Honeywell International Inc. ($HON)

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

Thank you. Good morning, and welcome to Honeywell's 2026 Guidance Update Conference Call. Joining me today are Senior Vice President and Chief Financial Officer, Mike Stepniak; and Vice President of Financial Planning and Analysis, Rajiv Reddy. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information on its website that may be of interest or material to our investors. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to certain risks and uncertainties, including those described in our recent SEC filings. This morning, we will review our guidance for 2026 ahead of our Investor Day later this week on Thursday, June 11. Last week, Honeywell Aerospace hosted their inaugural Investor Day and provided a pro forma financial outlook for 2026. Today, we will provide a similar framework for the RemainCo entity, which will be named Honeywell Technologies. We'll provide a bridge for investors from our previous guidance to the RemainCo figures as well as provide additional color on the second half outlook postspin. As always, we'll leave time for your questions at the end with Mike, Rajiv and myself. With that, it's my pleasure to turn the call over to Mike, who will begin on Slide 3.

Thank you, Mark, and good morning. We're nearing the end of Honeywell's multiyear transformation, and we're excited about what's ahead for Honeywell Technologies. To begin today, we are reaffirming our prior full year outlook for Honeywell that we provided in our first quarter earnings call. Importantly, the second quarter remains on track. Through May, demand remains strong, particularly in our building and process technology businesses and we continue to see short-cycle recovery in industrial automation to began in the first quarter. A. Few other points to highlight. We now expect the impact from the mill is conflict to be roughly $50 million to $75 million of revenue, although we continue to monitor the situation closely for signs of further escalation. Segment margin is also trending in line with our guidance, and we continue to expect an acceleration in free cash flow in the second half after a slow start to the year. As we plan for the spin-off of Aerospace on June 29, we are introducing a simple reporting framework with 3 key changes. First, we removed the estimated implied results for aerospace that were included in the former Honeywell's full year outlook for revenue, earnings and free cash flow. We have also included the benefit of the Honeywell Aerospace Trademark License Agreement which will partially offset the temporary standard cost impact. Second, our guidance now removes financial estimates for productivity solutions and services and warehouse and Workflow Solutions businesses beginning in the fourth quarter which is the assumed closing date for both divestitures while also adding estimates for the pending acquisition of Johnson Matthey's Catalyst Technologies business, which is assumed to close in the third quarter. Finally, we are removing the P&L impact of our overfunded pension and the full impact of our investment in Quantinuum from our adjusted results from prior and future periods to provide a clear and more simple presentation of our performance. I will talk more about each of these items in the coming pages. This outlook for Honeywell Technologies will also form the basis from which we will introduce new 3-year targets at our Investor Day on June 1. Let's now turn to Slide 4 to discuss our latest outlook in our business segments. Here, we show a full year organic growth outlook for each segment and total Honeywell technologies. To start, building automation is continuing to outperform with strength in all regions across both products and solutions. As you will hear later this week from Bilal and team, the business is leading the charge with new innovative products that are driving share gains and continued growth above market. We continue to expect PMT sales to be roughly flat organically for the year although we remain confident in a high single-digit growth outlook for this business in the second half due to the strength in orders and expected ramp in the conversion of backlog despite the transitory impact from the Middle East conflict. We're also starting to see stronger short-cycle catalyst demand. We have raised our full year expectations for Industrial Automation from down low single digits to flat for the year. as the short-cycle demand recovery continues, particularly in Europe and Asia, which we previously thought would be headwinds in 2026. And last, strong pricing execution and discipline are meaningfully contributing to top line growth across the portfolio, more than offsetting rising inflation. Overall, we expect Honeywell Technologies to deliver 2% to 3% organic growth in 2026 with stronger growth expected in the second half. Let me turn to Slide 5 to talk more about the details of Honeywell Technologies guidance. On this slide, we lay out the impact of each of the moving pieces that take us from our prior guidance for Honeywell to the Honeywell Technologies guide we are providing today. First, the decision to exclude pension income from adjusted earnings removes $0.85 of EPS from prior guidance, which includes the impact from both Aerospace and Honeywell Technologies. We believe the separation is the right time to make the change and the exclusion of this nonoperational income from our adjusted earnings should reduce earnings volatility, increase visibility and improve free cash flow conversion. While we are excluding pension income from our operational results, our roughly $5 billion overfunded pension represents real value to annual shareholders. We're actively evaluating ways to monetize this surplus, and we will provide more details on our plans at a later date. The next and more significant adjustment is the removal of Honeywell Aerospace, which represents approximately $5.50 of earnings. This includes roughly $19.2 billion of sales and $5 billion of segment profit at the midpoint of our prior expectations with roughly $3.3 billion of free cash flow prior to any stand-alone costs and carbo adjustments, but including a partial allocation for interest expense and below-the-line