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Good morning. Thank you for standing by, and welcome to the Honeywell Second Quarter 2026 Earnings Conference Call. The operator provided instructions for the question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Mark Macaluso, Senior Vice President of Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to Honeywell Technologies' Second Quarter 2026 Earnings Conference Call. Joining me today are Honeywell Technologies' Chairman and Chief Executive Officer, Vimal Kapur; and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information on the Investor Relations website that may be of interest or material to our investors. Our discussion today will include forward-looking statements that are based on our best view of the world and of our businesses as we see them today, and are subject to certain risks and uncertainties, including those described in our recent SEC filings. This morning, we will review financial results for Honeywell Technologies for the second quarter of 2026 and discuss our updated guidance.
And as always, we'll leave time for your questions at the end. I would also like to take a moment to remind our audience that the 2026 results and guidance we will present today exclude results from Honeywell Aerospace following the spin-off on June 29. Additionally, our guidance reflects both the completion of the Johnson Matthey Catalyst Technologies acquisition as of July 17 as well as the anticipated closures of the Productivity and Warehouse divestitures, which we now expect by early August. Pension income and the results of Quantinuum have also been removed from our adjusted results in all prior and future periods. Finally, adjusted EPS for Honeywell Technologies now reflects the impact of the 1-for-2 reverse stock split. You'll find a summary of these changes on Slide 3. With that, it's my pleasure to turn the call over to Vimal, who will begin on Slide 4.
Thank you, Mark, and good morning. The second quarter marked an important milestone for Honeywell Technologies as we began our next chapter as a pure-play automation company. At Investor Day, we laid out our go-forward strategy of growing and monetizing our installed base through outcome-based services, software and new product innovation. We also introduced long-term targets for Honeywell Technologies, which will be our road map for the next three-plus years. And as you can see, we are laying the foundation today to deliver on our commitments. Our results this quarter have demonstrated the strength of the new Honeywell Technologies portfolio. We delivered 4% organic sales growth driven by continued strength in Building Automation and a better-than-anticipated performance in both Process Automation and Technology and Industrial Automation businesses. Orders grew 16% organically with broad-based demand across all segments, resulting in a 9% increase in ending backlog.
Notably, short-cycle orders grew double digits across all segments. In PA&T, orders were up 24% organically, led by roughly 5% orders growth in Process Technologies, providing even greater confidence in their expected second-half growth inflection. We also expanded segment margin by 100 basis points, overcoming significant cost inflation headwinds and unfavorable mix through a combination of productivity and volume leverage. This drove earnings in the second quarter above our expectation from early June with increased confidence heading into the second half of the year. As a result today, we are raising our full-year outlook for organic growth, segment margin and adjusted earnings per share. We continue to expect a sharp growth inflection in Process Automation and Technology and continued momentum in Industrial Automation in the second half of 2026. Combined with the sustained outperformance in Building Automation, we now expect to grow 4% to 6% organically in the second half of the year, in line with our long-term targets.
We're also raising our adjusted EPS outlook by $0.10 at the midpoint, which reflects the second-quarter outperformance and improved second-half outlook that is more than offsetting the loss of income from the earlier-than-anticipated close of the two divestitures. We also took important action this quarter to strengthen the portfolio to support long-term growth. On the portfolio, we closed the acquisition of Johnson Matthey's Catalyst Technologies business on July 17. With this business, we add a differentiated technology portfolio that will expand our installed base and strengthen PA&T's portfolio across refining, petrochemicals and renewable fuels. Ken and his leadership team are already fully engaged with our new colleagues, meeting with over 90% of employees globally at key sites in just the first week. They have been involved in all aspects of the transaction and are prepared to hit the ground running to deliver for our customers and our shareowners.
I could not be more excited to welcome the JM Catalyst Technologies team to Honeywell Technologies. As part of the final stage of our portfolio transformation, we completed the separation of Honeywell Aerospace and also supported the Quantinuum team in their successful initial public offering in June. On Quantinuum, we expect to provide more color on our plans for our 47% ownership stake by early next year. We remain strong supporters of Raj and his team and are excited to be shareholders in such a groundbreaking quantum computing company. Thanks to the great work of our team, we also now expect to close the divestitures of both Productivity Solutions and Services and Warehouse and Workflow Solutions businesses by early August. This is approximately two months ahead of our initial planning assumption, which has reduced our 2026 revenue expectation by approximately $400 million. We're also confident this will drive greater focus and further simplification of the Industrial Automation portfolio, which is already beginning to see improved financial performance.
