Prepared remarks
Thank you. Good morning, and welcome to Honeywell's second quarter 2025 earnings conference call. On the call with me today are Chairman and Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information 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 businesses 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 second quarter, share our guidance for the third quarter and provide an update on full year 2025. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Vimal Kapur.
Thank you, Sean, and good morning, everyone. Honeywell again delivered solid results in the second quarter, meeting or exceeding all our financial commitments in a time of significant global economic change. Our organic sales and orders growth both accelerated during this quarter as we are seeing the benefit of our consistent spending and execution on new product development across our businesses. Given the strong first half performance, we are raising sales and earnings guidance for the full year, while incorporating into our outlook all currently known tariffs and the uncertain business conditions going forward. Our proactive multipronged mitigation efforts, coordinating closely with suppliers and customers on productivity and pricing initiatives have been working as planned. And because of our systemic approach, we are in a position to deliver strong sales profit and cash flow growth in 2025.
As our business leaders have been solely focused on meeting and exceeding our financial commitment, management and the Board have been fulfilling our promise to transform our portfolio ahead of our upcoming separation to best position each of the future independent company's success. Throughout the comprehensive portfolio review I initiated shortly after becoming CEO, we have diligently analyzed how to further simplify and optimize Honeywell. Earlier this month, we entered the final stage of this process, announcing our intention to pursue strategic alternatives for our productivity solutions and services, and warehouse and workflow solutions businesses. The results of this pursuit, whatever they may be, will clarify the standalone automation company's go-forward strategy and value proposition. With many changes in flight, our dedicated separation management office has kept us right on track to execute our spin-off transaction, both on time and without commercial disruption.
Let's now turn to Slide 3 for a further update on our formation of 3 industry-leading public companies. We continue to make great progress along the path to separate into 3 independent companies, which we believe will maximize long-term value for all Honeywell stakeholders. As independent entities with clear alignment and purpose, increased organizational agility, and customized capital allocation priorities, each will be better positioned to accelerate future growth opportunities. Given the pace of our progress, we cannot narrow the timing for the spin-off of this Advanced Materials to Honeywell shareholders to the fourth quarter of this year. Solstice shares will trade under the ticker SOLS on the NASDAQ Stock Exchange. A few weeks prior to the spin, the Solstice leadership team will host an Investor Day in New York. They will lay out in detail the powerful investment case for this innovative market leader in the secularly growing Advanced Materials market that will carry on Honeywell's legacy of operational excellence.
We hope you will join CEO, David Sewell, and his team at this event. We're also making great progress on the Aerospace spin, which is planned for the second half of next year. Last month, Aerospace President, Jim Currier, and I presented at an investor reception ahead of the Paris Air Show. Jim highlighted Aero's industry-leading position as a mission-critical supplier of systems across aerospace verticals and platforms. In addition, he provided insights into the drivers for our strong growth profile, underpinned by a broad aerospace and defense upcycle, which we enhanced with a powerful decouple sales initiative, ongoing supply chain transformation effort and robust research and development investments over time. We look forward to providing you with more details on standalone Honeywell Aerospace in the coming quarters. And yet we are not waiting for the separation to reshape our portfolio for future growth.
We continue to selectively deploy capital towards acquisitions, announcing 2 new deals in the past couple of months. We are also looking to recycle capital, as I discussed earlier, by pursuing alternatives for businesses that do not fit our future. In combination with these actions, we will drive value creation as we await becoming separately publicly traded vehicles. If you turn to Slide 4, I will discuss our recent portfolio announcement in more detail. In June, we agreed to a GBP 1.8 billion bolt-on purchase of Johnson Matthey's Catalyst Technologies business. We have long identified our UOP process technology business as a natural owner of this highly complementary business because it gives us additional capabilities in sustainable methanol, sustainable aviation fuel, hydrogen and ammonia to better serve our extensive customer base. It also brings attractive sales from catalysts, which fit very well with our existing offerings.
