Honeywell International Inc

NASDAQ:HON

Thank you for standing by, and welcome to the Honeywell First Quarter 2024 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 Sean Meakim, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Honeywell's First Quarter 2024 Earnings Conference Call. On the call with me today are Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Greg Lewis. .

This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings.

This morning, we will review our financial results for the first quarter, share our guidance for the second quarter and provide an update on full year 2024. As always, we'll leave time for your questions at the end.

With that, I'll turn the call over to CEO, Vimal Kapur.

Thank you, Sean, and good morning, everyone. We delivered a very strong first quarter, exceeding the high end of our first quarter adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges.

The disciplined execution of our world-class Accelerator operating system and differentiated portfolio of technologies enabled this strong performance amidst a dynamic macroeconomic backdrop.

As expected, our long-cycle Aerospace and energy-oriented businesses led the way with healthy organic volume growth. We are starting to see recovery in some areas of our short-cycle portfolio, including consecutive quarters of order growth in productivity solutions and services, while the other short-cycle businesses continue to normalize as the effects of destocking fade consistent with our second half acceleration framework.

Before we get into a more detailed discussion on the first quarter 2024 results and updates to our full year 2024 expectation, let me take a minute to revisit my priorities for Honeywell.

First, we are keenly focused on accelerating organic sales growth towards the upper end of our long-term target range of 4% to 7%. We are doing this by enhancing our innovation playbook, accelerating sustainability and software offerings, increasing penetration of our installed base and leveraging our leadership position in high-growth regions.

Second, we are evolving Honeywell Accelerator to drive incremental value through deploying global design model across the portfolio to enhance our growth capabilities. Following the great integration inside of Honeywell over the past several years, we are now an integrated operating company that deploys world-class digital supply chain and technology development capabilities at scale, along with multiple growth drivers that benefit the entire enterprise. This includes leveraging generative AI to maximize the potential benefit of our operating system, both for our customers and internally. Of the strong digitally enabled foundation, Accelerator is providing to be a powerful source of profitable growth across all of our businesses and potential addition to our portfolio.

Third, we are executing on our portfolio, optimizing goals, upgrading the quality of our business and financial profile by executing on strategic bolt-on acquisitions while divesting noncore lines of business to accelerate value creation. We expect to deliver profitable growth and strong cash generation as we demonstrate progress against these priorities, creating a compelling long-term value proposition for our share owners.

In the spirit of that progress, let's turn to Slide 3 to discuss the latest action in our portfolio-shaping goals. Our M&A playbook is yielding positive results. Over the last few years, we have accumulated several quality bolt-ons and tuck-in assets that strategically add to our technological capabilities, enhancing our alignment to compelling megatrends and provide accretive growth that supports Honeywell's overall long-term financial framework. We remain focused on creating a flywheel of bolt-on M&A transaction roughly in the $1 billion to $7 billion purchase price range. We have successfully executed on meaningful deals that add technological adjacencies to our portfolio and are accretive to our growth and margin rate profile with attractive business mix characteristics.

The most recent example of this came in the fourth quarter when we announced our intention to acquire Carrier's Global Access Solutions business for nearly $5 billion, enabling Honeywell to become a leader in security solution for the digital age. The transaction further enhances our equipment-agnostic, high-margin product business mix within Building Automation.

Last year's acquisition of Compressor Controls Corporation, or CCC, a leading provider of turbomachinery control and optimization solutions that will play a critical role in early transition, aligns with this playbook as well. CCC technologies, including controlled hardware, software and services bolster Honeywell's high-growth sustainability and digitalization portfolio with new carbon capture control solution. CCC has seamlessly integrated into our Process Solutions business, and we are already seeing meaningful revenue synergies benefit with Honeywell Forge.

Second, acquisition is also an important growth lever for us as we continuously evaluate a build, buy or partner approach to add strategically important offering that solve our customers' toughest challenges. Last month, Honeywell announced our intention to acquire Civitanavi Systems for approximately EUR 200 million.

Civitanavi's technology will reinforce our leading navigation solutions across aerospace, defense and industrial platform. This acquisition, which is [ direct concert ] with Honeywell's alignment to the megatrend of automation and future of aviation, furthers our ability to create value for our customers from nose to tail, whether they are traditional operators seeking to increase the autonomous capability of their existing fleets or new entries in the advanced air mobility space.

Last year, we acquired SCADAfence, a business that delivers Internet of Things and operational technology cybersecurity solution for monitoring large-scale network. SCADAfence brought proven technologies in asset recovery, threat detection and security governance into our [ SC ] portfolio, all key components for critical infrastructure and industrial cybersecurity. The acquisition has bolstered our strategic foundation in an attractive market for us to continue to build on both organically and inorganically. With the recent portfolio announcement, including Carrier's Global Access Solutions business and Civitanavi, we are on track to accelerate capital deployment in 2024 and exceed our commitment to deploy at least $25 billion of capital in 2023 through 2025.