We wish both these businesses and their teams continued success as they embark upon their next chapters. Our transformed and simplified portfolio is well positioned to outperform with momentum in both long-term and short-cycle orders, ramping activity and pipeline and meaningful macro tailwinds for the next several years. Let's turn to Slide 5 to recap our recent Investor Day, where I had the pleasure of spending time with many of you in New York City last month. On June 11, we hosted investors, sell-side analysts, media and others at our Investor Day for the new Honeywell Technologies. We kicked off the day laying out our revamp and focused strategy that will drive value-enhancing solutions for customers and drive outperformance in our focus markets. Each business leader walked through their differentiated offering, connected strategy, growth framework and three-year targets. Guests also heard directly from our leading customers and partners, including Exxon, Dangote, Google, Equinix, Duke Energy and others about the differentiated outcomes we are delivering and the long-standing relationships we have built over many decades.
My team and I are highly confident in our ability to deliver on our three-year commitments. We have a strong position in key end markets, differentiated technologies, a global footprint and a clear competitive advantage in high-growth verticals. Our team is comprised of Honeywell veterans, talented new additions and even some folks that rejoined us after successful careers elsewhere. All of this, coupled with a proven Honeywell Technologies Accelerator operating system, positions us for a new chapter of growth and profitability as Honeywell Technologies. The event concluded with us delivering our new three-year target, which you can see on Slide 6. Over the last three years, we transformed our portfolio through acquisitions, spin-offs and divestitures into a pure-play automation company focused on innovating in mission-critical environments where uptime, safety, productivity and efficiency are paramount.
This has set us up to deliver on these commitments. Our strategy focuses on two key pillars: growing our installed base and then monetizing this vast installed base through innovative software, services and outcome-based solutions. While maintaining our leading position in core verticals, we are also increasing our exposure to higher-growth verticals like data centers, LNG, grid infrastructure and life sciences as examples, which are all linked to compelling megatrends. Our projected top-line growth and margin expansion is also underpinned by a more meaningful shift towards services and software annual recurring revenue. On margin, we have over 200 basis points of margin expansion coming quickly from stranded cost removal, portfolio actions in Industrial Automation and benefit of the aerospace trademark agreement. On top of that, we expect to drive 60 basis points a year of operational margin expansion through price, improving mix, new product introduction and productivity.
As you heard from our CFO in June, we are confident that the 24% target is achievable and provides meaningful upside as we execute our strategy. Collectively, this will drive approximately $12 of adjusted EPS, representing more than 10% growth annually. The important point here is that we will generate these returns right out of the gate given all the actions we took to prepare the organization ahead of the aerospace spin. And finally, on cash, we expect to improve our conversion to over 90% and have line of sight already in the second half of this year to hitting 95%. I want to talk more about the acquisition of Johnson Matthey's Catalyst Technology business, which will become part of our Process Automation and Technology segment. This addition to Process Technology will unlock strategic growth by increasing our existing installed base and creating a more integrated offering across catalysts and process technology.
It also expands Honeywell UOP's capability across refining, petrochemicals and renewable fuels with complementary offerings and capability, which you can see on Slide 7. What makes this acquisition specifically attractive is its strategic fit with our existing business. We are already on many of the same customers with complementary process units, and the business perfectly aligns to our core verticals. The acquisition also enhances our end-to-end solutions by combining catalyst process technology and digital capabilities powered by Honeywell Technologies Forge. We have clear visibility to both commercial and cost synergies and our long-term outlook for this business as part of Honeywell Technologies has not changed. Let's now turn to Slide 8 to discuss our orders trend in each business. As you can see, our orders growth has been accelerating across the company, driven by strong demand generation, new product introduction and continued share gains.
This resulted in 16% organic orders growth in the second quarter with broad-based growth across all short-cycle businesses, driving considerable momentum on an LTM basis as a result. PA&T had an incredibly strong quarter of orders growing nearly 25%, leading to a book-to-bill for PA&T above 1.2. Our refreshed portfolio with the addition of JM's Catalyst Technology business is set up well to benefit from an energy upcycle, particularly as customer CapEx forecasts support the ongoing transition to LNG and renewable fuel as a priority. Strength across both long and short-cycle orders growth, including increased pipeline activity from refurbishment and rebuilds and Middle East activity, will provide meaningful macro tailwinds for the next several years. In Industrial Automation, we saw strong demand across Europe, the Middle East and China. For the core business that remains after the divestitures, orders grew 11% or 7% sequentially with Sensing and Industrial Measurement orders up over 20%.
Pete and his team continue to execute the turnaround strategy in IA to win back share and grow the core business. Finally, in Building Automation, the team continues to drive innovative new product introductions that are driving share gain while growing our position in a high-growth vertical. This quarter, we drove over 50% orders growth and 30% organic sales growth in high-growth verticals while maintaining our strong position in the core with approximately 30% orders growth in our fire business. Orders in the Middle East grew over 50% this quarter by our Process Technology business. Regarding the conflict, we are assuming the situation remains as it is today with no improvement from the current situation, but also no significant escalation in the war or further disruption to the supply chain. This is, of course, a very fluid situation, but our teams in the region have done a tremendous job minimizing impact to our business while ensuring our employees are safe, and we're able to continue to support our customers.
