's the 20 teens, but as you know, the world has changed a bit, right? So China may be not the growth driver than it was before, but it's doing well for you. So like -- have you shifted at all and what high-growth regions mean? Or is it still kind of the same?

Yes, I'll just start on the operating expansion. It's all within our control. And this is why I feel highly confident about it. I think we get there low single digits to almost no growth just on the self-help -- some of the self-help stuff and then growth will obviously supersize that or be a part of that or we would take some of that and reinvest it as we're growing, but we would -- I feel -- obviously, on the growth side, there's more that's out of your control. But I feel pretty in control on the margin expansion and feel like we could do that at low single-digit growth.

Yes. On the vision, the good news is with the new organization we have and regional focus, all of our regions are growing. China and Europe have long been slow. But for us, they're growing quite nicely. In fact, Europe is showing up in the mid-single digits, and we expect that to continue.

Your question about how things change I think the fact that we have capable teams empowered to make our own choices and the visions will help us to do that. If I take the example of our Middle East and Africa region. A couple of years ago, when we talked about growth in that vision, it was all about the investments happening in Asia. Well, last it was all about Saudi Arabia and more than Northwest Africa. Our teams anticipate the growth and they have the capability and the empowerment to go and make sure that they are the default when it happens. And we see that dynamism and how our team approaches it to across all of our regions and the customer centricity help them continue to deliver on that.

Excellent. Great. Let's leave it there. We take a quick 15-minute break. We'll get back here right about 3:35 to kick off with Suresh. Thanks.

[Break]

[This call length has exceeded streaming capabilities - Please refer to the preliminary transcript that will be posted shortly.]

Please welcome Chief Technology Officer and President of Honeywell Connected Enterprise, Suresh Venkatarayalu.

Welcome back. And just to let you know, I've been with the company for 31 years. It's a great day and great beginning to rewrite the chapter of Honeywell along with Vimal and the leadership team. I really feel both excited and fortunate to really do so. I actually met many of you here back in CES and also in AHR along with Billal. So great to connect with some of you, and I would love to really spend more time this evening. Forge, why Forge matters. I'm sure the question you hear from Vimal, you hear from all the 4 segment CEOs. They talked a lot about Forge is enabling their services growth, software growth, how that's going to be the future and foundation for driving automation to autonomy.

For me, there are 3 or 4 things that really matters from a customer standpoint. #1, please imagine or reimagine the future buildings, plants, data centers, critical infrastructure are not going to be just connected. Maybe that's what all of us have done in the first 6, 7 years. It's going to be more intelligent, adaptive and increasingly autonomous. I think that's the future state our customers are going to demand in the name of outcomes that they demand. Second, if you really look at our history for a century, we have automated the physical world. And how did we do it? It's a combination of installed base asset with domain knowledge, and we brought Forge to really drive the outcome. Third, for me and for us, Forge is that intelligence layer. And it brings in this 2 interesting dynamic, which is deterministic model. I think many of you would actually really question what it is.

As a control system company for the last 140 years, the control system company have to have a control lot to deliver 99.9999 in person. That means those algorithms that model, a predictive input parameter from sensors and actuators has to deliver a predictable output all the time. Now with all of it, there are 4 things that we have done different that's very real in Forge. You see that frictionless connectivity. We saw our customer environments are fragmented. You actually walk into a customer site, data is fragmented, systems are fragmented. When you actually really see it, you would have seen an example. We connected our campus in India. When you walk into that building, you need to connect 14,000 assets, not easy. They are specialized protocols that requires certification. So when we sat on it 2 years ago, Vimal looked at it and said, how long does it take to connect any of those buildings, our industrial plant, we said close to 100, 150 days or 150 hours, sorry.

And it wasn't clicking because we were working with our system integrators and system integrators who lose interest and they don't have the technical skill. That's something that we really brought it down to less than a day. And not only that, in Billal's business, we have 14,000 system integrators. We have taken Forge Academy to train them, handholding them, supporting them across the region. That's clicking. Second, we use the word Ontology. It's not new for many of you. We hear it from all the software companies like Palantir and others. We thought -- we used -- how many times have we used the word domain knowledge. For us, it's codifying the domain knowledge that AI understands, and that's what we have been doing in the last year or so. Third, it's our control systems. It's built for the regulated and safety industry. We are proud about it. AI in itself needs a guardrail.

I think we speak a lot about the guardrail, which we believe that the control architecture and Experion, EBI, I think it's a control guardrail for us. The last one, I think with our cyber business, we believe that we will be the bridge between IT and OT world. I think 3 things that I would actually ask us to really remember, it's all about data. It's about domain knowledge, deterministic model together. I think it's going to be speed. I think we spoke a lot about the speed of innovation, and I'll give you a little bit more teaser about how we are retransforming our company. There's 2 chapters, Chapter 1, 2018 to 2024. We enabled the connectivity, brought the visibility, sold a lot of remote services to our customers. Customers believed in it. I think there are a lot of value additions that we brought in for them, for us, and I'll walk you through the evolution model. But there's one thing that it lacked.

I think if you look at the point #5, it lacked the contextual insights around our installed base because you're dealing with bits to Athens. That's the difference between the traditional AI to physical AI. And that's something that actually said, you could do more because that's where you can deliver outcome. And that's an area that we spent a lot of time. So that led into 2025 last year, we said physical AI was real to an extent. I'm sure if you've all been in CES last year, Jensen set the tone on physical AI as a new reality. It's going to be a near term. And we actually said we need to take the lead right there. And then in the last year or so, as you really look at it, it's not -- meaning I'll be happy to really walk you through a little later. It's not just on the compute box. We absolutely believe that it has a category to bring in a compute with controls and an ability to contextualize using ontology, it's the new beginning.

That's how we are actually starting to tease you with an opportunity to show how we drive autonomy in a building environment or a plant environment. So what have we done in terms of -- from 2025? We said, Billal said it nicely. The amount of connections we have had in the last 12 months was much larger than what we have done in the first probably 5, 6 years. One of the reasons was frictionless connectivity. Second, once we connected right there, the next thing was how do we move up your value chain, not just selling services upgrade or a software upgrade, it's an outcome. So for us, it's a real pivot point where physical AI was a reality, and I'll talk to you a little bit more about partnership and we'll also give you a teaser on how we are trying to do this. Now with that, Forge business model is evolving, evolving all the time.

Now there are 4 ways to really see this evolution. Look at 2020 to 2024. I think we focused on connectivity selling digital services on top of our installed base. I think it's there in that $1 billion ARR that Vimal talked about. We have grown our services portfolio. We brought in other assets like Sparta and 3DM. So there is a high focus around connectivity upselling services. That was our focus from the first 4, 5 years. Look at from '25 onwards, which points out to what Billal said, we had more connections from sites, customers and assets. That's an acceleration, which we really brought in. Then from there, our focus was all about selling software as a Forge Performance Plus, customers were asking us to run their operations better. So asset performance management, predictive maintenance, carbon energy management, you have cyber. So a lot of software evolved. And the final category is an automation economy.

We believe that it's a closed-loop operation. Customers are expecting us to really deliver on certain outcomes. I think it's an interesting pivot, and I'm sure that you're starting to see some of the demonstration later this evening and something that we're going to show, it's the beginning for the new reality. And that new realization is going to be a tremendous opportunity growth for us moving forward. There are 2 or 3 case studies that I want to really talk about before we jump into automation economy. Take a digital services. We built this business along on the process automation, traditional services portfolio. As you look at it, we had probably a traditional reactive support model, which over a period in time, we were able to connect to our installed base. Look at it 660 sites, 350 customers, 130,000 assets. Now what does it do? One, direct visibility to our installed base. Two, we were able to really upsell some of the new product portfolio, Digital Prime, Assurance 360, but it also helped us to improve our cost to serve.

Now the business is growing in spite of some of the core erosion, they were able to keep up with it. For me, this is important because it gives you a hook back to your installed base to really upsell more software and then a future possibility what Ken and Jim talked about, a connected plant cannot happen without hooks back into your installed base. And this is a replicatable one for Billal's buildings portfolio and also for the Industrial Automation in terms of really selling, upselling services on top of your installed base. A second case study, which is organically built CLSS. Billal talked about it. I think you heard Pete referring that CLSS. This is a connected life safety services business on top of Fire. Fire was working with this system integrator portfolio, selling panels and selling services and they were selling outcomes, which is compliant, which is manual-driven compliance outcomes they were selling.

What we were able to do in the last 8, 9 years is $130 million software portfolio with $40 million ARR that is growing at a rapid pace, move from remote operation, compliance response, human-driven to a Digital alarm transmission, AI assist with integration with Rapid SOS, that business is transforming. We believe that this is replicatable for our gas detection business and utility business moving forward because you actually deal with a similar system integrator dimensions right there. Now for me, case study 3, which is the automation to autonomy is an interesting one. I think autonomy, we speak about it, and we spoke about it as an industry for the last 2 to 3 years. Two things, process automation that our customers are working with us. For them, it is clear. Can you eliminate the variability in operator handling of abnormal solutions?

I think you can actually read it. It's in the public domain. I think we have a demo coming up with -- in a Middle East customer with Borouge. They've been very happy partnering with us, taking experient cognition. That's an important use case. On the building side, it's 10% to 15% operational efficiency, meaning when you double-click it, it's energy performance, operational performance because of all the nuisance alarm coming from multiple systems on top of it, cyber, on top of it, comfort performance. There are 4 or 5 KPIs. But directionally, they will tell you that 10% to 15% improvement that you needed. Now Interestingly, though, right here, there are 2 stories before I jump in and give you what I'm about to show. 2025, CES, and some of you were there and I was there where NVIDIA launched what they call a DGX and AGX, which is a supercompute at a price point was available for every automotive player.

And then we talk with them and we said, if that is available for every single car, can we bring that category into every single building. It could be a commercial building or industrial plant because I was looking for a brain behind a building similar to a brain behind a car to drive autonomy and action. 6 to 7 months in a row, I think we really built that both the compute and the AI engine as a full prototype. I think around September, we showcased it to our Board with an initial idea of our forge cognition with some few use cases and whatnot. But this CES, within a 12-month period, we actually sat down with NVIDIA leadership team. Vimal was there, and we've been talking about a future prospect of building autonomy in action. I think Jensen's leadership team pushed us back to say, we should have a lighthouse customer. And then Vimal being Vimal, he said, yes, we need to have a lighthouse customer. Why can't you be the Lighthouse customer? And I was a CTO sitting there not really knowing what are we committing for. But here we are.

We were able to really take -- I think to give a credit back to the NVIDIA team, they took their one of the campus, Wag headquarters. You see the picture. They hand over back to us on February 6. I, along with Rahul Patel and Greg Turner, technology leaders pitched in the vision and what we could do. It was not on our installed base. But OnGuard was our installed base. We were able to get cognition up and running. What it does is 3 things. That box is powered by Blackwell architecture from NVIDIA. It has Omniverse to simulate the entire campus. You can emulate and simulate the building connected to their assets, and I'll show you that very quickly. Third, it has the whole NVIDIA model, Nemotron and Cosmos reasoning and Gemini model and is autonomously running. So let me take you live to our Voyager campus, give you a view on what it does.

So as you really see, as we get into the real aspect on zooming into the NVIDIA campus, Santa Clara, it's a 750,000 square feet area. And close to 1,000 assets, a combination of building management, BMS assets and then some of the security access control. What you see as a virtual reality is Omniverse powered up. You would be able to pick any of those assets to see their real-time performances. I just want you to know, for me, it's a ChatGPT moment for the industrial world as a technologist. And from there, you have an opportunity to have an interaction directly with the building. So you're asking the question, how much electricity have you consumed? This is Voyager headquarters data point. It also highlights 30% of their energy spend every single month was during the peak load that to in California. In fact, I presented back to their GRE head 2 weeks ago. He is seriously looking at should they have a battery energy storage to optimize the spend, how should we do it? As you look at it, one of the biggest pain points that they have is the nuisance alarm all over the place.

You have an opportunity to really interact with your building to say, how much is the nuisance alarm coming from a security system? As you look at it for a week, close to 5,000. Remember, they have to have human beings, more operators inside an SoC who are clearing up every single false alarms, which they call a nuisance alarm. So we actually built an agent for them, which is a semiautonomous agent, which technically goes back and then looks at it, BMS system today for the past 1 month had 85% nuisance alarm. And then it's not just at this level, the agent goes back and gives them all those alarms so that the operator in building operations can go back and look at what those alarms are, what the fact stays, what are the insights and then there is a point in time we should be able to train the system to provide more recommendation. But end of the day, it also gives an operator opportunity like you post your e-mail by saying, these are pretty much junk e-mails or spam e-mail. You have an opportunity.

So if the operator trains this model 3, 5, 10x, then there'll be a confidence to give the control back to autonomy. And if you really look at the next big thing, which is their biggest ask when we started was security system. You look at 98% false alarm. And I can just tell you, in one of the buildings that we are not touching right now, 250,000 alarms per quarter. And they need 14 to 15 people clearing up every shift. This actually gives -- this is an interesting one. You're dealing with security means your camera inputs have to be fed in and with facts that SOC should be able to clear up to say is it false or not. So as you're really looking at it, you're interacting with the building and then you are actually dealing with an algorithm and you're reinforcing the model, either you're reinforcing the model or reinforcing the process side altogether. So this is a great use case where I just wanted to really give you a first instance perspective on how we are approaching this autonomy.

We have done -- we have showcased to some of you how we did Bangalore campus. That's how we took this idea back to NVIDIA. The head on GRE initially was not very sure what we could do. But having done this, and I presented it last week, they've given us 6 more weeks where if they can actually really go back and look at all the KPIs, if it hits it well, I hope that we can actually go and deploy across their entire campus, and we may have a PR release. But I want to really get to a point on partnerships. These things are not possible. I think there's an NVIDIA partnership. You have seen me in Dell World Congress or Technologies World last month. But Google's partnership started 2 years ago. We brought in Gemini 1.5, 2.5. We've rewired a number of things. But what you're going to see in our cognition is GDC, which is Google distributed cloud compute, which is like a GCP. So Thomas and his leadership team has been working with us for the last 2 years, and then we have asked him for a short video about his partnership and how he sees he can contribute to a physical AI transformation.

Hello, everyone. I want to start by thanking Vimal and the entire Honeywell team for inviting me to join you today. When we announced our AI partnership with Honeywell in 2024, it was centered on a mutual vision to realize and accelerate the path to autonomy for the industrial sector by combining Google Cloud's leading AI capabilities with Honeywell's industrial expertise and installed base. This means bringing AI into the physical world in a way that can help buildings, plants, utilities and other industrial environments move from traditional automation and static data to self-managing agentic systems.

For example, Honeywell Forge provides the industrial software foundation and operational data from buildings, plants and utilities, while Google Cloud and Gemini help process that information, identify patterns and support better, faster decisions. This enables organizations to move beyond automation to autonomous systems that can sense, reason and react in real time. Our partnership is critical to shaping the future of physical AI and supporting the infrastructure that businesses, communities and economies rely on every single day. At Google Cloud, we're fully committed to our strategic partnership with Honeywell, and we look forward to shaping the future of physical AI together. Thank you once again, Vimal, and the entire Honeywell team.

Just to sum it up, I think the whole piece that I want to say is Forge is here to stay for driving the physical AI transformation. And with a partnership in place, for me, automation to autonomy for future has 3 fundamentals. Assets need to work harder, People to work smarter and Processes work more efficiently. Those fundamentals are important to enable the future buildings, plant and industrial operation that can see, think and learn and act and which is the fundamental for autonomy. And I'm really, really happy to really take this evolution forward, and we'll be happy to really share more later this evening and connect with all of you back. So with that, I'm going to be inviting Mike Stepniak for the next session.

Please welcome Senior Vice President and Chief Financial Officer, Mike Stepniak.

Good afternoon, everybody. Thank you again for being here today and your support. I realize it's been a long session, so I promise I'll be quick. But I think I understand why they always put the finance guys last in those sessions. Vimal and the team took you through our strategy, and I think they gave you a really good overview of the business and how we think about the future. In the next 20 minutes, I'll give you a little bit more insight into our financial framework. But before I do that, I just wanted to have a quick moment of reflection because I think days like that require that. I've been with Honeywell now for about 6 years. I've been the CFO of Honeywell for about 16 months. And I can tell you, I have never seen a team that is more committed and excited to deliver on our commitments and on the mission.

Vimal talked about our VOE scores and our attrition. It goes beyond that. We have people that left us over the last 5 years, knocking back on our doors. Wanting to be part of the story. So it's extremely exciting. And look, I'm not a very outwardly excited person. I realize that, especially if you put me in the room with Mark Macaluso. But I am extremely excited about our financial framework and about our strategy and what we are going to deliver for our shareholders and our customers over the next 3 years. So with that, let's just recap the day really quick. Vimal talked about our transform and simplified portfolio. This is going to deliver higher, more profitable growth. Our legal team, our business development team spent the last 18 months deleveraging our balance sheet, which is unlocking our cash flow and helping our G&A costs. We are rapidly eliminating stranded costs and going beyond that, and I'll talk about it, it's a significant driver of margin expansion for us over the next 3 years.

And all the presidents talked to you about refresh NPI, about better offering, being closer to the customers. Everything that we have done over the last 24 months makes me more than comfortable committing to delivering 10% plus EPS growth through 2029. Honeywell prides itself on execution. And before we talk about the financials, we just have to acknowledge and talk about how much the team has executed because I think that's been largely unnoticed, but a significant impact on our financials in a very good way going forward. So let's start with Industrial Automation. Industrial Automation, like Pete said, now it's pure sensing and measurement business. This business alone is going to deliver 100 bps of margin expansion for Honeywell over the next 12 months. More importantly, Pete can now keep the team focused and deliver not only the margin expansion, but deliver growth and think about expanding -- growing the business inorganically.

Solstice spin-off made us less CapEx intensive and less cyclical. By the way, Solstice is up 60% since the launch in October. What a great story for the team and the shareholders. Like I said, we divested over $2 billion of legacy liabilities over the last 18 months. It's a significant tailwind for our cash flow and our G&A. And the automation segment, there is a reason why Ken and Jim talked to you together today. Their teams this year alone will deliver over $100 million of commercial synergies just between these 2 businesses. And this is -- we're really just in early innings of the journey. And finally, Quantinuum is making just excellent commercial progress, and you'll hear about it in the second half and delivering on their strategy. And once again, I'd like to congratulate Raj, Nitesh and their teams on a very successful IPO last week.

By the way, that business, you'll see it in our second quarter financials, is going to sit on our books at $7 billion. So if you think about the optionality as far as cash flow and capital allocation, it's a big help for us going forward. So here we are. We are a pure-play automation company delivering mission-critical solutions in building automation, industrial and process automation industries. And the keyword here is mission-critical. The nature of our products and solutions allows us to have life cycle relationships with our customers. Most of our products, once again, have to be certified and have to be specified. More importantly, these products allow us greater pricing, more predictable revenue streams and getting closer to our customers. But this is just the beginning. So let's talk about where we go from here.

Our value creation engine has 3 pillars. And I realize this is kind of on par with the -- this is on par with our peers as far as the growth, top line growth, margin expansion. What's exciting to me and what's compelling that this growth is going to come early. And there is a very good chance for us to overdrive this framework. And I'll talk about each of the pillars in a minute. Both top line and margin expansion will be underpinned by a more meaningful shift towards services and software annual revenue, recurring revenue. More importantly, margin expansion, the 60 bps of annual margin expansion, that's just operational expansion. We have over 200 bps of margin expansion coming structurally from us removing stranded costs and driving the portfolio actions that we talked about in IS. So let's talk to each of the pillars. And I think this is the most consequential page of today's presentation. And I'm really excited about the growth framework because as Honeywell, we know we undergrew last few years, but that's changing significantly.

And let me just go through each of the pieces here. On volume, volume, we should grow 4% a year. And we talk about NPI, we talked about higher growth verticals. I'll talk a little bit about software annual recurring revenue. But I'm a data person to just give you some data points that I'm seeing. Billal is very humble human being. His business now delivered high single-digit growth 7 quarters in a row. His fire business last year launched over 30 NPIs. His orders quarter-to-date are high double digits. This business has momentum, not only in data centers, it has momentum in every vertical and every region that his business operating with. Pete has turned the corner on the business. It's really a story of self-help. The business is delivering better for the customers, starting to introduce NPI, team has focused and have mission.

And finally, Process Automation Technologies. We talked about it now for 3 or 4 quarters. This business has been building the backlog, projects backlog. This backlog is converting. We are mobilizing our teams and starting to deliver these projects. And this is a multiyear cycle. Majority of our projects take 3 years to deliver. Our LNG business is sold out for the next 3 years. And by the way, catalyst volumes coming back. Second half over first half, catalyst short-term demand is going to be up more than 20%. So I'm really excited about this setup because all of our businesses have momentum and it's a strong momentum. Price. Look, we learned a lot about the art and science of pricing over the last 3 years. And just like Ken said, our models are better. They're much more dynamic. We're closer to our customers where we can understand how to price.

And for better or worse, pricing now reports to me for the last 9 months. So I can give it the right level of visibility and drive the say do when needed. But I'm confident we'll deliver 3% plus pricing over the next few years.

And then M&A, I'll have a slide later on to talk about M&A. M&A will drive 1% incremental growth for our company. All of our M&A is accretive to our growth. So why are we not growing 6% to 8%? Well, it seems these days, we have a 100-year flood about every 6 months. So I am assuming a very healthy level of contingency to make sure we can withstand all the geopolitical uncertainty and issues that we face every year.

I have 2 more slides on top line growth that I want to touch on. One is on ARR and one is on M&A before we move to margin expansion. So let me start with services and software. Our services and software business is today about $7 billion or 40% of our business. Recurring revenue is about $2.3 billion, and software ARR is about $900 million. That's as of 2025. As the team said earlier today, we'll grow service and software from about 40% to 45% of overall revenue mix over the next 3 years. And software is going to grow at about 3x the rest of the business. We like this revenue model a lot. As we are maturing Forge and looking at connected and starting to analyze our installed base, we realize we have a massive opportunity here to lean in and drive incremental growth. This growth is also accretive to us and gives us a lot of leverage. Our incremental cost to scale this business is actually minimal. We're studied -- we're looking at our compute costs and for software. And on 15% revenue growth, our compute cost grows about 2%. So we're getting really good leverage on this growth.

So let's talk about M&A. Look, our M&A strategy, bolt-on M&A strategy is doing extremely well. And that's something that I think is core to our -- it's a core strength for us. And team has been doing an excellent job, one, identifying M&A targets, vetting them and then bringing them on board at the right multiples. And the teams in the businesses have been doing really good job integrating these businesses. All of our M&A that we've done since 2023 is accretive to our growth, is beating revenue synergies and delivering on return on invested capital. If you take just Air Products LNG as an example, this business next year is going to be $0.5 billion business and it's sold out for the next 3.5 years. We'll continue to do M&A in the future, but we'll be very selective and continue to strategically supplement our businesses where we think there is a close adjacency or a strong fit.

So let's move to margin expansion. I can guarantee you, Honeywell has not forgotten how to expand margins. We talked about this earlier this week, we'll deliver about 20% segment margin this year. We have a very clear path to expand about 200 bps over the next 12 months through structural actions. On top of that, organically, we'll expand another 60 bps a year. And that 60 bps a year has a ton of contingency and optionality in it. So if you start calculating this data, I think it becomes very clear that 24% is not only achievable, it's actually beatable and gives us a lot of optionality for M&A investments and obviously, contingencies. How we think about the 60 bps? Look, we have, I would say, plenty of optionality as far as how we expand the margins depending on the market. Like I said, price should be 3% to 4%. We're improving mix. We're doing more NPI. We're doing cross-sell. That's giving us a better leverage on our growth and expanding margins. But to me, the biggest opportunity is still in cost productivity. It's not only stranded costs. We're going much further beyond that.

I'll just give you an example of what we're doing. Today, Honeywell has still about 700 legal entities. We can operate at 300. Over the next 2 years, we'll eliminate 400 legal entities as a significant source of productivity for us and margin expansion. Today, we still have about 10 ERPs. Over the next 2 years, we're migrating to 2 and now a significant source of simplification and productivity. And finally, if you think -- start thinking about artificial intelligence productivity tools and how you're going to deploy them, you need to deploy them at scale.

