Honeywell at J.P. Morgan Conference: Aerospace Growth and Challenges

On Tuesday, 11 March 2025, Honeywell International Inc. (NASDAQ: HON) presented at the J.P. Morgan Industrials Conference 2025, offering a strategic overview of its aerospace division. The presentation highlighted strong contract wins and growth prospects, while acknowledging challenges such as supply chain constraints and margin pressures. The company remains optimistic about its future growth trajectory, despite potential tariff impacts and ongoing market fluctuations.

Key Takeaways

• Honeywell Aerospace secured over $40 billion in lifetime contract wins, a record achievement.
• Anticipated revenue growth in the mid to high single digits for 2025, with double-digit growth in commercial OE.
• Supply chain constraints persist, but improvements are underway with dual-sourcing strategies.
• The Bombardier partnership is valued at $17 billion, enhancing Honeywell’s market position.
• Free cash flow conversion aims to reach 100% as supply chain issues normalize.

Financial Results

• Lifetime Contract Wins: Over $40 billion in wins, surpassing previous years by 2.5 times.
• Revenue Growth Guidance: Mid to high single-digit growth expected, with commercial OE leading at double digits.
• Profit Margins: Long-term target of 29% margin, but near-term performance remains flat to slightly up.
• R&D Spending: Currently at 4% of sales, potentially increasing slightly; total R&D including customer funding is 7%.
• Free Cash Flow Conversion: Currently at 83%, targeting 100% as supply chains recover.

Operational Updates

• Supply Chain: Achieved 10 consecutive quarters of double-digit factory output; mechanical components still face constraints.
• Acquisitions: Recent acquisitions, CASE and Civetinabi, present short-term margin headwinds.
• Bombardier Partnership: Includes HTF engines and Anthem avionics, with a $17 billion lifetime value.
• Anthem Avionics: Progressing well, scalable across various aerospace platforms.
• Tariffs: Minimal current impact, with strategies in place for potential future changes.

Future Outlook

• Growth Drivers: Business aviation and defense markets expected to drive growth, with significant investments in new technologies.
• Strategic Investments: Focus on avionics, sensor systems, and electrification, among others.
• Inorganic Growth: Robust acquisition pipeline to enhance growth and technology capabilities.
• Separation: Post-separation, all entities aim for investment-grade balance sheets, maintaining a 29% margin target.

Q&A Highlights

• Aftermarket Dynamics: Fleet retirements open opportunities for Honeywell’s Aerospace Trading business.
• Fleet Mix: Significant demand for classic aircraft parts, with a 3:1 ratio of classic to newer models.
• Trading Business: Supports aftermarket with repair, overhaul, and resale of refurbished assets.

For a detailed understanding, readers are encouraged to refer to the full conference call transcript below.

Full transcript - J.P. Morgan Industrials Conference 2025:

Operator: Okay.

Steve Toussaint, Analyst, JPMorgan: Welcome everyone to the twenty twenty five JPMorgan Industrials Conference. My name is Steve Toussaint, company of electrical equipment and multi industry companies here. We’re very happy to kick it off this morning with Honeywell and the Head of Aerospace, Jim Courier. We’re going to do a few questions and then Q and A at the end. So don’t be afraid to raise your hand.

Jim, thanks for being with us today. No, thanks for sharing the opportunity. Aerospace probably one of the less controversial end markets right now, although Delta didn’t sound too great last night. So maybe you could start with State of the Union, what you’re working on these days. Obviously, you guys have the separation coming up, but more of kind of a fundamental State

Operator: of the Union, any kind

Steve Toussaint, Analyst, JPMorgan: of updates you wanted to give on the separation start?

Jim Courier, Head of Aerospace, Honeywell: Yes, absolutely. I think from Honeywell Aerospace perspective, a couple of things I would say is the way we’re positioned in the market today, I see a lot of tailwinds for us going forward. We have a very strong industrial installed base. We’re entering another period of rapid OEM production growth as well going forward. I love the positioning that we have in our defense and space business, new products on certain platforms that are growing as well.

So that setup works out very well. I think as you know as well, we closed out on two acquisitions last year, which set us up very nice with CASE and Civetinabi and the growth area force in the defense and space market. So that’s looking very well. Last year, for us, we had an absolute banner year in terms of lifetime wins of contracts that we secured well over $40,000,000,000 unprecedented for what we’ve seen before. It was almost like 2.5 what we’ve ever seen in any prior year before that, largely driven by the technologies, the innovation that we’re doing and the investments that we’re making across the portfolio.