Finally, book-to-bill for the total company was 1.1, and our ending backlog was up 9%. This and continued momentum we see in all segments supports a 4% to 6% growth outlook in the second half and over the medium term. It's been our pleasure speaking with you this morning, and let me now turn it over to Mike to discuss our second-quarter results and 2026 outlook in more detail.
Thank you, Vimal, and good morning. In the second quarter, Honeywell Technologies delivered strong results that surpassed our expectations. Sales grew 4% organically, led by continued momentum in building automation and stronger-than-anticipated growth in Industrial Automation. Process Automation Technologies sales decreased 1% organically, but we're still materially ahead of our original outlook for the quarter. On a segment basis, Building Automation delivered 9% organic growth, driven by double-digit growth in products and continued strength in solutions. The teams drove double-digit growth in the fire and services businesses, respectively, and we saw strength in all regions led by Asia Pacific, Middle East and the Americas. All in, another strong quarter from Vimal and the Building Automation team. Industrial Automation sales were up 4% in the second quarter, exceeding our expectations led by strength in solutions.
Products grew slightly with continued momentum in Sensing and Industrial Measurement, partially offset by utilities. The core Industrial Automation business, excluding planned divestiture, grew 2% organically in the second quarter. Finally, Process Automation Technologies sales declined just 1% organically in the second quarter, ahead of our prior expectations as the upcycle in energy end markets and activity in global projects begin to materialize. Projects grew 5%, driven by strength in gas, LNG and petrochemicals. This strength was offset by a 6% decline in aftermarket due primarily to a tough prior-year comparison from a large catalyst shipment in the second quarter of 2025. Importantly, consistent with our messaging at Investor Day, we expect a sharp inflection in growth in Process Automation Technology beginning in the third quarter, led by Process Technology and driven by backlog conversion and much stronger catalyst shipments.
On profitability, segment profit increased 9%, while segment margin expanded 100 basis points to 19% with strong margin expansion in Building Automation and Industrial Automation. In addition to ongoing volume leverage and productivity actions, stranded cost removal continues to track ahead of plan. By segment, Building Automation segment margin expanded 90 basis points to 27.1% on volume leverage and price, which was partially offset by inflation. Segment margin in Industrial Automation also expanded 90 basis points to 17.2% as pricing and productivity actions more than offset inflation and unfavorable mix. In Process Automation Technologies segment, margin contracted 180 basis points to 22.1%, largely driven by unfavorable mix from lower catalyst volumes as expected. This, however, was also ahead of our original margin outlook for the quarter. Adjusted earnings per share of $1.95 was up 10%, driven primarily by higher segment profit.
We drove lower net interest expense stemming from debt paydown, which was partially offset by higher repositioning costs. And as we previewed in the first quarter, a higher adjusted effective tax rate drove a $0.16 headwind, which we overcame with stronger operational performance. You will find additional information on the segment performance in the appendix of our presentation. Rounding out the results, free cash flow grew considerably this quarter, both year-over-year and sequentially to roughly $0.5 billion. This was principally driven by higher income as well as improvements in working capital, which more than offset ongoing collection headwinds in the Middle East. This quarter, we deployed $1 billion of capital through roughly $800 million of dividends and roughly $200 million in high-value capital expenditures. Year-to-date, we have deployed over $2.8 billion in capital to repurchase our own shares, pay dividends and invest in future growth.
Let's now move to Slide 10 to quickly discuss the second-quarter adjusted EPS bridge. As you can see, we delivered high-quality results in the second quarter. Strong segment profit growth, including elimination of stranded costs, lower below-the-line expenses due to interest expense and lower share count allowed us to overcome the higher tax rate. Excluding the tax headwind, earnings would have been up 20%. Let's turn to Slide 11 to discuss our updated 2026 guidance. Today, we're increasing our organic sales growth outlook to 3% to 4% for the year, up from previous guidance of 2% to 3% and now expect the second half to grow 4% to 6% versus 3% to 5% previously. Building Automation continues to execute well, leading to a mid-single-digit plus organic growth outlook, supported by incredibly strong orders growth in the second quarter, particularly in our focus verticals, including health care, hospitality and data centers.
We expect Process Automation Technology growth to accelerate to high single digits in the second half as global energy projects resume, backlog conversion ramps and catalyst shipment volumes increase significantly. Finally, Industrial Automation growth will continue in the second half, driven by resilient short-cycle demand for industrial measurement and sensing, continued growth in Europe and China and strengthening Americas demand. As a result of the momentum in Process Automation Technology and Industrial Automation, we're increasing our full-year organic growth expectations for both businesses from roughly flat to up low single digits for the full year, a meaningful improvement from our original expectations coming into the year. We now expect full-year segment margin expansion of 250 to 290 basis points, up 25 basis points at the midpoint from the previous guidance. This reflects the outperformance in the second quarter in Process Automation Technology and Industrial Automation, significant progress on stranded cost elimination and accretion related to the accelerated timing of PSS and WWS divestitures.