items. Next, following Quantinuum initial public offering on June 4, we're removing the financial impact of our investment in business from earnings, a decision that aligns with our other efforts to simplify Honeywell Technologies results for investors. Notably, this removal improves our segment profit by approximately $300 million, which translates to roughly $0.19 of earnings and $100 million of free cash flow. The teams and I also have been very focused on the elimination of stranded costs and I recently shared that we have reduced our estimate of these costs on day 1 to less than $300 million, a roughly $0.38 impact to full year earnings. And I am pleased to share that roughly 75% of this total will be out by year-end, a sharp acceleration from where we began. I look forward to sharing more on this topic on Thursday. Partially offsetting stranded costs is the benefit of the aerospace trend mark license, which amounts to $146 million to segment profit, a half year impact of $73 million in 2026 or $0.09 of EPS. The difference between the $225 million cash impact at Honeywell Aerospace sites in their Form 10 and the Investor Day materials, and the $146 million segment profit benefit you see here is due to the accounting treatment governing license expense on aerospace books and license income on ours. However, from a free cash flow perspective, the $91 million we show here represents a $225 million of cash prorated for half year and net of tax, plus our guidance now incorporates the expected exit of PSS and WWS from Industrial Automation and the Johnson Matthey Cables acquisition in PA&T. We expect the dilution from these portfolio moves to be partially offset by a stronger-than-anticipated outlook in our Automation segment in the second half. All in, these items bring it to the midpoint of our initial Honeywell Technologies guidance for 2026. Now let's turn to Slide 6. This page illustrates the work of our 2026 guidance midpoint for Honeywell Technologies from the Honeywell guidance issued in April. One point to mention is that the basis points impact is calculated of the revised base after removing aerospace sales and segment profit. The endpoint will be the starting point from which we issue our 3-year financial targets at our Investor Day on Thursday. With all of these pieces in place, let's turn to Slide 7 and for a summary of our full year and second half 2026 guidance for Honeywell Technologies. As previously mentioned, our 2026 Honeywell Technologies guidance excludes results from Honeywell Aerospace following the spin-off and subsequent reclassification of the business into discontinued ops. Additionally, the guidance now assumes the divestiture of productivity solutions and services and warehouse and Workforce Solutions businesses as of October 1 and assumes the acquisition of Johnson Matthey's Catalyst Technologies as of July 1 for the purposes of your model. And last, pension income and Quantinuum results have been removed from our full year 2026 guidance entirely and in prior periods for comparison purposes result. Following these updates, Honeywell Technologies expects organic sales growth in the range of 2% to 3% for the year including 3% to 5% in the second half. We expect full year segment margin expansion of 220 to 270 basis points, reflecting the prior year margin impact of stranded cost and our significant progress to date on the elimination of these costs as well as accretion related to the sale of PSS and BWS. Importantly, we expect Honeywell technologies will exit 2026 at approximately 22% segment margin. Full year adjusted earnings per share should be $4.05 at the midpoint or up 22% to 28% versus prior year. Similar to segment margin, the strong year-over-year EPS growth reflects our rapid removal of aerospace stranded costs. Finally, we expect free cash flow of roughly $2 billion in 2026, with the majority of this coming in during the second half at an approximately 95% conversion rate. On a pro forma basis, we expect Honeywell Technologies to deliver 90%-plus conversion annually. In the second half of the year, organic sales growth should increase to 3% to 5% and led by a sharp acceleration in process automation technology as our strong backlog begins to convert and demand for catalyst shipments materializes. Margin dynamics should also improve in the second half given the stranded cost and portfolio dynamics we discussed. And as a result, we expect second half segment margin of roughly 21.3% at the midpoint, up 350 basis points year-over-year. Finally, earnings per share in the second half is expected to be in the range of $2.20 to $2.35, up 22% to 31%. Please note that our earnings per share guidance and 3-year targets to be issued on Thursday, don't reflect the impact of the planned 1-for-2 reverse stock split which was approved by our shareholders last week and is expected to take effect on June 29 at the time of the aerospace spin. We will provide more color on that final step closer to the effective date. You can also find details of the simplified below-the-line structure in the supplemental information section of our presentation, which includes estimates of our go-forward corporate ever below-the-line items, which will continue to decline in 2027. Now let's move on to Slide 8 to above. We hope you found the information presented in this call helpful in laying the foundation for Honeywell Technologies outlook ahead of our Investor Day. We believe the changes we are making today will provide a cleaner and more simple presentation of our performance going forward. We are tracking ahead of schedule on our separation milestone with Aerospace spinoff now expected to be completed on June 29 and I am very excited to see these 2 leading [indiscernible] companies in action. I also want to take a minute to congratulate Rash, Mitesh and the entire Quantinuum team on an incredibly successful IPO last week. We remain shareholders and supporters and look forward to partnering with Quantinuum on their continued success. We also look forward to hosting everyone at our Investor Day on June 11 in New York City. This event will provide an excellent opportunity to share our strategy and long-term growth expectations. With that, Mark, let's take the questions.