So that setup has been very good for us. And I would tell you from your comment about the separation aspect, I can’t think of a better time, to be very excited about the opportunities that this presents for Honeywell Aerospace in terms of our separation. Very strong management team across our organization. Everybody on my staff has anywhere from fifteen to thirty years of experience specifically in Honeywell Aerospace. The ability to have very focused capitalized investments that we want to make going forward, our operating system, I feel is one of the best in our industry in terms of efficiency and productivity across the board.

And the commitment that we’ve made as part of the separation announcement that we will ensure that we’re going to have an investment grade balance sheet going forward. So that’s sort of the macro view, I would say, for us is Honeywell Aerospace.

Steve Toussaint, Analyst, JPMorgan: If I break that down, it’s

Jim Courier, Head of Aerospace, Honeywell: a little bit more within the end market specifically, within Honeywell, kind of what we’ve guided for 2025 is overall Honeywell Aerospace being in the mid single digit to high single digit range going forward. What I would tell you, the commercial OE portions of our business, as I mentioned, they are transport, BGA, particularly in the BGA segments, business aviation segments, where we have a lot of our avionics and engine content

Jim Courier, Head of Aerospace, Honeywell: are all going to be

Jim Courier, Head of Aerospace, Honeywell: growing double digit. Aftermarket will be mid to high single digits in that realm, largely driven by commercial air transport. We’re still seeing a lot of growth happening flight hours in that realm. I would say that’s going to be more of the mid to high singles business aviation aftermarket somewhere in the low to maybe mid single digit Rome. And then you look at defensive space.

We had an absolute banner year last year in our defensive space business in terms of growth. It was double digit growth. So this year, the comps get a little bit tougher in regards to that. The backlog is very strong that we have. Our book to bill has been very strong in defense and space, and we’re anticipating mid singles in that end market segment for us.

Steve Toussaint, Analyst, JPMorgan: How do supply constraints play into this or your output, if you will? I think for you guys, it’s lingered a little bit longer perhaps than we would have expected. Where do you stand on unlocking some of that?

Jim Courier, Head of Aerospace, Honeywell: Yes. So we’ve had 10 consecutive quarters of double digit output from our factories, right? And so we’re seeing the unlock that is happening across the board. And what I will tell you in terms of like where we’ve lagged

Steve Toussaint, Analyst, JPMorgan: a little bit, I think an element that

Jim Courier, Head of Aerospace, Honeywell: I would consider and remember is the fact that the diversification of our portfolio spans everything from the electronics portions of our business all the way through the mechanical portion.

Unidentified speaker: And when

Jim Courier, Head of Aerospace, Honeywell: I look at that, I will tell you that our electronics portion of our business has recovered quite nicely across the board. We’re back close to being on purchase order for many of our customers. The mechanical side is still very fragmented. It’s still very non robust. There’s still a lot of lack of resiliency in the mechanical supply base.

It’s an ongoing issue. It will be an ongoing issue for some time. But we are seeing an unlock that is happening. We are continuing to work with our suppliers very closely. We’re continuing to invest in unlocking the supply base.

We’re doing a lot of work in terms of dual sourcing, multi sourcing, many

Jim Courier, Head of Aerospace, Honeywell: of our products kind of unlock the capacity that exists there

Jim Courier, Head of Aerospace, Honeywell: from getting away from single source scenarios that we’ve had with certain suppliers. So it’s getting better. There’s much more recovery on the electronic side. Still a lot of work to do on the mechanical side, and I’m happy with the progression that we’ve been making quarter over quarter thus far.

Steve Toussaint, Analyst, JPMorgan: And where you’re most stressed? What end markets does that cut across? Is that when it comes to defense? I assume it’s on the OE side, but what part of the business is at most acute? I mean,

Jim Courier, Head of Aerospace, Honeywell: it’s across the board. When I look at the supply base, to me it’s one supply base. It’s one industrial supply base that supports multiple end markets. Same suppliers could be producing parts for us that support OEM production on the commercial side. Same supplier to be producing parts for us that support the defense end markets.