Importantly, we expect Honeywell Technologies will exit the year above a 22% segment margin. We now expect full-year adjusted earnings per share of $8.20 at the midpoint or up approximately 27% versus the prior year and up from our previous midpoint of $8.10. Finally, we continue to expect free cash flow of roughly $2 billion in 2026, with the majority of this coming in during the second half and approximately 95% conversion rate. You can find additional information on 2026 outlook in the appendix of our presentation, which includes estimates for corporate and other below-the-line items. On Page 12, you will find the bridge from our June 8 guidance call to today's update. As you can see, we expect full-year adjusted earnings per share will be $8.20 at the midpoint, up from our previous midpoint of $8.10. Let me now turn the call back to Vimal to wrap up before Q&A.
Thanks, Mike. We are pleased with Honeywell Technologies' second-quarter results, which enabled us to increase our 2026 outlooks across all key metrics. We successfully navigated an uncertain geopolitical backdrop with the strength of our resilient business model and the rigor of our Honeywell Technologies Accelerator operating system. With our portfolio transformation complete, our simplified pure-play automation portfolio is well positioned to benefit from long-term macro tailwinds, including the proliferation of AI, increasing global energy demand and an aging population and increased consumption. This, combined with our focus on increasing exposure to higher-growth verticals, driving annual recurring revenue growth from outcome-based services and software and maintaining our innovation engine will enable us to achieve double-digit annual adjusted EPS growth at greater than 90% free cash flow conversion. We laid out our three-year targets for new business and I look forward to updating you on our progress to achieving them in coming quarters. Today is only the beginning of that journey, and I'm pleased with how we have started, but we have considerably more work and opportunity ahead of us. With that, Mark, let's take the questions.
Vimal, Mike and I are now available to answer your questions. We ask that you queue properly in the queue. Operator, please open the line for Q&A.
分析師問答
I'd just like to say congrats to Vimal and the whole leadership team on the successful spins. You got them all done on time. It was well communicated, and I do like seeing that boost to guidance here right out of the block. So congrats. Since it is so topical, I'd like to circle back on the Middle East impacts. I mean you still had double-digit orders. So you still have got momentum there. I'm just interested about the idea that you've got some collection issues. Is there any risk of force majeure here and any kind of disruptions like that?
I would say, Deane, the Middle East is the way we have guided the second half; it is the normal condition which exists today, as we said in our prepared remarks, based on how things have shaped up over the last four to five months. We have understood the dynamics on the ground. We did lose some revenue in Q1 and Q2 as we had guided. But now we are assuming our future state is built upon how the conditions prevail today unless things change dramatically. To your question, we observed some collection issues in pockets. They are modest. They are not material, but we have taken prudent decisions to address the customer set where we have limited risk. But we don't have any risk, to your point, of any major disputes and things of that nature. We think the business is in good shape. As an example, 50% orders growth in Q2 was primarily driven by a few big deals in our Process Technology business, refurbishments, which are occurring there, and that certainly is providing us some tailwinds. But overall, we believe that we are well positioned. As this region invests more and as things settle, mostly in transportation and logistics-related investments and some resiliency investments, we will benefit from that.
And Deane, I might just add that the majority of our collection issues happened in March and April in the Middle East. That started to normalize. We still expect revenue in the Middle East to be about high single digits this year and orders should be about 40%. So we look forward to seeing the Middle East perform in the second half and next year.
Good to hear. And then just as a follow-up, and congrats on getting the Johnson Matthey deal closed. Can you talk about the implications because you did renegotiate a lower price. Just what were the circumstances there and the conditions that you got the lower price? And what are the plans, near-term plans for integration?
Yes. We are excited about having this business, and the business is really built upon our fundamental belief that the world needs more energy and the energy mix will change. Those are the fundamental principles that were the reason behind doing two acquisitions in LNG and that are the reason behind doing the JM acquisition. Primarily, we believe that the world will need more investment in petrochemicals and renewable fuels and the JM acquisition strengthens our portfolio around that. We also get more installed base and our ability to serve it. The negotiations are part of the normal course, in my view, as any deal transaction occurs. There are a few milestones, and depending on how the business trended, we work with our counterparty to look at how we should value the business. So I don't want to dwell a lot upon that. But we remain excited about how we got the deal done at about 13x EBITDA with cost synergies, no sales synergies included in that multiple. And you will agree with me that we have acquired this business for commercial synergies at the heart of it. But we're not going to count on that in our early innings; we'll build upon it.
And then I would just add that I think we got the business at the bottom. And I would say that the second half looks good. Even in our own catalyst business, the second half is sequentially versus first half up 25% to 30%. So we look forward to getting our hands on this business.
And Deane, congratulations on the retirement, and you should have good next innings, and we will stay connected.