The transaction is expected to close in the first half of 2026 and will enhance our growth and margin profile over time, while providing a strong financial return. In early July, we also announced a technology tuck-in acquisition of Li-ion Tamer that enhances our building automation capability in high-growth energy storage and data center end markets. While such smaller deals do not often get much investor attention, in aggregate, they can accelerate our strategic roadmap and boost growth with a lower risk profile. We recently announced our intent to evaluate strategic alternatives for our PSS and warehouse automation businesses. Just as we want to acquire businesses such as Catalyst Technologies and Li-ion Tamer, where we believe we are natural owners, we must also acknowledge when the time comes, that they'll be better owners of parts of our portfolio. We're looking to create a pure-play automation company with a consistent business model and focus in of end markets where we have durable competitive advantages.
Both PSS and Intelligrated have strong customer bases, long histories of innovation and best-in-class operations, and we will evaluate options for them from a position of strength. To avoid interfering with the review process, we will hold further updates until it's completed. I will now turn it over to Mike to provide more details on our excellent second quarter results.
Thank you, Vimal, and good morning, everyone. Let's begin with our second quarter results. We continued our strong performance from the beginning of the year, surpassing our targets for organic sales growth and adjusted earnings per share. Our outcomes highlight the strength of our operating system to quickly adapt to changes in the environment while fulfilling our financial commitments. We remain dedicated to investing in growth initiatives and are seeing signs of progress. In the second quarter, organic sales grew by 5%, with three out of four segments performing above this rate. Defense and Space and UOP led with double-digit growth. Segment profit increased by 8% compared to last year, in line with sales, and segment margin remained nearly flat, within our guidance. Margin improvements in Building Automation and Industrial Automation and lower corporate costs were slightly offset by margin pressures in Aerospace Technologies and Energy and Sustainability Solutions.
An increase in research and development expenses, which rose by 60 basis points as a percentage of sales to 4.6%, impacted current margin but will support future growth. Earnings per share for the second quarter was $2.45, up 4% year-over-year, while adjusted earnings per share reached $2.75, up 10% from the previous year. The growth in both organic and inorganic segment profits, along with a lower tax rate, more than compensated for challenges arising from higher interest expenses and lower pension income. Orders totaled $10.5 billion for the quarter, a 6% year-over-year increase, excluding acquisitions and divestitures, driven by strong double-digit growth in Aerospace orders. Our backlog grew by 10% organically to a record $36.6 billion. Free cash flow for the second quarter was $1 billion, down about $100 million from the previous year, affected by tariff-related inflation in inventory costs and planned increases in capital project spending.
We are strategically allocating our excess cash flow based on market opportunities. During the second quarter, we completed a significant acquisition of Sundyne, investing $2.2 billion, and returned over $2.4 billion to shareholders through share repurchases and dividends. We also earmarked $300 million for capital projects. Moving on to our second quarter performance by segment, I’ll outline the key results. Aerospace Technologies experienced 6% organic growth, aided by a strong performance in Defense and Space and Commercial Aftermarket. However, segment margin decreased by 170 basis points to 25.5% due to cost inflation effects. In Industrial Automation, sales were flat on an organic basis but exceeded our guidance, with segment margin expanding 20 basis points to 19.2%, thanks to productivity efforts. Following the sale of our PPE business, we expect positive impacts on organic growth and margins in the latter half of the year.
Building Automation outperformed expectations, with sales up 8% organically, and segment margins growing by 90 basis points due to increased volumes. Energy and Sustainability Solutions saw a 6% organic sales increase, driven by strong UOP growth, although segment margin fell 110 basis points to 24.1% as inflation and settlement impacts outweighed benefits from acquisitions. Now, regarding our outlook for the third quarter and the full year, our strong first-half performance has given us the confidence to revise our year-end projections upward, while remaining cautious about potential demand impacts from recent tariffs. Our expectations for the year remain largely consistent, with adjustments for non-tariff impacts considered. We are maintaining open communication with our customers and suppliers to mitigate the effect of these tariffs. We are raising the lower end of our organic sales growth guidance by 200 basis points, projecting growth of 4% to 5% for the year or 3% to 4% when excluding last year's Bombardier agreement impact.
Our year-to-date results have been better than anticipated, while we are approaching the second half with care. We’ve noted the deferral of significant energy projects and catalyst spending into 2026 due to economic and legislative uncertainties. Full year sales are now estimated to be between $40.8 billion and $41.3 billion, primarily driven by improved organic growth and the revenue contribution from the Sundyne acquisition. We expect organic sales growth for the third quarter to range from 2% to 4%, translating to $10 billion to $10.3 billion. For the entire year, we anticipate an increase in overall segment margin of 40 to 60 basis points or a decline of 30 to 10 basis points when excluding Bombardier. The revised margin expectations result from the impact of deferred energy project work and the lag in pricing adjustments related to tariff pressures in our Aerospace unit. For the third quarter, segment margins are expected to be between 22.7% and 23.1%, reflecting a decline compared to last year, with certain segments experiencing differing trends.