So same supplier is producing parts for us to do all of our armor and over. So that’s strength that exists within the industrial supply base. It’s not as if you have a commercial industrial supply base and you have a defense industrial supply base. It’s one industrial supply base supporting the entire industry. So, when you look at it from that perspective, theoretically, every single end market can be affected by that ultimately at the end of the day.

But I will tell you again, the electronics portion of our business, again, not labor intense part of the portfolio in terms of a supply chain versus the mechanical. Electronics has recovered quite nicely. Mechanical, very labor intense type work, specialized work that has

Steve Toussaint, Analyst, JPMorgan: to be done. That area is still struggling, but recovered. And I guess we brought up supply chain,

Operator: maybe we was going to address this

Steve Toussaint, Analyst, JPMorgan: a bit in the margin discussion, but what how do tariffs and what’s going on out there impact Honeywell Aerospace?

Jim Courier, Head of Aerospace, Honeywell: Yeah. The current scenario right now that’s in place is that we do tariffs as being relatively minor to the overall impact to our business. That’s the current state that we’re in today. And that obviously can change, you know, depending upon what happens, in terms of any executive orders and or decisions that are made. But what I would tell you is that we do have a playbook.

We will exercise that playbook. We will work very closely with our suppliers, very closely with our customers. And if those scenarios change out over time, we’ll make the necessary adjustments that we need to make within the portfolio, within the business, the multiple levers that we have to again minimize any impact that that could happen. In present state today, under the current conditions and where tariffs are residing, it’s minimal to negligible impact to the business.

Steve Toussaint, Analyst, JPMorgan: Turning back to top line on commercial OE, talk about the main programs where you guys kind of gain the most content and then how those progressing from a production perspective and which ones do you see the most growth in this year as you kind of deliver on that

Jim Courier, Head of Aerospace, Honeywell: on a double digit. So if I think about bifurcate that a little bit to commercial for Air Transport and then commercial for Business Aviation. On the air transport side, obviously, as you’re starting to see the ramps that are occurring with Boeing coming out of where they were at the end of last year, there’s significant growth opportunity in terms of OEM production growth at Boeing. And similar, we’re seeing it at Airbus as well. And so with the content that we have on board this platform, which I’m very comfortable with the content that we have on those platforms, you’ll see that double digit OEM growth for us on a go forward basis for 2025.

Similarly in business aviation, if you think about the areas of growth that are happening most in business aviation, think in terms of super midsize aircrafts, think in terms of large cabin aircraft. And that’s what we are exceptionally positioned with our products in our portfolios. With super midsize, we have our HTF engine on board. We have APUs on board those aircraft. You get into the larger platforms.

We’re proliferated with our avionics and cockpits across those platforms. Those platforms are growing heavily in business aviation, which positions us very well, coupled with the Air Transport work to see that double digit growth in commercial loading.

Steve Toussaint, Analyst, JPMorgan: For the ATR side, do you have any particular difference in exposure to the three twenty or the seven thirty seven?

Jim Courier, Head of Aerospace, Honeywell: I mean, the content mix is a little different between the two platforms across the board, but we’re very well positioned on both. And then that obviously then plays for where we currently have our aftermarket potential growth and then future aftermarket potential growth. But we’re very positioned well on the platforms and then White Body as well. Yeah.

Steve Toussaint, Analyst, JPMorgan: And then as far as, obviously, you have tremendous relationship with all these companies, but it is a very global industry. How do you see your customers? Are they talking to you at all about, you know, the tariff situation that they may have? Because that’s coming across borders as well. So it’s just, I mean, you just got a deal with the Canadian company.

So, how are the customers reacting to, to this today?

Jim Courier, Head of Aerospace, Honeywell: I would say in general, there’s nervousness across the board as to what will be the next thing that will fall in terms of a decision that may be made. So there have been reach outs in terms of whether potential impacts to their portfolios, impacts to their aircraft platforms going forward. We just stay very much lockstep and in touch with what they’re doing and what we’re doing in terms of addressing tariffs and the like. If there’s anything that we can do to support in some way, shape or form, we’ll attempt to be able to do that. But there is general concern across

Operator: the board. So do you

Steve Toussaint, Analyst, JPMorgan: think this combination of from a biz jet perspective, definitely cross border business, perhaps higher prices even though I’m not really in that market, unfortunately, higher prices for some and stock market volatility. I mean,

Operator: is there risk that there’s a

Steve Toussaint, Analyst, JPMorgan: bit of a pullback in the biz jet market? Is that something we should be thinking about as a bit of a risk?