So Mike, it's obviously good news to see the guidance increasing. You did indicate in June that there was scope for upside. But I'm curious if there's anything you saw in June or July to give you more confidence? Just any color in terms of how we exited 2Q and entered 3Q on your markets? And then within that discussion, maybe just touch on IA. It sounds like the upside came outside the U.S. So I'd be curious if you're seeing any momentum in the U.S.
Sure. I would say launching the new company here today, what we saw in the second quarter gives us a lot of confidence in the second half. As you saw, orders across the board were strong. Every business printed double-digit short-cycle orders in the second quarter, which gives us a lot of confidence in the third quarter and the fourth quarter. For Industrial Automation, the growth and the strength is broad-based, including in China and Europe. The U.S. is recovering nicely as well and the business is benefiting from onshoring. So I would say across the board, we see a really good outlook for the second half. We raised the guidance, as you saw, but I also think there is more room as we're going to go into the third quarter and fourth quarter to beat even the raised guidance.
Only thing I'll add, Nigel, is that I think Pete and his team are executing quicker than we anticipated on how the business recovery will occur. And as we reported, the orders growth for Industrial Automation business is about 10%, which signals our performance in the second half. We have the right momentum, and that was the reason behind raising the guide of the business to low single digit in the second half.
And I'm confident that Pete will deliver a 22% margin rate in the fourth quarter. So the team has worked on it for a long time, and we have a really good line of sight here.
Mike, that's a great segue to my follow-up, which is the two points of sequential acceleration — two points of expansion in segment margin from 3Q to 4Q. There's a lot going on here with portfolio, the sale of the warehouse and PSS businesses and then stranded costs tapering off in the back half of the year. But I'm just wondering if you maybe can unpack that two points of expansion from 3Q to 4Q for us.
Yes, sure. Nigel, it's Mark. Just a couple of things. I think it's pretty broad-based. Building Automation continues to drive strong volume leverage and productivity, so they'll be up quarter-to-quarter. As Mike mentioned, Industrial Automation continues to take a considerable step up, including in 4Q. And then PA&T will continue to get better, particularly as growth resumes and we also start to see a little bit more mix towards catalyst. So I would say, broadly speaking, it's really in all segments, but quarter-to-quarter, probably the largest increase is in IA.
And I would just add that, as we talked about earlier in the year and at Investor Day, about half of the margin expansion is operational and half of it is structural given the portfolio actions. As we stand today, I see the team driving operationally 100 to 120 basis points of margin expansion.
I was on mute. My apologies. Anyways, I'll start over again. I will also echo congrats to Deane. We'll miss having Deane around. He's been a great colleague for a lot of years. So we'll miss him, too. Guys, a couple smaller things here. One, when you look at your M&A pipeline, is it kind of evenly split between your segments? Are there particular segments where you think you're more likely to over-index? Just a little bit of color there, please.
Sure. Scott, I would say think of M&A in three distinct categories. The highest priority is strengthening our Industrial Automation, sensing and measurement portfolio. I and Pete are looking at a variety of options. So that remains our first priority. Second bucket is, as we're thinking about accelerating our business in some of the higher-growth verticals, where impact is clear in our orders growth rate, we are getting more and more convicted that's the right strategy for Honeywell. So how can we add some portfolio additions in some of these end markets to further accelerate our growth. We have identified eight high-growth markets and are looking at M&A opportunities there. In the end, we'll acquire product lines only like we acquired two businesses in LNG, for example. So what can we do more in verticals like hospitality, semiconductor, microgrid, etc. Finally, tuck-in acquisitions on the tech side. We always look at frontier technologies, a few in fire detection, a few in cybersecurity. Those are much smaller, of course, but they do propel our organic growth.
Okay. That's helpful. And guys, can you just help us kind of size or at least help us understand the opportunity within the data center? I mean it's pretty easy to picture the fire and security stuff, but can you walk us through kind of the longer list of SKUs and opportunity that you have there?
So I would say that we are looking at data center in two dimensions. One is growth beyond the U.S. We can clearly observe that build-out of data centers has now grown beyond the U.S., across Europe and across Asia, and we have a better position as a company globally given Honeywell's brand and participation globally. So that certainly is a tailwind for us. That is benefiting us. But we are also observing more data centers putting on-site power generation, which allows our process automation business to participate in data centers to automate the utilities and energy storage on location, the gas coming in there for pipeline for those power plants. So we can clearly see that as a new business opportunity. None of that is in our orders yet, but we have multiple proposals by the process automation team apart from the building automation, which you mentioned, which has benefited a lot from fire detection, security and building management systems that go into data centers.
Finally, I would also say the third leg for the stool for Honeywell emerging longer term is liquid cooling. Sensing required in liquid cooling is a good play for us. Our sensors are a critical input for liquid cooling. So OEMs are actively working with us to develop new strategies on how they're going to execute liquid cooling. All things being equal, we will continue to expand our play in data center from almost nothing three to four years back to a larger percentage of the building automation business. I expect that we will be at a higher number across Honeywell as time progresses.