Our robust balance sheet capacity enable us to allocate capital to opportunistic share repurchases, high-return growth CapEx and accretive M&A. As the deal environment remains relatively favorable in 2024, we will build on our already strong pipeline of high-value M&A opportunities, supporting the execution of our portfolio-shaping strategy.

Before I hand it over to Greg, let's turn to Slide 4 to review some of our exciting recent wins. Let me take this opportunity to highlight our recent commercial wins and strategic actions we are taking that demonstrate innovation across our portfolio and support alignment of 3 compelling megatrends: automation, future of aviation and energy transition, all underpinned by robust digitalization capability and solutions.

In the automation space, Honeywell was chosen to provide automation, cybersecurity and safety solution to a multibillion-dollar plant expansion project for a major energy company in Middle East. We will deploy our flagship distributed control system and safety manager technologies amongst other solutions. We remain excited about the various automation opportunities across our portfolio.

In Aerospace, we will invest more than $80 million to expand our Olathe plant in Kansas. This project will enable the production of next-generation avionics technology and directly create hundreds of jobs at site and in the local economy. This facility upgrade is another example of the resources we are committing to unlock the supply chain and our ongoing investment in the Aerospace Technologies business to drive growth.

Finally, Honeywell will be incorporating our hydrocracking technology in the new DG Fuels SAF refinery to convert hydrocarbon liquids into SAF. This technology is a low-capital solution, which facilitates 90% reduction in CO2 intensity versus traditional fossil fuel-based jet fuels by using biomass as a feedstock. When completed, the refinery is expected to produce 600,000 tons of SAF every year. As demonstrated here, Honeywell remains committed to actively solving both our customers and worst, toughest challenges.

Now let me turn it over to Greg on Slide 5 to discuss our first quarter results in more detail as well as provide our views on second quarter and full year 2024 guidance.

Thank you, Vimal, and good morning, everyone. Let me begin on Slide 5. As a reminder, we're now reporting our results using the new segment structure, which went into effect in the first quarter. With that, let's discuss the results.

We delivered a very strong first quarter, exceeding the high end of our adjusted earnings per share guidance and meeting the high end of our organic sales and segment margin guidance ranges. Despite a dynamic macro backdrop, Honeywell's disciplined execution and differentiated solutions enabled us to deliver on our commitments.

First quarter organic sales growth were up 3% year-over-year, led by 18% organic growth in Aerospace Technologies. This was the 12th consecutive quarter of double-digit growth in our commercial aerospace business in addition to double-digit growth in Defense & Space.

Segment profit grew 4% year-over-year, and segment margins expanded by 20 basis points to 22.2%, driven by expansion in Aerospace. Improved business mix, our focus on commercial excellence and benefits from productivity, allowed us to expand margins in line with the high end of our guidance range.

Earnings per share for the first quarter was $2.23, up 8% year-over-year. And adjusted earnings per share was $2.25, up 9% year-over-year. While tax was a bit lighter relative to our first quarter guide, our full year tax expectations have not changed. A bridge for adjusted EPS from 1Q '23 to 1Q '24 can be found in the appendix of this presentation.

Orders were $10.2 billion in the quarter, down 1% year-on-year, which supported our backlog growth of 6% to a new record of $32 billion. This was led by quarter-over-quarter growth in aero, Building Automation and Industrial Automation, including in key short-cycle product businesses, namely productivity solutions and services in IA and fire in BA. This setup gives us confidence in our back half 2024 outlook, which I'll discuss in a few minutes.

Free cash flow was approximately $200 million, up $1.2 billion versus the first quarter of 2023, due to the absence of last year's onetime settlement of legacy legal matters that derisked our balance sheet. Excluding the impact of these settlements, net of tax, free cash flow is up approximately $200 million as higher net income was partially offset by a higher working capital due to lower payables. However, we see working capital becoming a tailwind in the coming quarters as we unwind the multiyear buildup of excess inventory.

We also continue to execute on our capital deployment strategy, putting our robust balance sheet to work through $1.6 billion, including $700 million in dividends, $700 million in share repurchases and $200 million in high-return capital expenditures. As you saw in February, we successfully issued $5.8 billion in bonds during the first quarter, including our first-ever 4-year maturity, taking advantage of strong demand in both the euro and dollar markets and locking in attractive long-term spreads, while extending our weighted average bond maturity from 7 to 10 years.

Proceeds will be used primarily to fund our acquisition of the Carrier Global Access Solutions business and to address current debt maturities. This really demonstrates the attractiveness and strength of Honeywell in the capital markets that we have built over time. Now let's spend a few minutes on the first quarter performance by business.

In Aerospace Technologies, sales were up 18% organically year-on-year, matching the third quarter of last year as among our strongest performances in over a decade. Increases in commercial aviation were led by original equipment, which saw over 20% growth in both air transport and Business & General Aviation as supply unlocks and deliveries continue to increase.

We also saw significant growth in air transport aftermarket as global flight activity remains strong. In Defense & Space, robust demand and improvements in our supply chain enabled us to grow sales 16% in the quarter. AT had book-to-bill of approximately 1.1 in the quarter as commercial demand and benefits from the impact of an increased global focus on national security support a strong growth trajectory.