Jim Courier, Head of Aerospace, Honeywell: Yes. I would say it’s something to be cognizant of and to watch very closely. Any conversations that I’ve had with our customers that have expressed some concern, have not expressed that specific concern about a pullback happening. I mean, Business Aviation in general typically follows more of a macro churn, not an interim you know, insertion of a potential upset into the process. You know, those macro trends will be around GDP growth and the like going forward.

Wealth, that, you know, within the industry of those people who fly those particular aircraft. What I will tell you is that the backlog at these OEMs and the business aviation market segment is years of backlog that they have in place. Right? So you’d actually would have to have somebody come forth and say, I’m not willing to accept an aircraft due to the current tariff situation that is in play. I don’t anticipate that being proliferated across the board.

So I think on a near term basis, the impact would be minimal at best.

Operator: Got

Steve Toussaint, Analyst, JPMorgan: it. And from a Bombardier perspective, maybe just talk for a second about the deal that you guys announced in December and any other incremental color around that and your future R and D efforts with them.

Unidentified speaker: Yeah. No.

Jim Courier, Head of Aerospace, Honeywell: I mean, it’s a it was super exciting opportunity we had with Bombardier. It was a landmark deal that we’re able to secure with them to kind of put that in context. That’s working in partnership with Bombardier across multiple technologies within our portfolio, whether we’re talking our HTF engines for aircraft, whether we’re talking about our Anthem avionics cockpits, as well as we talk about SATCOM communications. And so we established this broad, strategic partnership with them to introduce those technologies onto their platforms, both current and future platforms going forward. Total lifetime value that we booked at that, and I would say it’s on a conservative basis, was about $17,000,000,000 across those three entities.

But I could not be any more excited about working very closely with Bombardier and introducing our products onto their platforms.

Steve Toussaint, Analyst, JPMorgan: And then what’s the status of Anthem?

Jim Courier, Head of Aerospace, Honeywell: So Anthem is progressing quite well in its development cycle. I’m very pleased with where we currently are today. I will tell you the development efforts and the work that we’ve been doing has been absolutely impressive in terms of the technology that we’re developing with that particular system and introducing it into the cockpit. We’ve won positions unannounced on multiple platforms on a go forward. We’re also getting a tremendous amount of interest in terms of aftermarket retrofits and upgrades of existing aircraft that may exist, that would have a desire for Anthem.

But the thing about Anthem going forward is the way that system is architected very different than how we’ve architected other avionics cockpits within Honeywell Aerospace is the scalability of the architecture. So we can take that cockpit, install it on a business aviation aircraft, we can scale it down, move it into general aviation, we can scale it up, move it into air transport, scale it up even further, move it into the defense market. So it really has the ability to touch every single platform across the aerospace ecosystem in the way it was architected and the way it’s being designed for introduction.

Steve Toussaint, Analyst, JPMorgan: Got it. Moving to so it sounds like the OE side, at

Operator: least as we move into the year, and any comp issues where you’re going to kind of start the year a bit slower and ramp throughout the year, pretty consistent double digit growth throughout the year? Anything to consider here in the near term?

Jim Courier, Head of Aerospace, Honeywell: There’s always cyclicality that happens within our industry. It’s never really a straight line growth opportunity. I wish it was more along those lines. So you’ll start to see in terms of overall output, you’ll start to see a more normalization here in Q1. You’ll start to see a growth throughout the balance of the year.

So it is a little bit of a sinusoidal effect that occurs. And that’s similarly in the Air Transport aftermarket as well in terms of flight hours. We just kind of have a little bit of that cyclicality that comes into play. That’s very typical within our industry.

Operator: So can we talk about aftermarket? Lots going on here. Delta preannounced last night some pretty weak numbers. What are you seeing day to day here in the aftermarket? And you mentioned there’s some volatility.

Maybe just explain that as we move through the year. This would be mostly, let’s start with the ATR aftermarket for you guys. Yes.