Congratulations. Just a question. Did I hear right? I apologize. You mentioned 40% order growth. What was that number related? Was that on Process Automation in the second half? Or was it referred to, I apologize?
No. What I said was that the catalyst second half versus first half will be up 25% to 30% on that framework. Our orders for the quarter were up 16%.
Okay. Apologies. Can you talk about — sorry.
I was just going to add the orders in Process Automation Technology were up 24% for the quarter.
Can you talk about the exposure to the Middle East? How soon can you see that show up, a, in orders and b, in your actual work?
The strength in orders for the second quarter in Process Automation Technology was driven largely by LNG demand globally. The U.S. is a big part of that, but also outside the U.S. Some of the big deals in LNG are a major driver for orders growth in the Process segment. To your question about diversification of investment beyond the Middle East due to the conflict: yes, we absolutely are seeing projects coming in. We have a large project in Africa where we are actively working. Some of it has been booked and some booking will occur in the technology side of the process business. We see investments in Asia for downstream refining and petrochemical work because, as we all observed, there was a very high price for fuels. So there are customers and countries looking at more domestic production for fuels as well as downstream petrochemical products. Overall, the process market will see more capital investment to de-risk the Middle East conflict situation. That's our forecast.
And then maybe can you talk about Industrial Automation: can you give some KPIs on improving performance, like on-time delivery? Anything you want to share about how you're moving along in improving execution in this segment driving this improvement?
So the KPIs we are looking at include delivery performance. It's a very channel-driven business, so sensitivity to delivery performance is high. We're working towards high-80s percent delivery performance as we progress through the year; that's our trend line. Pete mentioned at the start of the year we were in the mid-40s, and we are trending from 40% towards 80% as we speak. The other critical KPI is performance on new products. We launched several new products at the end of last year and early this year, and they are becoming an enabler for our growth as evidenced by our orders growth rate of 10% in Q2. We expect continued strength in our orders rate for the segment in the second half of the year. The actions we are taking on innovation and on operational performance are the foundation of how this business is going to turn around. We expect the improvement trend to continue from no growth to low single-digit growth and, at some point, to mid-single-digit growth.
Just wanted to ask on Building Automation: it continues to show really nice high single-digit growth and orders up 13% in 2Q. It feels to me that that high single digits should be sustainable into the second half, keeping all of that in mind. Would you disagree with that for any reason? And then why wouldn't this — if orders continue to hold up, why couldn't we see high single-digit growth proceed into 2027?
Nicole, the evidence suggests you're right — seven quarters in a row of high single digits. There is no inherent logic that it can't continue. As a new company, we are printing a new forecast and include a level of prudence in our guidance. Fundamentally, the strategy of the business is a pivot toward high-growth verticals. We clearly see tailwinds in data center, hospitality and health care. They are driving a lot more orders growth and pivoting the base business on the strength of new products. We will be launching even more new products in the second half. So fundamentally, there's no reason it can't continue, but we are cautious given competition can respond. I remain optimistic we can surprise on the upside in the second half.
Awesome. We all love beats and raises. Okay. And then on stranded costs, you referred to making more progress than expected. Can you put a finer point on that with respect to any changes in the stranded cost reduction timeline versus what we got at Investor Day or in the periods before?
Sure. Stranded cost is progressing extremely well. At Investor Day, I think we said something around $85 million of stranded costs at year-end. This is about $20 million better right now. So we should enter 2027 with about $60 million to $65 million of stranded costs that we'll proceed to eliminate early next year. So it's a good story — incrementally about $20 million better than what we talked about earlier.
Just coming back to Johnson Matthey, Vimal, maybe two questions. One, as you looked at that business over time, have its sales been relatively synchronous with what goes on at UOP? In other words, I'm wondering if this is more of the same kind of quarter-to-quarter volatility or are there differences in timing and what they do that possibly smooth some of this quarterly volatility out of your catalyst sales?
I would say their licensing technologies are different from UOP. That's the reason we acquired the business: the complementarity of the technology. They are more into spaces like hydrogen, methanol and ammonia, where we don't have capability. It's not a one-to-one comparison because the end markets they serve are different from the end markets UOP serves, which is more refining, petrochemicals and LNG. So those comparisons are not directly comparable. There is variation between them. But on the catalyst side, trends are very convergent. Each of us has product lines and customer bases, so there are not wide differences in catalyst performance. But the technology licensing does differ.
And as you've noted, you don't want to include revenue synergies in your outlook, but maybe just a little color on where you get after those, how quickly you might be able to capture some of those?