We now forecast full year earnings per share between $10.45 and $10.65, reflecting an increase of 6% to 8% or a smaller increase when excluding the Bombardier agreement impact. Third quarter earnings per share is projected to be between $2.50 and $2.60, reflecting a slight year-over-year change. I will discuss more on our earnings per share guidance adjustments later. We still expect free cash flow for the year to be between $5.4 billion and $5.8 billion, which aligns closely with adjusted earnings per share growth. Further details on changes in free cash flow from last year will be provided in the appendix. Having deployed $7.8 billion in the first half for various purposes, we are positioned to be strategic with additional capital allocation for the remainder of the year. In conclusion, our strong first-half execution has set high expectations for the year while we also focus on maintaining realistic outlooks in a changing environment. Concentrating on what we can manage, we are set for strong performance ahead of our planned separations.
Thank you, Mike. Honeywell performed admirably in the first half of 2025, with back-to-back quarters that delivered earnings above the high end of our target ranges. Our investment in innovation is gaining traction, driving improved sales growth and yet another record quarter for our backlog. On the back of this operational momentum, we are raising our organic sales growth and adjusted earnings per share guide for the year, while being mindful that we may not yet have felt the full impact of escalation of global tariff rates in recent months. Business demand has remained resilient in more sectors and geographic regions thus far, but we are well prepared for potential changes ahead in the macro, regulatory and geopolitical environment utilizing a playbook that has served us well over many cycles. As our businesses focus on delivering our financial targets, we have also made substantial progress in transforming our portfolio to maximize their value.
Through separation, acquisitions and divestitures, we are simplifying Honeywell for investors, customers and our future shapers. All our transactions are proceeding according to plan. Even as the first chapter of my tenure as CEO comes closer to an end, with the conclusion of the comprehensive portfolio review, our dynamic approach to capital allocation and portfolio optimization remains ever green. We are confident that the combination of our accelerating growth and high-return capital deployment will compound the value of Honeywell going forward. With that, Sean, let's take questions.
Thank you, Vimal. Vimal and Mike are now available to answer your questions. Operator, please open the line for Q&A.
Questions and answers
Our first question comes from Julian Mitchell with Barclays Bank.
Just maybe wanted to start off with Aerospace to try and understand kind of the moving parts there. I suppose it sounded in Paris as if there was a bit more confidence around sort of supply chain issues and getting those resolved, and that might help the Commercial OE top line, but it seems something sort of moved the other way. So just trying to understand, is that BGA or large commercial? What's the pace at which Commercial OE sales improve? And on the margin front, should we think about this sort of 25% to 26% margin being the new sort of baseline for the next 12 or 18 months?
Julian, so I would say, first, orders in Aerospace, extremely strong, continue to be strong on all fronts, Defense and Space, Commercial OE, etc. What we see in our Commercial OE in the second quarter, it's really a transitory item, I would say. We experienced some destocking with one of our OEMs, and we expect our shipments to normalize to the OE build rates in the second half. So I feel very confident that you'll see better OE profile from us in the second half. But like I said, we feel quite bullish on Aero performance for the year. From a margin standpoint, as we talked earlier, we were integrating CAES, and that's about a 100 basis points drag for us year-over-year. That's going to start to normalize in the next year. CAES, by the way, is growing revenue this year at high double digits, so it's ahead of our pro forma. Really encouraged by that. And we also year-over-year are putting about $200 million of incremental R&D into the Aerospace business to help support our NPI growth and new revenue next year. So I think in the second half, the margin profile for Aero will be better than what you've seen this quarter. And like I said, I'm quite confident about the high single-digit growth on revenue for the rest of the year.
Julian, I want to emphasize that everything Mike mentioned relates to transitional issues. If you look at our discussions around margins, the operational efficiency mix is a transition due to destocking, and our R&D efforts are being evaluated to ensure future performance. This will establish a new normal. The CAES acquisition is also expected to provide future benefits. In response to your other question, this does not create a new baseline, as these matters are transitional, and we have strong confidence in the Aero margin projections we've outlined.