So we are leveraging our shared services. Today, our shared services penetration is about 40%. Over the next 2 years, it will be over 70%. And that's where you get really payback on productivity on your AI investment. So we feel really good about this margin expansion. While we're also taking out stranded costs, and we get a lot of question on stranded costs. What is it? How much is it? When are you going to take it out, et cetera. So I'm pleased to say that today, our stranded cost is only $290 million. Just think about it, it's $290 million on over $20 billion of revenue.

More importantly, we'll be taking this cost out -- remaining cost out in the next 12 months. We already actioned about $200 million of that through repositioning and other actions. It just needs to show up in our run rate. And then we have about $85 million of cost left that we'll take out next year by simplifying our structure and taking out -- sorry, and getting better penetration in shared services. So our fixed cost is going down by about 500 to 600 bps from '25 to '27 while we reinvested and stepped up our investment in R&D. So I think a really good story on cost. So with that, let's talk about EPS. And look, to me, the $6 EPS in 2029 of 10% drop, this is table stakes. I really have -- I'm asking 2 questions to myself.

It's not whether we can hit it, but by how much can we beat it. And this EPS growth is coming in early years, meaning it's front loaded. So I'll be super disappointed in next year if we don't grow EPS by 12% plus. And to that point, the $4.05 for this year, there's still a lot of opportunity to beat that as well. So the teams are working really hard to deliver that. And I could assure you that, that growth is coming sooner versus later. You don't have to wait 3 years to see it, and it's operational. It's all through above-the-line items, volume, price, mix, productivity, everything we talked about today. So with that, let's maybe talk about -- a few minutes about cash and capital allocation because, obviously, those are extremely important to our future.

So on cash, we will be 80% 'free cash flow-converted this year. We will be 95-plus percent converter in the second half of the year. There's just a lot of things went on in the first half of the year that we had to manage. If you think about it, we're raising $16 billion of debt. We're in the process of retiring $21 billion of debt. We're separating 140-year-old company and creating hopefully 2 companies over $100 billion market cap over the next few years. Just a lot of complexity that we had to deal that manage through transitory interest costs, taxes and also the conflict in Middle East, we had some [ possibilities ] in the first quarter.

Now I am convinced we are 95% free cash flow converter going forward based on all the structural things we've done. We're paying out our debt, focusing on -- that's going to help our cash interest. Our tax rate going forward is about 19%. It used to be -- our ETR used to be 22%. That's a significant source of cash as well. And we have higher quality portfolio that is going to deliver better cash flow. And finally, look, as people -- our folks are coming off the separation work, including myself, we're getting more focused on cash. So I'll be focusing a lot on cash over the next 18 months. I can promise you that.

So what are we going to do with all this cash? So first, we're going to pay down debt. We're managing our debt and that leverage ratio to below 3, hopefully by year-end. In the midterm, we'll continue to invest in CapEx. Our CapEx should be about 3% of sales. It's lighter than it used to be. It used to be more like 4% -- 3.5% to 4%. And then medium term, we also -- obviously will focus on returning excess capital to shareholders. Our dividend payout ratio should be about 35%, which is on par with our peer set, and we'll focus on about 1% share count reduction. And then we'll continue to do bolt-on M&A. Ticket size will be for us, bolt-on is about $2 billion to $4 billion of the purchase price. But we'll be thoughtful and we'll be patient. There is no urgency, but we'll continue to add assets strategically, just like we did with Access Solutions, just like we did with LNG and Sundyne.

So with that, in closing, I just want to say we have created a very unique pure-play automation company. And from my vantage point, this company has a very, very good financial profile and financial framework for the next 3 years. And I'm confident that with the team you saw today, we're not only going to deliver this financial framework, we will beat that.

So with that, I would like to invite Vimal, Suresh and Mark back on the stage for the final Q&A. Thank you.

Let's start right in the middle, Mr. Sprague.

Somebody said white space earlier. I think it was Julian. But Vimal, you really started off very early with our interest with the comment on discrete. And then also in the process pitch, we didn't really hear a lot about M&A, but you got sort of big white space maybe in field instruments and some other places. So maybe just spend a little bit of time on like what your strategic priorities are now as you try to take the company up to the next level.

I mean I would say the 2 biggest priority. One is we need to strengthen our IA portfolio goes without saying, but it has to be done thoughtfully. We have built this portfolio with a lot of effort, sensing and measurement. So we're not going to excursions here and there and just again create unrelated portfolio, but we'll absolutely pay more attention to that. But if I move beyond it, because that's must do, the two things I focus on, one is a vertical-based offering M&A.

What we have learned hardware, it just takes 1 or 2 offerings just to give you a tremendous opportunity in a vertical. Look at LNG business. It was an Air Products business acquisition, which changed the whole profile of our business. And of course, we added on Sundyne subsequent to that. If you look at our hospitality segment, we have a big play in hotels. We always did the thermostat in the hotel INNCOM business we have for 10 or 15 years.

But when we acquired Access Solutions business, we got electronic locks, which have digital identity of all of us linked to those locks. So all of a sudden, we became so critical for the hotels. So the point being one acquisition can change your whole profile. And those 8 verticals we have identified, which I talked about, the semiconductor and data center and LNG, hospitality and so on, that's where I want to focus on how we bring more strength so that our story is going hand in hand.

We want to grow in those verticals. Can we find more space to inorganically to grow in that? And the last but not the least, I'm a big believer of frontier technology. Frontier technologies have an important role to play in our businesses. So think about we have made 2 acquisitions in cybersecurity in a very thoughtful manner. It's a frontier technology in our world. OT cybersecurity is still a nascent business. But if we continue to invest in frontier technology, we will be the leader in that space. We made 2 acquisitions in that. We made an acquisition in fire detection. We were the first company in 2017 to made a fire detection for data centers, a fact, which is not well known under Anne's leadership.

Now of course, it's benefiting us from today because nobody would have put a bet on early detection of fire in data center in 2017, but we did. And we made a detection of the lithium-ion battery, the off-gases 3 years back. That's frontier technology. We need to know about it because they are disruptive. You need to be staying ahead of the game, which means we need a deeper understanding of our segment. So I think that's fundamentally our playbook here. Strengthen our IA business, continue to have our vertical story building together and keep an eye on frontier technology. And as we generate more cash, we'll responsibly spend it and do it in a thoughtful manner.

We'll go to Nigel Coe of Wolfe Research.

You sound very confident on overdriving the plan. So I'd be curious if you maybe just like emphasize where you think the best opportunities are driving, I'm guessing is the margin expansion. And on the margin question, can you just talk about the drop-through and the incremental margins on the ARR and recurring services because I'm guessing that's going to be higher margin. And then on the process side, you only pointed to 25% margins by 2029 versus 24% in 2024 -- 2025, I should say. Why is there limited opportunity there?

So a lot of questions. Four questions. So I would say, I think the reason I feel so comfortable about the margin expansion is in -- in many ways, our margin expansion is not dependent on the strong top line growth. So with whatever we're guiding at 4% top line growth, we still can get majority of this margin expansion. And this is because of us taking out the stranded costs, but also, like I said, going beyond that. It's really, I would say, about our structural simplification across the company. And I think with now having a cleaner portfolio and more focused portfolio, we can drive a lot of that.

Second, pricing. Pricing discipline in Honeywell got much better over the last two years. Like I said, we learned a lot about pricing as far as how to be more into the markets. how to price regionally versus globally in one cookie approach. We're closer to our customers. Our offering is better, which allows us more pricing. So that's all helping us. So I think the margin expansion is largely derisked. It's really about can we get -- how far beyond 24% we can get there. As far as the incrementals on software are going to be really high. We invested $1 billion in Forge. We're not investing as much anymore. And that's why those incrementals that you're going to start seeing on the software revenue are higher than our product incrementals.

So with all that, we see a lot of opportunity there. And then in terms of the growth, like I said, we -- all 3 businesses have momentum, and it's really strong momentum. IA is different because it's all about self-help -- so Pete is going to grow for a while at this mid-single-digit rate without even having considering too much of the market itself. And process automation technology, if you follow this industry, the cycles are multiyear cycles, and they're on the cusp of it. And Billal just -- he's taking share across the world, and he regionalized the first in the -- in Honeywell, and he's been on this journey now for 3 years. So -- and it's really -- his growth is driven by offering.

The P&T segment, we have assumed the Johnson Matthey acquisition. It pulls our margins down. But the rate of change opportunity it provides is very large. So it's like a little bit of short term, the math works against us, but then the rate of change opportunity, that's why we acquired it. So that's why kind of '25 is a little bit -- if we take it out, the numbers look different. So that's more of a math.

Okay. Let's go to Andrew Obin, Bank of America.

Just a question on your installed base and getting better attachment rate. So who does the service and specifically building automation and industrial automation. So what kind of people perform the services right now? And what's the strategy for increasing your share of the wallet with your customers?

Yes. So Andrew, if you look at it, if I look -- let me start with building automation, then I'll go to industrial automation. Building automation, as Billal shared, 60% of our revenue comes through channels. And two years back, we said we have no entitlement for any service there. We ship the product and they should serve it. I mean that sounds like a logical answer. And then 40% installed base, we own because we sell projects, and that's -- we have a large service business on that.

So our first inning of Forge was to connect our installed base and make our service contact more digitized and Suresh talks about it. And then we said, who stopped us to ask service business from our channel partner? Whose thesis was that? It turns out nobody's thesis. It was self-imposed kind of a ban. Now our Forge is open to our channel partners. They can sell connected building to their installed base. When they sell it, they have to pay me a license fee. We have opened them an academy to train our channel partners on how to sell Forge. It's a big transformation for them.

Our classical system integrator grown up to sell fire system, security system, and HVAC system. We are selling go and sell this IoT platform, and they obviously said, that's hard. We will train you for that. But every time you sell it, you have to pay me a license fee. So a great example is we talked about Connected Life Safety Solutions business in Fire launched in 2019, more than $100 million revenue from the recurring revenue it generates, but that's the engine which grows the product business because our channel partners are so dependent on our software to configure their product, it's unlikely they can move to anybody else.

So I think how you -- the compounding effect of that is very high. Same is going to be now moving towards industrial automation. When we look at our installed base of gas detection, which is very similar to fire detection, the hazard to human. We are replicating the same model, building the tools by which our customers can remotely inspect these gas detectors, they can configure them, but it's in early innings, and we will repeat the same process. So it's a learning from one and transferring to other. And my confidence is that the ARR growth of 15% from a base of about $1 billion will require us to constantly innovate and generate that extra revenue.

And just a follow-up question. It sounds like pricing embedded in your medium-term forecast is 3 percentage points. Which sort of implies midpoint of volume growth is 2%. Am I correct? And it seems not much macro acceleration is embedded in that.

That's right. That is correct. And I think that's really where the opportunity is for us to overdrive.

I mean that's why we show the hedge of 2%, right? I mean, look, the inflation wants to just want to go up. The thing we can't do is we don't want to forecast next 4 year of price to say our prices will stay 3.5%, 3% to 4% range. But I and Mike know it is in that range for '26 and '27. It's in front of us. Can I say that Tony? I don't know. Maybe the inflation cools down and maybe it wants to become 2% or 1%, but we are then ready with higher NPI efficiency to still grow our revenue 4% to 6%.

So I think it's a one variable we control in our growth, which is new products. one variable in our top line growth we don't control, which is inflation, which drives our pricing. So we'll manage the 2% and deliver the 4% to 6%. Do we have a hedge in it? Yes, we do. But if we plan a strategy in which we don't plan any hedge, I think we are not being responsible to making our commitments.

Let's go to Jairam Nathan from Daiwa.

Thanks, Mark. So I had a question for Suresh and kind of in terms of Forge, what's the go-to-market strategy here? Do you have a separate sales force? Or is it connected with the different segments? And I would think that the skill set for a sales team would be different for selling Forge compared to the...

The last two years, we took a go-to-market sales offering management. It's under Billal, it's under Jim Masso and Ken. We believe that, that is a very important pivot as part of our connected enterprise redesign that we have gone through because central team will own the whole platform operation, innovation partnership. I think -- and to that point, Billal and Jim and others are completely rewiring the skill set that's required to sell software, new business model, and there's a mix that is happening on an ongoing basis. And I think I completely agree that's a new muscle that we are building.

That's a journey we have gone through. So your question is absolutely right. when we started Honeywell Connected Enterprise in first phase, we said we need a separate -- we need very smart people who can sell software. It turns out that thesis was wrong because it creates an internal conflict in one organization. So we made a decision in early '25, late '24, operational '25. All those salespeople have been moved to all 4 segment leaders. They are very smart people. They know how to sell. They need offering, which this guy makes. Do we need to upgrade our sales force? Absolutely. That's our future. We want to sell services and software. So let's solve the real problem to upgrade our sales force progressively versus putting a band-aid to say, I think you are not so smart. I'm going to hire some extra people. I don't think that really works.

We acknowledge our -- we created detour here and come to this core. And this is really working for us. Our confidence factor is high. The limiting factor for growth of ARR is innovation. Salespeople are smart. They'll always sell what sells in the market. if the offering is creating value for our customer, they want to sell it. So if we are innovating, if we have the right set of proposition and have a high confidence in Suresh's ability to think through innovation engine, and we are on the right trajectory there. It's hard, but we will do that.

And just as a quick follow-up. So to the earlier question, so would it be possible to kind of be a little more in the future, be more selective on the project side, given that it's slightly margin dilutive overall, if the channel partners' effort kind of succeeds?

I mean, look at our current mix of question, if I understood right, today mix of project business is 20%. It's very concentrated in process segment. You bring installed base through selling projects. That's how the market buys. So I don't think we want to walk back from that. We are not moving our process business to channel. There's no such strategy. Our channel business are industrial and buildings.

There again, we don't have any plans to go direct. So we're very clear on our business model. Two channel businesses, direct business. And as we sell more software and services, between product and solution, what will reduce? I mean, I'm not going to forecast a guess here. 60% is going to become 55%, there'll be probably some adjustment. But net-net, we are more focused to kind of maintain our overall mix to 55%-45% range.

And I would just add to it, in our process business, and that's where we're really owning the life cycle, product life cycle relationship with the customer. We, a lot of times design the chemical process and own the IP on it for our customers. So before we even build anything, the customers will come to us and ask us to essentially engineer the outcomes for them, chemical outcomes as far as their feed, et cetera. So it's really the channel model there wouldn't work.

Let's go to Scott Davis from Melius.

Mike, how do you cut 400 legal entities without having your tax rate go up?

Yes. So look, I mean, we obviously -- we're working through it. It's really -- we're changing and thinking through how we're going to operate in countries. We operate materially in about 70 countries. We have countries where we have 30 legal entities. So we just have massive proliferation of legal entities. Like Germany, we have 30 legal entities in Germany. I guarantee we don't need 30 entities in Germany. So we have some of the frictional tax coming our way as far as trying to simplify it, but that's already, I would say, calculated in the context of what we're trying to do and as far as our simplification.

The low-hanging fruit, Scott, is pretty large. I mean if you look at it, one thing we did not pay attention to is we made -- Honeywell has made a lot of acquisition over the last 15, 20 years period. We did not pay an attention to eliminating the legal entities. And what we are realizing is that you don't need those legal entities just for the basic transactions, and that number is large.

So low-hanging fruit out of the $400 million reduction is significant. And then comes a difficult portion of the tail where the fractional tax will come in and the team has to be thoughtful at how do we do that work here. The motivating factor for us is very clear. The motivating factor was we created Solstice and Aerospace from scratch. Aerospace has got 100 legal entities, and I can't stomach it. We need 300. There's no reason when we create a new entity, they have such a pristine business and then the RemainCo tends to carry the burden of the history. I think we can do it. It's just going to be a lot of effort, but I think structurally, we know how to execute that.

And a lot of this is also -- it's really simplification, not necessarily externally, but internally within Honeywell, we have a lot of intercompany transactions, et cetera. That's really eliminating this noise. That's where the leverage comes in, if you will, or the productivity.

That's helpful. And I just wanted to clarify, will there be some fine-tuning and tweaking to the incentive compensation program?

The compensation of the people?

Executive compensation.

We're working with our Board here. That's going to be one of our key topics coming right off as we become. The answer is absolutely yes. I think we need to make our compensation aligned to the strategy, which we are presenting to you. I haven't discussed with our Board of Directors. It's too premature for me what it will look like. But directionally, it will look like the things we talked about, our compensation should link to what we committed to you, should be directly proportional to that. So there's an opportunity here, and we're going to work with all our directors to make it happen.

Great. Okay. Let's go to Brett Linzey from Mizuho.

Just want to follow up on the 200,000 AI deployments. And specifically, what are the highest ROI opportunities at the segment level for the customers? And then as you guys look more inward and you gave a lot of customer examples, but more inward, is there more opportunity with physical AI in your own plants and footprint?

Let's take the inward example of AI. I think Mike talked about it. We as a company has been a productivity engine because we had an operating system for many years. So driving productivity 15, 20 years back was using Six Sigma and Kaizen and then you move forward, it became robotic process automation and so on. What we have realized is that for us to create opportunity of productivity at scale required us to build a centralized services model. And that realization came, we have centralized execution of R&D under Suresh's leadership, a common R&D team of almost 7,000 people.

They were the first one to use AI at scale to do software testing and gave us substantial productivity. That gave us a ring bell to say, if you want to use AI, you have to centralize your function. It's as simple as that. There's no way you can have a disparate function like in case of Mike, he has finance team in the center. He has an FP&A, then he has people in the businesses. There's no way you don't have any scale to do AI to make a meaningful P&L impact. which made us now to pivot towards a shared services model to say corporate will be light. We are a public company. Of course, we need a corporate function to behave like a public company. But everything else we do should be a shared service so that we can reimagine that service using AI.

So there should be Agentic versions in that when we do procurement, when we do finance, when we do other functions, customer service, that's our journey. So I would say that how much that number should be, it probably is going to be greater than what we all expect. But it's hard for us to put a number on the table to say it's going to be 30 basis points or 10% or nothing. But it absolutely is greater than 0%, and we are very bullish about that.

On the external customer side, I think the -- our innovation adoption has to match with the customer's ability to do change management. Because these offering we are launching of Agentic system, building an Agentic system for buildings, building an Agentic system for process industry or plants. When a customer adopts it, they have to make an organization structural change. They have to hire different type of people. So can they do it in two months? Unlikely. Can they do that in two years? Probably. So we are shifting our discussion not only limited to Agentic system.

When I talk to my peer group, they talk about it, how are you dealing with it? Are you making org changes? And they are really dealing with that issue because Agentic system means the skills are getting automated at the bottom of the pyramid. And the skills are moving in the middle of the pyramid. Suresh showed to you, he's going to eliminate all the nuisance alarms, okay? So there are a lot of people who are doing this punching the key to deal with nuisance alarm in different kind of system. But given they're eliminated, somebody needs to do something about it. Those people are different.

So who's going to make the org change to say, all these people are left and we need something in the middle. So our scaling is more dependent upon customer adoption of their own org change. And more quickly they do it, I think the rate of change here could be quite different in any new technology, and we're absolutely working with our customers on that.

Okay. Let's go back to Andy Kaplowitz in the center.

Vimal, like I think you've run all the businesses in the past. So I'm just curious, like what do you think the biggest unlock is? Because you talked in the beginning of the conversation about getting the other segments to look like BA. So what do you think the biggest unlock is? And if you think about something like process, for instance, it is bigger customers, it's different markets. So how do you sort of deal with the different businesses to get them to look like BA?

I think the biggest unlock is for us, the next innings for Honeywell Technologies is going to be building a vertical-oriented offerings. What industrial companies do well is to build businesses by product line, process automation, life safety, gas detection. But the people are trained to sell their product to a customer. But if you pivot the problem by end market to say we are serving life sciences, we are serving semiconductor, we are serving grid infrastructure. Those are -- you have not solved a problem, which will need to sell products from multiple businesses, that to me is the biggest unlock.

In today's revenue stream and all the numbers we presented to you, we don't have any meaningful number of cross-sell built in because we haven't proven anything. But if you ask me and all my SPG colleagues and Mike, that's what we are most excited about because this is a real scenario. And as we execute that, that to me is the biggest unlock because within the segments, I think each business leader is very capable to grow the strategy which we really presented. My job and Mike's job is really to imagine now how do we solve this vertical orientation because that's a relatively unique concept to build cross-sell of by each end market. In process, it's easy because both Jim and Ken, they sell to the same customer.

There's a high amount of interrelation. Now I do it beyond, it just makes it harder, and that to me is the biggest unlock we have to solve it. 200 basis point of growth in there is possible? Absolutely. That's my incoming thesis. Have we delivered on that? Answer is no, but that's an upside, which is not in our numbers right now.

And then you probably deserve a little vacation after June 29, and you've been pretty busy. But assuming you don't take one, like where do you reprioritize your time? Because you will have a little more time, right? So where are you going to focus?

I mean, if you -- it looks -- how we executed the separation, it's a bit interesting to spend a minute on that. I think the separation team was done as a separate team under Anne's leadership. And we separated -- created a separate separation management office to really drive execution of Solstice and Aero separation. My time actually spent was not as significant as it appears from outside. I had to make a few difficult decisions, how to hire leadership team for Solstice and for Aerospace and create Board of Directors, of course. But time required is less, implication of decision is very big. So I did not really went away from the core of spending about 1/3 of my time externally. That has been my principle.

It means be it with your salespeople and be it with your customer because that really gives you the insight on the businesses they are moving in. And -- but to your question, it's going to be a vertical thinking. The segments where we have a lesser penetration, I'm spending more time with life sciences customer. I'm spending more time with semiconductor customer, getting to know them, what are their pain points and what offerings we can make. It's interesting that I met with one of the large life sciences customer earlier this year or the largest company. And his comment was, I'm surprised I'm meeting a Honeywell CEO for the first time. But you're the biggest automation company, and I don't know why we don't have a relationship with you.

My takeaway was our brand value is so high in his mind, and we've not done a good job to create value for them. And then we talk about our cross-sell solution, they really get excited about it because they said, this is new. We haven't heard this before. So that's where the time will get spent more in terms of organic growth, creating more opportunities and of course, building pipeline for M&A. I see my job continues to be more growth coming from organic and inorganic actions, and that's where I should spend more -- a lot of my time.

But just to the point of how focused we are, tomorrow morning, we'll have all day of business review.

Business review.

To focus on the second quarter.

For quarter 2.

We're serious.

We need to deliver.

Okay. Let's go to Nicole DeBlase with Deutsche Bank.

Just on the topic of M&A, does the $2 billion to $4 billion bolt-on range mean that large deals are completely off the table? And then a follow-up to Mike, you talked about the legal entities. You talked about the ERPs and you talked about shared services, but you didn't talk about facilities. Is that an opportunity? Or do you think that the size or the number of facilities that you have is right?

Do you want to answer M&A? I can talk about the facilities.

Yes. I mean -- look, our strategy is -- we have worked really well for us as a bolt-on acquisition. So what works well don't mess around with that. So I think fundamentally, we want to stay focused on that enterprise. And you never say no to everything. There's never say we won't do this and we won't do that. Things change. But principally speaking, we don't see any necessity to go away from our fundamental strategy of grow your installed base, mine your installed base, this strategy will work for us and do some meaningful addition in M&A where necessary, specifically to on what I mentioned, verticals and frontier technologies.

On your question on facilities, we are already 85% local for local, if you will, on region for region. We're optimizing things. Especially in IA. So you'll see more consolidation, but this is more just really to drive scale in our facilities. And that won't require any, I would say, incremental repositioning funds. I'm assuming about $70 million to $80 million of repositioning for Honeywell on a go-forward basis. But largely, we have a footprint that we want and we can grow on it.

Actually, Scott is here is our VP for ISC built a very clean strategy. We have about 80 factories, 80 facilities manufacturing as in Honeywell Technologies. He wants to build 25 facilities will produce 80% of our revenue, 80-20. We still need 80% because there are some nuances of localization, some of unique product line.

But if we turn our focus to 25, that's where you invest capital, that's where you build scale, that's build your Honeywell operating system. And I think really his strategy is really smart to execute it that way. And that's going to give us leverage like Billal talked about it. We don't think Honeywell needs any new factory with one exception, LNG. If somebody has more LNG capacity, give me a phone call. We have so much of business. We can't serve it because it is unexpected business which is coming our way. But outside that, I think we have a good capacity to serve the entire company and scaling a few factories is our strategy.