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

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

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

[indiscernible], I think if I step from a first half to second half, first half [indiscernible] slower. Two reasons, obviously, Middle East impacted us. Second half, we should be north of 95%. We have a lot of elections coming in. Demand is very strong. And structurally, a few things are happening. Obviously, our tax rate is getting better going into the second half and -- with that cash taxes same for next year. And we're paying down debt aggressively. That's going to help us as well with better free cash flow conversion. And structurally, our portfolio is getting better. So I wouldn't say 100% free cash flow conversion is not out of the ramp expectations for us, but something that we have to work our way through. And that's what I'm working for in the second half, but I cannot commit to it yet. Just a lot of moving pieces.

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

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

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

Maybe just wanted to start with the segment margin guidance. I just wanted to sort of check, I think previously, you talked about a flattish segment margin kind of year-on-year in the second quarter on the old basis. Just wondered if that was still on track. And when we look at second half margins, is the way to think about it, it's sort of 20% margin in the third quarter, 22% in the fourth quarter. Is that how you're thinking about the second half?

Julian, thank you for the question. Great question. So maybe first, I take us back to what we guided at the beginning of the year. So we guided 50 to 90 bps expansion operationally, then we had about 30 bps of Quantinuum drug. So if you take that out, we should be at 50 to 90. I would tell you that operationally, we'll probably expand north of 100 bps in this year. And to your question on the second half then, I would expect third quarter to be around 21% and the fourth quarter about 22%. So a really good story of margin expansion. I would say we're getting good mix. We're getting good volume leverage. We aggressively are taking out stranded costs. All of that is showing up in the margin rate.

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

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

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

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

So look, I mean, there are multiple options. The pension is overfunded by about $2 billion. And we're obviously considering various options and there are numerous ways you can structure the pension benefits on a go-forward basis. And it's an option for us. Right now, [indiscernible] I don't have any significant or further plans on pension. That's something that we're definitely considering next year and look at it. But like I said, there are numerous ways to access this overfunding.

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

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

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

Maybe just starting with the Middle East impact, the $50 million to $75 million in 2Q. I guess what's the level of conviction that, that kind of moves to 0 in the back half of the year? And if you could give us a little bit of an update on what you're seeing with respect to impact to the Middle East today.

Sure. So I would say the very high level of conviction, obviously, for this quarter, assuming there is no significant reescalation if you will, and the conflict continues to progress to de-escalation and ramp up, we don't see any significant impact in terms of pressure for us in Middle East. In fact, I would say we would see probably incremental demand showing up from Middle East. Generally, I think with the conflict, what it generated is just a lot of demand globally as people are thinking for their own energy security. So our business is predominantly PA&T is seeing a lot more incremental demand outside of Middle East. So I would say net for Honeywell [indiscernible] guide, I would say this is -- will end up being a tailwind or incremental volume, they will have to contend with. As you know, in many of our places where we're already sold out in the business. So we're working our way through that. So I would say that if the conflict kind of remains the way it is, we can absorb it in our guide for the rest of the year. I don't see any big red flags right now, assuming things continue to [indiscernible].

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

Yes. So our goal is to fully eliminate in the first half of next year. the 75% of the $290 million that we're talking about, best cost is already actions to repositioning programs, et cetera, it just needs to show up in our run rate. And then we are essentially resetting the bar for the teams and that incremental cost are going to be taken out by really in 2 areas. First, there's a broader adoption of shared services. And we're simplifying beyond stranded costs. So there's some additional simplification where we're pushing in the first half of next year, 100% confident we'll be able to eliminate the stranded costs and then some. .