Got it. And just following up on that, Vimal. So the R&D hike, you think by the end of this year, kind of R&D to sales in Aero shouldn't be a headwind next year, and then CAES margins start to improve over the next year or so.
Yes. Both statements are true, and then the OE destocking issue also goes away because the rates will convert to the normal baseline. That's why I mentioned these are all transitionary issues. By the way, on the R&D spend, the R&D spend rise is not only in Aerospace. It's across all 4 segments of Honeywell. We feel continued confidence in our ability to accelerate organic growth through new products. We see part of that happening in Building Automation, pockets of Industrial Automation, Aerospace, we talked about wins. But overall, we have a meaningful acceleration of R&D spend for the right projects. And this is going to set up a new baseline for Honeywell for the future. So this is again a transitionary for the overall company. We don't expect that to repeat in the year ahead at the same level.
Our next question is from Andrew Obin with Bank of America.
Can we just talk a little bit about UOP? And my question is very strong growth this quarter, but you're seemingly talking it down for the second half of the year. Can we just understand what verticals drove the upside? And what verticals are driving the downside if we could disaggregate it?
So I'll say, Andrew, for the quarter 2, we had 2 favorable items. We had a big licensing agreement with a customer, which gave us strong growth. And also catalyst sales were much stronger in Q2. So some of the catalysts got pulled through from the second half to the first half. So that's more of a cycle of this long-cycle business. To the second part of your question, the impact we see is energy project spend is moving more to the right. Part of it is, I would say, economic uncertainty which got settled in and some of the regulatory items which got clarified with OB3 regulations. So we do believe they will settle. But clearly, we saw pressure on that for rest of the year, which we have reflected in our guide for ESS business and, to a certain degree, also on IA for processautomation.
And I would just add that just looking at the OB3 and the IRA, that's mostly preserved for us. So it's not really a headwind for us into next year.
I got you. And then on Industrial Automation, just to follow up. So HPS, similar dynamics. So is it fair to say that when you say weakened demand and price cost deleverage in the second half in the slide that it mostly relates to HPS, and that's what's driving sort of slightly lower margin outlook there? Is that the key driver?
Yes. Primarily, I would say in case of HPS, the same energy projects, the projects part of the business will see similar pressure. The services side remains strong. Mike, anything you want to add on the...?
I would just say, Vimal, I continue to be prudent about the second half. A lot of moving parts. I feel confident we'll be able to deliver on the guide that we put upfront, but just continue to be prudent on the second half, especially around the short-cycle orders.
But you don't have one specific industry vertical or region to call out other than this big tariff uncertainty.
That's correct.
No, no. Absolutely right. I mean, in fact, we see much more balanced growth across the board. Now of course, the U.S. remains a leading growth, no doubt about it. But the headwinds we saw a couple of quarters last year, in particular on Europe and China, have subsided now. So the growth is more normalized across the globe, with the U.S. being the leading growth.
Our next question comes from Nigel Coe with Wolfe Research.
I just want to pick up on maybe the first couple of questions. Just on the energy project timing, I guess, is that mainly on the clean energy project? So is it just large process projects in general? And then maybe just the final point on Aero margins. It seems like tariff inflation should be better news today than it was back in April. So I'm just curious what additional inflationary pressures you see in Aero.
It's a good time for energy projects, and I can provide some detailed insights. LNG continues to perform strongly, and the business we acquired is doing exceptionally well, so we remain optimistic about LNG. This will benefit our ESS and process automation segments through our two-in-a-box strategy. Sustainable fuels projects are experiencing delays, mainly due to policy developments around the IRA and their integration with OB3. However, recent clarifications should generate positive momentum. In the traditional refining and petrochemical sectors, we observed increased catalyst spending in Q2, with some actions accelerated, resulting in strong performance for that quarter. Nonetheless, we have noticed a decline in demand as customers are becoming more cautious about making significant catalyst investments in specific areas. Overall, following our attendance at a recent OPEC meeting, the outlook for the energy segment remains highly optimistic across coal, gas, refining, and biomass-based products in the future. Our perspective on the energy sector remains very positive, and we believe we are simply navigating a typical cycle at this time.