Okay. Let's go to Alex Virgo from Evercore.

I wondered if you could talk a little bit to the context of the decision to have a fixed date, i.e., 3-year targets as opposed to through cycle targets? And maybe talk a little bit about, I guess, the lift in the acceleration near term and the confidence that you clearly have on the next 3 years, I totally get that, but the transition to, I guess, building habit to be growing faster in the NPI, et cetera, et cetera.

I think the 3-year number is just to illustrate for everybody in this room to give something which is tangible. Our strategy is more longer term and new durable. We don't think we are going to come back to you in 2 or 3 years from time to say we don't think we're going to change our strategy. So fundamental strategy of having mission-critical segments, serving building, industrial and process, growing through new products, that's going to remain very robust. But as a public company, we need to give you some commitment you can hold ourselves accountable to. But then as Mike said very well, we think every day, how do we beat that $6 commitment we are making because that really is what will excite you and what will excite us.

We operate on the 3-year cycles in Honeywell. And if someone comes to me with a plan that has 10% CAGR like that, and it's linear, it's not believable. So really, I always discount the last year, but really focus on the first 2 years because if you can get that growth and the margin expansion in the first 2 years, you're pretty sure you get it on the back end. So it's really about next 18 months. And once we instrument the next 18 months, in 6 months increments, we can then talk about rolling forward the forecast. But that's our general, I would say, construct of financially, and we're quite convicted on what we're going to deliver here in the early cycle of that.

Let's squeeze 1 or 2 more questions, Mark, before we...

Yes. Let's go back to Julian for a final question.

Maybe one for Vimal, just because of your background in the process business. I remember you used to talk about positioning the portfolio differently there. But when we look at it now, it's still almost half petrochem and refining. So I guess when you -- how do you think about the growth profile of that piece of it? And kind of how -- in 5 years' time, let's say, how much of that segment should be petrochem and refining?

Yes. I mean, clearly, Julian, the actions we have taken on LNG was thoughtful to derisk our business, which is concerning refining petrochemicals. So I think that certainly has helped. And the outside growth in that is certainly going to change. And then we are equally focused to grow our business on the process side of the business in life sciences and in grid infrastructure.

On the core, we believe the biggest opportunity is OpEx leverage. There may not be a lot of capacity coming for refining petrochemicals, but nobody is shutting down any plant. So it means the money being spent on OpEx in terms of running these facilities better. That's why our mining installed base strategy is very critical. So I think that's going to enable our growth. A case in point is Ken's business never had any services. They licensed the technology and then sold the catalyst.

Now Ken believe he can create several hundred million dollars of services business from ground zero. He never had any. So all that for us is incremental growth. We're displacing somebody else who was providing those services, maybe small system integrators, small EPCs, maybe customers' in-house team. So getting the maximum share of demand in our core but pivoting towards some of these higher-growth markets like LNG, grid infrastructure and life sciences. That's why vertical strategy is important. We have called out life sciences and grid infrastructure as our priority verticals. We'll do organic growth. Nothing stops us to look at inorganic opportunities there to continue to build our business more diversity there. So more to come.

Great. We'll leave it there. A couple of points before we wrap up. Lucky for all of you. We have nice warm pullovers to put on, on your way out the door and great timing. And we're going to watch the second half of the customer video from before, and then Vimal will join us for closing remarks. So thank you again.

[Presentation]

Please welcome back Vimal Kapur.

All right. So again, I just wanted to thank everyone. I wanted to make sure that we start the day with the customer and end the day with the customer because I believe that customers drive our future. And you heard from several segment CEOs and how they're partnering with us every day to drive shape our future. I think this slide is a summary of where I started my day in the morning. Why own Honeywell Technologies, everybody has a lot of choices. But we have built a portfolio which is transformed as a pure-play global automation company.

And the portfolio mix and the business model really give us an optionality to have more than 10% earnings growth through cycle. And then AI is an optionality. I truly believe that this industry is going to transform itself. The timing is near term versus long term, and we are going to be leading that whole move of automation to autonomy. And finally, execution is in our DNA, whether it's our operating system or it's in our team.

So there's no -- this -- I've been in this segment, automation segment for 40 years. I just realized yesterday that I started working on 10th of June 1986. Today is 11th June. So I completed 40 years only in one segment. And I've never been excited about the future of automation industry, not because I'm CEO of the company, but the opportunities which is ahead of us. I'm really excited. I think this moment is a great moment for Honeywell Technologies. And I feel you all are excited in terms of future which falls ahead for us.

So thank you very much for being here. We have a great set of demos put together for you on the site. So do stop by for reception, and have a good rest of your day. Thank you very much.

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

Thank you. Good morning, and welcome to Honeywell's 2026 Guidance Update Conference Call. Joining me today are Senior Vice President and Chief Financial Officer, Mike Stepniak; and Vice President of Financial Planning and Analysis, Rajiv Reddy.

This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information on this website that may be of interest or material to our investors.

Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to certain risks and uncertainties, including those described in our recent SEC filings.

This morning, we will review our guidance for 2026 ahead of our Investor Day later this week on Thursday, June 11. Last week, Honeywell Aerospace hosted their inaugural Investor Day and provided a pro forma financial outlook for 2026.

Today, we will provide a similar framework for the RemainCo entity, which will be named Honeywell Technologies. We'll provide a bridge for investors from our previous guidance to the RemainCo figures as well as provide additional color on the second half outlook post spin. As always, we'll leave time for your questions at the end with Mike, Rajiv and myself.

With that, it's my pleasure to turn the call over to Mike, who will begin on Slide 3.

Thank you, Mark, and good morning. We're nearing the end of Honeywell's multiyear transformation, and we're excited about what's ahead for Honeywell Technologies. To begin, today, we are reaffirming our prior full year outlook for Honeywell that we provided in our first quarter earnings call.

Importantly, the second quarter remains on track. Through May, demand remains strong, particularly in our building and process technology businesses, and we continue to see short-cycle recovery in Industrial Automation that began in the first quarter.

A few other points to highlight. We now expect the impact from the Middle East conflict to be roughly $50 million to $75 million of revenue, although we continue to monitor the situation closely for signs of further escalation. Segment margin is also trending in line with our guidance, and we continue to expect an acceleration in free cash flow in the second half after a slow start to the year.

As we plan for the spin-off of Aerospace on June 29, we are introducing a simpler reporting framework with three key changes. First, we removed the estimated implied results for Aerospace that were included in the former Honeywell's full-year outlook for revenue, earnings and free cash flow. We have also included the benefit of the Honeywell Aerospace framework license agreement, which will partially offset the temporary [ stranded ] cost impact.

Second, our guidance now removes financial estimates for Productivity Solutions and Services, and Warehouse and Workflow Solutions businesses beginning in the fourth quarter, which is the assumed closing date for both divestitures, while also adding estimates for the pending acquisition of Johnson Matthey Catalyst Technologies business, which is assumed to close in the third quarter.

Finally, we are removing the P&L impact of our overfunded pension and the full impact of our investment in Quantinuum from our adjusted results from prior and future periods to provide a clearer and more simple presentation of our performance.

I will talk more about each of these items in the coming pages. This outlook for Honeywell Technologies will also form the basis from which we will introduce new 3-year targets at our Investor Day on June 11.

Let's now turn to Slide 4 to discuss our latest outlook in our business segments. Here, we show a full year organic growth outlook for each segment and total Honeywell Technologies.

To start, Building Automation is continuing to outperform with strength in all regions across both products and solutions. As you will hear later this week from Bilal and team, the business is leading the charge with new innovative products that are driving share gains and continued growth above market.

We continue to expect PA&T sales to be roughly flat organically for the year, although we remain confident in a high single-digit growth outlook for this business in the second half due to the strength in orders and expected ramp in the conversion of backlog despite the transitory impact from the Middle East conflict. We're also starting to see stronger short-cycle catalyst demand.

We have raised our full year expectations for Industrial Automation from down low single digits to flat for the year as the short-cycle demand recovery continues, particularly in Europe and Asia, which we previously thought would be headwinds in 2026.

And last, strong pricing execution and discipline are meaningfully contributing to top line growth across the portfolio, more than offsetting rising inflation. Overall, we expect Honeywell Technologies to deliver 2% to 3% organic growth in 2026, with stronger growth expected in the second half.

Let me turn to Slide 5 to talk more about the details of Honeywell Technologies guidance. On this slide, we lay out the impact of each of the moving pieces that take us from our prior guidance for Honeywell to the Honeywell Technologies guide we are providing today.

First, the decision to exclude pension income from adjusted earnings removes $0.85 of EPS from prior guidance, which includes the impact from both Aerospace and Honeywell Technologies. We believe the separation is the right time to make the change and the exclusion of this nonoperational income from our adjusted earnings should reduce earnings volatility, increase visibility and improve free cash flow conversion.

While we are excluding pension income from our operational results, our roughly $5 billion overfunded pension represents real value to Honeywell shareholders. We're actively evaluating ways to monetize this surplus, and we will provide more details on our plans at a later date.

The next and most significant adjustment is the removal of Honeywell Aerospace, which represents approximately $5.50 of earnings. This includes roughly $19.2 billion of sales and $5 billion of segment profit at the midpoint of our prior expectations with roughly $3.3 billion of free cash flow prior to any stand-alone cost and cargo adjustments, but including a partial allocation for interest expense and below-the-line items.

Next, following Quantinuum initial public offering on June 4, we're removing the financial impact of our investment in business from earnings, a decision that aligns with our other efforts to simplify Honeywell Technologies results for investors. Notably, this removal improves our segment profit by approximately $300 million, which translates to roughly $0.19 of earnings and $100 million of free cash flow.

The teams and I also have been very focused on the elimination of stranded costs, and I recently shared that we have reduced our estimate of these costs on day 1 to less than $300 million, a roughly $0.38 impact to full year earnings. And I am pleased to share that roughly 75% of this total will be held by year-end, a sharp acceleration from where we began. I look forward to sharing more on this topic on Thursday.

Partially offsetting stranded costs is the benefit of the Aerospace trademark license, which amounts to $146 million to segment profit, a half year impact of $73 million in 2026 or $0.09 of EPS. The difference between the $225 million cash impact that Honeywell Aerospace cites in their Form 10 and Investor Day materials and the $146 million segment profit benefit you see here is due to the accounting treatment governing license expense on Aerospace books and license income on ours.

However, from a free cash flow perspective, the $91 million we show here represents a $225 million of cash prorated for half year and net of tax. Thus, our guidance now incorporates the expected exit of PSS and WWS from Industrial Automation and the Johnson Matthey Catalyst acquisition in PA&T.

We expect the dilution from these portfolio moves to be partially offset by a stronger-than-anticipated outlook in our Automation segment in the second half. All in, these items bring it to the midpoint of our initial Honeywell Technologies guidance for 2026.

Now let's turn to Slide 6. This page illustrates the walk of our 2026 guidance midpoint for Honeywell Technologies from the Honeywell guidance issued in April. One point to mention is that the basis point impact is calculated of the revised base after removing Aerospace sales and segment profit. The endpoint will be the starting point from which we issue our 3-year financial targets at our Investor Day on Thursday.

With all of these pieces in place, let's turn to Slide 7 for a summary of our full year and second half 2026 guidance for Honeywell Technologies. As previously mentioned, our 2026 Honeywell Technologies guidance excludes results from Honeywell Aerospace following the spin-off and subsequent reclassification of the business into discontinued ops.

Additionally, the guidance now assumes the divestiture of Productivity Solutions and Services, and Warehouse and Workflow Solutions businesses as of October 1 and assumes the acquisition of Johnson Matthey Catalyst Technologies as of July 1 for the purposes of your model.

And last, pension income and continuing results have been removed from our full year 2026 guidance entirely and in prior periods for comparison purposes.

Following these updates, Honeywell Technologies expects organic sales growth in the range of 2% to 3% for the year, including 3% to 5% in the second half. We expect full year segment margin expansion of 220 to 270 basis points, reflecting the prior year margin impact of stranded costs and our significant progress to date on the elimination of these costs as well as accretion related to the sale of PSS and WWS.

Importantly, we expect Honeywell Technologies will exit 2026 at approximately 22% segment margin. Full-year adjusted earnings per share should be $4.05 at the midpoint or up 22% to 28% versus prior year. Similar to segment margin, the strong year-over-year EPS growth reflects our rapid removal of Aerospace stranded costs.

Finally, we expect free cash flow of roughly $2 billion in 2026, with the majority of this coming in during the second half at an approximately 95% conversion rate. On a pro forma basis, we expect Honeywell Technologies to deliver 90%-plus conversion annually.

In the second half of the year, organic sales growth should increase to 3% to 5%, led by a sharp acceleration in Process Automation & Technology as our strong backlog begins to convert and demand for catalyst shipments materializes.

Margin dynamics should also improve in the second half, given the stranded cost and portfolio dynamics we discussed. And as a result, we expect second half segment margin of roughly 21.3% at the midpoint, up 350 basis points year-over-year.

Finally, earnings per share in the second half is expected to be in the range of $2.20 to $2.35, up 22% to 31%. Please note that our earnings per share guidance and 3-year targets to be issued on Thursday do not reflect the impact of the planned 1-for-2 reverse stock split, which was approved by our shareholders last week and is expected to take effect on June 29 at the time of the Aerospace spin.

We will provide more color on that final step closer to the effective date. You can also find details of the simplified below-the-line structure in the supplemental information section of our presentation, which includes estimates of our go-forward corporate and other below-the-line items, which will continue to decline in 2027.

Now let's move on to Slide 8 to wrap up. We hope you found the information presented in this call helpful in laying the foundation for Honeywell Technologies outlook ahead of our Investor Day. We believe the changes we are making today will provide a cleaner and more simple presentation of our performance going forward.

We are tracking ahead of schedule on our separation milestone with the Aerospace spin-off now expected to be completed on June 29, and I am very excited to see these 2 leading pure-play companies in option.

I also want to take a minute to congratulate Raj, [ Nitesh ] and the entire Quantinuum team on an incredibly successful IPO last week. We remain shareholders and supporters and look forward to partnering with Quantinuum on their continued success.

We also look forward to hosting everyone at our Investor Day on June 11 in New York City. This event will provide an excellent opportunity to share our strategy and long-term growth expectations.

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

Mike, Rajiv and I are now available to answer your questions. We kindly ask that you please be mindful of others in the queue by asking one question and one related follow-up. Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research.

This is really helpful. Just on the free cash flow conversion comments, Mike, I think the $2 billion represents about 80% of adjusted net income for this year. Just wondering, are there some one-timers in the free cash this year? And then going forward, the 90% plus, now that we've got pension income adjusted out, what are the barriers to getting towards 100% or close to 100%?

Nigel, I think if I just step from a first half to second half, first half for us was slower. A few reasons for it. Obviously, Middle East impacted us. Second half, we should be north of 95%. We have a lot of collections coming in. Demand is very strong.

And structurally, a few things are happening. Obviously, our tax rate is getting better going into the second half and the cash -- with that cash taxes, same for next year. And we're paying down debt aggressively. That's going to help us as well with better free cash flow conversion. And structurally, our portfolio is getting better.

So I wouldn't say 100% free cash flow conversion is not out of the realm of expectations for us, but something that we have to work our way through. And that's what I'm working for in the second half, but I cannot commit to it yet. Just a lot of moving pieces.

Okay. That's great. And then just a quick one on the net interest expense. You've got the dividend coming from Aerospace. Just wondering, what your plans are in terms of paying down debt? And what is the cash and debt balance driving that net interest?

Sure. So we -- in the short term, we're focusing on debt repayment, and we're targeting our leverage ratio below 3 by year-end. And from there, we'll see where we go. We obviously, like I said, expect much stronger free cash flow conversion in the second half. And our commitment is to get the debt lower this year and continue to do that next year.

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

Maybe just wanted to start with the segment margin guidance. I just wanted to sort of check. I think previously, you talked about a flattish segment margin kind of year-on-year in the second quarter on the old basis. Just wondered if that was still on track.

And when we look at second half margins, is the way to think about it, it's sort of a 20% margin in the third quarter, 22% in the fourth quarter. Is that how you're thinking about the second half?

Julian, thank you for the question. Great question. So maybe first, I take us back to what we guided at the beginning of the year. So we guided 50 to 90 bps expansion operationally, then we had about 30 bps of [ Quantinuum drag ]. So if you take that out, we should be at 50 to 90. I would tell you that operationally, we'll probably expand north of 100 bps in this year.

And to your question on the second half then, I would expect third quarter to be around 21% and the fourth quarter about 22%. So really good story on margin expansion. I would say we're getting good mix, we're getting good volume leverage. We aggressively are taking out stranded costs. All of that is showing up in the margin rate.

That's great. And just one follow-up on the free cash point. Do you have -- maybe I missed it, but did you provide maybe what last year's number was on free cash flow for Honeywell Tech or the conversion rate? Just to give us some context to understand kind of how one-off the headwinds are this year on the free cash flow number.

I would say we were about 80% and moving to 90%. So I think that last year, we finished about 80%.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

I appreciate all the details. Maybe we start with what are your options for the overfunded pension plan? Just kind of set expectations here.

So look, I mean, there are multiple options. The pension is overfunded by about $2 billion. And we're obviously considering various options, and there are numerous ways you can structure the pension benefits on a go-forward basis. And it's an option for us.

Right now, in this year, we -- I don't have any significant or further plans on pension. That's something that we're definitely considering next year and look at it. But like I said, those are -- there are numerous ways to access this overfunding.

Great. And then can you just give us a sense of how the dollar amount on the Aero license was derived? Was this a negotiation? Just kind of how do you land on this number?

That's really -- it's really based on the fair market valuation, and we had a lot of advisers and third parties to help us with that. That's how we derive at the number. It's not really a point of negotiation. We wanted to leave Aerospace in the best possible shape go forward, and that's just how the fair market value played out for trademark.

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

Maybe just starting with the Middle East impact, the $50 million to $75 million in 2Q, I guess what's the level of conviction that, that kind of moves to zero in the back half of the year? And if you could give us a little bit of an update on what you're seeing with respect to impact to the Middle East today?

Sure. So I would say the very high level of conviction, obviously, for this quarter, assuming there is no significant re-escalation, if you will and the conflict continues to progress to deescalation and ramp up, we don't see any significant impact in terms of pressure for us in the Middle East. In fact, I would say we would see probably incremental demand showing up from Middle East.

Generally, I think with the conflict, what it generated is just a lot of demand globally as people are thinking through their own energy security. So our business is predominantly PA&T is seeing a lot more incremental demand outside of Middle East.

So I would say net for Honeywell and for our guide, I would say this is -- will end up being a tailwind or incremental volume that will have to contend with, as you know, in many of our places, we're already sold out in the business. So we're working our way through that.

So I would say that if the conflict kind of remains the way it is, we can absorb it in our guide for the rest of the year. I don't see any big red flags right now, assuming things continue to deescalate.

Okay. And then just a follow-up on stranded costs. You said you'd be kind of 75% of the way through that by year-end 2026, which is impressive progress. What about the remaining 25%? Is that something that can be fully eliminated in 2027?

Yes. So our goal is to fully eliminate in the first half of next year. The 75% of the $290 million that we're talking about, that cost is already actioned through repositioning programs, et cetera. And it just needs to show up in our run rate.

And then we are essentially resetting the bars for the teams, and that incremental cost that is going to be taken out by really in two areas. First, just a broader adoption of shared services, and we're simplifying beyond stranded costs. So there's some additional simplification we're pushing in the first half of next year. 100% confident we'll be able to eliminate that stranded cost and then some.

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

Congratulations. Just a question on pricing. What kind of pricing is now embedded in the stand-alone Honeywell Technologies?

Yes. So I would say pricing is progressing well for us. We see -- first, maybe I'll start with that.

We have just -- see a lot of demand. Our orders are high. May quarter-to-date, our orders are in the range of about high single digits, potentially double digits for the quarter. So we feel really good about that. With that, what's happening, the pricing is falling. So I think we'll finish second quarter about 4% pricing and the second half should be around that range, so 3.5% to 4.5%.

Fantastic. And just maybe a little bit -- sort of Building Automation continues to be strong. Can you just sort of provide a little bit more visibility what's happening inside there? Maybe just looking building solutions, fire solutions, security and access, building management, power infrastructure; any color as to why this remains so good for so long?

Sure. So Bilal will talk about it on Thursday. And I think we have a great story on Building Automation. Building Automation has been introducing new products at a very high rate for the last 2 years. We have a lot of exciting offerings coming into the market. We feel like we're taking share. And globally, if you think about Europe, Asia, China, these regions are growing for us as well. So there's a multitude of factors that's helping us.

And I would say Forge is maturing. And you'll hear on Thursday a lot about Forge and our connected offering. And I think it's just outstanding story. So Building Automation orders this quarter, I've been with Honeywell for 6 years, I haven't seen orders that strong yet in the company. So we definitely are taking share. At least that's my view based on what we see in order rates, and this is driven by the number of offerings and solutions that we're providing into the market.

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

I was intrigued by your comments on improving short-cycle catalyst demand. And as you know, catalyst has continued to be a bit of a drag or at least lumpy. So maybe you can talk about that. And then what are you seeing at Johnson Matthey as it comes into the fold?

Sure. So short cycle, I think your question was on Industrial Automation?

On catalyst demand.

On catalyst, I'm sorry. On catalyst, we -- so as you know, we talk about a lot over the last several quarters that there is still oversupply and not a lot of demand, et cetera. As crack spreads got better and our customers realize they have opportunity to really improve their yields and get that better price, we're starting to see a lot of orders on catalyst.

So net-net for the year, I think the catalyst sales will still be low single-digit growth, but we see a significant step-up in the second half, double-digit step-up in catalyst demand out there. So we really feel good about the progression. And with that also, we feel better, obviously, with about our cash flow position as this business is going to generate a lot of cash flow for us in the second half.

And Mike, maybe same question on IA. I mean, Europe and China getting better, which you did not expect. Are you seeing the same in the U.S. too, given the improvement here in PMI as well?

Yes. I think IA is a little bit different for us. There's another factor there, which is the self-help factor with [ Pete ] coming onboard, spend a lot of time just simplifying the business, focusing the business; that business now is really pure-play measurement and sensing.

We're doing much better on supply chain. That allows us to do better on pricing. We're driving volume. We simplified this business significantly structurally, which helps margin expansion.

And then there is -- with our end markets, there is some reshoring going on that's helping the business grow as well as China, we thought it was going to be a drag for us this year, and it isn't. So we just have a lot of tailwinds.

Generally, I would say, for the whole business, if you look at our three segments, all our three segments have momentum right now going into the second half. So I feel really, really good about the setup.

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

Just thinking about getting the model together, any chance you can tell us what Q1 '26 EPS is on this basis?

We can, but probably -- I don't have my notes on this right now with me. But I'll come back to you on this.

Okay. Great. And then can you just come back to PSS and WSS? We got obviously the net here with Johnson Matthey. But thinking about rolling this into '27, what is the actual kind of segment profit contribution or lack thereof in the guide separate and apart from Johnson Matthey?

To answer your first question, and then we can follow up after the call, but the 1Q actual should be $0.89. That's the 1Q EPS.

Can you just ask your second question again? Sorry, we were looking for...

Yes. I just wanted to get -- so we've got kind of the net effect in portfolio actions, right, between WWS, PSS and Johnson Matthey. Can we just isolate what the contribution for PSS and WWS are inside that number?

Yes. Jeff, for at least part of those, we haven't said. And obviously, it's the sum of those 3 plus an estimates for JM, which, again, we don't want to get ahead of ourselves seeing the deal hasn't closed yet. So I would just think of it as you have the two businesses coming out, a small addition for JM.

And then on top of that, you have the stronger outlook in the base business. So it's just a little bit splitting hair, [indiscernible] had said, some of that we just haven't disclosed for agreements with the sellers and buyers.

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

My first question, just to clarify, the stranded cost of $290 million, that's a full year number. So what does the split look like for stranded costs in the second half of the year?

$200 million, $290 million for the year, we'll give a little bit more color on Thursday. So you'll see it on Thursday when we talk. But like I said, majority of this cost is already actioned. It just needs to show in our run rate, meaning the restructuring actions, et cetera, were taken, the people that we had to take out those people already exited.

So it's just a matter of that showing up in our run rate. And like I said earlier, we should end first quarter about 21% segment margin. And in the fourth quarter, it will be about 22%.