Supply chain continues to show sustained modest sequential improvement, leading to a 15% increase in output year-on-year, marking the 7th consecutive quarter of double-digit output growth. Segment margin in Aerospace expanded 150 basis points year-over-year, driven by commercial excellence and volume leverage, partially offset by cost inflation and mix pressures within our original equipment business.

For Industrial Automation, sales decreased 13% organically in the quarter, primarily as a result of lower volumes in warehouse and workflow solutions as investments in warehouse automation remains subdued. Our short-cycle sensing and safety technologies and productivity solutions and services sales were stable, but lower year-over-year with orders in our productivity solutions and services business growing sequentially and year-over-year for the second consecutive quarter, a positive sign that we're nearing a return to growth in that business.

Process Solutions revenue was flat in the first quarter as growth in our aftermarket services business was offset by mega project timing. Segment margin in Industrial Automation contracted 200 basis points to 16.8%, driven by lower volume leverage and cost inflation, partially offset by productivity actions and commercial excellence.

Building Automation sales were down 3% organically. We had another strong quarter of growth in our long-cycle building solutions business, while we worked through the volume challenges and the short-cycle building products area. Solutions grew 7% in the quarter, led by double-digit growth in building projects, driven by strong execution of our backlog. On a year-over-year basis, orders and building projects were up double digits with strength in our core business and robust performance in energy and airports. Sequentially, orders for Building Automation improved in the first quarter, highlighted by a seasonal lift in building services and modest improvement in fire, resulting in an overall Building Automation book-to-bill of 1.1.

Segment margins contracted 120 basis points to 24%, due to mix headwinds from softer product volumes and cost inflation, partially offset by productivity actions and commercial excellence. Energy and Sustainability Solutions sales grew 5% organically in the first quarter. Advanced materials gained 6%, primarily driven by double-digit growth in flooring products.

In UOP, sales were up 3% year-over-year as robust demand led to a double-digit increase in both petrochemical catalyst shipments and refining equipment more than offset expected challenging year-over-year comps in gas processing equipment projects.

ESS book-to-bill was 1.2 in the first quarter, the second consecutive quarter of a book-to-bill above 1. Segment margin contracted 70 basis points on a year-over-year basis to 19.8% as onetime factory restart costs were partially offset by favorable business mix and productivity actions. Growth across our portfolio was supported by another quarter of double-digit sales growth in Honeywell Connected Enterprise, a powerful indicator of our strong software franchise powered by our differentiated Forge AI IoT platform.

Our offerings in cyber, life sciences and connected industrials all grew by more than 20% year-over-year in the quarter. HCE continues to generate not only value for our customers, but accretive growth and profitability for Honeywell. The ongoing tailwinds in our long-cycle end markets and the strength of our backlog give us confidence in our ability to navigate the current operating environment. We continue to execute on our proven value creation framework underpinned by our Accelerator operating system, which will enable us to drive compelling growth in earnings and cash for quarters to come.

Now let's turn to Slide 6 and talk about our second quarter and full year guidance. We delivered on our 1Q commitments while maneuvering through known risks. And as we look to the rest of 2024, our original guidance framework continues to be solid. We expect the environment to remain dynamic as we were reminded again by recent geopolitical events.

However, our Accelerator operating system that enables us to move quickly and decisively, our exposure to attractive megatrends and our record backlog will continue to support organic growth for the business. This outlook includes continued progress among our long-cycle portfolio as well as a modest back half recovery in short cycle as markets continue to normalize. Overall, we have a strong setup that will drive growth within our long-term financial framework for sales, margin, earnings and cash in 2024.

Now let's discuss how these dynamics come together for our 2024 guidance. Given the backdrop I just laid out, in total for 2024, we continue to expect sales to be in the range of $38.1 billion to $38.9 billion, which represents overall organic sales growth of 4% to 6% for the year with a greater balance between volume and price. We expect sequential improvement in the second half of 2024 over the first as Aerospace continues to grow its supply capabilities, coupled with a modest short-cycle recovery that should build momentum in the second half of the year, albeit with different rates of improvement for our various end markets.

For the second quarter, we anticipate sales in the range of $9.2 billion to $9.5 billion, up 1% to 4% organically. We anticipate our overall segment margin to expand 30 to 60 basis points this year, supported by improving business mix, price/cost discipline and productivity actions, including our precision focus on reducing raw material costs. Similar to last year, Building Automation margins will lead the group in margin expansion, followed by Industrial Automation and Energy and Sustainability Solutions.

For Aerospace, margins should remain relatively comparable to the last few years as volume leverage covers higher sales from the build-out of our original equipment installed base, which is driving robust year-over-year profit growth. For the second quarter, we expect overall segment margin in the range of 22.0% to 22.4%, roughly flat sequentially, but down 40 basis points to flat year-over-year, primarily due to volume deleverage in IA and the expiration of the Zebra licensing payments.