Jim Courier, Head of Aerospace, Honeywell: So, I mean, what I would characterize the ATR aftermarket is being a little bit more of a normalization. I mean, coming out of COVID, we saw some rapid growth occurring in terms of flight hours, a lot of the pent up demand that passengers had in terms of wanting to fly. And now you’re starting to see that a little bit more normalized. I mean, that wasn’t sustainable on a year over year basis, right? We’re constantly seeing double digit growth year over year.

And I would say domestically in The U. S, we have fully recovered and we’ve actually surpassed the number of flight hours occurring on an annual basis pre COVID versus where we are today. And you’re starting to see a little bit of that normalization occurring. Where you’re not seeing that as much and you’re seeing much more opportunities still for growth, it’s a little bit more in Europe and particularly in the Asia Pacific region as well. A lot more growth opportunity and that’s where we’re seeing a lot of growth with the platforms that we see flying out there, whether our content is more on that double digit side in the Asia Pacific region.

A little bit more normalization in The U. S, still opportunities in Europe, much more opportunity for growth in Asia.

Operator: So as we break that down

Steve Toussaint, Analyst, JPMorgan: a little

Operator: bit, what is your headset? What are you thinking as far as flight hours growth this year?

Jim Courier, Head of Aerospace, Honeywell: Yes. So for us on an

Jim Courier, Head of Aerospace, Honeywell: aftermarket side, I mean, you can figure somewhere between the mid to overall, globally speaking, mid to high singles for the aftermarket. You’ll start to see that a little bit more in the probably mid in The U. S, mid to high singles in Europe, and you may even surpass a little bit double digit like we saw last year in Asia. So that’d be

Operator: a little distribution globally. And Honeywell’s view on flight hours, what is your take on what is your what’s underlying that from a flight hours growth?

Jim Courier, Head of Aerospace, Honeywell: Yes. For us from an Air Transport on a global perspective, it’s sitting around 5%, five point five %.

Operator: Five %, five point five % flight hour growth. And then so the content is kind of a little bit of a positive impact to get you to the mid to high. Yes. And then I know Honeywell at a higher level has gotten about 3% price. How much of an influence is pricing in the aftermarket these days?

And how did that trend over the last couple of years?

Jim Courier, Head of Aerospace, Honeywell: It’s trended basically in that particular ballpark that you’ve described and that’s been the trend for the last few years as well. Okay.

Operator: 3%. Okay. The BizJet side, perhaps a little different. What are you seeing in flight hours there? And how do you think about BizJet aftermarket?

Or maybe not too different?

Steve Toussaint, Analyst, JPMorgan: It is

Jim Courier, Head of Aerospace, Honeywell: a little different though, actually, right? I mean, coming out of COVID, there was a massive whipsaw that happened in terms of flight hours and business aviation. It’s tremendous exponential growth, as the air transport market was waning in terms of growth going forward out of COVID. That is now sort of self corrected and has become much more normalized. I would say from a business aviation flight hour perspective, you’re probably somewhere in the low singles, flat in certain market segments, but low singles overall.

Operator: And you guys have talked a lot about upgrades and mods and things like that. Is that more of a I would assume that’s more of a business jet dynamic than an ATR driver?

Jim Courier, Head of Aerospace, Honeywell: It’s actually both. And so to kind of expand upon that a little bit, that’s what you refer to our retrofit mods and upgrades. We actually call it arm use. And, you know Definitely. Well, it’s a really nice part

Jim Courier, Head of Aerospace, Honeywell: of our business and a

Jim Courier, Head of Aerospace, Honeywell: nice part of the portfolio that has seen tremendous growth over the years to the investments that we’ve made. And the thing that I would characterize that is that’s really built upon the large installed base that we have across the industry. There’s virtually not a single aircraft flying in the free world today that in some way, shape or form does not have Honeywell content on board. And these aircraft fly for twenty, thirty, forty years. And so as new technologies are developed, as new features, new functions, new enhancements in terms of safety, those generate opportunities to upgrade or retrofit or mod some of the equipment that we have on board those aircraft today.

And so we started that process probably about fifteen years ago in terms of investing into these RMUs. Right now, it’s a part of our portfolio that’s well north of $1,000,000,000 on an annual basis and growing at double digits going forward. And it still is that opportunity for us. And when I think about where we are today in terms of OEM production rates and double digit production rates, to me, I view that as just seed planting for the future. It’s just more aircraft entering into the market, which produces more opportunities for us to continue investing and continue driving those RMUs.