Okay. All right. Great. And then just lastly, the Quantinuum exit, how are you guys thinking about monetizing your remaining stake? Any comments around that would be helpful.

So I would say, first, once again, I'd like to congratulate the team on the raise through the IPO. I think that the business now is extremely well positioned as far as having capital. We're making a lot of progress commercially as well as from a strategy execution standpoint, and we'll stay in the business for a while. But it is an optionality for us that we'll definitely consider down the road. But we don't have the urgency to get out, given that the business is such a good position commercially and where it's going.

And then look, we will have a book adjustment coming up, obviously, as part of the deconsolidation, et cetera, we'll update our valuation of the business and reflect on our books. So it's going to be $5 billion plus pickup in terms of the value of the business and that's reflected on the books. So you can from there infer how much potential cash -- incremental cash flow might come through any modernization down there.

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

I guess when you guys were building the first half to back half plan, this acceleration or step-up in organic growth; maybe just help us bridge the confidence level there between backlog conversion, the order momentum that you're seeing, short-cycle recovery, comps, whatever.

Just curious in terms of the confidence level in that step-up and where is that coming from, is it already within the backlog? Or is it some extrapolation of the order trends you're seeing now?

Sure. So let me maybe just level set on where we are here for the quarter and how we're thinking about the second half. So May quarter-to-date, our orders across the board are high single digits. Building automation is closer to double digits. So we see strong orders, both on short cycle and long cycle.

Let me just maybe talk through various segments and start with PA&T. In PA&T, as you remember, we always talked about us having a record backlog and that backlog building. This quarter, this backlog is starting to convert. Why do I say that? I start seeing cash, customers are paying us advances, we're mobilizing our people to go work on these projects and start the engineering work.

We see significant pickup in the second half from that project work, and we are 100% confident in the volume coming. On top of that, you have the increased catalyst demand that's coming as well, and that's short cycle. And -- but I think that given where the oil prices are today and just the general demand, we will continue to see strong performance in PA&T.

On Building Automation, Building Automation now has been delivering 7 quarters high single-digit growth. We continue to guide them at mid-single-digit plus, and the orders are extremely strong. We're seeing a lot of volume from our products, but we also see volume in projects and services.

There is a little bit of pull in, if you will, from a second half to the first half, the customers are driving because we did announce price increases, so people want to lock in their pricing. That said, that gives me confidence this accelerated demand, it gives me confidence that the projects that people have in their pipeline are going.

And then finally, on the Industrial Automation, a lot of it has been self-help story. But the team is, again, starting to introduce NPI. Volume is better as far as demand. We're able to satisfy that demand. So the business is going to grow in the second half, low single digit. And based on everything I see, it should grow mid-single digit next year.

And then Pete is definitely taking advantage of reshoring happening and pivoting the business to being more focused. So across the board, like I said earlier, all three segments have momentum.

Great. That's very helpful. And then just a separate question on profit trends. So obviously, the back half guidance is helpful. There's a few moving pieces like the trademark license economics, I think, is helping maybe $145 or so million, and then you've got WWS and PSS leaving.

So on the trademark licenses, is that -- should we think about that as kind of sustainable as we exit this year? And then I assume PSS and WWS, there's obviously some margin and growth mix dynamic. Maybe you can talk about what those businesses exiting does from a mix perspective.

The trademark income is just helping us with stranding cost. And then obviously, it will subside over a period of time, but we're going to be continuing to simplify and drive margin expansion operationally. So over the next few years, this will offset.

What I said earlier, operationally versus the guide that we gave at the beginning of the year, so the 50 to 90 bps operationally, right now, we're more like 100 to 120 bps of margin expansion operationally on top of everything else that's happening structurally as far as the portfolio adjustments, et cetera.

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

I know you talked about better Industrial Automation growth this year and now expecting flat because of maybe better performance in Asia and Europe, I believe. But can you just maybe talk about which categories or product verticals are driving that better-than-expected outlook?

I would prefer just Pete talk to it. He has a lot of material that he's going to share, and it's only a few days away. So I wouldn't do it justice, and I'd prefer Pete talk about it.

Appreciate that. Fair enough. And then maybe just, I guess, to follow up, it seems like Q4 is really the first quarter where we kind of have a real, I guess, pro forma for all the portfolio movement that's happened with some coming in, some going out.

So I guess, how do we think about that 22% margin rate in Q4 as we look into '27? It seems like there will still be some stranded cost out coming out of there. And anything else just to call out from that Q4 jumping off point?

So in fourth quarter, we still have about -- like we said, about $85 million of stranded costs that will take out in the first half of the year. We we will finish the year about 22% margin. And then we'll talk about 2027 when we get to the beginning of the year.

But we have implemented a multiyear margin expansion framework that is based on operational improvement. So it's price, it's mix, it's leverage on fixed cost. And structurally, we're continuing to simplify the business significantly, and I'll talk about it later this week.

Yes. And Chris, I would just add, don't forget, just to think about the seasonality too. Yes, we are exiting '22, but Q4 is always the strongest for this business. Obviously, we have a limited history of just this group of assets, but you shouldn't think of this as goes up into perpetuity. Obviously, Michal will say a lot more about the long-term targets in a couple of days. But just remember, Q4 is also historically the strongest quarter of the year.

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

I just wanted to check on -- you made the comment that you had some large orders in the Process segment. Do you mind adding some color to that? Like what's incremental that you're seeing this quarter? And I know last quarter, you cited some strength in LNG. Can you talk a little bit about that [ market ] specifically?

Sure. So it's the orders coming from two areas. A lot of the orders are coming from LNG. And we obviously, like I said, we have the tales orders, et cetera. You'll hear more about it here as we go through the quarter, make the announcements, but we have some orders in Africa, we have some orders in Middle East. So generally, we feel good about the backdrop here and our commercial pursuits and how they're starting to materialize in terms of firm orders.

Okay. Got it. And then in the call, you cited Q2 tracking in line. You did raise a little bit on your Industrial Automation front. So wondering, should we assume midpoint or maybe slightly better than the midpoint?

For the second quarter?

Just Q2, yes.

Yes. I should say it's in line. I mean it's rounding at this stage. I would say that everything indicates that the quarter is going to be good, but it's within our guide.

Our next question comes from the line of Jairam Nathan with Daiwa Capital Markets.

So just wanted to understand for Honeywell Technologies, the CapEx percentage of sales, R&D run rate, yes, that would be great.

Sure. So I would say -- from a CapEx standpoint, everything we've done with the portfolio makes us a bit CapEx lighter. Our CapEx over the next few years should be around 3% of revenue, and that's with investment in capacity, incremental investment in capacity in LNG. So feel good about CapEx.

And R&D, our R&D as a percentage of sales should be north of 4.5%, probably this year will be 4.8%. As if you remember, we stepped up our R&D spend last couple of years. And we feel that at 4.8% -- north of 4.5%, it's appropriate level of R&D spend. And it's not pressure to us for margin expansion. We continue to take out fixed costs down despite taking up our R&D investment.

And finally, in terms of -- you talked about on HPS, you talked about Middle East in terms of energy diversification. But is there -- are you seeing any reconstruction benefit? And -- or if not, what do you think the timing there would be?

Any -- sorry...

The reconstruction of facilities that have been damaged and things like that.

Yes, 100%. I mean we're actively talking to our customers. We're on the ground with our customers. Dan was there on the ground a couple of times, Bilal, Jim. So the whole leadership team has been in the Middle East since the conflict, and we're working through it. And over the next -- this quarter and quarter after, you should see some announcements on orders, but the reconstruction has already begun.

Our final question comes from the line of Chigusa Katoku with JPMorgan.

Just starting with IA, I was curious, so the fourth quarter is when you'll have the steady-state portfolio at IA. So I was curious your thoughts on what the fourth quarter exit rate for organic growth would be.

Yes. So look, I would tell you that it will be low single digits to mid-single digits. I have a high level of confidence that next year, the business is going to grow mid-single digits. We obviously right now, we are guiding low single digits, but the team is having momentum and mid-single digit in the fourth quarter is not out of realm of possibility, but we'll continue to be cautious.

Okay. Sounds good. And then similarly, for PA&T, do you expect Johnson Matthey to grow in line with the high single digit? And kind of what kind of exit rate do you expect there in the fourth quarter?

I would say, like I said earlier, we have a good momentum going to the second half in PA&T. And I'll just leave it at that for now. We'll have more to say when we report second quarter.

I would now like to turn the call back over to Mike Stepniak for any closing comments.

Thank you all for joining us today. We really appreciate your time and support, and we are looking forward to seeing many of you in New York later in the week. And I just want to say, have a great day.

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

I think before we kick off the conference, I thought I'd make a few opening remarks. For those of you who don't know me, my name is Nigel Coe. I lead coverage of the U.S. industrial sector here at Wolfe Research. And it's my pleasure to welcome you to the -- first of all, on behalf of the Scott Group, Myles Walton, the sales team, corporate access teams and also our founder, Ed Wolfe. I do -- I want to give you a warm welcome to the 19th Annual Wolfe Industrials and Transports Conference.

I use the word warmly because today is going to be a warm one. Temperature outside today is going to be over 90 degrees. The first day in New York, over 90 degrees this year. So what a great day to be in this small confined room with 400 people. So, so far, the air conditioning is working. We've got some cold air coming through and long may that continue. So as you'd expect for a U.S. industrials conference, we're going to be running the AC really hard. We're going to have CEOs on the stage, and we've got AC come out of the vents. So we'll endeavor to keep you guys as cool and comfortable as possible.

We've got another really great lineup of corporates this year. We've got 106 corporates attending for one-on-ones and presentations. We've got 577 investors registered, and we're hosting 526 one-on-one meetings. So that's a really good lineup, new records for the conference. And I'd like to really thank all of you for both corporates and investors for supporting this conference. It's not easy to pull us off. So I do want to say a big thank you to our corporate access teams for really just the dedication and hard work of making sure all the logistics line up.

And finally, I do want to just remind you, we've got a cocktail event this evening, kicks off at 5:00 p.m. I would love to see as many of you there as possible, just to mingle and in a sort of very casual environment at 5:00 p.m., but we'll see if we can get the bar track to open a little bit earlier than that. So that's it for my prepared remarks. Once again, thank you for being here. And yes, okay, we're good to start. It's 8:00 a.m. So it's time to get into the conference.

And it's -- I've got 4 fireside chats to kick off the conference, and it's my great pleasure to welcome Honeywell. I can't think of a better way to start the conference than with Honeywell. And it's my pleasure to welcome Mike Stepniak, CFO and SVP of Honeywell, to the stage. So Mike, thank you for being here.

Thank you. Thank you for having us today. Really appreciate it. Good morning, everybody. Maybe before we get to Q&A, I'll just give you a quick update on what's going on in Honeywell, where we're at. But as we announced, separation will take place on June 29. That's the first day of the third quarter. And we are in the final stages of separating, I would say, all green lights as far as we go. Aero Analyst Day, just once again, it will be in Phoenix on June 3. There will be a couple of events on June 2 as a prelude to that. And the Analyst Day for RemainCo will be here in New York City on June 11. So obviously, everybody is welcome, and we have great events lined up. Operationally, things are going well. We'll talk about it today, but I would say, obviously, we're reconfirming our forecast for the year and the guide and a lot of, I would say, positivity in the markets generally.

Great. Thanks, Mike. We're going to spend today talking predominantly about Honeywell Automation, I think. But you mentioned all green lights for the spin. Any remaining hurdles to cross here? Or are you pretty much good to go at this point?

We're clear to go. We're obviously all the way to the end, there are some activities and post spin, you have some transitional services, TSAs, things like that. But operationally, we're ready. So I don't foresee any issues as far as the 29th.

Great. Sounds good to know. It hasn't exactly been a huge amount of time since you reported results, but we are 2 months into the quarter. Anything to comment in terms of moving pieces around the portfolio, particularly interested in this Middle East headwind that you're forecasting?

Sure. So maybe I'll address that first. Middle East is resilient, and it's -- I would actually say it's better than what we thought it was going to be. Customers are extremely active. We already sent our teams to the region, including all 3 of our general managers have been visiting customers. So works are underway as far as repairs, et cetera. Underlying demand is still there.

So I think we said $100 million to $150 million pressure in the second quarter. That's looking much better. It's going to be ways up $100 million. And customers from order activity, I see customers not only looking for repairs, but also thinking about the future expanding, et cetera. So really good demand, I would say, coming up in the midterm from the region.

Okay. And anything else to highlight across the portfolio?

Sure. So maybe I'll just go through all of our segments. Building Automation sees strength across the board. And as you know, they've been printing high single digits the last 6 quarters. We are guiding to mid-single-digit plus. Based on everything I see in the second quarter, they'll have another outstanding quarter. So that portfolio is performing extremely well. Industrial Automation for us has been a story of self-help. And with Pete Lau coming in and applying some of the knowledge transfer that he brought from Fire and some of his external pursuits, we're seeing a lot of improvement. And we also see green shoots in terms of underlying market.

So I feel like the business stopped losing share and starting to gain share and will be growing into the second half. So a lot of positivity there. And obviously, transformation of the portfolio is helping us a lot as well.

And then on process automation technology, that's a business that has been facing pretty hard dynamics. In the second quarter, they're lapping pretty tough comps from last year, but they're sitting on the record backlog, and they'll have another outstanding quarter from an order standpoint. And there is a significant inflection coming back into the second half that we talked about, and we have a strong visibility to that volume. And orders are extremely, I would say, are picking up both on the catalyst side now on the short cycle and from the projects. Our LNG business is sold out now for 3.5 years. So really good, I would say, tailwind going into the second half. Now I remind you, though, second quarter is a tough quarter for the business. So that's not changing, but we're seeing a lot of inflection in the second half.

Okay. And the backlog, does that give you confidence in that inflection? Do you have that visibility? Or is that more beyond this year?

It's the second half of next year. So it's a very high-quality backlog. What I mean by it, we see projects going to FID. When they go to FID, we start work. So the teams are starting work because they have financing. And then we're having a lot of discussions now with customers on catalyst. So that interest is going to lead to orders as well.

Okay. And we talk about projects. Obviously, LNG is what we have in our minds mostly. But what else beyond LNG, are you seeing that?

Look, I mean, U.S. doesn't talk about ESG a lot. We were just last week in Europe. ESG in Europe is quite alive. There are lots going on, a lot of interest. Same with Latin America and Asia. I think this disruption that happened here in Iran reminded people how fragile the whole ecosystem is that people are looking for energy security. And I'm confident these projects are starting to come back. We had a couple of projects go FID in the second quarter, predominantly in Latin America, but we see ESG coming back.

No, ESG is not quite dead yet.

I actually -- I think it's going to be resurrected.

Right, I think so. And then going back to Building Automation, you mentioned another -- I think the word was outstanding quarter from Building Automation. Maybe just take a step back, we're not seeing too many of your competitors growing at this level. Maybe just unpack what's driving that outgrowth.

We did several strategic shifts over the last couple of years in the Building Automation business. One, we moved many of our teams and the focus in region for region, where we can be more intimate with our customers. We revamped very early our NPI machine and R&D. We talked about it last year. We reinvested into, our R&D and R&D was about 50 bps of margin pressure for us last year. That's about $350 million across the company. Just last year alone, our Fire business had over 30 NPIs come to the market.

And Forge is a big deal for us as far as connected and driving the connected offering. And Bilal and Suresh talked about early in the year, but this is really taking off for us. So we see growth in our verticals, and we'll continue to pivot to high-growth verticals for us, which is for us, it's life sciences, it's hospitality, hospitals, data center as well, although data center is still fairly small for us, but we're seeing growth across the board.

If you had to rank order the NPI versus Forge as a driver of that growth, enabler of that growth, would you say one is more important than the other?

So really, NPI is all about just installing your -- creating installed base and growing your installed base. Where I see most Forge opportunities for us is moving really to autonomous operations, which for us, a lot of it is in the aftermarket. If you think about technicians retiring, not having people to come to service buildings or whatever facility you have. That's where really connected comes in. That's where Forge comes in. That's where cognition comes in, where you can run and operate facilities remotely with fewer people. And that's where we see the benefit of Forge coming in.

Okay. Now Forge has been around for quite some time, but I think it's now starting to reinflect. And I'm just wondering is AI starting to enable some tools that customers are now seeing real value.

Yes. So AI, I think, is alive, obviously. I can tell you in Honeywell, we are deploying AI on the cost side. For us, this is really a productivity tool. And you have to be able -- in order to be effective in it, you have to deploy it at scale. So you need really processes that are scalable and at scale in order to be applied those tools and be cost effective for you. And that's what we're doing from Honeywell standpoint inside the company, if you think about how we are creating NPI, how our engineers work, a lot of the spectrum processes use AI.

On the commercial side, for our line of work, it's a little bit different. You can't just come in and take AI from the street and apply it into a process plant that you have very strict, I would say, operating parameters and you have 40, 50 years of domain expertise in terms of how we design these. So where we're deploying right now, AI is really just for Forge and really focusing on our domain expertise and which is around controls and critical operations.

But in terms of Honeywell, the way you operate Honeywell, you're not seeing big displacement of traditional roles by AI at this point?

No, we don't.

No. Okay. Okay. Aerospace, I do want to just touch on -- maybe just going back to 1Q, the supply chain issues that you saw. Obviously, growth was well below what you expected. Maybe just bring us up to the speed. Well, maybe first of all, just maybe just run through where you're seeing the barriers on the supply chain, what you're doing to overcome those? And how are we tracking through the second quarter?

I would say, maybe first, to talk about the second quarter. So Jim guided mid-single digit to high single digit for the quarter. And I think I'll leave it at that. They'll have their Analyst Day in a couple of weeks. They can talk more about it. As you know, the quarters in that industry are very back-end loaded. So it's really the last month of the quarter where you get majority of your output. And I think that's what the team is instrumenting. Everything I understand, April was encouraging. So it's definitely will print better results than the first quarter, but they still have some work to do.

As far as the supply chain issues in Aerospace, specifically related to Honeywell, it's on the mechanical side. On the mechanical side, we -- I remind you that the business produced 14 quarters in a row, double-digit output growth from factories. First quarter, I think, was unusual, and the team got surprised with a few late-stage decommits from the suppliers. They're working through that. But the supply issues, I would say, continue. We've done a lot in terms of investing in our own supply chain. We've done a lot in terms of investing in our suppliers as far as tooling, testing, et cetera. But right now, the capacity of the supply for us, it's about 10% to 12% year-over-year growth, and we really need something like 15%.

Okay. It seems like it's a lot of the smaller links in the supply chain that's where the pressure points are.

That's right. And that really comes to the nature of the mechanical supply chain. It's more fragmented. It's smaller players. Some of them are not well capitalized, et cetera. So you either have to assist them or you have to in-source it, et cetera. So the team is kind of working through that.

Okay. And when you say mechanical, is it mainly on APUs and engines or is it?

It's more engines, more engine pronounced. It's forgings, castings, plates, things like that.

Okay. Nuts and bolts basically.

Exactly.

Yes. Okay. And maybe just before we move on to separation, some of the separation items to consider. Industrial Automation, maybe just bring us to speed in terms of the timing for the PSS and warehouse exits. And then maybe just remind us what's left in IA at this point. We know there's sensing, there's smart meters, anything else to think about there?

Sure. So the business will be post TLW exit, it will be about $3.5 billion, and it's pure-play now measurement and instrumentation business. Quite excited about it. We have a lot of domain expertise. We have good positions, much more focused and that's why I'm so confident in the inflection of the business, both from a top line standpoint, but also very important from a margin expansion standpoint. The business right now is quite dilutive to Honeywell. Over the next 2 years, it's going to lead the margin expansion for the company, and you'll see that at the Investor Day, and you'll see essentially impact immediately as we go through the second half. So I'm quite excited about the inflection of that business.

And any help you can give us in terms of once we extract those 2 businesses, how the margins look for the business?

I would say there -- the businesses are dilutive to overall Honeywell, obviously, but also to IA. I would just ask you to be a little bit more patient with us, and we'll have that information on the 11th.

Do you think that again, this is probably a question for back in June. But do you think these are low to mid-20% type margin businesses because that's obviously where Honeywell is?

The business we're exiting?

No, no. The remaining IA business.

Yes, the business -- look, I mean, it's -- for the business to earn its keep in Honeywell portfolio will have to be north of 20%. So that's what we're working for.

Okay. Okay. And obviously, $3.5 billion makes it a little less scale than the other 2 segments. Is the intention to build -- to refocus acquisition activity within IA?

Sure. So maybe I'll talk about it. And we have a discussion at the investor event about how our acquisitions are doing. But -- when you talk to Pete, what you'll see is that within Industrial Automation, we have a lot of white space and the industry itself is quite fragmented. So there is a lot of opportunity there as far as do M&A, but we obviously will be careful to make sure the assets that we add and when we add them, they continue to be accretive for us, and we see a strong technology fit. I would just leave it at this.

And if you look at our portfolio, process automation technologies are pretty well provisioned with acquisitions. They have a lot to work with as far as organic growth and margin expansion. So is Building Automation. The Access Solutions business is doing extremely well. We'll be looking at maybe some bolt-ons down the road there. And then the focus is really on Industrial Automation at this stage.

Yes. Okay. We do still get questions about the possibility of a big bang transformational acquisition within IA. It seems you've been indicating some a bit more maybe creative and maybe I don't know, tangential is the word, but where do we stand on that?

That's probably a better question for Vimal when we talk to him. But generally, I think where our head is we don't want to bet an enterprise on something big and transformative. We've seen companies that get in trouble with big acquisitions like that. What we find works for us the best is bolt-on, which for us, it's $2 billion to $4 billion ticket type assets. We tend to know how to absorb them quickly and realize commercial synergies in the best way.

Okay. I'll take 1 or 2 more questions, and then I'll throw the Q&A open to the audience. Maybe just think about the Aero separation. You mentioned on track, maybe some TSA agreements to dot i's and cross t's. Maybe just bring us up to speed on the stranded costs. You said $350 million to $400 million stranded costs. That's run to the low end of that range, I think, is what you said. But maybe just where do you expect to be on day 1?

Sure. So we thought stranded costs was going to be around $400 million when we looked at it in January. We obviously went after stranded costs for a while now before Solstice. And by the way, remind you, Solstice is up 70%. I just want to shout out to the team. They're doing extremely well. We will show up in June with probably less than $300 million stranded cost and majority of the stranded cost is already being addressed. So meaning it's related to repositioning, et cetera. And we've already provisioned for it as far as executing the stranded cost.

So by year-end, I'm assuming right now about $100 million of stranded costs. It's a really good story. Team really rallied around this. And given we're going through separation, but we're also trying to grow the business, et cetera, I think it's really strong focus from the team on getting the stranded costs in the box quickly.

Okay. So just to make sure I understand that. So less than $3 million of stranded costs on day 1 of the separation.

On June 29, that's correct.

Right. Okay. That's really impressive. Okay. And then the restructuring actions to accomplish that will be part of the acquisition onetimers, I think?

Most of it is onetime cost, correct.

Yes. Okay. And then pension. Can you talk about pension, any decisions on pension income?

So for people that don't follow our pension discussion is, I'll just remind you, our pension is 40-plus percent overfunded, more like 46% overfunded. We did and we're doing a natural split on the pension between Aerospace and Honeywell. What I mean by that is we're essentially dividing the pension base when employees were and overfunding goes proportionally with that. So Aerospace where we get about 55% of the pension assets, RemainCo will be left with the rest.

With that said, we're still having discussions with our Board on what's the best treatment for the pension. There are 2 schools of thought. One is obviously, you get implicit value for the pension because it is an asset. The second school of thought it's quite volatile. It affects your free cash flow metrics. It skews the quality of earnings, et cetera. So we're finalizing that discussion. Obviously, we'll have more to say on the 11th. Do you have a thought on it?

My free advice and it's free because it's worth is I do think that free cash flow is the key.

That's correct.

And I think the pension just adds noise personally. I'd get just going clean on earnings. Not to say it's not clean. But maybe just going back to the pension surplus. You've sort of referenced the possibility of monetizing the surplus. Any thoughts on that?