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

Congratulations, and thank you for hosting this call. Just a question on pricing. What kind of pricing is now embedded in the stand-alone Honeywell Technologies?

Yes. So I would say pricing is progressing well for us. We see -- first, maybe I'll start with that. We have just seen a lot of demand. Our orders are high make quarter-to-date, our orders are in the range of about high single digits, potentially double digits for the quarter. So feel really good about that. But that's what's happening, the pricing is falling. So I think we'll finish second quarter about 4% pricing, and the second half should be around that range, so 3.5% to 4.5%.

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

Sure. So I will talk about it on Thursday. And I think we have really -- we have a great story on building automation. The building automation has been introducing new products at a very high rate for the last 2 years. We have a lot of exciting offerings coming into the market. We feel like we're taking share. And globally, if you think about Europe, Asia, China, these regions are growing for us as well. So there's a multitude of factors that's helping us. And I would say Forge is maturing. And you'll hear on first day a lot about Forge and our connected offering. And I think it's just outstanding story. So building automation orders this quarter, I've been with Honeywell for 6 years. I haven't seen orders that strong yet in the company. So we definitely are taking share. At least that's my view based on what we see in order rates, and this is driven by the number of offerings and solutions that we're providing into the market.

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

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

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

On catalyst demand?

On catalyst, I'm sorry. On Catalyst, we -- so as you know, we talk about a lot over the last several quarters, there is still oversupply and another lot of demand, et cetera, as crack spreads are got better and our customers realize they have opportunity to really improve their yields and get that better price. We're starting to see a lot of orders on catalyst. So net-net for the year, I think the tale sales will still be low single-digit growth, but we see a significant step up in the second half, double-digit step-up in [indiscernible] demand out there. So we really feel good about the progression. And with that also, we feel better, obviously, with about our cash flow position as this business is going to generate a lot of cash flow for us in the second half.

And Mike, maybe same question on IA. I mean you have been trying to getting better, which you did not expect. Are you seeing the same in the U.S. to, given the improvement here in BMI as well?

Yes. I think IA is a little bit different for us. There's another factor there, which is the self-help factor would be coming on board, a spend a lot of time just simplifying the business, focusing the business -- that business now is really pure-play measurement and sensing. We're doing much better on supply chain that allows us to do better on pricing we're driving volume. We simplified this business significantly structurally, which helps margin expansion. And then there is -- with our end markets, there is some reshoring going on that's helping the business grow as well as China, we thought it was to be a drag for us this year and it isn't. So we just have a lot of tailwinds. Generally, I would say for the whole business, if you look at our 3 segments. All our 3 segments have momentum right now going to the second half. So I feel really, really good about the setup.

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

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

We can, but probably I don't have my notes on this right now [indiscernible] come back to you on this.

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

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

Can you just ask your second question again? Sorry, we're looking for the...

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

Yes. Jeff, for [indiscernible] part of those, we haven't said and obviously, it's the sum of those 3 plus in estimates for JM, which again, we don't want to get ahead of ourselves, seeing as the deal hasn't closed yet. So I would just think of it as -- you have the 2 businesses coming out a small addition for JM. And then on top of that, you have the stronger outlook in the base business. So it's just a little bit splitting hairs like I said, some of that we just haven't disclosed for agreements with the sellers and buyers.

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

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

$290 million of the year. We'll give a little bit more color on Thursday. So you'll see it on and on Thursday when we talk. But like I said, majority of this cost is already actioned. It just needs to show in our round run rate, meaning the restructuring options, et cetera, were taken, the people that we had to take out those people already exited. So it's just a matter of that showing up in our run rate. And like I said earlier, we should end third quarter about 21% segment margin and in the fourth quarter, it will be about 22%.

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

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

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

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

I guess when you guys were building the first half to back half plan this acceleration or step-up in organic growth. Maybe just help us bridge the confidence level there between backlog conversion, the order momentum that you're seeing, short-cycle recovery comps whatever. Just curious in terms of the confidence level in that step-up? And where is that coming from? Is it already within the backlog? Or is it some extrapolation of the order trends you're seeing now?