Importantly, our guidance for both the second quarter and full year 2024 does not consider the planned acquisition of Carrier's Global Access Solutions business. We anticipate the closing of the deal by the end of the third quarter, and we'll update our guidance accordingly at that time.

Now let's spend a few minutes on the outlook by business. Looking ahead for Aerospace Technologies, demand remains very encouraging across our end markets. Sales should grow sequentially in the second quarter, particularly in commercial original equipment as shipset deliveries continue to increase. However, we expect these sales to come at a lower margin, driving a sequential and year-over-year decrease in margin rate following the first quarter's strong result.

Increased build rates and shipset deliveries will carry on throughout the year, leading commercial OE to be our strongest growth business in 2024. In commercial aftermarket, volume strength and further improvement in wide-body flight hours will support additional growth. We'll continue to work through our healthy order book in defense and space, generating sequential sales improvement throughout the year. Ongoing supply chain improvements will continue to support double-digit output growth in AT throughout 2024.

For the year, we still expect Aerospace Technologies to lead organic growth for total Honeywell with sales in the low double-digit range. 2024 segment margin should be relatively comparable to 2022 and 2023, as volume leverage is mostly offset by higher sales of lower-margin products, a dynamic that likely leaves the first quarter at the high point for aero margins this year.

In Industrial Automation, the timing of short-cycle recovery will remain an important factor in our 2024 results, leading a back half-weighted year. In the second quarter, IA should be roughly flat sequentially. We expect growth in Process Solutions to be offset by warehouse automation demand that remains near trough levels and the end of the $45 million quarterly license and settlement payments we have received for the past 2 years in our productivity solutions and services business.

For the full year, Process Solutions will grow sequentially each quarter to build on last year's strong performance, driven by the aftermarket services business. Warehouse and workflow solutions will improve as we move through the trough of warehouse automation spending, while also benefiting from easing comps throughout the year. Our sensing and safety technologies business will benefit as the effects of distributor destocking fade throughout the year.

Lifecycle solutions and services orders grew sequentially and year-over-year in the first quarter, and we expect that strength to continue throughout the rest of the year. Two consecutive quarters of orders growth in our Productivity solutions and services business provide confidence in a back half ramp, excluding the impact from the absence of additional Zebra payments. As a result of these dynamics, we continue to see flattish sales growth in 2024 for IA. We still expect segment margin to expand, particularly in the second half as short-cycle recovery leads to positive volume leverage.

Moving to Building Automation. We remain confident in the overall outlook and execution of the business. For the second quarter, sales should improve sequentially as the channel further normalizes and our long-cycle businesses continue to benefit from strong backlog and aftermarket services tailwind. The timing of the short-cycle recovery remains one of the key drivers of business performance throughout the year, and our expectation for a more back half-weighted recovery in BA has not changed. As such, we will anticipate our long-cycle businesses to outpace our short-cycle portfolio, as both projects and services benefit from strong demand in backlog.

Additionally, high-growth regions remain a core part of the growth strategy for this business, and encouraging signals from regions like India and the Middle East support our full year sales forecast, which remains low single-digit growth for the year. We anticipate BA will be the segment with the largest margin expansion, primarily driven by productivity actions and commercial excellence net of inflation.

Finally, in Energy and Sustainability Solutions, the geopolitical environment will remain a key focus as we move through the year. In the second quarter, we expect sales to remain roughly flat year-over-year and sequentially, as sustained demand in flooring products and catalysts will offset remaining volume headwinds from challenging comps in gas processing equipment. For the full year, strong performance in those businesses is expected to offset volume declines in our legacy stationary products due to well-telegraphed quota reductions within the U.S.

In sustainable technology solutions, robust demand will lead to another strong year of growth. We continue to monitor the ongoing short-cycle recovery, particularly from semiconductor fabs, a key component to achieving our unchanged top line expectation of flat to up low single digits for the year. Margins should improve throughout the year from a 1Q bottom, driven by a combination of commercial excellence and productivity actions.

Moving on to other key guidance metrics. Pension income in 2024 will be roughly flat to 2023 at approximately $550 million. We anticipate net below-the-line impact to be between negative $550 million and negative $700 million for the full year and between negative $120 million and negative $180 million in the second quarter. This guidance includes repositioning spend between $200 million and $300 million for the full year and between $25 million and $75 million in the second quarter, as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 21% for both the full year and the second quarter. We anticipate average share count to be around 656 million shares for the full year, as we execute our commitment to reduce share count by at least 1% per year through opportunistic buybacks.

As a result of all these inputs, we are maintaining our previously provided full year adjusted earnings per share range of $9.80 to $10.10, up 7% to 10% year-over-year. We anticipate second quarter earnings per share between $2.25 and $2.35, up 1% to 5% year-over-year. We also expect free cash flow to grow in line with earnings, excluding the after-tax impact of last year's onetime settlement from derisking our balance sheet. We are progressing on the multiyear unwind of working capital, where our efforts to improve demand planning and optimize production and materials management are yielding some early operational benefits, another indicator of the power of our digitalization capability through Accelerator.