They are driven by the combined offerings of Johnson Matthey and our process technology business solving customer problems better. For example, we can combine our capabilities in areas like hydrogen: Johnson Matthey brings on-purpose hydrogen production capabilities, and we have capabilities on CO2 elimination, which produces low-carbon hydrogen. There are examples in sustainable aviation fuel and on the gas processing side. Combining the two technologies improves our proposition. We expect that to result in better win rates because historically customers had to buy from two different companies, which was complicated. Now with a single umbrella and our reputation in technology licensing, we expect that to create synergies. Additionally, connecting Johnson Matthey's large installed base with our services and software portfolio creates cross-selling opportunities. The Process Automation business will benefit from Johnson Matthey's installed base and customer relationships where our presence may not be strong, giving our teams additional door openers. That's why I mentioned the headline multiple is about 13x EBITDA based on 2027 earnings, but that is largely cost-synergy driven. We acquired this business to add value through sales synergies and expect to deliver improved results over time.
So I wanted to double-click a little bit on the Middle East. Your orders were up over 50% this quarter. I'm curious whether some of the disruption there is actually helping. Conversely, you called out the large catalyst shipment a year ago as a tough comp on the aftermarket business, and aftermarket was down. Are you impacted at all from an aftermarket perspective in the region? Any color around both would be helpful.
The initial months of the conflict — March and April — were where we lost revenue because we did not know how to ship, some customer sites were closed, and we were not able to perform some service contracts. After losing some revenue in Q1 and Q2, things have normalized and we don't expect material revenue loss in the big picture. As we observe today, business activity has mostly resumed to normal. We do see some big orders — one of the big deals we got for Process Technology was in the Middle East for LNG facilities, so their investment cycle is back. We also see customers looking at ways to improve resiliency, remote operations and more digitization so they can operate despite the disruption. Early days, but we clearly see investments in the Middle East pivoting towards logistics infrastructure — pipeline terminals and different ways of shipping product. Overall, things have settled and we see investment normalizing with large projects coming back into the pipeline.
Got it. That's helpful, Vimal. And then maybe a broader question on the guidance: the 4% to 6% baked into the second half. Trailing 12-month orders up double digits is supportive. It sounds like some conservatism is included. How much of what you're seeing from an order perspective today is longer cycle and already starting to help support a pretty good outlook for 2027 as well?
I would say it's both. Versus what we guided at Investor Day for 2027, looking where we're entering the second half and all things progressing given the strength across the board in the short cycle and continued orders on the long cycle, our 2027 outlook is looking incrementally stronger versus when we talked last month. So we feel really good about the prospects for next year.
Orders growth is occurring as a result of our strategy pivot to high-growth verticals, which we discussed at Investor Day. Building Automation saw 13% orders growth in the last quarter, a lot of which came from data centers, hospitality and health care. Process had growth from LNG and low-carbon energy or renewable fuels, and Industrial Automation saw growth in semiconductor fabs. This narrative is turning into reality, and we expect to maintain this momentum, which forms the basis of our second-half guide and supports 2027.
Mike, can you comment on price versus cost? Commodity inflation is all over the place; your margin is trending a bit better than expectations. Maybe talk about what you're seeing and any updated thoughts for price versus cost in the second half of 2026.
We thought inflation would be persistent, and that's what we continue to see going into the second half. Price was about 3.5% to 3.7% for the second quarter. Looking at the second half, it will be around 4%, and that's where we see inflation. Essentially, we're able to cover inflation with price, but inflation is stubborn. We see inflation in electronics components, copper, and labor. We'll continue to price at that level and manage things with customers. Much of the margin expansion here is driven by productivity, stranded cost takeout and better leverage from new product introductions, not just price versus cost.
That's helpful. Going back to core Industrial Automation: you mentioned improvement in the product side of the business would lead to growth in the second half, which is different from Q2 where growth was solutions-led. I assume this is continued recovery in short-cycle demand and NPI self-help. Could you elaborate?
Solutions is a smaller component but is growing nicely — aftermarket services on our installed base. For example, gas detection has a large installed base served through service contracts and that is growing. The growth is based on improved operational performance so customers have more trust in giving us business and on new products creating more differentiation. On the top line, as Mike mentioned, pricing helps given prevailing high inflation across all segments.
I'll add that part of the growth in solutions in 2Q was related to Intelligrated, which won't continue post-divestiture. So you should think about the core IA business growing in the low single-digit range, around 2% or so, as a starting path for the post-divestiture world.
I wondered if you could elaborate a little bit more on the 15% growth in software ARR. Is there anything in particular driving that strength? And then a couple of housekeeping questions: I think you've raised the guidance on repositioning costs, and they were a little bit higher in the quarter than I had anticipated. Can you give us a sense for what's driving that and whether that perhaps brings forward some costs that might otherwise have fallen next year? And then could you give us a sense of the magnitude of the impact in the quarter from catalyst volumes being down on the margin and the benefit that would have in the second half? Just to give us a sense, that would be great.