And then on the Aero question, what I would tell you is that if you look at tariffs, tariffs, when we incur tariffs, we pay them in 10 days. It's easy to pass tariffs as far as timing on short-cycle businesses. When it comes to Aerospace and our OE contracts, these matters take a longer time because you have to open the contract, and these contracts usually are set for 10 years and prescribed by stricter frameworks. So the team is working through it, and it will take them a little bit longer to get that price aligned with the cost, as we obviously keep in mind on how it will impact our customers.
And Mike, could you maybe just touch on the changes to the R&D tax expensing for tax purposes? You've got about $1 billion of deferred tax assets. It's on your balance sheet. So just how does that unwind over the next couple of years?
Yes, I would say it's clearly a net positive for us. Currently, we are assessing this with our tax team, considering all the factors involved and how to best manage the separation. I see it as a favorable factor for us in 2026 and 2027. We will provide more information as we move into next year. You are right, this is indeed a positive factor for us.
Our next question comes from Steve Tusa with JPMorgan. Yes. I would say it's obviously net positive for us. Right now, we're just evaluating it with our tax team, considering how to unwind it in the best way given everything we have going on and the separation. I would say it's a tailwind for us for 2026 and 2027. We'll provide more information about it as we move into next year. You are correct, this is a tailwind for us.
Just trying to clarify the margin guidance for the year. You’ve provided some good details. I think to fall within that range, is Building Automation expected to be close to 28% this year? Is that about right?
I would say it really depends on how you look at it and where you look at it. On the product side, obviously, the incrementals are extremely high for us right now. Projects is a bit lower, but I would say incrementals are quite high.
Yes. Steve, this is Sean. I would say, thinking about the full year, that's probably a little bit aggressive in terms of is that business capable of delivering a number like that. It has the capability of doing so.
It's fair to say, Steve, that BA will be the highest margin business in our portfolio in '25. So that will be a fair statement.
Our next question comes from Scott Davis with Melius Research.
Guys, can we talk a little bit about Quantinuum? I mean, it looks like it's still bleeding a little bit of cash for you guys. But what are the hurdles? Specifically, what are you guys looking for to be able to get that to an IPO-ready situation?
Scott, we are committed to deconsolidating, and that plan remains unchanged. Currently, we are in the process of fundraising to capitalize the company leading up to the IPO. In response to your question, we are seeking more commercial evidence to validate the revenue stream. We had a significant success in Qatar during the President's visit, where it was announced that Qatar will invest in Quantum infrastructure. Wins like this help boost investor confidence regarding the revenue stream. As for the timeline, I would estimate that the end of 2027 is the latest we are looking at, with the possibility of moving it up by a few months or a quarter. We are working with that timeline and have good visibility on commercial progress to achieve it. We also plan to reveal Quantinuum's plans in the fourth quarter and will keep all our shareholders updated on our progress and share broader details.
Okay, that's helpful, Vimal. Regarding R&D, I find it unusual for a company to increase R&D spending prior to a breakup. I'm curious if this indicates that the businesses feel they are lagging or if it is just a coincidence. I'll leave it at that.
This reflects my ongoing message since last year about Honeywell's organic growth, supported by improving our fundamentals. The two key areas we are concentrating on are refining our processes and ensuring we have the right talent and investments. Additionally, we decided last year to ramp up our research and development efforts in areas where we see growth potential. Hiring in fields like Aerospace and Energy involves lengthy cycles, so we cannot expect immediate results. Overall, we are increasing R&D investments, with a notable emphasis in Aerospace, but this growth spans all sectors. I firmly believe this prepares Honeywell for future organic growth by strategically investing in the right areas. We are already witnessing some improvements in specific segments due to our accelerated organic growth, and more advancements are on the horizon. It's important to note that I view spending and organic growth as distinct but complementary elements. We are enhancing our capabilities as a company focused on organic growth compared to our historical performance.
I believe this is beneficial for us as we aim for top-line growth and shift towards higher growth sectors. This investment is advantageous and has a high return on investment expected for 2026.
I should have mentioned that we are consistently at the median of our R&D spending. As the year ends, I think this will shift us towards the upper quartile. As you may notice, our investments for growth will start becoming more apparent.