In addition, we will continue to fund high-return projects focused on creating uniquely innovative, differentiated technologies. As a result, our free cash flow expectations remain $5.6 billion to $6 billion for the year, up 6% to 13%, excluding the impact of prior year settlements. Our robust balance sheet and strong cash generation will support accretive capital deployment. And while we're happy with our recently announced transactions, we will further build on our active M&A pipeline as we continue to optimize the portfolio.

So in summary, we executed a strong first quarter and anticipate delivering a strong second quarter and 2024, benefiting from our alignment to the compelling aerospace, automation and energy transition megatrends. Our record backlog and rigorous operating principles give us confidence in our track record of execution.

So let me turn it now back to Vimal on Slide 7.

Thank you, Greg. Let's take a minute to zoom out from the near-term dynamics and talk about the tremendous progress Honeywell has demonstrated across our key metrics since 2016. We remain keenly focused on delivering our long-term growth algorithm and remain confident in our ability to accelerate growth, achieve 25%-plus segment margins, expand gross margins to above 40% and generate free cash flow margins to mid-teens plus. This framework will enable us to deliver what matters: consistent, compelling EPS growth. Our annual 4% to 7% organic sales growth rate and 40 to 60 basis points of margin expansion, coupled with 1% to 2% of EPS accretion from both share buyback and consistent M&A execution, is a powerful combination that will allow us to generate double-digit adjusted EPS growth on through a cycle basis. '24 is no different as we continue to make steady, consistent improvement to the quality of Honeywell's financial profile. The organization is aligned to my key priorities of accelerating organic growth, deploying the operational power of Accelerator 3.0 and executing on a robust portfolio optimization strategy, all of which will enable us to achieve our long-term targets.

I'm incredibly optimistic about the high-value opportunities we are already surfacing during the next phase of our transformation. We'll continue to track our progression closely as our efforts to drive incremental sales growth, expand margins and generate more cash faster into our enhanced financial profile.

Let's turn to Slide 8 for closing thoughts before we move into question and answers. Our value creation framework is working. While the economic backdrop remains fluid, we are deploying our rigorous operating playbook to effectively manage near-term challenges to meet our performance targets. Record backlog levels, ongoing strength in our biggest end market, aerospace and energy as well as an impeding recovery in our short-cycle businesses will allow us to achieve our strong results as we progress through 2024. This includes our margin expansion guidance, which will benefit from improving business mix, in addition to our continued focus on commercial excellence and productivity.

It's no secret, I am excited about the future of Honeywell and believe our company is on track to drive the innovation needed to solve some of the world's most challenging problems and enhance the life of people around the world. As we move to Q&A, I want to take a moment to thank our 95,000 future shapers whose dedication and capabilities enable us to deliver the best of our customers, partners and communities every day.

With that, Sean, let's take questions.

Thank you, Vimal. Vimal and Greg 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 Scott Davis of Melius Research.

Guys, in the spirit of kind of looking at the outliers here, warehouse automation is still really a tough spot. What's on the other side of this? Is this just a deeply cyclical business, so we're going to see a big bounce back? Have you structurally changed your cost structure? What's kind of on the other side of this tough period?

Yes. So Scott, if I get your question, just that I've missed the front word. Is it -- did you mention industrial automation or warehouse automation?

Warehouse automation.

Warehouse automation. Okay. Thank you.

Warehouse. Sorry, Vimal, warehouse.

No, I got it. I got it. Look, the need for warehouse automation is strong. There is no doubt that it drives labor productivity. So there is no debate on the basics of it. The interesting part is our pipeline remains strong, but order conversion is weak, specifically in the project side.

Another fact which encourages me about the business is the aftermarket continues to grow, which means once the systems are deployed, people use it well and our aftermarket business is in excess of $0.5 billion. We also have rationalized our cost base. All in, I would say the business is in trough right now, and we are waiting for its recovery. But net-net, we remain very optimistic and confident about the business prospects.

Okay. I appreciate that, Vimal. And you've been in the seat kind of long enough to have a good sense to, well, at least review the portfolio. Do you anticipate further portfolio actions, Vimal? It's still a relatively complex portfolio. We certainly get that feedback frequently. I'm sure you do as well. But has your view on the portfolio evolved at all since you've taken the role?

Scott, I would say it in two parts. I have committed that we will take action on about 10% of our portfolio, which doesn't fit with the 3 megatrends, and we are absolutely taking action on that. We will make progress one step at a time because that constitutes a few businesses and no one big thing.

On a broader basis, I will review with both, as I did last year on a broader Honeywell portfolio, and we will continue to be our own activist. And wherever there's a case to look at things differently, we absolutely will do that.

Yes. And if I just build on that, I would say our pipeline on inbound as well is very healthy. You saw the Civitanavi announcement. You know that the Carrier deal is on its way. So we're on pace to deploy $10 billion this year with just what we know about, and we're not done.

Our next question comes from the line of Stephen Tusa at JPMorgan.