I'll answer the first portion on software and hand over to Mike. We expect ARR growth to be around 15% for 2026. What is driving it is two things. First, our existing offering is penetrating more — selling existing offerings to more new customers. We're seeing strength across both building and process automation because our offerings are getting more market acceptance. Second is launching new offerings. We continue to have new offerings on our Forge platform aligned with customer needs, which creates more pipeline. We remain bullish on Forge-based strategy and its role in our earnings algorithm moving forward.
On repositioning, we decided to consolidate footprint within our process business in the second quarter, which drove the spike in repositioning. We're estimating repositioning for the year around $100 million to $110 million, and that's what you should expect. That repositioning will help us get benefits in the second half and next year around depreciation and how we absorb the footprint from an ISC standpoint. Net-net, it will be positive with a fairly quick payback.
On the catalyst volumes question: second-half catalyst volumes are more normalized versus the first half. We anticipated pressure on catalyst volumes earlier in the year and that occurred. Now we see a normalization such that second-half volumes are way greater than the first half. On catalyst margins, there are two types of catalysts we sell. One is more commoditized where pricing is market-based, and the second is where we have unique intellectual property and better margin capture. In any given quarter, the mix between those two types drives net margin variability. Sometimes we sell more of the unique IP catalysts and get favorable margins; other times, the mix is different. These mix effects are driven by plant consumption and are hard to forecast within a quarter, but on an annual basis, margins are more predictable and linear.
I also wanted to ask about the Middle East. I think you guys said the full year up high single digits. I presume the back half is even stronger. I appreciate that activity has stabilized. The outlook for you guys seems a lot more constructive relative to broader U.S. industrials in the region. Is there something specific about what you guys are doing there to support volumes? Or is there something specific about the products or the markets served that is allowing you guys to show that kind of growth?
At the heart of it is our portfolio. Honeywell's portfolio is strong in Building Automation and Process Automation, and the Middle East market is a big energy market, which matches our Process Technology and Process Automation strengths. It's also a big infrastructure market with hospitality, health care systems, airports, etc., where building automation does extremely well. What also separates us is a heavily localized model: we are one of the most localized companies in the Middle East for decades. We did not evacuate even one person during the conflict; our people are local and on the ground. We didn't have to do any big move-out. So a combination of portfolio fit and localization places us in a favorable position compared to many peers.
Appreciate that. Following up on M&A: you signaled willingness to do M&A. Do you think the balance sheet and bandwidth allow deals of material size in the back half of 2026? Or is this more 2027 and beyond maybe after monetization of Quantinuum, which gives you more dry powder?
In 2026, we are very focused on retiring debt and will execute on that. M&A activity is better previewed in the lens of 2027 onwards. These things take time, but we're actively working on pipeline. Honeywell's balance sheet has strength to do deals in the $1 billion to $5 billion enterprise value range that we discussed at Investor Day. Monetization of Quantinuum would give additional optionality if we need it. But note that our $12 adjusted EPS target by 2029 is based on organic growth — no M&A assumed — so any M&A is incremental to that plan.
Just a follow-up on process discussion. It's encouraging to see that LNG activity picked up. Can you reiterate the timeline for conversion of LNG projects? Would you say six to 12 months or is it multiyear?
It's multiyear. For LNG, our business model is a bit distinct: typically, we license technology and customers hire an EPC to build their plant. For LNG, we supply proprietary equipment, such as heat exchangers. Typical delivery times are somewhere from two to three years depending on design. So conversion timing: if we book something in 2024, it may convert in 2026. What we are booking in 2026 will convert in 2028. Also remember a lot of the revenue recognition is on a percentage-of-completion basis, so you accrue some revenue along the way, but large revenue accruals happen over a two-year window.
I would just add that we're sold out on LNG for the next three years.
Okay. That's about what I figured. AI had not come up in the Q&A yet and everything's been pretty picked over. I wanted to ask a high-level one about physical AI driving demand. Are you beginning to see AI driving incremental investments in hardware to get ahead of monetizing AI long term? Are you hearing that in discussions or seeing it in any orders across industrial automation?
When we sell software on our Forge platform, those offerings are AI-based. We are seeing ARR growth on Forge offerings. That does pull in products to a certain degree, and that's integrated into our strategy. We continue to launch new offerings and drive demand for products. AI is an integral part of our offering set. Honeywell believes automation will move toward autonomy and AI is central to that. We have been in automation since 1975 and our offerings are becoming more autonomous. ARR growth is the best way to measure our progress in that shift, and that's why we report ARR growth for Forge periodically.
Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Kapur for any final comments.
Thank you very much, operator. I would like to thank our shareowners, our customers and all the Honeywell Technologies future shapers around the world for the strong second-quarter results you delivered. We are confident on our path ahead and look forward to sharing our ongoing progress in the months to come. I hope all of you have a pleasant and restful summer. Thank you very much for joining us today, and we hope you have a great rest of your day.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.