Operator: And then just lastly on defense, what the outlook for the next couple of years, what’s going on globally, how is that influencing Honeywell?

Jim Courier, Head of Aerospace, Honeywell: Yes. So our portfolio is roughly 60% commercial, 40% defense. So it is a representative large part of our portfolio. And what I would tell you is that what we’re seeing in terms of the geopolitical concerns that are existing around the world, which do not seem to be waning across the board, which is driving a substantial amount of investment, and budgetary increases with a lot of our NATO allies and peers across the board will drive a lot of opportunity in the international market segments. So, where we view at Defense for us being about a mid single digits coming off of a double digit growth from last year, we continue to see the investments occurring particularly in Asia, particularly in Europe.

We see opportunities with our products through foreign military sales that we do as well that will generate some growth for us in international market segments. In our business, international versus domestic on defense, you can think of it in terms of about 70%, seventy five % domestic, maybe 25% international, and that international opportunity space that is being able to grow for us through the investments that we’re making.

Operator: Turning to the margin side, the 29% margin was put out a couple of years ago. It’s not quite a straight line on the way there. There’s been some acquisitions. What are talk about the bridge on margins this year and what do you see as kind of the underlying cadence going forward from a margin perspective when you kind of strip out the acquisitions?

Jim Courier, Head of Aerospace, Honeywell: It’s definitely not a straight line,

Unidentified speaker: that’s for

Jim Courier, Head of Aerospace, Honeywell: sure. I would bifurcate the margin story for Honeywell Aerospace into, I would call it, a near term and a longer term view. So near term, what I would say is, if you exclude the effects of the Bombardier transaction that we did in Q4, we should be somewhere slightly up flattish thereabouts in terms of margin performance. And it’s really three major contributors that are holding us in that realm that we’re talking about. One of them is OE production rates.

And so as I mentioned a moment ago, we’re seeing double digit growth on the OE side as opposed to what we see on the aftermarket that creates mixed head base to unlock investments we’re making with suppliers, investments that we’re making in buying tooling for them and the like going forward. So that is a little bit of a headwind for us as well. And then the third element that you just mentioned a moment ago, Steve, is acquisitions, right? Closing out on the two acquisitions that we did, the integration cost associated with those acquisitions is also a headwind. So that’s sort of the near term dynamic when we talk about margin performance for Honeywell Aerospace.

Operator: Are investments in mix roughly the same size? Or does one is one significantly more than the other from a year over year perspective, we think about that bridge?

Jim Courier, Head of Aerospace, Honeywell: In terms of investments of Well,

Operator: you just talked about investing in the supply chain and unlocking. Is that are those similar sized items? Or is one significantly larger than the other from year over year perspective?

Jim Courier, Head of Aerospace, Honeywell: They’re similar. Okay. They’re similar in terms of size relative to that. And then if I pivot to a little bit with a longer term view in terms of margins, I definitely see a path to attainment to the 29%. It’s just going to be in a little bit more of a protracted timeline.

As those three issues that I mentioned a moment ago start to alleviate themselves, obviously, OEM production will begin to normalize, then you’ll start to see the mix between OEM aftermarket starting to shift. Hence, that what was a headwind then becomes a tailwind. We’ll complete the integration, and those costs will fall off the books as another example. And then thirdly, at some point in time, those investments will start to wane coming out of the supply base as they’ve recovered to a more normalized demand going forward.

Operator: And then hence, you can see that trajectory then on the attainment to 29% going forward. Is 29% going to still be a part of your long term targets when you guys come out? Is that that sounds like it’s still in your mind the right level?

Jim Courier, Head of Aerospace, Honeywell: You mean when you say commodity post separated stake? Yes. Correct. Yes. Absolutely.

Absolutely. That’s still part of our

Operator: long range plan. Okay. And obviously that depends on mix and things. But is there any for as of now when you think about Honeywell has a reporting structure, segment margins and then like a bunch of stuff below the line, how does Aerospace, is it should we it’s pretty easy to pull out the segment numbers restructuring things. Anything below the line that will move around from a reporting perspective that aerospace will take more than their fair share of?

Unidentified speaker: I think

Operator: that’s something that we’ll be working In the P and L?