Can you just talk about maybe just sequentially how you see the earnings trajectory in 3 and 4Q?

Yes. So I would say the earnings, as we guided here, we gave the guide for Q2 and rest of the year. So I think the headline is that H2 will be stronger than H1, and that's built upon our order spacing. If you see our orders performance in Q1 was on expected lines, our book-to-bill is 1.1, our backlog is up 6%. Long cycle remains strong across the board in Aerospace and building solutions, and we expect the same trend in European Process Solutions. And short cycle is recovering on expected lines.

You saw the results of ESS. The chemical business did perform well on the strength of short cycle. We saw a recovery in scanning and mobility business. We saw some early green shoots in fire business. So things are progressing as we expected, and that's the basis of our guide for rest of the year. So the punchline is we're going to have stronger second half versus first half, and that's reflected on our earnings guide for the year.

Yes. And we know that, that's outside of the normal historical comps that you've seen, but that's not really different than the way we've modeled the year so far. And to Vimal's point, we are starting to see some of those short-cycle order patterns. And we said that those were going to be different by end market as the year progresses. So no real change, Steve, to what we outlined in the original guidance.

So I guess just normally, you guys are up, I think, a little bit 2Q to 3Q. You're up like, I think, I don't know, low to mid-singles from 1Q to 2Q. Should we think about like just to kind of frame this, the ramp because it is from a timing perspective, is it 2Q to 3Q? What do you think?

Yes. So we're going to have a ramp from 2Q to 3Q as opposed to flat, and then the ramp from 3Q to 4Q will be greater than 2Q to 3Q.

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

I think a lot of that second half pickup rests on the IA segment. So maybe just wanted to home in on that for a second. I think you'd guided full year sales there flattish, so about $10.8 billion. And it sounds like you're doing $2.5 billion a quarter in the first half. So you've got a sort of high teens half-on-half step-up in the second half in IA revenue from sort of $5 billion to $5.8 billion. Maybe help us understand which of the pieces inside IA will lead or lag that delta, and if it's similar to the firm-wide where there's some pickup in Q3 and then a steeper one in Q4 sequentially.

Yes. So thanks, Julian. I mean the ramp for the company actually is in IA and in BA, and then we'll get sort of a nice ramp in the fourth quarter in ESS as well. So it really does come back to all the products businesses inside of each of those portfolios.

So think about in IA, PSS, the sensing business. In BA, think about fire and the BMS business. And then as Vimal mentioned earlier in ESS, you're going to get a continued step-up in electronics and chemicals as well as our normal sort of fourth quarter move in our catalyst business. So it's really not all predicated on any one segment overall. And it's going to be -- you've got your numbers approximately right in terms of the IA first half, second half overall. But you're going to see it across the portfolio. It's not going to be concentrated in any one specific business around the portfolio.

Only thing I'll add, Julian there, is that in IA, the HPS continues to perform very well. It's going to mirror the performance it had in 2023. So similar growth rates. The bookings remain very strong. Aftermarket is performing extremely strong. And that's the biggest constituents of the newly framed IA business.

And the short cycle is recovering. I remain very confident on short-cycle recovery. We have seen that in PSS business, it has 2 successive quarters of orders growth. We see that in early cycle in other businesses. So net-net, we are going to see strong exit rates in IA business at end of the year.

That's helpful. And then just my quick follow-up on the buildings division margins. So I think they're guided to be up maybe 100 bps or so for the year, above the firm-wide margin expansion. First quarter clearly starting down -- tricky down over 100 bps. So the slope of that, maybe help us understand kind of how do we think about the buildings margins in the second quarter? How quickly we start to see that flip to margin expansion in the rest of the year, please?

Sure. So again, you're going to see that tie a lot to the product volumes because of the volume leverage that comes with that and the margin rates associated with it are going to be very helpful in that margin ramp as well as the work that we've done on productivity, particularly around direct materials this year.

So that's -- our last 2 quarters were in the same neighborhood, right around 24 points with the lower product mix. And as the year progresses, you're going to see that move up sequentially throughout the remaining 3 quarters of the year.

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

Good to hear that short cycle is finally starting to move.

Absolutely, Andrew.

Just a question on defense and space. That picked up very nicely, nice lever. Can you just talk specifically, and I know there are a lot of programs there. But what is driving that? And what's the outlook specifically for defense and space into the second half because this is a very, very impressive performance there.

Yes. Thanks, Andrew. Look, the Q1 performance of defense and space was more linked to the supply chain unlock. That remains the biggest variable in Aerospace even in 2024.

We are very pleased with the strong growth in Q1. We expect high single-digit growth in defense and space in the revenue, but order booking will be much stronger. And that's driven by the fact of not only the demand in U.S. but the international demand, which is coming up in this business. And those trends are extremely favorable. So net-net, we do expect to finish the year strong, not only in the revenue side but equally strong on the order side on the defense.