Our next question comes from Sheila Kahyaoglu with Jefferies Group.
If I could ask 2 Aerospace questions, please. The first one on aftermarket, the 7% growth decelerating from 15% in Q1 and lagging some of the early reports from peers. How do we think about what weighed on that growth? Was it Air Transport, Business Aviation? And how are you thinking about the full year there?
I would say that the aftermarket is returning to normal for us. The range we saw in the second quarter aligns with our expectations for the second half. As we catch up with demand, we view this as a more typical rate moving forward. The hours remain fairly stable for both ATR and Business, which we see as a new normal for us.
Okay. And then if I could maybe hone in on the Aerospace OE decline once again, if that's possible. Why the destocking now? And it seems like deliveries are actually increasing. Was it related to one specific platform? Or is it inventory across multiple platforms?
The impact is mainly from North America platforms on the OE side. Last year, we were shipping a lot into our OEs inventories, which are now being depleted. They have a clearer understanding of how much safety stock they require. We are adjusting for this temporary situation, and based on what I know today, I expect some normalization in the third quarter, with a return to normalcy in the fourth quarter.
And then, Sheila, I would just add the nuance is not everything is the same inside of OE. And so electromechanicals where we've had the supply chain challenges and continue to work towards making sequential improvement, whereas electronic solutions have been caught up for quite a while. And so you can see a little bit of a difference in terms of what those needs look like for customers between those 2 businesses.
Our next question comes from Chris Snyder with Morgan Stanley.
I wanted to ask about portfolio actions. Vimal, you guys have remained quite busy here in the first half of '25 after you announced the separation in Q4 of last year. So should we assume that everything of size has been completed or announced at this point? And then just on some of the strategic reviews, I think I understand why PSS doesn't fit the Aftermarket business. But Warehouse is both automation and aftermarket driven. So it does fit the characteristics that Honeywell is looking for. Can you just talk about why that one doesn't fit in the future portfolio?
Yes, thank you, Chris. To address the first part of your question, we have completed our portfolio review that I began two years ago. Going forward, we do not anticipate any significant portfolio exits. While, being a large company, there may be ongoing developments, we have fundamentally finished this process. The decisions regarding Intelligrated and PSS were based on our perspective of the sectors we want to focus on. Automation is a significant market with a total addressable market of $500 billion, providing us with substantial opportunities in this area. We have established three verticals: Industrial, Process, and Buildings, and we are now making strategic choices within these. Our aim is to prioritize verticals with higher growth potential to maximize returns for our shareholders. We believe that logistics, warehouse, and transport segments are promising, but they have also shown certain growth rates and fluctuations that may not align with our portfolio’s future direction. Thus, we are making selective additions and subtractions. While Warehouse Automation does offer strong aftermarket opportunities, the decisions we're making are primarily about the markets we want to engage with moving forward, which drove the recent choices.
I appreciate that. I want to follow up on Building Automation, which has experienced a remarkable turnaround over the past year. Can you discuss the specific actions taken by the company that contributed to this growth? Additionally, are we seeing revenue synergies from the significant security acquisition made last year?
I think there are 3 strategies, which are, by the way, going to be the strategy for new Honeywell as we unveil that in late 2026. First is how we make our mix towards higher growth verticals. So in case of buildings, we are focused on 3 or 4 markets: hospitals, hotels, data centers, airports in high-growth regions. So one is pivoting more towards that. Action 2 is mining installed base. We have a large installed base, how we mine it higher and deliver high single-digit growth in services. That's certainly working in Building Automation. And finally, the new product acceleration, the comment I mentioned to Scott's question, we have elevated R&D even in Building Automation, and they are the most ahead in delivering higher growth with new products. So when you pull all 3 things together, we are participating in high-growth markets. We are mining our installed base better. We are turning more new products. That's becoming the driver for higher growth. The final point there is we had some pressure in some geographies. Like there was a drag in China. There's a drag in Europe in some pockets. Those have normalized now. So the Building Automation growth is double digit in North America, but like low single to mid-single in other different parts of the world. So that also helps because we don't have any pullbacks from some other geographies, which normalize our results here.
Our next question comes from Andy Kaplowitz with Citigroup.
Vimal, can you give a little more color into what you're seeing in Defense and Space as it continues to accelerate here? I think the growth you've talked about in the past has been pretty balanced between the U.S. and international. But I think international defense spending is just starting to accelerate. So could you talk a little bit more about what you're seeing?