Sure. So let me maybe just level set on where we are here for the quarter and how we're thinking about the second half. So May quarter-to-date, our orders across the board are high single digits, building automation is closer to double digits. So we see strong orders both on short cycle and long cycle. Let me just maybe talk through various segments and start with PA&T. In PA&T, as you remember, we always talked about us having a record backlog and that backlog building. . This quarter, this backlog is starting to convert. Why do I say that? I start seeing cash customers are paying us advances. We're mobilizing our people to go work on these projects and start engineering work. We see significant pickup in the second half from the project work, and we are 100% confident in that volume coming. On top of that, you have the increase catalyst demand that's coming as well, and that's short cycle. And -- but I think that given where the oil prices are today and just the general demand we will continue to see strong performance in PA&T. On building automation, building automation has been delivered in 7 quarters, high single-digit growth. We continue to guide them at mid-single-digit plus and the orders are extremely strong. We see a lot of volume from our products, but we also see volume in projects and services. There is a little bit of pull in, if you will, from a second half to the first half the customers are driving because we did announce price increases so people want to lock in their pricing. That said, that gives me confidence this accelerated demand, it gives me confidence that the projects that people have in the pipeline are going ahead. And then finally, on the Industrial Automation, a lot of it has been self-help story, but the team is again starting to introduce NPI. Volume is better as far as demand. we're able to satisfy the demand. So the business is going to grow in the second half, low single digit. And based on everything I see, it should grow mid-single digit next year. And then Pete is definitely taking advantage of reshoring happening and pivoting the business to be more focused. So across the board, like I said earlier, all 3 segments have momentum.

Great. That's very helpful. And then just a separate question on profit trends. So obviously, the back half guidance is helpful. There's a few moving pieces like the trademark license economics, I think, is helping maybe $145-or-so million. And then you've got and PSF leaving. So on the trademark licenses, is that -- should we think about that as kind of sustainable as we exit this year? And then I assume PSS and WWS, there's obviously some margin and growth mix dynamic. Maybe you can talk about what those businesses exiting does from a mix perspective?

The trademark income is just helping us with trending cost from. And then obviously, it will subside over a period of time, but we're going to be continuing to simplify a strike margin expansion operationally. So over the next few years, this will offset. What I said earlier, operationally versus the guide that we gave at the beginning of the year. So the 50 to 90 bps operationally, right now, we're more like 100 to 120 bps of margin expansion operationally. On top of everything else that's happening structurally as far as the portfolio adjustments, et cetera.

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

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

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

I appreciate that. Fair enough. And then maybe just, I guess, to follow up. It seems like Q4 is really the first quarter where we kind of have a real, I guess, pro forma for all the portfolio movement that's happened with some coming in, some going out. So I guess how do we think about that 22% margin rate in Q4 as we look into it seems like there would still be some stranded cost out coming out of there. I mean, anything else just to call out from that Q4 jumping off point.

So in fourth quarter, we still have about -- like we said, about $85 million of stranded costs that will take out in the first half of the year. We will finish the year about 22% margin. And then we'll talk about 2027 when we get to the beginning of the year. But we have implemented a multiyear margin expansion framework that is based on operational equipment. So it's price, it's mix, it's leverage on fixed cost. And structurally, we're continuing to simplify the business significantly, and I'll talk about it later to speak. .

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

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

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

Sure. So it's -- the order is coming from 2 areas. A lot of the orders are coming from LNG. And we obviously, like I say, we have the tallest orders, et cetera, you'll hear more about it here as we go for the quarter and make the announcements, but we have some orders in Africa, with some others in the Louis -- so generally, we feel good about the backdrop here and our commercial pursuits and how they're starting to materialize in terms of firm orders.

Okay. Got it. And then at the beginning of the call, you cited due to tracking in line, you did raise a little bit on your industrial automation front. So wondering should we assume midpoint or maybe slightly better than the midpoint?

For the second quarter?

This Q2, yes.

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

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

So just wanted to understand for Honeywell Technologies, the CapEx personage of sales, R&D run rate.

Sure. So I would say from a CapEx standpoint, everything we've done with the portfolio makes us a bit CapEx lighter. Our CapEx over the next few years should be around 3% of revenue, and that's with investment in capacity, incremental investment in capacity in LNG. So feel good about CapEx and R&D. Our R&D as a percentage of sales should be north from 4.5%, probably this year will be 4.8%. If you remember, we stepped up our R&D spend the last couple of years. And we feel that at 4.8 -- over 4.5% is appropriate level of R&D spend. And it's not pressure to us your margin expansion. We continue to take out fixed costs down despite taking up our R&D investment.

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

Any -- sorry, any...

Reconstruction of facilities that have been damaged and things like that.

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

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

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

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

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

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

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

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

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