Got you. And maybe to -- shifting to ESS. Can you just talk about visibility of UOP? I know you guys were optimistic about some of the green projects coming in. And I think due to regulatory issues, it's just taking time. What does the pipeline look like? And what does the ramp look in this business into the year-end? And how do you balance this visibility on these projects and just the time it takes to get them approved?

So very bullish on UOP. I would say this business is headed for a great time ahead. The traditional projects continues to remain active while the new energy project on sustainability, a strong pipeline, and we see decisions now maturing. You saw in one of our exciting wins, we mentioned here new way to make SAF with the biomass now, which is a new technology we have launched.

So net-net, with the strength in traditional energy, strength in renewable technologies and catalysts, we are going to have a strong year for UOP, both in orders and revenue. And that's not only 2024. Look ahead for the business remains extremely, extremely positive in the times ahead.

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

I wanted to ask about Aerospace. Commercial OE was really strong, up 24% in the quarter. How are you thinking about that for the full year just given slower MAX production we're seeing and the new news of the 787 also slowing down production there? Any top line margin or cash impact that you foresee? And then I just want to clarify the comment about margins for Aerospace. You said it would dampen just given OE mix, but I would think aftermarket would accelerate as we progress through the year.

Okay. So I think there are 3 questions there, Sheila, I'll try to pick up.

Sorry about that.

No, no problem. So the overall, we do expect commercial OE to grow double digits, both on the -- the commercial OE to grow double digits and aftermarket. So we'll maintain the strong growth trend as is indicated in our guide for the rest of the year.

To your comment specifically on 787 MAX, I won't give you a specific input on one particular platform. But I would say that our demand for Boeing hasn't changed. We know that we all heard their earnings call yesterday, and there are different drivers for that. But for Honeywell, we are present in multiple platforms, and the demand for them remains unwavered.

I personally talk to Boeing leadership, and I'm very confident that's going to trend that way. On margins, it's a -- Q1 was strong. It's a mixed driver. As the year progresses, we have different product mix and mix between OE and aftermarket. So net-net, we are still guiding flattish margins for the year, and that's what we have given in our guidance.

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

I just want to really focus my questions on margins. So just making sure that I understood some of the comments already. As you think about the rest of the year, I guess, how much of the margin expansion that you're expecting in both BA and IA is really dependent on short cycle accelerating?

And then, Vimal, just a quick clarification on the answer you just gave on the aero side of the business. The OE business was up, I think it was over 24% or something like that in aero. I'm just curious, like what were some of the kind of mix tailwinds you saw this quarter in aero? And again, why doesn't that continue going forward?

Yes. Joe, I mean, as it relates to the mix, I'm not going to bore you with the details, but it's actually quite deep between the different OEs, the shipsets within each of them and so forth. So that is going to migrate up and down during the course of the year as it goes. So there's not one particular thing happening there.

As Vimal mentioned though, we're going to continue to see very strong OE margins -- or excuse me, OE volumes during the year. In fact, I wouldn't be surprised if the growth in OE actually accelerates in the next couple of quarters, not dramatically so, but in terms of its relative mix inside of the overall portfolio. So that's what I would say about aero.

And then in terms of the margin rates in IA and BA, both of those businesses are seeing mix down with products softer. And so absolutely mix up with products growth is going to be a driver of those margins. But that also comes with a lot of the work we've been doing on the productivity side, both in direct materials as well as in our continued repositioning of the cost base that we have been doing. So our margin story is going to be a combination of the volume leverage, the product mix and our productivity actions that we continue to take, as you know, is always a strength for Honeywell.

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

Sorry to bore you in another -- obviously, aero margins were great. What's the timing of Boeing shipments to customers affected there? Just curious if there's a timing issue there. But mainly my question is around 2Q margin dynamics. And thinking about that drop-off in the Zebra royalty income in the second quarter, are we looking at maybe margins, I don't know, down like 300 basis points year-over-year in the second quarter for IA? And therefore, the balance of the segment margin performance is actually probably more like on trend? So just any more color on the 2Q margins by segment would be helpful.

Yes. No, we don't expect IA margins to be down 300 basis points in 2Q on a year-over-year basis. We talked about the Zebra impact. Again, it's $45 million a quarter on the revenue side. There is some costs associated with that as we talked about over the last 2 years, as we've had that impact into our P&L. So you guys can do the math on the direct impact of just that item all by itself. But we have other actions in place to continue to offset that. I don't expect margins to necessarily be up year-on-year in IA, but nothing to the degree that we described in terms of 300 basis point drop.

Okay. And then any color on aero margins in second quarter?

Yes. Just that I would expect them to be down sequentially from Q1, that Q1 is going to be the high point. And as we go through the year, again, our overall expectation is flattish on a year-on-year basis, but Q1 will be the high point.

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

Vimal, maybe can you talk a little bit more about what you're seeing by region? I think you mentioned strength in India. How important is that region becoming? And what are you seeing in China and Europe?

Yes. So I would say, if I go around the corner, we continue to see strength in our high-growth regions, specifically in India and Middle East. Those remain strong. China also did well for us. We grew high single digits on the strength of our aero and energy business. So net-net, we do see strong -- continued strong trend in emerging markets.