Yes. I think the Defense and Space growth is driven by both on the supply chain healing. Because it was last to heal, we have much more mechanical content in Defense and Space compared to Commercial. So that's certainly seen as part of our results. And on the demand side, the orders remain very strong, both domestically and international defense, which is our strength, is growing double digit, and it will remain so for many years to come. We see strength in Europe. We see strength in parts of Asia, like Korea, etc. So I think it's a combination of accelerated demand with the geopolitical circumstances in the world and the supply chain healing, which is giving us the performance in Defense and Space as we are demonstrating.
And then, Vimal, I want to ask you about a couple of other initiatives. You've been working on direct material productivity and harnessing AI. You seem to mention quite a bit today cost inflation you're facing across the portfolio. But I imagine a lot of that should have been expected. So update us on your ability to offset that with your initiative here around direct material savings and then maybe how sticky have your price increases been that you've made here this year.
I believe our pricing initiatives have been effective. We've carefully crafted a strategy that safeguards both our earnings and our volume, which aligns with our plans for 2025. It's a delicate balance since we want to avoid raising prices to a level that could hurt demand. Overall, we've successfully managed our pricing, with the exception of Aerospace OE due to contract-related delays. Across Honeywell, our pricing execution has been strong. Additionally, our productivity improvements are significant, giving us flexibility in how we approach pricing in specific segments while maintaining margins through increased productivity. Value engineering is performing exceptionally well, especially with the integration of AI. We've been using AI to optimize board designs more efficiently, reducing what used to take months to just a week. This speeds up the savings we can achieve in any given year. I'm confident that value engineering is now a crucial asset for Honeywell. We can rely on it and incorporate it into our financial planning, making it a key factor in our pricing versus volume considerations, not just for 2025 but also for future years.
Andy, from a financial perspective, I've previously discussed our six-quarter rolling forecast. My primary focus with the team is to show consistent growth over a longer duration. As Vimal mentioned, we're prioritizing both top-line and bottom-line growth. This includes managing aspects such as price, volume, or mix, with teams gaining better insight based on their specific verticals and customer segments. The goal is to establish a framework for delivering consistent results over an extended period.
Our next question comes from Deane Dray with RBC Capital Markets.
I was hoping to get some color on free cash flow. So you boosted the EPS guide, but cap free cash flow guidance, the same. Just are there any puts and takes related to free cash flow for the second half you'd like to highlight?
Sure. So we have a pretty broad range on cash flow, the $5.4 billion to $5.8 billion. If you look at the moving pieces, I would say our inventory got a little bit worse just because of what we are facing right now in Aero. That hopefully will normalize in the second half. On the other hand, we have a little bit of tailwind from stronger collections and higher sales and pricing. So net-net, we're the same. We're really focusing on moving towards that 90-plus percent conversion in 2026.
Great. And then just a related question. Anything in the second half on price cost that you'd particularly want to highlight here?
So I think, generally, if you think about our guide, our price probably, vis-a-vis the last time we talked, we're probably 100 basis points better. So if we thought about a price of 1% to 2%, now it's 2% to 3%. Volume is probably going to be 1% to 2%. And then from a cost price standpoint, short-cycle businesses will offset. And then Aero, like I said earlier, it is still working through their OE contracts, and that should normalize going towards year-end and early half of next year.
Our next question comes from Joe Ritchie with Goldman Sachs.
I just want to make sure I understand the relationship between the tariffs and the demand contingency. And so it seems like the moratorium is you kind of kept the kind of tariff rates at a higher rate. And if the moratorium were to become permanent, I'd assume that maybe the demand contingency gets released to some degree. Just trying to make sure that I understand that correctly. And are there any specific segments that you could see benefiting in the second half of the year if, in fact, tariffs come in at lower rates permanently?
Sure. Looking at the second half of the year, the short-cycle businesses are managing well without any significant prebuy or demand disruptions. Building Automation is performing well, and IA is exceeding our expectations. The focus is on our energy business and the conversion of orders into revenue. At this time of year, when we receive an order for an energy project, there's a delay in engineering, which could mean that some revenue won't be realized this year. We're managing this aspect while also looking ahead to the first half of next year and monitoring our catalyst orders, which have not met forecasts as we had anticipated. This pattern reflects customer behavior; when they have options, they may choose to postpone catalyst orders for a quarter or two while still operating their refineries and facilities at lower output levels.