There are 2 different ways you can do it. And I don't want to take a lot of time today on that and people can read it. But if you look at what IBM did or what Kodak did or what Nokia is doing, I mean, those are several different options. You can structure it in a way where you open in your defined benefit plans, you can straight up exit it and sell it, which -- but it's very tax inefficient. And there was actually in the One Big Beautiful Bill, there was some legislation proposed where you could fund some of your employee benefits from the, I would say, from the overfunding that didn't pass, but nonetheless, it is being discussed. So maybe we'll see more about it in the future.

Okay. Great. Thanks, Mike. Enough pension. Otherwise, we'll send anyone asleep. Any questions from the audience? Any questions for hand up. Otherwise, I'll keep going. No, -- everyone likes to just listen to me talk and ask questions. So thinking about Quantinuum, I know there's an S-1 on Quantinuum. I know that you're strict in terms of what you can say, but maybe you tell us what can you say about the IPO?

I can't say a lot. I will leave it at that. But what I would say is that there will be a few announcements coming up soon as the team is working through various steps of its strategic journey as well as commercial journey. I'm extremely excited about the commercial progress the team has made on maturation of their technology, and they have a very strong pipeline as far as orders that's going to convert to revenue, which we're excited about. And I think right now it's the right time for them as they're maturing, growing, et cetera. It's a good time to stand up the company.

And you said publicly the $250 million of investment spend or losses that's right now in corporate expenses that deconsolidates. Is that still the case?

That's right. So right now, we're fully consolidated. At some point, we will not fully consolidate. And we will only, I would say, from an EPS standpoint, it won't change anything. But from a segment margin standpoint, it will be a tailwind for us because we will only put above the line the portion of the company that we own. It will be sub 50%. And today, it's 100%. So simple math, today, it's $250 million that goes above the line. Tomorrow, it's $125 million.

Okay. Got it. So it seems to me that when we think about the $250 million from Quantinuum going below the line, you got the $150 million of royalty income from Aero. You've got the $300 million coming in. It seems that net-net, corporate expenses come down on day 1. Is that right?

That's right. I mean, structurally, we have a lot of margin expansion. And look, the Aero trademark license is helping us with some of the inefficiencies we'll have as far as simplifying residual taxes, et cetera. And that's temporary, too, because that's -- I think that cash flow continues for about 5 years. But yes, generally, I think the corporate expenses will be much better. And more importantly, it will be cleaner. We're trying to have a cleaner income statement. And hopefully, you noticed we also removed our asbestos liabilities last year, which is a big drag for us and a tailwind going forward.

That's great. So my remaining questions are really -- you're probably going to tell me come back in June for the Investor Day. But you've got standing targets for 4% to 7% for Honeywell today. The RemainCo automation business, is that still a decent framework for organic growth going forward?

That's right. I would say it's mid-single digit. I think that's how I would position it. I think you'll see us growing more consistently on a go-forward basis. We've cleaned up the portfolio. We have diversified. We -- like I said, we restarted our NPI wheel machine, reinvesting into R&D, moving purposely into high-growth verticals. Software and services revenue is growing faster than the rest of the business. It gives us stability in the top line as well. I think what I'm most excited about is the margin expansion story for Honeywell over the next 2 years, and we'll talk about a lot during the Investor Day.

Okay. That's exciting, actually, margin expansion. So that would be the process margin normalization, IA.

IA is going to lead Process and it's going to get better mechanically, just where they are in their cycle. And then Building Automation continues to innovate and introduce really compelling NPI, which allows it to have better mix, better leverage on volume and obviously, stronger pricing.

Okay. I'm going to be keen to figure out that you're going to be pitching double-digit EPS growth for the next 2 or 3 years?

Look, you'll see on the 11th.

But I've got a question here and I need to ask these questions.

What I will say with this is that our growth will be front-loaded. I think that's kind of where the setup for us is. So I know people discount the year 3 usually. But what I'm excited about is we're instrumenting the company to perform this year and next year.

I think a really important part of the story is the way that you and Vimal have retooled the incentive structure to incentivize investment spending. Maybe just touch on that quickly because I think that's really important.

Yes. And Vimal is passionate in terms of linking pay to performance. And we're actually looking at our plans right now for 2027. He really wants to focus the team on customer obsession, and NPI. And NPI, obviously, is also a function of customer obsession. So we're working on KPIs which we will put into our performance plans for the management team that are focused on metrics that our customers care about and obviously, the Street cares about from a growth standpoint. So there's more to come to it.

But generally, in the past last few years, we pivoted as far as incentivizing more on revenue growth, and we incentivized certain teams within our engineering, offering, et cetera, around cross-sell, around NPIs they do, around offering. And we're taking a step further to put more of the organization under those plans.

And that wasn't the case before.

That wasn't the case, no.

Okay. I think one of the key changes on the Vimal has been much more M&A, much more, I don't know, progressive is the word, but certainly deploying more capital into M&A. The balance sheet for automation is in good shape with the dividend. Is that still the case going forward to be more acquisitive and maybe less buybacks?

I would say this, we'll have -- we'll continue to have a prudent capital allocation framework. And what I mean by it is that we obviously invest in growth CapEx, but generally, business is CapEx lighter, I would say, versus it used to be. Second is we'll maintain our dividend ratio, if you will, in line with our peers. We've talked about that. And then we'll maintain our, I would say, share count and offset dilution at a minimum if our free cash flow generation allows and we need to, I would like to get the outstanding shares lower, maybe 1%.

That said, all that said is, in the short term, we're focusing on debt repayment. And you will see us this year paying down a lot of debt and getting our leverage ratios down to about 3x on the gross leverage before -- at the year-end. As far as M&A, we'll continue to do M&A. Like I said, I think for us, better is bolt-on and tuck-in. And if you look at our cash profile, we should be able to comfortably do 1, maybe 2 M&As a year.

Okay. And of course, we've got the Catalyst acquisition still pending.

That's right. So that should hopefully close in the third quarter. We're quite excited about that business, has great market positioning with everything going on in the world. I think this technology has a lot of future. And this is -- we're quite excited about it.

You mentioned negotiating on the price as well, which is...

We did. I mean the business just wasn't worth what we thought the last year given where the market is. So we're able to renegotiate, and we're just waiting to close it.

It's always the case. Sometimes you buy a company and realize it's not quite worth what you thought. You don't get the low price, so that's actually well done. I think that covers it. I'm not going to touch on tariffs. I want to spend a little time talking about tariffs as possible. So Mike, I think we'll draw a line there unless there's any last questions from the audience.

We're around today, so I'm sure there'll be questions.

I'm sure there'll be. Any closing remarks, Mike?

No, thank you. Once again, thank you for coming today. We're really excited about Honeywell, both businesses, and we have some exciting news at the respective Investor Days coming up. And both companies have a really good setup, and I think are entering the second half from a position of strength.

Thanks, Mike, and good luck with the separation.

Appreciate it. Thank you.

Thank you.

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

Thank you. Good morning, and welcome to Honeywell's First Quarter 2026 Earnings and Outlook Conference Call. On the call with me today are Honeywell Chairman and Chief Executive Officer, Vimal Kapur; Honeywell Aerospace Technologies President and Chief Executive Officer, Jim Currier, and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website.

From time to time, we post new information on this website that may be of interest or material to our investors. Our discussion today includes forward-looking statements that are based on our best view of the world, and of our businesses as we see them today and are subject to certain risks and uncertainties, including those described in our recent SEC filings. This morning, we will review our financial results for the first quarter of 2026, provide guidance for the second quarter and discuss our full year outlook. As always, we'll leave time for your questions at the end with Vimal, Mike and Jim.

With that, it's my pleasure to turn the call over to Vimal, who will begin on Slide 3.

Thank you, Mark, and good morning, everyone. Honeywell delivered strong results in the first quarter, building on the momentum from 2025, despite a complex geopolitical backdrop and temporary mechanical supply chain constraints in Aerospace. Orders grew 7% organically on the strength of our Building and Industrial Automation segment as well as in petrochemical and refining verticals in Process segment. Including the orders growth in Aerospace, we drove backlog to over $38 billion with book-to-bill above 1.1. Sales growth was robust across Electronic Solutions and Aerospace, [indiscernible] aftermarket services in Building Automation and gas and LNG in Process Automation and Technology bolstered by our innovation and new product engine. We expanded margin 90 basis points to over 23%, driven by pricing discipline, productivity and accelerated stranded cost removal ahead of the Aerospace spin. All of this drove 11% adjusted earnings growth in the quarter, demonstrating the strength and agility of the Honeywell operating system. We also made tremendous progress on the portfolio transformation that began in 2023.

We announced the sale of our Productivity Solutions and Services and Warehouse and Workflow Solutions businesses, respectively, which we expect to close in the second half of 2026. We are also excited to announce that now we expect to complete the Honeywell Aerospace spinoff in the third quarter on June 29, marking the final step in our transformation. All of the acquisitions, divestitures, spin-off and simplification effort over the past 3 years have positioned both Aerospace and Automation for right future as independent leading industrial companies.

Despite the strong start to the year, we are taking a prudent approach to our guidance given the uncertainties surrounding the conflict in Middle East. We remain confident in our ability to drive accelerating growth in the second half as our backlog supports a pickup in growth in Process Automation and Technology. We will continue to closely monitor the situation and provide any further updates if the situation changes materially. Before we get into the details, I want to thank all our employees for their focus, commitment and dedication throughout our multiyear transformation. The future is bright as we set both businesses and gear to thrive with the right strategic focus, and capital allocation priorities that will drive value for our customers, employees and shareholders.

Let me turn to Slide 3 to discuss the progress on our portfolio transformation. As I mentioned, we are progressing on the final separation milestone with the Aerospace spinoff now expected to complete on June 29, just over 2-months away. The leadership team for both Honeywell and Honeywell Aerospace are in place and already executing for our customers today. In March, we successfully raised $20 billion of Aerospace spin financing while delivering strong investment-grade credit rating of A3, A- and BBB+ with a positive outlook from Moody's, Fitch and S&P, respectively.

Proceeds from the financing will be used primarily to redeem Honeywell debt, the majority of which has been completed as of quarter end and to fund a cash to the Aero balance sheet. Aerospace also announced a groundbreaking supplier framework agreement with the U.S. Department of War to rapidly increase the production of critical dense technology through a $500 million commitment. Honeywell was among the first tier 1 supplier to sign an agreement of its kind, and we are honored to support the U.S. and allied forces with these increased production capabilities. This agreement demonstrates the criticality of Honeywell Aerospace to national security interest and supports a multibillion-dollar revenue opportunity.

Turning to Automation. We amended an agreement to acquire Johnson Matthey'’s Catalyst Technologies business, which [ adjusts ] the total consideration and extends the date to close the deal to the end of July. We continue to believe the combination of the business with our capability in Process Technology will unlock future growth by broadening our portfolio, growing our installed base and creating a more integrated offering for our customers. As I mentioned, we announced -- we signed an agreement to sell Productivity Solutions and Services to Brady Corporation and Warehouse and Workflow business to American Industrial Partners, in two, all cash transactions. These businesses are well positioned to grow profitably under highly capable new leadership with deep industry experience. And for Honeywell, the sale allow us to further simplify our portfolio alongside the planned separation from Aerospace. Following these sales and spin, we will have a more cohesive portfolio focused on three principal end markets. [indiscernible] to share much more about our business with the investment community at our upcoming Investor Day for both Honeywell Aerospace and Automation business in June, both companies have exciting future ahead.

Before we get into the details, I want to discuss our outlook for Process Automation and Technology in light of the current Middle East conflict, let's turn to Slide 4. In quarter 1, the Middle East conflict drove a roughly 0.5% impact to revenue for all of Honeywell, most notably in Process Automation and Technology given the energy exposure and presence in the region. Clearly the situation in the Middle East is evolving rapidly, and we hope for fast resolution to the conflict. However, our guidance assumes the conflict persists through the end of the quarter and the resulting logistics and shipment delays cost a roughly 1% impact to revenue. We continue to effectively manage through this with the safety and well-being of our employee being the top priority.

Despite the conflict, demand continues to be strong for differentiated Process Technology on a global scale. We have secured over $2 billion in project wins over the past 3 quarters, including for LNG, refining and petrochemicals and sustainable aviation fuel across U.S., Brazil, Africa and Middle East. These wins include both rebuilding of the impacted facility with the key customers, including Qatar Energy LNG and new expansion projects helping further reinforce the growth outlook for PA&T, securing a long tail of high margin services and software opportunities.

Notably, in November last year, Dangote Petroleum Refinery and Petrochemicals selected Honeywell to supply advanced technology services, proprietary catalyst and equipment to help double production capacity at Africa's largest refinery in Nigeria. In addition, Dangote will license Honeywell's Oleflex Technology, which converts propane to propylene and Honeywell's Petrochemical Technology to produce linear alkylbenzene or LAB, a key ingredient in detergents for household needs. With this agreement, the customer will nearly double its production of polypropylene which supports the manufacturing of packaging materials, consumer goods and industrial products and once at full production will operate once of the world's largest LAB plants. As a follow-up of this award earlier in April, we announced that Dangote also selected Honeywell to provide Connected Services, Advanced Digital Performance Monitoring and Operator Training at the same refinery. This will help customers like Dangote improve operational performance, increase asset reliability and enhance their workforce ultimately unlocking greater value for their facility.

On LNG, we recently signed agreement to provide integrated liquified natural gas pretreatment and liquification solution for Commonwealth LNG planned export facility in Louisiana and next decade's Rio Grande LNG project in Texas through an agreement with Bechtel. We expect strength in our LNG vertical to continue given the additional projects we expect to be awarded in quarter 2. Longer term, we expect the favorable crack spreads in petrochemical and refining will generate incremental catalysts and services demand to maximize performance of our customers' plant in addition to needed repairs and modification related to rebuild. Once the conflict stabilizes, we expect the industry will benefit from pent-up demand and more stable feedstock supply, enabling better plant utilization rates.

Despite the near-term disruption Process Technology orders increased double digit, driving a 22% increase in PA&T backlog. We remain on track on expected second half ramp as LNG and large modular equipment deals convert to sales in the back half of the year, which will be followed by new catalyst demand in 2027. So while we acknowledge the challenges the business faced over the last few quarters, we are encouraged by the resiliency of orders growth and backlog, which will generate a strong runway as we progress through 2026 and into 2027. I look forward to sharing more with you during the June Investor Day.

Let me now turn to Slide 5 to talk more about Aerospace growth trajectory in 2026. We continue to see strong Aerospace demand across commercial OE, commercial aftermarket and defense space, which is driving sustained orders growth of 28% over the last 12-months, which drove roughly $19 billion Aerospace backlog, a 20% increase from the prior year and 1.1 book-to-bill in the first quarter. Against this backdrop, our mechanical supply chain over-delivered in the fourth quarter of 2025 enabling double-digit organic sales growth. However, certain critical suppliers experienced temporary constraints to start the year, which led to slowdown in January and February and lower output and sales growth. Output improved considerably in March, our highest revenue month for the quarter, making us confident that our supply chain efforts will produce better results moving forward. Given the significant amount of demand we see in Aerospace portfolio, Honeywell has invested more than $1 billion over the past 3-years into expanding the capacity and resiliency of our supply chain.

Our 2026 guidance incorporates the continuation of this elevated level of spending focused on [ on-boarding ] new suppliers, developing internal capabilities and assisting our supply partner with engineering and operation. The strategy drove double-digit output growth for 14 straight quarters prior to quarter 1, and we are confident on getting back to the trajectory in the near term. Given the progress exiting Q1, our history of recovering from supply chain constraints and continued positive demand trends, we are maintaining our Aerospace guidance of high single-digit organic sales growth for the year.

As you can see on this page, the outlook is consistent with historical linearity in the business, as we typically experience a sequential ramp throughout the year. To further support this ramp, Electronic Solution deliveries are meeting accelerating defense requirements, and we are investing in a new capacity necessary to ensure we can continue to do so. In the first quarter, Electronic Solutions sales grew double digit. With that, I will now turn the call to Mike to go through Honeywell's first quarter results and 2026 outlook in more detail on Slide 6.

Thank you, Vimal, and good morning. In the first quarter, we successfully navigated the difficult geopolitical and macroeconomic environment while exceeding expectations for both segment margin and adjusted EPS. Sales grew 2% organically, led by growth in Building Automation and Aerospace Technologies, and pricing and execution remains strong across the portfolio, fueled by new product introductions. On a segment basis, Building Automation surpassed our expectation once again in the first quarter with sales up 8% organically across both solutions and products. Sales growth was led by strong demand for new products and momentum across the high-growth data center and healthcare verticals.

On a regional basis, sales in the Middle East and India were both up double digits. Building Automation also delivered strong orders growth, up 9% with double-digit growth in projects, services and fire products. Aerospace sales grew 3% organically, with commercial demand and increasing global defense needs, supporting growth in commercial OE, commercial aftermarket and defense and space. Underlying demand remains robust. But as we discussed on the previous slide, 1Q results were adversely impacted by temporary supply chain headwinds in mechanical products. On profitability, Aerospace segment margin expanded 20 basis points from the prior year to 26.5% aided by pricing, productivity and favorable mix.

In Industrial Automation, sales were up 1% organically in the quarter. Solutions grew 7% led by robust Services demand in measurement and strong performance in Warehouse and Workload Solutions. Products declined slightly primarily in Productivity Solutions and Services, but was partially offset by continued strength in Sensing. Notably, Industrial Automation orders were up 10%, highlighted by strength in China and recovery in Europe.

Finally, Process Automation and Technology sales were down 6% organically in the first quarter. This was driven principally by timing delays in refining catalyst reloads and automation service upgrades, including impacts related to the conflict in the Middle East. Project sales were flat as elevated demand in LNG was offset by delays in process automation. However, the orders momentum continued in Process Automation and Technology with double-digit growth in Process Technology in the first quarter, following very strong order growth in the fourth quarter of 2025.

In total, Honeywell orders grew 7% organically with broad-based demand, resulting in book-to-bill above 1.1 and 15% increased backlog. On profitability, segment profit increased 6%, while segment margin expanded 90 basis points to 23.3% with margin expansion in all 4 segments. This was principally led by Industrial Automation, which expanded 260 basis points and Process Automation Technology, which expanded 200 basis points from pricing and productivity actions, a strong result in Process Automation and Technology despite the top line volatility. Adjusted earnings per share of $2.45 was up 11%, driven primarily by higher segment profit and lower share count. Foreign currency provided a modest benefit and below-the-line items were favorable primarily due to higher pension income. You'll find additional information on the first quarter adjusted EPS bridge in the appendix of our presentation.

Running out the results, we ended the quarter with nearly $100 million of free cash flow, down from $200 million last year. The benefit of higher operational income was offset by timing of collections in the Middle East and inventory headwinds in Aerospace, given the mechanical supply chain dynamics. Collections have improved meaningfully in April, and we remain confident in our full year outlook. On capital deployment, we returned $1.8 billion to shareholders through roughly $1 billion of share repurchases and $800 million of dividends while funding over $220 million in CapEx to drive future growth.

Let's now turn to Slide 7 to discuss our second quarter guidance. We anticipate second quarter organic sales growth of 2% to 4%. Aerospace should improve sequentially from first quarter, driven by ramping OE production rates and higher defense spend, supported by incremental improvements in the supply chain, while Process Automation Technology will be slightly weaker than first quarter due to incremental pressure stemming from the Middle East conflict. Both Building Automation and Industrial expect to be roughly in line with their full year outlook for these businesses. We expect segment margin to be in the range of 22.2% to 22.5%, down 10 to up 20 basis points, led by pricing and productivity actions that we expect will largely offset rising inflation and unfavorable mix in Process Automation and Technology due to timing of high-margin catalyst shipments and the impact from the Middle East.

We are also seeing an acceleration in the stranded cost takeout ahead of the Aerospace spin. On the segment level, we expect strongest margin expansion in Building Automation, while Aerospace margin will be roughly flat. Adjusted EPS is expected to be $2.40 at the midpoint, reflecting a higher effective tax rate in the quarter, amounting to about $0.16 headwind. On a normalized tax basis, EPS in the second quarter would be roughly $2.55 at the midpoint of our guidance, driven by higher segment profit and higher expected pension income.

Slide 8 provides a look at the second quarter dynamics, I just described. We expect growth from roughly $0.06 of higher segment profit, while lower below-the-line expenses will drive a similar benefit of $0.04 to $0.07 due to higher pension income, partially offset by increased repositioning costs. But the main item to note is the $0.16 headwind from a higher tax rate of approximately 21% versus 16% in the second quarter of 2025. Nevertheless, we still expect our full year tax rate to be approximately 19%. The impact from the share count reduction and foreign exchange translation will be roughly $0.01 each. Additional below-the-line details are available in the appendix of the presentation.

With that as the backdrop for the second quarter, let's turn to Slide 9 to discuss our full year outlook. We're maintaining our organic growth outlook of 3% to 6% despite the temporary headwinds we encountered in the first quarter. We expect strength to continue in Building Automation, while Industrial Automation will continue to recover in Europe and China. Process Automation Technology should be roughly flat for the year as order visibility and robust backlog levels delivered a strong second half. Finally, in Aerospace, as I mentioned earlier, our full year guide of high single-digit growth remains intact, driven by improvement in our supply chain observed in March. We expect to continue to deliver strong operational execution driven by pricing discipline, productivity actions and earlier-than-expected stranded cost takeout. In the first quarter, this allowed us to deliver strong margin performance while navigating near-term volatility related to material cost inflation, mechanical supply chain headwinds in Aerospace and impact from the Middle East conflict.

While we outperformed our expectations in the first quarter, the ongoing geopolitical situation warrants prudence. And we are, therefore, maintaining our full year segment margin guidance of 22.7% to 23.1%. Our guidance continues to include the results of PSS and WWS until the transaction close. It also assumes a continued ramp in Quantinuum investments. And while we expect to de-consolidate the results of Quantinuum in the second quarter, we are not adjusting our segment margin or adjusted EPS guidance at this time to reflect this. There is also no change to our free cash flow guidance for the year.

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

Thanks, Mike. We are pleased with our first quarter results with segment margin and adjusted earnings per share exceeding expectations. Looking ahead, we are successfully navigating an uncertain geopolitical backdrop with the strength of our resilient business model approach and rigor of our Honeywell accelerator operating system. We are tracking ahead of schedule on our separation milestone with the Aerospace spin-off now expected to be completed on June 29. I'm very excited to be on the [indiscernible] of this formation of 2 leading pure-play public companies and witnessed a long runway of value creation both businesses will deliver. We look forward to hosting investors at our upcoming Honeywell Aerospace Investor Day on June 2 and 3 in Phoenix and our Honeywell Investor Day on June 11 in New York City. These events will provide an excellent opportunity to share our strategy and long-term growth expectation.

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

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

[Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research.

[indiscernible], this is the last quarter of Honeywell as is. But I just wanted to just maybe just try and get a bit more information on the supply chain challenges, especially in such a low volume quarter. So just -- it's obviously a very popular inbound question we're getting from investors. So any more details on that? And kind of measures in place to try and solve this problem?

Nigel, this is Jim Courier. Just to give you a little bit of color and commentary around the supply chain challenges. Typical historical patterns are such that we normally have a slower start at the first of the year, particularly as we exited a very strong fourth quarter at 13% output growth for Aerospace. What I would tell you is that the start of the quarter, however, was more acute in terms of the decline versus what we had anticipated. And we recognize that this issue at the end of January and early February, and it was a very acute transitory issue specifically with some key suppliers in the mechanical space that adversely affected both our engines business and our Control Systems business.

And when I say acute, we can actually identify down to specific outlines within the portfolio that were impacted. The point being, however, is that we started to see the recovery as we deploy the resources accordingly and we started to see that recovery in the March time frame, and we're seeing that momentum carry itself over into April, which gives us the confidence in terms of our forecast that we have of mid- to high single-digit growth for the second quarter.

Okay. That's great. And then just on the 2Q margins, you're forecasting quite a step down Q-over-Q. And you talked about some of the productivity and obviously getting ahead on the stranded costs. Just wondering any more details on how to think about margins by quarter, why they'd be coming down Q-over-Q? And I think you called out Aerospace flat year-over-year. I just want to make sure that was the case.

Yes. Nigel, this is Mike. So our margin expansion framework for the year remains the same. So we talk about [ 20% to 60% ] for the year. 50 bps to 90 bps expansion operationally. We have 30 bps drag from Quantinuum. What's happening sequentially versus the first quarter, first, operationally, nothing is changing. We're doing extremely well on stranded cost takeout, that's ahead of plan. Pricing will be above 3% again. So feel good about what we're doing on pricing and the teams are progressing well.