Europe has stabilized. I would say the worst is definitely behind us. We see more recovery and positive trends, specifically in short cycle, we talked about it earlier in Europe. And U.S., of course, is the balance here. So net-net, high-growth region remains a tailwind in overall revenue mix for Honeywell.

Great. And I just want to follow up on the process business. I think you mentioned delays. Is it you're seeing more geopolitical uncertainty or election fears, higher rates? I think you still have a good outlook for that business. Maybe talk about it a little bit more.

So Process Solutions business, absolutely. Our booking -- we carried a strong backlog, and our booking trends remains strong there. Aftermarket is double-digit growth for several quarters in a row. So that business will, as I mentioned before, will repeat 2023 pattern of high growth.

And we expect to do -- continue to do well in that segment, monetizing installed base, aftermarket software, all our strategies are really working. And also diversification into new verticals as the new energy segment are emerging like battery storage, gigafactories, all are becoming attractive growth optionality for us in that business.

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

Vimal, just back to kind of the ongoing portfolio review, and you said it could be many things, not one big thing. Can we take that? Or should we take that to mean as we look at kind of your revenue disaggregation, right, there's kind of 11 buckets we track and model to, that none of those entire sleeves would be gone at some point in time in your thought process?

Look, whenever we complete any action of addition and substraction, we'll give you an early guide for that. As I mentioned, this is no one step change. So it's not that we're going to take action of a $4 billion type of thing in a single move. But whenever we are ready to communicate, we'll give you a heads up on what's likely coming in.

For example, Carrier business will likely come in, Civitanavi will likely come in, and what are the implications on the guide? And then what goes out, if and when this happens, we'll provide you the guide. But what I can share with you is there is not going to be one mega event on divestiture. It's going to be a combination of multiple small events.

And one thing you have been clear on is ultimately, there's a monetization play on Quantinuum. Where are we there? Where's the spending tracking? And can you kind of give us an idea of maybe the time line of a monetization event?

So Quantinuum is in, I would say, exciting times. We completed a major event of pre-money. We got valuation in excess of $5 billion, got more people invested there. We talked about that in the last earnings call.

We also met another major milestone. I don't know if you read that Honeywell and Microsoft announced a major milestone of testing different scenarios to deliver reliable results. So Microsoft gave, ran 14,000 experiments on H2 quantum computer, and they were able to prove that every time all 14,000 times, we're able to deliver results with accuracy.

Why it matters is in quantum, the repeatability or accuracy matters more than the speed at this point. Once we are able to solve the problem solving with accuracy, we can work on the speed part. So that's a major milestone, and that's what matters in quantum business. We continue to hit these milestones one after another, and we score some wins on the commercial side, and that has set us for the next event of the monetization somewhere in 2025. It's contingent upon hitting this, but I remain confident that we are on the right track on that.

And by the way, the last comment I'll make there is AI is definitely giving us a lot more momentum. There's a deeper understanding and appreciation why quantum is necessary. And that's going to certainly help us when we are ready for an IPO or something similar in 2025.

Our next question comes from the line of Brett Linzey with Mizuho.

Again, I wanted to come back to ESS. You noted the margin contraction on some of this onetime factory restart cost. Maybe could you quantify that? And then any detail on the nature of just the timing of some of these pressures?

Sure. So in our clean energy business, we had been operating as in a trading manner, and we had shut down the major facility some number of years ago in that business, and we restarted it. And so as you can imagine, that restart has some fits in it as we go through the course of the year to get to stabilization. And that's really the -- if you look at ESS margins, I'm not going to give you precise numbers. But if you back out the impact of that, we would have been roughly flat, maybe slightly up on a margin rate basis year-on-year in the first quarter.

And so that's going to take some time to get to stability. But the good news is this is a great business. The long-term dynamics for it from a pricing standpoint, a supply standpoint are very favorable. As we exit the year, we're going to have more stable operations internally. And so we're going to have a very nice exit rate going into 2025 with a very strong business. And again, that business is, think about it being around about $400 million on an annual basis.

All right. Got it. And then just one more on M&A. Just thinking about the velocity there. I know last May, you talked about the pipeline prioritization. I think you had 90 deals looking at within your markets, and that's still at the top 10. I guess how is that 90 compared today? I mean it sounds like the enthusiasm, it sounds a little bit more optimistic about some actionability. But maybe just talk about some of the pipeline and the movement there.

Absolutely. I would say the pipeline is very strong as we sit today. Of course, we compete for every target, and we remain very sensitive to both strategic fit and valuation fit. So net-net, we do expect to continue to take some actions on adding new business to our portfolio. And overall, my tone is very positive on that.

Okay. Just to wrap up here, I want to continue to express my appreciation to our shareholders for your ongoing support and, again, to our Honeywell future shapers, who continue to drive differentiated performance. Our future is bright, and look forward to sharing our progress with you as we continue to execute on our commitments. Thank you for listening, and please stay safe and healthy.

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