Got it, Mike. That's helpful. And then maybe just my quick follow-on on the strategic alternative announcement on PSS and warehouse. It kind of looks like the demand environment there is getting a little bit worse again, so kind of bouncing along the bottom. I guess, Vimal, I know that we can't bank on any outcome here. But I guess, how are you thinking about the time line for a decision to be made on that piece of the business?
We started the process just last week after making the announcement. By the end of the year, we expect to have a clearer understanding of the strategic options available to us. As you can imagine, there are multiple choices we can consider. We anticipate that we will know which option we will pursue in the first part of this process. It's difficult to specify a timeline right now; if we had one, we would share it with more confidence. That's why we're referring to strategic options. However, I believe we should be able to provide more clarity on the specific timeline before the year ends. Ideally, we want to have a streamlined portfolio by the time the spin-off is finalized, which is one reason we initiated the strategic review now to align the timing. Nevertheless, as you can understand, it's challenging to provide a definitive timeline for these processes at this stage.
Our next question comes from Nicole DeBlase with Deutsche Bank.
Maybe just starting with some of the order trends that you guys saw throughout the quarter. How would you say that orders progressed each month and then into July? It sounds like maybe energy was the only area where you saw a discernible difference. But if you talk a little bit about IA, BA more on the short cycle side through the quarter, that would be helpful.
Sure. So I would tell you, overall orders, 6% up. Really pleased with that better orders than in the first quarter. Aero led the orders growth for us. Once again, very strong orders on both Defense and Space and Commercial. Building Automation was low single digits, but it had tougher comps. So we didn't see anything there. And then for IA and ESS, I would say we saw strong first 2 months, and June was a little bit softer. Going into July, on the other hand, orders are continuing to be strong. So June might have been kind of a false positive. In general, I feel like orders are sticking. And the second quarter was better than the first quarter. And in terms of what the teams showed us for the third quarter and the forecast, we don't see a lot of concern in our order rates slowing down.
Okay. Got it. That's really helpful. And then there's a lot of discussion around what you guys are doing from a portfolio perspective, but I don't think we talked much about future M&A plans. And you guys have clearly been a lot more active recently. How does the M&A pipeline look today? And what is your appetite for doing more deals before the spin happens?
So Nicole, we absolutely are building our pipeline. We are going to be slightly slowing down given the activity we have or the spins in motion and some acquisition integration work we are doing. But we are not slowing down on building the pipeline. The pipeline remains strong, and we'll execute opportunities as they become available. I think what gives me more confidence is that we're getting much more comfortable not only doing the normal deal but also acting like a sponsor to do carve-out deals. We have demonstrated that capability repetitively now over the last 2 years. And that additional skill increases our optionality now because we are willing to go to another partner, suggest an optionality for them to create value for both sides. And that gives me confidence that we can remain active in the portfolio side in the years ahead. So more to come. We'll continue to build our portfolio as a higher priority item under my leadership.
We have reached the end of the question-and-answer session. I would now like to turn the call back over to Vimal Kapur for closing remarks.
Thank you. I want to again once express my deep appreciation to our shareholders, our Honeybee team and our customers for their continued support during the transition time for the company. And we are excited for the future and look forward to sharing more of our progress as we deliver on our commitment. Before we close out today's call, I want to take a moment to remember our pivotal former leader of Honeywell that we lost this week, Larry Bossidy. Larry was the Chairman and CEO of AlliedSignal and led the company's acquisition of Honeywell in 1999. He was a forefather of operational excellence that Honeywell is known for today and served as the combined company's Chairman and CEO until his planned retirement in 2000. He then came out of retirement briefly to offer his leadership again as Chairman and CEO during a challenging period of our company. And under his very deep leadership, the Board hired Dave Cote as Honeywell's new CEO, and setting up the company for the next 2 decades of tremendous value creation. He was a remarkable leader, a committed family man. And our thoughts are with his family and friends at this point in time. So thank you again, everyone, for listening, and please stay safe and healthy.
This concludes today's conference call. We thank you for your participation. You may now disconnect from the conference.