What's happening in the second quarter sequentially, we have, I would say, a mix pressure from catalyst sales or lack of catalyst cells in the second quarter. And it also gives us a little bit of pressure year-over-year. But as you remember, last year, second quarter was our strongest quarter on catalyst sales in the year. So on total year, I don't see any pressure to what we guided. In fact, I feel more confident that we'll deliver that 20 bps to 60 bps. We just have to get through the second quarter. In Aerospace, we talked about roughly being for the year at 26%, and that's kind of where it's going to be for the year.

I'll also add that the loss of revenue we're having in Middle East is also high-margin revenue. So that just has associated margin pressure because of services software, which has impacted the most due to disruptions there. So that becomes the additional driver because it's kind of high dis-synergies associated with that.

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

Just wanted to start off maybe with the PA&T organic sales ramp through the year. Help us understand kind of how we should be thinking about that? It sounds like you're still thinking sort of flattish for the year as a whole on organic sales, which is consistent with your prior guidance, but obviously a much tougher first half. So maybe sort of flesh out for us some of the main moving pieces and how that organic sales growth trends from here in the year? .

So essentially, I think the only change since we provided the guide has been the Middle East situation and we lost revenue, as we indicated, about 0.5% of Honeywell total revenue in Q1 and about 1% in Q2. What we feel very strongly about is our backlog in the business continues to grow. Not only we had a strong booking in Q3, Q4 of second half of last year, but also printed a very strong orders number in Q1 of this year, and trends remain very, very robust for Q2, which gives us a very high confidence of second half ramp of the revenue of high-single or PA&T segment. Therefore, it's just going to be first half is, as you've seen the actual results of Q1 and then forecast for Q2, they get offset by strong performance in the second half. So net-net, the overall year being flattish, we remain very confident on that. The backlog supports it, the historic linearity supports it. So there's not much out of the way assumptions we have made in this forecast.

And Julian, there is also just continues to be more pent-up demand for the second half. We're seeing a lot of requests from customers in the Middle East. So I'm confident this demand is coming and like Vimal said, from a backlog standpoint, we still have a lot of conversion happening sequentially that's going to happen in the second half. So quite excited about that opportunity.

And then just secondly, back to Aerospace. I just wondered if you could give us some update on what you're seeing kind of real time in the commercial aero aftermarket side of things and whether you have moderated your outlook at all for the second half or Q2 on things like flight hours or departures that type of thing? That would be helpful. And on the supply chain issue, just lastly on that, is there any help you can give us on kind of specific product types that were most affected by the supply chain issue?

Yes. So specifically, Julian, to the product type, I'm not going to provide specificity around the actual outlines themselves other than say that it was very acute and we could attribute it to a couple of outlines specifically within the Engines and Power Systems business. As it pertains to the commercial aftermarket and any implications on a full year basis, right now, we saw no impact in Q1 as a result of the conflicts, and we see negligible potential impact in Q2 that's going to be overcome-able. I think the point that I would highlight, however, is that the demand is exceptionally strong, and our growth is constrained by supply and not demand across the board, and any impacts that we see in terms of flight hours in the Commercial segment tend to have a trailing impact in the Aerospace business, as flight hours go down, we start to see as it works its way through the ecosystem, it's anywhere between a 3- to 6-month delay before we would see something within the Aerospace business.

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

Maybe just a follow-up on the last question. On the commercial aftermarket. Jim, any way you could delve into that a little bit more, talking about your Middle East commercial aftermarket exposure? How do we think about it on engine mix within business aviation, APUs on commercial, powered by the hour on that 3- to 6-month lag comment, where would you see the most volatility? And as a follow-up, on Aerospace margins, as we look at Q1 solid start, 26.5%. How much of an impact was the supply chain? And do we see any puts and takes from asset sales or mix in that Q1 figure?

Sheila, a couple of things I'll talk to you on the commercial side of the aftermarket, particularly out of the Middle East. Again, as I mentioned, our growth is limited by supply, and not about the demand. Now having said that, we are watching very closely fuel prices, the increase in fuel prices and how much longer they will persist across the board. But we're not seeing any related demand impacts. And power by the hour programs for us, there's a smaller revenue stream within the overall aftermarket portfolio, as compared to time and material and repair and overhaul portions of our business overall.

The one point I wanted to highlight, and you mentioned it about business aviation we've actually seen very strong resilient growth in business aviation flight activity, even in light of the higher fuel prices, and it actually grew much better than what we saw in the commercial air transport. And as you know, that is a part substantial part of our portfolio in terms of business aviation within the aftermarket and part of the overall revenue of our Honeywell Aerospace. The one thing I would also add is just on defense. So as we see the conflicts that are occurring, the two key words to remember are going to be around replenishment and sustainment, replenishment around the aspects of missiles and munitions, furthering increasing the magazine capacity that exists not only for the U.S. but for our allies abroad. And then with the usage of aircraft in theater and how we are positioned, we're continuing to see very strong demand in terms of sustainment and support of those operations.

Great. Can I just add the margin question. Can we just -- can you talk about the solid Q1 margins. How much of an impact was supply chain? Was it negative? And any positive onetime items in there?

As you know, our mechanical business, we actually -- our mix was much more favorable Electrical versus Mechanical and that produced a tailwind for us in Q1, even despite of our lower volume leverage in the quarter. Now as our output will increase throughout Q2 and be more of a mix around mechanical due to the recovery that we anticipate will occur, you'll start to see that fluctuate, and you'll start to see it being a little bit more normalized. But the focus area I would apply is full year. You do see fluctuations quarter-to-quarter, very mix dependent. But on a full year, we expect modest expansion for Honeywell Aerospace.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

Good morning, everyone. I just want to say at the outside here, I don't recall any other time in Honeywell's history where you've had more portfolio moves at one time that you've been orchestrating as well as navigating all the geopolitical issues. So the fact that you can reaffirm guidance here is impressive. I did want to understand -- I know it's early, and I appreciate that you've -- you're assuming the conflict last through the second quarter. Can you size for us what the Middle East rebuild opportunity is at this point? Maybe not just give us some dimensions and qualitative what areas you'd be active in?

Yes. First of all, Deane, thanks for your comments on portfolio transformation. I would say that with the announcement of the firm date of the Aero spin on 29th of June and completion of transactions for both businesses, which were held for sale, puts us in a position now, Honeywell will be a pure-play automation company, well positioned for its future. So I really feel good about what we have accomplished over the last 2 years.

To your question on Middle East, I would say that I see that coming up in three different phases. The first phase is obvious that the services required to get the plants up and running. That work has not yet started. The situation has normalized to a point that we are being requested for that. So there are a few facilities which got hit during this conflict. So they are still -- there's no real activity in those sites. Now after that phase is over, it probably will take -- typical plant start-ups can take 8 to 12 weeks then we really expect the refurbishment of some of the facilities, which have been impacted. The one where Honeywell equipment is there, specifically in Process Technology, we have some known issues. We are already working with the customer, and that can show us an incremental demand in second half of the year as the things become more normalized.

And finally, as the oil price remain elevated to now $100 or above, the forecast generally suggests that the supply side disruptions won't end so soon because the normalization is going to take likely much longer, which then bodes well for the overall spreads for the product for our customers, which will -- which should support the more demand for services and catalyst in the times ahead. So all in, I would say the best way to put it forward is that near-term headwinds are already reflected in our numbers. And long term, the trend suggests that it's going to be a favorable outcome for Honeywell and more broader for the process industry.

That's really helpful. And just as a follow-up on that last point on the impact of $100 oil to UOP, in particular, there's -- were pushouts of catalyst reloads. But you also said that the spreads remain favorable. So just what's the impact on UOP near term? And then as we see some normalization?

Yes. So as you saw, I just mentioned in our earlier conversation that we remain very, very convicted on the fact that we'll have PA&T Process Automation Technology, second half at high single digits. That's driven by the two facts. One is our backlog is very strong due to the 3 successive quarters of order booking and then [ Q2 ] was also looking very, very robust at this point. And then we do expect the catalyst demand favored by the favorable spreads. So all things being equal, we remain very confident of the second half performance for Process Automation Technology business due to a combination of backlog and catalyst demand coming ahead.

The only to just add that the margins will improve as well in the second half for the business, given better mix, more volume leverage and strong pricing.

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

I'm sorry to beat a dead horse on this Aerospace issue, but I just have one more follow-up on this. Like when we look across the 3 subsegments of commercial aftermarket, commercial OE and defense and space, which were impacted by the issue in the first quarter? And how should we think about the path to improvement within those 3 pieces into 2Q?

Nicole, this is Jim. It actually impacted all of 3 end market segments. When I talk about specific outlines within our Engines and Power Systems business, it was both commercial and again, very acute. It impacted both Commercial and it also impacted Defense Engine outlines. And then some of that, obviously, being that the supply base is the same for commercial and defense and that same supply base is supporting aftermarket and R&O repairs as well. Those same outlines then were affected from an R&O standpoint in terms of being able to deliver into the aftermarket, both from a defense standpoint as well as on a commercial. And again, it was highly acute and highly specific in the engines and Power Systems business. But again, the mechanicals also affected us slightly as well on our control systems business.

Got it. Okay. So the improvement into 2Q should be kind of broad-based across those 3 pieces?

That is precisely correct.

Okay. Understood. And then just on the order trends, Curious what you guys saw in the 7% organic growth if you were to kind of parse that out across your shorter cycle and longer cycle businesses? And any interesting trends throughout the quarter?

Yes. So order -- the overall orders reported are 7% growth. Orders growth was led by Industrial Automation, up 10%, which is a combination of both long and short cycle. Building Automation also had a strong quarter, 9% orders growth. Process and Automation Technology was up 3% and Aerospace was up 6%. So I would say across the board, it's broad-based strength in the orders.

On the short cycle, Nicole, I would say that specifically for Automation side, Building Automation performance remains exceptionally well. As you have seen that this is fifth or sixth successive quarter, we are printing high single-digit growth. Not only the demand remains robust. So it continues to perform well through our new product introduction and perform better than market. Industrial Automation also the demand is shaping up well. Initially, when the start of the year, we had expressed concern on demand of short cycle in China and Europe, that certainly is recovering, which is very positive for us. We'd also see short-cycle demand in U.S. I think that's where Industrial Automation business have some pockets where we have to do more recovery, but we are trending in a very right direction.

And as we have observed the Industry Automation results, I do expect that business to start performing more like low single-digit growth. Once we take out the 2 businesses which were held for sale out of our revenue forecast, I'm just saying the RemainCo business it's trending very nicely towards low single-digit [indiscernible] second half of the year. So short cycle, I would say, overall strength is favorable. On the Process market, I would say it's being clouded by the war and the disruptions, and it's just hard to separate the reality of the demand versus the disruption caused by oil prices, supply shortages, ability to do shipment. It's hard to kind of separate the facts versus reality and provide an absolute comment there.

Yes. I would just add that we're expecting short cycle to accelerate in the second quarter. It will be mid- to high single-digit growth. So we feel good about short-cycle right now.

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

Just a question on Building Automation. Clearly, it has been one of the best businesses for you for a while. At the same time, some of your competitors, I think, seem to be sort of waking up a little bit. How do you view a competitive environment in this market in areas like fire? And how sustainable is your leader -- clearly at AHR. I mean your software presentation was fantastic. Sort of -- I understand why you feel confident that maybe just expand what is we're seeing on Building Automation? How is competitive environment developing, as I said, given that some of your competitors are waking up.

Thank you, Andrew. I mean, I would say that, look, we remain in our guide more conservative because we always [ cite ] Building Automation at mid-single-digit plus and we are performing high-single. And as I had mentioned during our Q1 earning call -- in earnings calls in earlier in the year, that we don't want to always assume we will keep taking share. but we have been constantly doing that, which is good news for Honeywell. I would say the competition by our business model is sell product through channels. We actually compete with large multinationals on a very limited basis because projects business in Building Automation is just about 15% of the overall segment. So what the headline base is, some of the peers, which are publicly reported companies, our overlap with them from a portfolio perspective is not very large.

Our competition is midsized companies, which vary by each region. We have set up companies we compete in fire and BMS and security in U.S. We have different set of people we compete in Europe, different set of people we compete in China, and that's the benefit in this business that we are benefiting from fragmentation of the market. We are going on the strength of our new products, and our common supply chain. And we believe that our organic growth engine, new product and innovation [indiscernible], including Forge is working extremely well. And the quarters are shaping quite well ahead. The near-term demand remains strong. So we do expect that the trend what you have observed over the last 4 to 5 quarters should remain intact in the times ahead.

And with the divestiture of the Warehouse Automation and Handheld Devices I mean, clearly, the Sensors business is becoming much more core and front and center. Could you just sort of parse out what you're seeing there? And what are the trends in key verticals there?

Yes, Andrew. So clearly, now Industrial Automation is positioned as a Sensing and Measurement business. I'm really pleased on finally, we found a very clear strategy in the business. I would say that our position there in three broad end market sensing, in aerospace, medical devices, industrial equipment, that's position 1. Position 2 is our metering business in utilities and position 3 is gas detection on all environments, be it oil and gas, be it semiconductor and more broader in industrial.

The end markets are strong in each one of these areas I mentioned. And our job is to benefit from these fragmented industrial automation market in Sensing and Measurement and build a better position as we did in Building Automation over the last 3 to 5 years. That's a task ahead of us. Our strategy is working. Our performance is improving every quarter progressively. And as I mentioned, that I do expect that second half gets slightly better, and we remain very optimistic on the performance for 2027.

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

Yes. Vimal, can you give a little more color into the improvement you saw particularly in IA margin in Q1. The margin improvement was impressive. I know you've talked about a bigger focus on productivity and [indiscernible] ahead of separation in that segment, and in PA&T. But a bigger fixed cost take out in IA. So maybe you can update us on what you've been doing and or how much improved pricing versus cost is helping as well?

Sure, Mike, I'll start and I'll ask Vimal to add some color to it. I think IA is going to be a margin expansion driver for us for the next year or so. With the separation of the [indiscernible] businesses. We saw a lot of opportunities structurally just to simplify the business from a cost standpoint. And the team got after that cuase quite early. So you'll continue to see the benefit as we go through the year. Also pricing for us has improved. I think the team has done a really outstanding job in terms of understanding the inflation, working with the customers to manage it and improving pricing. So that's the second piece. And then finally, I would say NPI, the team has been on NPI for the last 18 months, and we're starting to see those NPI hitting the market, and that's helping us recover share where we lost share. So all around, a really good story on Industrial Automation and will continue to be a source of strength for us this year and next year.

Yes. I mean, I think the only thing I'll add would be the pricing story is very strong in Industrial Automation, but also more broad-based and across Honeywell. We signaled the pricing between 3% to 4%, and it's more trending towards upper end, more towards 4% versus 3% and how inflation is shaping up I expect that trend to persist, which is going to help us continue to expand margin expansion as we have guided. But I overall performance, I think I have nothing more to add to what Mike said.

And then, Vimal, maybe it's a little early for this question, but just focusing on some of your customer conversations as the Middle East conflict has played out here. And given your relatively big exposure now to LNG, do you sense a need for more energy security now or maybe more local-for-local investments. So maybe you have a more robust LNG cycle? Like what are your conversations like around that?

Very, very bullish on LNG cycle, I would say, Andy, the 2 businesses we acquired in the last 18 months Liquefaction business from [indiscernible] and Sundyne business, they're performing extremely well. The demand continues to remain strong by the fact we very correctly mentioned not only in U.S. there's more capacity being built to serve the known demand. There's additional capacity being asked now for diversification. [indiscernible] think about those demand being in places like Africa, which was not on the map of LNG business, but they have a lot of gas. So people are considering projects there. We have a lot of inbound requests from that part of the world. And clearly, the refurbishment will be required in Middle East to the damaged infrastructure, which will be the -- which was not a planned demand because this was not something we planned for.

So all in, the LNG Liquefaction business and our overall Honeywell LNG story in terms of automation story, our software capabilities is there, with the Sundyne having very specialized equipment for compressors and pumps for LNG, we have a very neat proposition, and it is going to remain a highlight of RemainCo Honeywell. It will remain for next few years a high-growth vertical based upon the demand I have seen over the last few months.

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

So I really like Slide 4. Obviously, it shows like how geographically diversified your project wins have been over the past year. I'm curious, as you kind of think about that high single-digit ramp in the Process side of the business. How do you -- how are you guys underwriting the potential risk to that second half implied guide?

Joe, these are very firm projects. There are -- sometimes the demand of these projects can get shifted due to FIDs happening and not happening. But in this case, the LNG backlog is very strong, in particular and some of the new demand, which have come from Africa for refining capacity, there's a natural case there to build more fuel infrastructure in Africa because it never had one, and there's a big refinery by Dangote, which is one of the largest refineries. So those are very, very firm demand, which makes us confident on a very, very limited uncertainty in our backlog. And that's why if you see our confidence factor on high single-digit growth for the overall Process segment is very high. We are not making any assumptions of unknown demand the linearity and supported by our backlog conversion is the basic fact on which we are forecasting this.

And Joe, we've been talking about it for almost a year now. We always had that backlog. The backlog improved. Those are all projects which went to FID, meaning they're invested, there is cash behind them and they're ready to go. So like Vimal said, this is a very solid backlog that's going to start converting in the third quarter.

Yes, that's great to hear. And then -- and then maybe just touching on the Building Automation business. I just came back from being a data center [indiscernible] the last couple of days. And clearly, that's a part of the business that I'm sure is growing significantly. I'm sure we're going to hear more about this in June, but maybe just help kind of highlight like how you're thinking about the potential opportunity for your business specifically as it sells into data centers?

Yes. So we continue to improve our share of demand in data centers every quarter progressively. And where we have done a great job is really moving into Tier 2 data center providers. I think there's always a lot of conversation of hyperscalers, but increasingly, Tier 2 providers are becoming very, very relevant, not only in U.S., but I'm also talking about Europe and Asia, and that's where our segment performance is very strong. So I expect that we continue to ramp up our volumes in building automation and data center, but interesting development is not Joe, that we are actively working on liquid cooling for our Sensors business because if liquid cooling trend is true, it requires more sophisticated controls compared to the traditional HVAC air-based control. And that's where Honeywell technology is going to be very, very relevant.

So our Sensing business is actively working with other liquid cooling providers, which names are well known. And we are also actively working for power generation for some of the data center, which are behind the meters. We have seen a trend where behind the meter power capacity is being set up and our traditional control and automation capability is very unique in that space, because think about it, we always did power plant within a refinery within a paper mill. That's not new for us. And now power plant happens to be in the data center, which is our natural capability. So I would say Honeywell penetration in data center now continues to improve, and we remain bullish on our revenue growth coming from the segment, not only in Building Automation, in the years ahead, it's going to help also Industrial Automation. And depending on some of the projects in the U.S., it may also help Process Automation business.

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

I wanted to ask a question on on Aero. Just the cadence of growth intra-quarter. I think you mentioned it being acute in terms of challenges in January, February. But obviously, the full quarter closed out at, I think, 3%, 4% organic growth. It implies maybe the exit rate in March is back to where you expected in the second quarter. I just want to get a sense of that. If you can just give us a little bit of that intra-quarter cadence.

Yes. This is Jim. A couple of comments around that. The cadence within the quarter, I think it's important to note that 50% of the quarter is actually delivered in the third month. And therefore, the momentum that we saw and which you saw in March and carrying that momentum going forward into April, the point being is that our starting point in terms of the first month is substantially better than what we saw in the first month of the first quarter, i.e., January. So as that momentum continues and has laid itself over into April, we expect to see that continued progression throughout the quarter. And even though it's early in the quarter, and as I mentioned, 50% of the quarter is delivered in the third month, what we're seeing in terms of recovery gives us the confidence in terms of what we expect in year-over-year growth for the second quarter.

Okay. And then just on the Process Automation side, we noticed, obviously, the aftermarket was down 10% in the quarter. Projects have been relatively stable. Just wondering if you could just talk about Process Automation aftermarket trends. I assume -- I think you said that Middle East conflict, nothing really embedded in the back half. Correct me if I'm wrong, but if you could talk about how that impacts the aftermarket of the Process Automation?

Yes. So most of our lost revenue was as a practical matter was aftermarket because this is where our ability to ship the product related to service migration project, lot of on-site services we provide, which are contractual, you can't just simply go there. So it got impacted incrementally by about $50 million round numbers in quarter 1, and we have forecasted about a 1% impact there. Overall, when we started the year, we had indicated the demand being very muted for services and catalyst in process thing got disrupted with a conflict, but the elevated oil price now supports strong demand on the other side of it. So we'll see how the business performs. But we think that the quarter 1 and quarter 2 were the bottom, and we should see more sequential improvement in the second half of the year in the business.

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

Just one question on the portfolio, but I guess, multi-part. Something wonky in your calendar you're calling June 29, Q3. I'm wondering on the PSS sale, if you could give us a little bit of color on whether or not there's tax leakage, on warehouse. I'm wondering if you could tell us what the 2025 EBITDA was? And then finally, I think you said Quantinuum would be consolidated in Q3. I guess that implies your selling a stake or there's a round that you won't participate in that will take you below 50%? Maybe you could give us a little color on that also.

There were four questions there. I'll try to see wrap up here. So I think on the tax leakage part, PSS, I'd like to let Mike talk about it.

Sure. So there won't be any tax leakage related to these two transactions. And obviously, we'll have more more to share on that as we progress and complete the transactions. But probably, you'll see it in the third quarter.

Both these transactions, Jeff, I want to look ahead and not look back. These are behind us. These businesses are in safe hand with the rightful owners, and I think we have gone through a public auction process and found the best buyers for both of them. I think that's what I can share. On Quantinuum, I'll let Mark...

Yes. I think, Jeff, not a great answer for you, but we're subject to rules restricting our ability to share really any further details beyond what you've seen in the release from Wednesday.

Okay. Understood. And then on the date, so 29 was technically the third quarter for us?

So the first day of the quarter 3, happens to be on June 29. I know I was equally surprised by [indiscernible]. Yes, I was confused for a couple of days, but now I've settled.

Our final question this morning comes from the line of Chris Snyder with Morgan Stanley.

Is the supply chain disruption that weighed on Aero growth in January and February, primarily a function of inability to ship because maybe some of your suppliers are struggling to keep up with the pace of demand? Or is it because your Aero customers overbuilt inventory towards the end of last year and they were effectively de-stocking early in the year?

Chris, this is Jim. It was absolutely not any de-stocking that is happening with our customer supply base. It was purely supplier-centric the lack of certain critical piece parts from high critical suppliers that did not achieve the volume outputs necessary to allow us to deliver the specific outlines within Engines and Power Systems and Control Systems portions of the business.

And then just a quick follow-up on Aero. Is there any color you could provide on back half margin expectation, just all the moving parts between the mix shift, obviously, some of the commercial OE price negotiations that you've talked about? And then maybe lastly, any sort of integration tailwinds from case just just kind of -- what do we expect there in the back half?

Yes. I mean, what I would say is, on an annualized basis, you will see us being modestly up on margin expansion. -- quarter-to-quarter, you do see variability largely driven by mix across the board and mix within the mix of what we are delivering. But on a full year basis, we'll be modestly up for Aero margins.

Okay. As always, I would like to thank all our shareholders, our customers and all the Honeywell future shapers around the world for the strong first quarter results you delivered. We remain confident in our path ahead, and we look forward to sharing more with everyone in the months to come. Thank you for joining us today, and we hope that you have a great rest of your day.

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

Good day, and thank you for standing by. Welcome to the Brady Corporation Acquisition Announcement Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ann Thornton, CFO. Ma'am, please go ahead.

Thank you. Good morning, and thanks, everyone, for joining us. This morning, we would like to take the opportunity to explain an exciting moment for Brady, which is our announcement of our planned acquisition of Honeywell's Productivity Solutions and Services business. The slides for this morning's call are located on our website at www.bradycorp.com/investors.

Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast and anticipate are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results.

Risk factors were identified in our press release regarding the transaction issued today and in our investor deck, each of which are included on our website and in Brady's fiscal 2025 Form 10-K, which was filed with the SEC in September of 2025. Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady.

We will be recording this call and broadcasting it on the Internet. As such, your participation in the Q&A session will constitute your consent to being recorded. I'll now turn the call over to Brady's President and Chief Executive Officer, Russell Shaller, for some prepared remarks before opening up the floor to questions. Russell?

Thank you, Ann, and thank you all for joining us today. As you know, this morning, we announced an exciting transformative move to acquire Honeywell's Productivity Solutions and Services business or PSS. The transaction will significantly expand our portfolio with data capture and workforce solutions.

At its core, this transaction brings together 2 highly complementary organizations that are uniquely positioned to help our customers operate smarter, safer and more efficiently through our full suite of products from our highly engineered durable labels to the data powering an entire supply chain.

With the combined strengths of our business, we will be able to offer our customers a one-of-a-kind solution, a more comprehensive portfolio of hardware and software solutions across critical workflows for companies in a wide variety of industries and markets. This transaction is the culmination of our Board and management team's thoughtful and opportunistic approach to M&A that complements our existing businesses, advances our strategy and deliver significant value for our shareholders.

We remain committed to our disciplined capital allocation approach to capitalize on the highest return opportunities that fit squarely within our strategic and financial criteria. And we view this acquisition as a unique opportunity that fits within Brady incredibly well. PSS provides mobile computers, barcode scanners and printing solutions with nearly 3,000 employees globally and 2025 revenues of approximately $1.1 billion for the 12 months ending in December 31, 2025.

Importantly, PSS also shares our focus on talent with a particular expertise across R&D with deep technical knowledge and a strong record of product innovation. PSS serves some of the largest transportation, warehousing and logistics companies in the world. which expands the enterprise customer channel for Brady as well as our total addressable market with fast-growing verticals.

Geographically, approximately half of PSS' revenue is generated in the U.S. and Canada, about 1/4 from Europe and the remainder is equally split among the rest of the regions. By vertical, the largest end markets are retail, industrial, transportation and logistics with smaller positions in health care and other industries.

This is truly a fantastic complement to our existing base of business. PSS has a broad global manufacturing and distribution footprint across 40 facilities. Their global footprint unlocks cost-efficient scale while maintaining the ability to meet shifting global needs. With nearly 4,000 patents and almost 4 million service contracts, PSS is focused on the development of products and solutions that empower worker productivity for millions of frontline workers around the world in applications in which data accuracy is critical.

We believe that the addition of PSS gives the opportunity to drive incremental growth and earnings from actionable near-term investments with R&D focus and an active new customer pipeline. Nearly 70% of PSS' revenue was generated from products launched within the last 3 years, demonstrating the effectiveness of their R&D engine. This, combined with our operational efficiency, compelling secular tailwinds within the productivity solutions market and PSS' growth and margin outlook makes us confident in the value creation opportunity presented by this transaction.

I think our strategic rationale in four primary categories. First is the expansion of our portfolio into adjacent workflows to provide a more comprehensive offering for our customers. Second is the expansion of our customer base into enterprise accounts where we may not play a large role today. Third is our entry into much larger total addressable market. And fourth is creating a new platform, including high-margin recurring software revenue. When we put all this together, it translates into a compelling financial benefits that Ann will walk through in more detail.

Walking through this one by one, starting with the portfolio, we're proud of leading position in high durability, high-quality printers and our specialty adhesive materials designed to withstand the harshest environments and comply with stringent safety and regulatory standards. PSS brings mobile computing, barcode scanning, RFID and workflow software, which is an incredibly strong complement to our existing portfolio.

PSS' products and purpose built to perform reliability in high-volume operations where accuracy and uptime are critical. We'll be able to offer our customers something new and truly differentiated, a complete portfolio that takes them from printing and identification through to data capture, workflow execution and real-time operating intelligence.

Our second strategic pillar is customer expansion. PSS expands our customer base within enterprise customers. These customers provide an excellent opportunity to cultivate long-term partnerships that we fully intend to grow with an opportunity to expand wallet share as we fully integrate PSS. We're also greatly expanding our presence in new verticals through PSS' customer set, particularly retail, logistics and warehouse environments.

The third strategic pillar is our entry into much larger total addressable market. This transaction moves us into technology-enabled data capture and workflow solutions markets, which is a $9 billion productivity solutions market. The core verticals in which PSS has a strong foothold have extremely compelling secular tailwinds that we can benefit from. Think of automation, digitization and asset tracking.

Global organizations are constantly pushing for efficiencies. And in order to achieve this year in and year out, they need high-quality products that are easy to use and most importantly, that allow employees to do their jobs accurately. This is exactly where PSS products success. To take one example within retail, which is PSS' largest vertical, retailers have done dozens of touch points with a single customer from in-store assistance and checkout to inventory management, customer service, picking orders and packaging and shipping.

Large global retailers can require tens of thousands of devices to serve high volume of customers, improve customer service and increase dollars per transaction. The same concept applies to logistics applications, health care environments and many others. Our fourth strategic point, we're creating a new platform of high-margin recurring revenue and software service and voice penetration.

PSS generates over $200 million in recurring software service and voice revenue today, which is meaningful. PSS' installed base is significant with over 3 million devices with active service contracts and millions more deployed. Product has a 3- to 5-year refresh cycle, which drives repeat demand with an opportunity to add service contracts as well.

We see an opportunity to lever PSS life cycle service, software and voice opportunities across our existing platform of high-performance products. Overall, we see a compelling story that should immediately result in financial upside with increased recurring revenue. Now I'll hand it over to Ann to provide additional details on the financials. Ann?

Thanks, Russell. This exciting transaction represents an important next step to grow the earnings power of Brady and to provide attractive opportunities to grow revenue in the future. We expect the acquisition of PSS to be double-digit accretive to adjusted diluted EPS within the first year following close.

This will allow us to maintain balance sheet flexibility as well as our disciplined capital allocation approach, both of which are core to Brady's fundamentals. We expect to achieve a minimum of $25 million in annual run rate cost synergies within 3 years of closing the acquisition through primarily improved operational efficiency. Over time, we expect that these synergies and other scale benefits such as commercial execution and manufacturing efficiencies will ensure that our margin profile remains within our historical levels. While we will see a short-term dip in EBITDA margins upon closing, we fully expect to bring that back up to our historic levels within 2 years post close.

Operational excellence has been a priority for us for years, and you can see this in our financial results. We've improved our gross profit margin to above 50% despite the impact of incremental tariffs compared to last year. We've reduced SG&A as a percentage of sales while increasing our investment in research and development from just over 3% of sales several years ago to more than 5% of sales as of last year.

All of this in combination has resulted in 5 straight years of record adjusted diluted earnings per share starting in fiscal year 2021 through fiscal year 2025. And finally, we always focus on cash generation and cash-based decision-making. You can see this through our cash generation often being in excess of our net income, along with our incredibly strong balance sheet, all of which gives us the ability to capture opportunities like the acquisition of PSS.

In terms of transaction financing, it will be funded with cash on hand and new debt. This acquisition is expected to increase our net debt-to-EBITDA ratio to approximately 2.5x at close, and we expect that our pro forma revenues and cash flow will support rapid deleveraging to below 2x EBITDA within 2 years post close. While we will immediately prioritize debt reduction, we believe that we will have ample capital on our balance sheet to maintain our robust shareholder return programs, including the increase in our annual dividend and opportunistic share repurchases, while always investing in our organic business.

As we think about transaction next steps, we anticipate completing the transaction in the second half of calendar year 2026, subject to regulatory approvals and other customary closing conditions. We believe the compelling deal economics of the transaction will result in long-term shareholder value and enable profitable growth into the future, and we're looking forward to bringing PSS into Brady. With that, we'd like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?

[Operator Instructions] Our first question is going to come from the line of Keith Housum with Northcoast Research.

Ann, Russell, congratulations on a massive deal and it's definitely a game changer for you guys. Help me understand in terms of looking at Honeywell. Honeywell has actually been declining in market share and revenue over the past 5, maybe 10 years. What are your thoughts in terms of how you're going to be able to turn that around in this organization?

Yes. So we obviously spent a great deal of time looking at the business and looking at where they were strong and how it would best fit into Brady. So first, I would probably correct what you said. They haven't been declining for quite that long. And there are definitely some strong pockets and there's some weaker pockets. But if you look at their business, their mobile computer business is actually doing very well as are their enterprise and other customers. That traditionally is an area that Brady has no expertise. So the part of the business that is doing well will continue to do that -- will continue to perform.

The part where we think we are best able to help them is in the printers and some of the [indiscernible] areas, where we know we've got a very strong position, not necessarily all Honeywell's customers. But if you look at this and you look at their struggles with, I think the small and medium-sized businesses, which is actually a tremendous strength of Brady. I think putting the 2 businesses together makes a lot of sense and really will turn their trajectory with us.

And Russell, if I can ask a few more here. You hit the nail on the head. My understanding is their channel program efforts have been really lacking over the past several years. And I'm not sure how deep Brady is into the channel, but any thoughts -- and maybe it's premature, but any thoughts on how you guys are going to try to address some of the channel relationships that they have and how you can perhaps support them to grow more?

Well, I think -- I'm not going to get into details at this juncture because we don't actually own them. But I think we're going to bring a level of stability to their business that they probably haven't enjoyed in the past. As you're well aware, Brady has had very consistent and methodical performance for the last decade. And we're not the flavor of the month or whatever, but we can pretty much consistently expand market share and expand operating margins as we've done for year. We're looking to bring that same set of discipline to Honeywell.

In terms of their R&D efforts, is it anticipated that you're going to have to increase their spending on R&D? Or are you satisfied with the level they're currently at?

I'm satisfied with where they're going to be by the end of the year. So they went through a period of R&D reduction that was pretty significant. I think they even realized that, that was too big of a cut. And so they've been building back R&D over the last couple of years, still not quite where it needs to be. But again, this is where you're going to get the dovetail of Brady and Honeywell.

We have a pretty significant portfolio of RFID products, we've done some things in machine vision and optics that we believe will be complementary. And then, of course, our printers will build out their portfolio in better shape. So those things we think are additive and so we'll be able to redeploy some of the R&D resources into different areas. So I do think the combination of Brady's R&D team and Honeywell's R&D team, which will now be roughly a $200 million spend will get us where we want to go.

And then maybe if I can get one more. In terms of the cultures of the two companies, perhaps can you talk about how the cultures they are and any thoughts in terms of how you're going to merge those together?

Yes. I think, Brady, I would say one of our outside people called us scrapping. And I think that's a fair characterization. We're quick to make decisions. You don't have a lot of bureaucracy. We are definitely going to be bringing that to Honeywell. I think that will be a pleasant surprise to some. It will probably be confusing to others. But our ability to make decisions at very low levels, I think, is a tremendous strength to Brady and something that we expect to translate into Honeywell.

And then maybe if I get one for Ann. Ann, you think double-digit accretive to Brady's earnings. Can you give us a little bit more context? Are we thinking 12%, are we thinking 40%? I mean any idea that we can kind of conceptualize that?

Yes. I mean it partially does, it will depend on when we do actually close. And I fully recognize second half of the fiscal year is broad. It's -- we just would expect in the more likely kind of third calendar quarter, but we'll see how things go. But beyond that, with the multiple that we're buying the business at and financing it with all cash, the incremental number will depend on a number of factors. But we do expect it to be meaningful, double digit for sure. And we'll give more specifics as we get closer to closing. But I appreciate that question, Keith, but it will be immediately accretive.

Our next question will come from the line of Steve Ferazani with Sidoti.

I just want to follow up the last question, Ann, in terms of the double-digit accretive. What kind of assumptions are you building in for financing? It's a pretty large transaction. You're going to be over 2.5x. I'm assuming not as attractive financing as you're used to? Or what are you building in there?

Yes. We're building in -- basically, I mean, you can kind of follow our EBITDA multiple. We'll still be in that mid-2x range and expect financing, at least our initial indication to be still decently favorable to Brady, not at the low levels that we're currently enjoying with our minimal amount of borrowing. But we expect -- we still expect basically favorable outcome from our financing. I'll be able to share more once we actually do get to that point and get closer to close, we'll absolutely provide a lot more color on that.

The $25 million in synergies over 3 years, that seems kind of low for a deal this size. Can you talk about where you think you'll realize it and what you're not including in that number? Because I would imagine there's other opportunities.

Yes. I think there is, but we wanted to be conservative. There is not a tremendous amount of overlap between our organizations. And this deal stands on itself with minimal synergies. We think we can get far more. In fact, we have very little baked in, in terms of those synergies and cross-selling, which we know money is there. But as we get through this -- and remember, this is a carve-out of a very large parent. So there's a lot of moving pieces, and we didn't want to, I guess, stick our neck out too far in the first year or 2 of the transaction, which I think is consistent with Brady. We've been a very conservative company, and we try to achieve or exceed what we say we're going to do.

Can you talk about the competitive landscape you're entering here?

Yes. So obviously, Zebra, and to a lesser extent, Datalogic. If you look at the small Chinese competitors of which there are numerous ones, they don't really compete with Brady or Honeywell or Zebra at the larger level. If you're going to buy 2 readers or 2 scanners or a printer, yes, there's a lot of different options that you might have. But if you're going to buy something for a retail environment where you have dozens of stores that you need to worry about data security and a host of other support issues, it really comes down to the three of us. So it would be Honeywell, Zebra and Datalogic, which is definitely stronger in Europe than in the United States. And then once you get past that, there really is very little competition.

Got it. That's helpful. I know it's a little early for this question, but given this is -- you've been through a multiyear, transformative might be a little strong, but it's certainly coming close to being transformative where Brady is going. When you start looking at your overall business, clearly, this transaction is going to take a lot of your attention. Do you start looking at pruning some of your other businesses or product lines that are not growing or are lower margin? Does this precipitate that?

Yes, I think -- I think everything is potentially on the table. Some of those businesses, though, are very, very steady and actually have a great return on invested capital. So some of those businesses that I think people would look at and say, why are you doing that? You know, we're getting mid- high double digits return on invested capital because we invest very little in them for the amount of cash they generate. So while anything is possible, we definitely like the stability and the profile of the cash those businesses generate.

And over the last few years, we've deemphasized investments and actually have now got disposed of 2 underlying businesses. So at this point, everything in our portfolio makes money. It's not a management distraction. We have a very decentralized organization with individual general managers running a host of these businesses. So I'm going to say possible, but we're not looking to do that immediately. All of our focus right now is going to be on integrating Honeywell and making sure that we hit the ground running once they get to become part of Brady.

Last one for me. I guess based on the timing of this deal probably doesn't impact your fiscal year, but are you expecting any changes to your fiscal guidance? Are you still comfortable with it?

Yes, we're still comfortable with it. There is obviously a onetime fees associated with the deals that were -- that happened in the quarter, but it's -- they're onetimers and not big scheme of things.

And I'm showing no further questions at this time. And I would like to hand the conference back over to Russell Shaller for closing remarks.

Okay. I'd like to leave you all with a few closing remarks. This is an exciting time for Brady. PSS allows us to expand our portfolio into adjacent workflows, which provides a more comprehensive offering for our customers. It expands our customer base into both enterprise accounts and much larger total addressable market and it creates a new platform, which includes high-margin recurring software revenue.

I'm incredibly excited about this opportunity. The PSS business has an incredible product portfolio, a talented R&D team with deep technical expertise and critical sales and support functions who know their business extremely well. We're looking forward to bringing the PSS and Brady businesses together. We have a bright future ahead of us with a significant opportunity to drive long-term shareholder value. Thank you for your time this morning. Operator, you may disconnect the call.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

All right. We'll kick off the fireside chat session here with Mike Stepniak, CFO of Honeywell as well as Mark Macaluso, who's back and running Investor Relations.

So let's just maybe start with some opening comments on -- I know you guys have a bit of Middle East exposure, but what are you kind of seeing out there in this fluid environment in the near term with everything that's going on in the world? We'll start with that.

So Middle East is obviously very fluid, but maybe I'll just start with that and make a small clarification based on some comments and write-ups I saw earlier today. So our annual revenue, if you think about Honeywell's annual revenue, high single digit of our annual revenue comes from Middle East on average.

With that said, given what's happening in Iran, we do not see any impact to us right now for the quarter or for the year. So there are some shipment delays, et cetera, but they're are minimal, about $20 million to $30 million of top line revenue pressure for the quarter, and the team is going to figure out, obviously, we offset it within our overall cost structure and framework as we have contingencies, et cetera. So right now, we don't see any impact from Iran conflict and what's going on in the Middle East.

Could you just talk about the various angles of attack from this issue, whether it's what happens if oil price stays higher for longer, aero traffic, like just maybe the variables at play here that you guys are watching more closely with all the various, I mean, knock-on impacts?

Sure. So I would say if oil prices stay higher for longer, that means that there will be more investment. Our customers will have more money, more investment. I think you'll see more investment in refining, more investment in catalysts, et cetera, as the spreads getting better and the pricing gets better.

On the other hand, you have to watch inflation because inflation will rise, and that's really where you have to have good pricing discipline. As far as traffic and hours, et cetera, we don't see a slowdown right now in -- due to Middle East. And Jim is going to talk about it in a while. But right now, everything is still intact. So if this conflict doesn't last for much longer, I think we'll -- will be a good outcome overall for the industry.

And as far as the other businesses, I guess, heading into the beginning of the quarter pre what's happening over there, what are you guys seeing on the ground in the other businesses or just in general from a macro perspective?

Sure. So I would say a lot of moving parts. But net-net, things are the way we plan them to be. So I'll just talk maybe through our segments. Building Automation is performing extremely well. Orders are strong across the board. All our regions last year in Building Automation grew. That seems to be -- continue to be a trend this year as well.

Overall, our orders for total business while automation were about 5% quarter-to-date, and March tends to be strong for us. And I think the orders will be mid-single digits. PT will have another quarter with double-digit orders growth. I think there are a couple of big projects that we're working that will close out.

So they're continuing to be building backlog, and we're just waiting for the backlog to start converting, and we see line of sight to -- for that backlog to start converting in the second half of the year. So we'll see about $100 million of incremental revenue coming on the back of those orders they had in the fourth quarter and early this year.

So orders remain pretty strong in that kind of a positive aspect of second half of '25.

Quarter-to-date, orders grow 5% on the 3-month rolling, high single-digit growth.

So high single-digit growth on a 3-month rolling basis.

Yes, so which includes strong December. So we don't see any deceleration. Pricing is good. Demand is good. I heard -- I listened to Delta talking this morning, their demand is still very strong. So I think right now, our end markets and macros are holding pretty well.

And when you think about kind of how this year is going to play out, you talked about the second half -- or is this kind of a -- I know normal seasonality is tough to call these days given what's happened in the last several years. But is the trend from 2Q into the second half, is that a normal seasonal trend, putting Iran aside? Or is that what you were seeing and thinking about as far as the trajectory of the year?

So just remind everybody on our framework and the guide for the year. So we guided 3% to 6% top line for the year. We guided 20 to 60 bps margin expansion and 6% to 9% EPS growth. I'm extremely confident in us achieving that guide.

What's happening right now is Building Automation will continue to perform strong. Industrial Automation is starting to grow in the second half, I see them starting to grow. They're getting much more focused and PA machines starting to work. We talked about PT and PA. They're starting to have some backlog and the backlog is converting into second half.

So if you look about seasonality, we see much stronger, I would say, tailwinds in the second half for our automation business. And on Aerospace, Jim will talk about it, but I think they're extremely confident in their total year guide as well. But as you know, with our supply chain, things are -- things tend to be choppy, and it's hard to kind of hit everything quarter-to-quarter.

Okay. Just digging back into the BA side, the growth there has been pretty strong. Maybe you could talk about whether it's the technologies that you're bringing to bear or the verticals. It's obviously a much more global business than maybe some of the building business that we think about here in the U.S. with U.S. nonresi exposure. So maybe what's driving growth there and talk about the macros?

We're seeing strength in Building Automation across the board. So regionally, if you -- this is a business that's most, I would say, global for us. Last year, we saw growth in every geography, including China. The team spent a lot of effort over the last couple of years pivoting to higher growth verticals.

So if you think about data centers, hospitality, health care, these verticals are about 20% of our revenue, and they're growing at 2.5, 3x rest of the business. So that's helping to the growth. And then NPI. NPI is really a big differentiator for the team, which that includes Forge, Forge cognition, connected. Our fire business last year alone had over 30 NPIs. Most of them based on Forge platform. And we're seeing that annual recurring revenue, software services being a bigger part of the business.

So I think the team is doing something exceptional there. And you met with Suresh and Billal a few weeks ago. So I'm quite confident that we're something special here in this business will continue to grow this mid-single to high single-digit growth over the next few years.

Maybe talk about what you're doing there and how it's been so successful, how you're kind of leveraging the R&D and the innovation on the product side and how you're able to bring that globally because it is a global business, I believe that's the way it's structured.

That's right. So we -- it really started with channels, if you will. So our solutions are helping our channels deal with most common industry problems, predominantly lack of workforce, lack of skilled labor, et cetera. So our products focus on self-testing, self-diagnosis, faster commissioning, better predictable failure mode spotting, if you will.

So when our channel partners go to the site and there's a problem in the building, they can already diagnose it before they go to the site, use fewer people, get the first attempt fixed and 100% yield through.

And just geographically, where are you seeing -- where are you having the most success with this innovation?

North America is extremely strong. If you think about hospitality, people are asking where are the most hotels being built. We're actually in U.S. Middle East has been strong. Asia, Australia. And like we talked earlier over the last year, Europe is starting to come back for us as well. So we're seeing some tailwinds in Europe as well.

Maybe just talk about your data center exposure here. I know it's not huge, but what you guys are doing there. I'm sure that's a growth driver, albeit from a low base.

Sure. So our data center business was 3 years ago, it was about 0% of our revenue. Today, it's about 5% of our revenue in Building Automation, and it continues to scale. We spend a lot of time with hyperscalers on updating our offering, getting into really security, safety, energy storage, fire protection modes, et cetera. So this business will continue to grow for us really nicely. But like I said, it's only about 5% of our business right now.

Right. And then just lastly, Forge on the building front, we saw the AHR Expo, it's pretty impressive what you guys are doing there, the connected assets. Maybe just the business model is always tough for us to chew on. How are you looking at that as the driving actual revenue business? What's the outcome of Forge from a financial perspective?

It's really about first connecting the installed base. If you think about our Forge platform, last year alone, we connected more buildings than we connected for the last 5 years prior to 2025. And we're still only about 10% connected. So we're focusing on -- first on connections and Suresh and the team have a really good, I would say, playbook as far as getting these assets connected.

Once you get them connected, that's where you really start deploying your ontology, which essentially just understanding how the assets perform based on asset class. Obviously, hospital building behaves very different than a hotel or a school, et cetera. So we have over 300, I would say, ontology models, which we're deploying for our customers to help them run these buildings more efficiently, more secure, et cetera.

And then it really comes to pricing in terms of how you value price. And historical model for us was really pricing by connection. That's I think that's where how you start the business. But now we're moving into value sharing, taking -- participating in the productivity and really leveraging the decoupled growth. So it's a business model that's quite similar to Aerospace model and RMUs. It behaves very similarly, but it's all about getting that asset base connected and penetrated from a services and ARR standpoint.

And this is a lot of where AI is coming into play. Maybe talk about how you've leveraged what you've done in the last several years in building that capability. And then maybe a little bit on why -- how you see it as -- what the moat is relative to development challenges.

AI is really the applications are built on Forge. Forge is just a platform where all this comes together, but we're building applications where we're co-innovating with customers to build these models to help run the operations more efficiently. And that's really what AI is.

And these buildings you want them to be self-learning, if you will. So that's what we focus on. And moving -- I think if you think about AI, Building Automation is furthest ahead of us, furthest ahead from our portfolio standpoint as far as moving into full autonomy, moving away from automation to full autonomy and having buildings run autonomously. In Industrial Automation, in PT and PA, we still have a lot of work to do, but that's really what's exciting about the business.

And then just taking a step back, just to tie up the loop here. On the growth verticals, how big do you see those growth verticals? How big are those?

So the growth verticals are about 20% of our portfolio in Building Automation. We'd like them to be 25% to 30%, and that's what we're working on. We also are focusing on services and ARR. So right now, our services ARR is about 40% of our revenue, then we would like it to be 60%. And that's something that -- if you think about, and we'll talk about it during our Investor Day, that's something that we will move towards over the next few years.

So clearly, BA kind of leading the way on growth, mid- to high single-digit, $7 billion business, a pretty significant percentage of your portfolio. Maybe just moving to the other large business, PAT. You talked about some of the second half, the wins and the orders flowing through in the second half. Maybe what are you seeing on the verticals there, LNG and some of the other core businesses within HPS and UOP from an end market perspective?

Sure. So first, I would say we've been supplementing our current business model in UOP with diversifying to other aspects of energy stocks, specifically around LNG and then Sundyne, which is more for us an aftermarket play. Last year, in LNG, we booked about $700 million of orders, $500 million of those orders in the fourth quarter alone. So our LNG business now is essentially sold out for the next 2.5 years, and we have more demand. So we feel really good about the LNG business.

How big could that be at some point, LNG for you guys?

It could be...

On an annual basis.

It could be well over $1 billion. It's really just a matter of having capacity and building that capacity thoughtfully. You don't want to overbuild capacity and then in the event of a downturn, be stuck with a bunch of under absorption. So that's something that we're monitoring.

On UOP, I would say we're seeing a lot of orders also in the projects that we talked about. So the backlog is extremely strong. Now the question is when these projects start to convert into revenue. And we have a good line of sight to the second half of this year where we'll start generating revenue for our projects. I would say catalysts, there's still a lot of overcapacity in catalyst because of, one, the oil prices, feed prices and the spreads were not attractive. I think with everything that's going on in the world, those spreads are starting to become attractive and that overcapacity industry is -- I can -- I get a sense is burning off. So I...

Capacity at the end user not in the catalyst or in the catalyst industry.

In the petro...

Yes, yes, in the end user, yes.

End user side. Correct. So it's a really good setup for the business. And on PA side, I would say it's predominantly PA from us is predominantly OpEx. The projects business is growing in MMM, life sciences, utilities, also LNG, traditional core energy is, I would say, still depressed, but that business should be a mid-single-digit grower for us in the second half as well.

So mid-single-digit run rate for the segment in the second half heading into next year? Is that the way to look at it?

Look, I mean, we're being, I would say, prudent. We're not assuming in our guide a lot of improvement in P&T, but the orders would indicate, assuming no significant disruptions in geopolitics that the market is coming back.

So a little bit of upside potential for second half relative to guide?

Maybe I wouldn't want to commit to it yet because a lot of things can change, but the backlog is strong.

But I guess longer term, if we think about what the growth drivers are here, what is the long-term algo? I mean, obviously, we think about these downstream oil and gas end markets as being relatively low growth. Can this be a GDP business? Can you have enough technology here to be GDP plus?

So if you think about how we diversify the business and if you think about us getting into LNG, us picking up Johnson Matthey, us picking up Sundyne, which has a strong play in the aftermarket, we're diversifying the business. And our aim is for the business to be a mid-single-digit grower through the cycle and less volatile. Great portfolio, as you know, #1, #2 products in many of the markets. So we're actually quite excited about that business.

And I guess from a regional perspective, what should we be watching outside of obviously what's happening in the Middle East? What are the -- what are the big hotspots for?

So generally, what we've seen is Europe to be slow. Now that said, if you think about Latin America, if you think about Mexico, if you think about Brazil, so Pemex, Petrobras, huge opportunities for us. Customers are investing. Venezuela, we have over 400 assets in Venezuela. That's -- but short term, it's not going to grow, I don't think. It's really more of a 3-, 4-year type of cycle. And -- but we're cooperating and working with some of our customers like Chevron to assess the situation and be ready to invest in that market if the background allows it. Meta continues to be strong. We see a lot of activity in Africa as well. And China for us is doing a little bit better than it did last year. So we see a lot of growth and green shoots, if you will, but we just have to be patient.

I think there were some growth businesses here you guys had. There were some -- I don't know, like a $1 billion of orders or something you guys used to talk about. Is there still this pocket of growth businesses, whether it was like the plastics recycling or any kind of the new technologies that we're watching? Because I feel like we're back to now talking about the core of the traditional business.

Yes. So the new technologies are down right now. We'll continue to invest in R&D and NPI. We're quite confident that these markets will come back, but that's more for us a 2028 event based on everything we're seeing.

Okay. So a bit further out into the future.

What's offsetting it is really LNG right now.

Okay. If -- let's just pretend that the war in the Middle East ends pretty quickly. There is some supply coming from Venezuela, oil price goes down quite a bit. Is that a positive for you guys because you're going to see more -- a bit more activity and volume? Or is that a negative because that will have an impact on spreads? How do we kind of look at a normalization? What's the right price of oil for you guys, do you think that you're comfortable with for that business?

I would say $70 plus. Okay. So if the oil stays above $70, the spread should be good enough for our customers start investing in it again. And time is on our side because these short-cycle catalysts, et cetera, they have a shelf life and then deteriorate. So if demand -- generally, the industry demand improves, then customers will need to be load, and that's obviously good for us.

And then I know this is a little bit of an area where you have software. You guys were kind of a leader in software and HPS. How do you see that business? And any -- I kind of have to ask any threats from AI there? I mean I think it's very highly mission-critical and domain expertise driven, but anything on the software side there and HPS?

We're quite bullish about that business. So that business is about $900 million, approaching $1 billion. It's predominantly ARR, and it's growing at the high single to double-digit growth. So it's a great business. It's very CapEx light. And we have a tremendous installed base and tremendous products. And we're -- like I said earlier, we are moving away from traditional energy into MMM, life sciences, utilities, and that transition is working quite well for us.

And you guys have in HPS historically not had a strong position in field devices. Is that something that maybe is with a fresh look as a new company could be interesting? Or you kind of want to focus on the core in HPS?

Right now, we're focusing on the core. We think that what we have as far as our play on software and the software strategy, that's the way to grow and continue to penetrate our installed base. We still haven't penetrated our installed base as far as aftermarket and decoupled growth. So that's really the strategy. We're embarking on right now, similar to what we've done over the last few years in Building Automation.

Okay. And then one last one, just on Matthey. I know that acquisition, they had -- you guys kind of repriced that. Any -- what's kind of the financial update there? And what kind of impact will that have this year?

So I'm targeting August close, assuming we get for all the regulatory approvals, things are progressing well. That price adjustment you saw there just reflects the state of the catalyst business in general industry and how the business performed. But like I said earlier, we like this business for a strategic fit to Honeywell and to our PT business. And this is a long-term play, not something that we're expecting to get a return on day 1, given where the industry is right now. But great technologies, great team, and I look forward to having in the portfolio.

Okay. On IA, obviously, the smaller of the 3, I think roughly $4 billion. Maybe just talk about what's left in there and how you view the drivers going forward? Obviously, to me, this segment probably will evolve over the next couple of years perhaps.

It will. Actually, that's the business I'm most excited about as far as the margin expansion and how it's going to contribute to the portfolio. With TLW coming out, what you will have left is really mission-critical applications in measurement and sensing. And that's a business that we know extremely well. It's highly fragmented, critical products, very high cost of failure, customers who are willing to pay price for performance.

And we have a management team, specifically Pete Lau that joined us recently, who knows very well how to run this business. Pete ran fire business for us 2 years back, and we're deploying very similar play on that side. We'll -- probably if you look at the portfolio, that's one business where we would like to do some M&A, but we will be selective and we'll be patient.

We -- vis-a-vis our last 7 transactions, we feel bolt-ons and tuck-ins are the best approach for us. That allows us then to plug in businesses that are accretive to growth in the right verticals, if you will, accretive to underlying business margin. And we're looking for businesses that we can actually, from a strategy standpoint, absorb into the portfolio.

So you think about the strategy of creating installed base and mining installed base, that's something that we want to do. So we'll be patient, but definitely, that's the -- that we focus. I would just add that in the short term, I'm personally focused on paying down debt of the company and get our leverage ratio below 3 by the end of this year and then 2.5 on a longer-term basis.

That's on a -- on a gross basis. And just remind us where you're going to come out on day 1 of the RemainCo on gross and net?

Sure. On -- we'll come out somewhere around 3.7, 3.5 on gross. I think 2, 2.5 on net. And obviously, we'll take it down from there.

Right. Just stepping back to IA for a second. Just talk about how you look at the -- I think there's now maybe 3 pieces of the business left. I know your segment reporting is a little bit different than that, but I think you talked about it as sensing, maybe sensing and measurement, maybe those are the 2 -- how should we think about the 2?

Industrial measurements and control and smart energy. That's really in thermal solutions. So kind of that's the -- those are the big businesses. And what Pete is really focusing on is self-help story. So that business is for us in the short term, it's about better execution. So better pricing execution and say do as far as managing discounting, the business has a lot of channel go-to-market where we need to do better as far as pricing discipline.

Better supply chain execution. Post COVID, we just took our eye off that. So we're working on that. Strong NPI. We grew NPI investment in our business, this business last year, about 10%. We're adding about incremental 6% this year. So -- and we're starting to see the benefits of it. And then focus on growth verticals and migrating to growth verticals. So I will be quite disappointed if this business is not mid-single grower second half of next year.

Second half of next year?

Next year, you think about NPI, NPI cycle in this business is 18 months. It's one thing to engineer the product and get it to the market, but then you also need to get it certified. Majority of our products in this industry, just like in Building Automation, they have to be either specified or certified. Ultimately, that process takes 9 to 12 months for most of the NPI.

So it's really low singles. It can still grow in the near term, but low singles and then you kind of...

It will be flattish in the first half. We have some tough comps in the second quarter, both in IA and PT. But post that, it starts inflecting in the second half of this year. And like I said, everything we're doing should -- we should be mid-single-digit grower next year in the second half.

Okay. And again, just remind us of what's in there. So it's the metering business, it's the sensors.

Sensors, smart energy.

Smart energy. And so on that front, are there any platforms here that you're looking at versus others? Is there a kind of a diversity of opportunity that's outside these platforms? Or is this really where you want to -- this is what you want to build off of synergistically?

That's something that we want to build off of. And the reason for it is, we want to protect consistency of the model and go to market. It's extremely difficult to manage a business that $7 billion and you have 12 P&Ls in it and each of them operates differently. So we're trying to get consistency, have teams focused. That's the reason we actually are shedding TLW to get more consistency in our business model and in order to -- for the teams to be more focused and have a better schedule.

Is T&M kind of an offshoot here that like whether it's electronic test or -- I know it's a little bit outside of what you guys do. Is that an area that could be of interest? Emerson bought NATI, that type of portfolio?

We're not shutting down any, I would say, any targets right now and keeping the optionality for us. The key for us is to make sure that the businesses are in areas where the technology stack is quite high. So where you need to innovate, you need to get the product certified or you need to be specified where you have not only creating installed base, but this installed base as aftermarket. And in terms of M&A standpoint, we're looking for businesses that can be accretive to us on day 1, meaning they're in better end markets, better verticals, et cetera.

But I think the key point here is you guys talk about it is Industrial Automation. this is not meant to be, hey, look at the discrete systems automation players. We want to kind of replicate that type of business. This seems like it's a little more of a, for lack of a better term, niche market approach in a bit more fragmented.

Industrial Automation is extremely fragmented. And whether it's...

You need a PLC, do you need to go in that direction?

No, we do not. And for us, it doesn't really -- I would say, ultimately, it doesn't matter kind of which end market it is as long as it has those characteristics that fit our business model.

Okay. Any questions out there? I know it's early. Just moving to the bottom line on the margins. This year's margin expansion is fine, but not necessarily what we've known Honeywell for over the years. How should we think about the algo here going forward on an incremental margin or a year-over-year basis?

I feel really good about our margin story and how the business is going to evolve. And we spend a lot of 2025 setting this up, one, from a portfolio transformation; second, just from a company transformation inside out. So as we're separating Aerospace as we separate Solstice, we got ahead on our stranded cost takeout, which is going to be a significant driver of margin expansion over the next 12 months. We have better pricing discipline. Our NPIs are delivering better pricing as well. And M&A is accretive. So you'll see it on June 11, but I feel we have a very compelling story on the margin expansion.

And then just thinking about the moving parts, you guys have always had a pretty complex below-the-line dynamic.

That's right.

So just corporate for clarity there, maybe talk about what that number will be on day 1 and then what you're able to work out of that over a 12-month period. There's some moving parts there.

So our corporate number you see today is about $650 million. $400 million of that is net corporate costs $250 million is -- about $250 million is continue. So that's $650 million on day 1. On top of it, what you'll see on day 1, you'll see $350 million to $400 million of stranded costs. So essentially cost that we're assessing today to Aerospace that will come back to us. And then we'll work for 12 months to take this cost out. And we'll also be receiving from Aerospace and trademark, which is about $150 million a year. So that's going to be net down to the corporate cost.

And that will run into corporate. So we'll just see one line item that will start. This might go roughly $1 billion, whatever, and then $150 million -- $1 billion plus and then $150 million off of that.

That's right. I'm trying to keep it simple.

And then the $350 million, $400 million comes out over a 12-month time period?

12-month period. Yes. So we are talking about 12 to 18 months where we are today and based on how the teams have executed, I'm confident we'll take the cost out in 12 months.

Got it. And is there -- is that cost to take that cost out embedded in the onetime cost that you're thinking about in the deal? Or is this something you'll see in restructuring running through as well?

So it's both. It's because some of the restructuring we're doing are related to the separation, others are not. So you'll see from us probably going forward annual basis, $50 million to $150 million of restructuring costs. I would say this year, next year, those costs will be lower as we essentially took care a lot of the restructuring with the onetime costs.

And then lastly, just the pension elephant in the room has always been a big debate for you guys. How are you thinking about reporting the pension income going forward?

So maybe I'll start with this. Pension is overfunded. It's over 40% overfunded for Honeywell. The way we're handling pension, we'll split the pension between Aerospace and RemainCo based on essentially how employees fall out based on their service and the overfunding will proportion go with that.

So for file commission, we're discussing whether to keep the pension in our financials or keep it up. We're gathering feedback and we'll -- obviously, our Board needs to opine on it, but there are 2 schools of thought on it. But like I said, I'm trying to keep our financials very simple going forward and make sure that there is a very, very clear connection between earnings generated and free cash flow generated.

Maybe we can -- who thinks that Honeywell should remove the pension expense from the income statement despite it hitting earnings even though it's noncash?

So for those not in the room, it's about 80%.

Anyway, right.

Thank you for the feedback.

Really appreciate it. Thank you.

Thanks, Steve.

Well, good morning. I'm Andrew Obin. I'm Bank of America's multi-industrial analyst covering U.S. companies. Welcome to day 1 of Global Industrial Conference, our flagship event in London. It's a pleasure to have you here.

To kick things off, we have Chairman and CEO of Honeywell International, Vimal Kapur. Vimal, welcome to London. We've had Vimal here for many years, and I'm very excited that I get to keep cover the part of Honeywell that Vimal is going to be part of. So because it's always a pleasure. Thanks so much.

Thanks for having me. Good to be back here after, I think, 3 years.

Yes.

Yes.

Okay. So -- maybe we can start with some macro questions. I think your guide has been fairly conservative and probably by design. But just maybe give us the latest read on macro. You're seeing signs of macro improvement on the short cycle. And what I was referring to is that your organic growth is guided to go from 6% in the fourth quarter to 3% to 5% in Q1, even as PMI is getting better, maybe some of your competitors are sounding better. Maybe we can talk about that.

So typically, Andrew, when we go from Q4 to Q1, typically, seasonally, we do cycle down a little bit. So it's not abnormal. And this year, we have more backlog in the second half of the year, specifically for Process Technology. So it ramps up more in Q3, Q4. So just the year guide just plays out slightly differently this year. We're very confident in the guide we have given, which 3% to 6% for the year on the top line.

And quarter 1, I would say, is trending well. To your point on short cycle. I think the demand trends remain consistent of '26 versus '25, with only one variable being for the last 2 weeks, the war situation, what it will cause. But clearly, that's not going to have immediate impact on the short cycle in a 15 days period. But directly speaking, the demand in Aerospace remains strong.

All the short cycle in Building Automation, Industrial Automation business in the U.S. remains strong. So we don't see any signs of variability. I think only change over the last couple of weeks is how do we ship product in the Middle East. It's a high single digit of our revenue. It's again a tactical issue. It's not that we are losing volume, but it's just -- if I can't physically send things, it can have a transitionary impact. But otherwise, the quarter is trending as we have guided, and we think the year is also shaping up quite well.

And just maybe on the Middle East, the question we've been getting from folks just from a technical perspective, are there going to be -- should we expect any pushout on orders from Middle East? Talking to the company, it seems that the staff is there, people keep working. But just purely technical, should we expect any order delays or pushouts? How is that just going to work out from a technical standpoint?

So reality is, I mean, if you look at Honeywell as one data point, we have a large operation there. I would say one of the measure of presence is we have a large amount of people on site because of our service contract. So 95% of the people are still on customer sites, 5% sites are impacted, closed, partially closed or whatever.

So I would say we don't see any impact in our operation as far as serving our customer from a services perspective. But two things are being impacted, which are purely tactical. First, as I mentioned, our ability to ship product into the region. So there's definitely a disruption there. So that can cause some revenue moving from 1 month, just merely a matter of fact.

Large orders have been held up for closure in some places. But again, these are long cycle. The customers have been actually pulling forward long-cycle decision-making for the last 1 year, which is a new phenomena. So that doesn't bother me. I mean if something was due in March shows up in April or May. I don't want to change our guide for the year or for that matter next year. So fundamentally, I see this situation more like not impacting 2026, but can impact Q1 as things happen on a transitionary basis a little bit from a revenue top line.

Okay. So some minor impact in terms of revenue?

It's high single digit of our revenue. So if I can't ship some, so it can have obvious impact, it will be not prudent on my part to say, yes, there won't be...

But broad framework is still on time? The broad framework is the Middle East.

Absolutely. Broad framework is still in place. There will be always things in and out, but we remain confident for our guide for the year, and things are shaping up quite well.

And what's the impact over Iran because you do have a sizable Defense and Space -- Defense business. What's the impact on Defense and Space? And specifically, how should we think about how long would it take the revenue earnings impact on the positive side?

I mean, Jim Currier, who's President and CEO of Aerospace business, had an opportunity to meet President Trump about, I think, last week or a week before that. There is a ramp-up of the defense production. And clearly, we are one of the big serving defense production through our navigation systems in a big way, the CAES acquisition we made about 18 months back.

So all that will play out as there is a more backfill of ammunition being used. And if the demand is even greater than we had guided, that certainly will bring more upside. But it's hard to predict that at this point. I think when we'll go for the Q1 earnings, we should have a much better understanding of if the run rate production is even greater than what we -- when the year was started here. But net-net, I would say, defense side, likely more tailwinds. And on the flight hours, typically, the lag impact of higher oil price and commercial aerospace flight hours is an overarching business of Aerospace is a smaller portion because business jet is equally a big portion of our business.

So we don't believe that flight hours impact will be a meaningful impact on our business on a 2026 basis because we're also carrying $2.5 billion of past dues. So there are multiple variables at this point relative to the lagging effect of the flight hours, past dues we carry, defense production increasing lightly. my take is that net-net, the guide we have given will hold, should not have any net impact of the Iran situation on the Aerospace business.

And just maybe a little bit more on Defense and Space. Your exposure in Defense and Space is mostly Europe, Japan and Korea.

Outside the U.S., yes. I mean, outside the U.S. So our defense business is about 40% of the Aerospace business and 25% of that 40%. So it means about total 10% of the Aerospace business is international defense, which is highly weighted towards Europe, Japan and Australia and Korea. So that portion is growing extremely -- at an extremely high rate. We think that trend to persist for a long time, and that will continue to help the Aerospace business.

So there, the dominant theme should be sort of European reinvestment in defense rather than sort of supply -- ammunition depletion in the Middle East, right? Or would you benefit from that as well?

Definitely because ammunition depletion in Middle East causes us to supply more to Department of Defense, Department of War to backfill that. And the demand in Europe or other parts of the world is independent of that. There are different drivers. Yes, both positive.

And maybe just sort of before we go, sort of your guide in terms of incrementals. You were guiding incrementals low 20s in the first half of '26. At the same time, it seems that we are past a lot of price cost issues and Aerospace headwind. So just maybe expand a little bit why so conservative in the first half.

I mean, look, we've guided for the full year in terms of our margin expansion. So we are not going to be nitpicking what will happen in H1 or Q1 versus Q2. We're confident on the full year. I think specifically for Aero, a lot of margin depends upon what gets shipped in a quarter. And those dynamics depends upon what we produce, some of the customer demand.

The full year is highly deterministic. I think within a quarter, some variables will always exist. So as we close the quarter, you will see what earnings expansion will occur. So it depends on the overall mix and mix within the mix, which customers we are shipping the products.

We'll talk about more, but sort of part of it, is it fair to say that part of your incremental guidance or margin guidance for first half is just you being prudent?

Yes. We have to guide what we are confident of delivering as a minimum, and we always work to deliver on the upside, but we'll talk about it when we come for earnings guide in about 6 weeks' time from now.

So maybe you resegmented, so we'll just go down your new segments. So on Process Automation and Technologies, can we just talk a little bit more about UOP, clearly one of the crown jewels of the business. So totally get the comps issue, but there has been less visibility there over the past year or 2. And I know that orders are definitely getting better. But what would it take for UOP to gain momentum, to gain this footing and really start improving? Because as I said, it's been a bit wobbly over the past year or 2.

Yes. The Process Technology business has seen strong order momentum from Q3. We had strong orders in Q3, strong orders in Q4. The trend actually persists in Q1 also. We'll likely to see what we have seen observed in the first 2 months. These orders typically turn 18 months-ish on an average cycle time, 12 to 18 in that zone.

So therefore, second half of the year, our conviction that the Process Technology business will have a higher revenue growth is highly certain because we have a firm backlog. These are not estimated. These are not likely. These are firm commitments. So it's just a timing on how the backlog is converting.

I think the only variable remains that how the catalyst demand will shape up for petrochemicals, which has an overcapacity for a while. And that demand has been more flattish, which is part of our guide. That's why we guided Process segment to be more flattish for the year.

Now how the war and oil prices will change the demand of petrochemicals, that dynamics is yet to be played out. When we guided this situation, oil price was $60, now it's closer to $100. It's downward impact on the spreads and all that has to be observed. And we'll see if that changes our opinion about how business will perform for the rest of the year.

So a couple of questions. So generally, the spread widening is positive...

Positive thing because our customers make more money, more the spread, more money they make, it means they spend more money. So the markets have been tight on some of the downstream polypropylene market, for example, and customers have been paraxylene and they've been not spending money due to overcapacity because their margin rates are less.

So they are not under pressure to run their plants more intensely. Therefore, they don't need to push out the catalyst demand to a certain degree. So to me, it's more of a pushout, not a demand destruction. And as the higher oil price will go favorable, generally speaking, but it's too early to say how is the down impact of that on different petrochemical commodities. And will we see reversion of the volume back to us.

And then the second thing, I know that UOP -- you're not -- you actually do have a conservative forecast for UOP as part of your plan. So your comments on strength in orders in Q1, so even though the forecast is conservative, it sounds like that there's actually more visibility post what you've seen in the first 2 months in the guide, but better visibility now.

Better visibility now on the second half revenue ramp-up, which is part of our guide becomes even more strengthened because we're further building our backlog now. So I think we have to watch the short-cycle performance in that business, which is the catalyst demand. If that becomes stronger, certainly, there could be an upside, but that's not part of our guide. Our guide assumes things remain unchanged, '26 over '25. And if we see different facts, we'll share that.

And can we talk about separately what, I guess, used to be Elster and HPS, now it's really more of HPS, so core process business that would really comp with what Emerson does or Yokogawa does. What kind of trends are you seeing?

I think there -- the process trends are going to remain very similar to what we observed in Process Technology business. So continue to have wins in areas like LNG, et cetera. Life sciences is a business we have been focused on for the last couple of years. It's a small base, so we are growing that. Very strong demand for cybersecurity. That's an area.

The aftermarket services portion of the business is doing quite well. So I would say Process Automation segment is performing for rest of our peers, no substantial difference. And areas of strength are primarily LNG in particular and life sciences.

Okay. And maybe -- okay, and your peers sort of mid-single-digit growth, right? Is that...

I mean overall, Process segment, we guide now together, Process Automation and Technology. So I would say the combined guide is what you have seen. So there are obviously puts and takes within the 2 businesses.

But within, you sort of see that your business performs in line with what the public for your public peers.

That's right. It performs in line with the rest of the peers.