Jim Courier, Head of Aerospace, Honeywell: Yes. We’ll be working through that as part of the separation exercises going forward. So that’s, I think, probably a TBD. Okay. Ultimately, how that will be structured.

What I will tell you is that the commitment across the organizations that we have made and the commitment we’ve made to shareholders and investors is that when the company separates, so you’ll have the automation, you’ll have aerospace, and now earlier on, you’ll have advanced materials going forward. All three of those will be have a balance sheet that is definitely investment grade.

Operator: Okay. And I guess from a portfolio perspective, anything that you’re looking to do differently when it comes to investing in the business, both inorganically as well as organically? Yes. What’s on your mind as far as this window you have to prepare yourself for being a public company?

Jim Courier, Head of Aerospace, Honeywell: Yes. I think the one thing I would say is, from an organic standpoint, so I’ll organic and I’ll just pivot to inorganic here for a moment. On the organic side, definitely taking advantage of the fact that we’re in this upcycle and we’ve been in this upcycle for quite some time. So the amount of investments that we’re making back into the business and back into the portfolio are world class in terms of overall investments that we’re making. And there isn’t a single portion of the aerospace portfolio that we are not currently investing in new technologies, new innovation and new services that can be provided, whether we’re talking avionics, whether we’re talking our navigation sensor systems for being able to operate in GNSS denied environments, HTF engines for next gen, next gen APUs, electrification, autonomy and autonomous operations, vapor cycle cooling systems.

I mean, you look at the breadth of the portfolio and the amount of wins that we have had, it requires you to invest in order to convert those wins into opportunities in the future. So we are investing in every single facet of our business going forward. So that’s on the organic piece of it and we will continue to do that and we’ll continue to grow that on a year over year basis.

Operator: Is there incremental investment that you want to make? So like this year at supply chain and is that supply chain headwind wanes that maybe you’ll feather in a bit more investment as you prepare yourself to be a public company? Or is that investment kind of at a steady year over year run rate? So it’s there’s no real fungibility there.

Steve Toussaint, Analyst, JPMorgan: Yes.

Jim Courier, Head of Aerospace, Honeywell: As we look at capital allocation within the aerospace portfolio, as we start to bolster up and we start to develop that resilient supply base, it will free up funds to be able to invest even more for future. But where we sit today and where we sit for the last couple of years, I’m very comfortable with the amount of investment that we’ve been making on a year over year basis, where we are investing this year and what we see investing over the next few years on a go forward basis, which will continue to grow on a year over year basis.

Unidentified speaker: Okay.

Operator: So R and D kind of flat, you’re comfortable with your level of R and D. R and D flat as a percentage of sales? Yes.

Jim Courier, Head of Aerospace, Honeywell: I mean, right now we’re running at about 4%, slightly up from last year. I could see that increasing to low 4% going forward. Okay. And that’s on the investments internally, and we don’t talk a lot about customer funding. That happens That’s either like 7% or something like that.

It gets us to about 7% when we do that, when we make that calculation in place. Okay.

Operator: And then sorry I interrupted you, but on the inorganic side?

Jim Courier, Head of Aerospace, Honeywell: Yes. Yes. So we will continue to be very, very active in the inorganic front as well. In all of my years in Honeywell Aerospace, I’ve never seen our acquisition pipeline to be as robust as it is across the entire portfolio across all of Honeywell inclusive of aerospace as well. And we’ll continue to look at properties.

I think there are certain properties out there where we are the best owners of those properties with the synergies that we can provide to enhance growth, to enhance margins and also to grow technologies in certain spaces at the end of the day to provide technology and innovation to customers where that makes sense. So we will continue to be very active on that front.

Operator: And then just lastly for me before we turn over to these guys for questions. Free cash flow, Honeywell currently converting on adjusted earnings at about 85%. I think on the call, you guys had talked a bit about 100%. I’m not quite sure like what that definition is. But is there a pathway for you guys to get to 100% conversion to Arrow?

Or what’s kind of the path to get to 100% or not?

Jim Courier, Head of Aerospace, Honeywell: So in Arrow, we’re around 83% free cash flow conversion at the moment. The biggest unlock for us is impediment for us going forward and we will begin unlocking that as the recovery in the supply base occurs and things begin to normalize. We’ll get that inventory back down to a normalized level. There is nothing foundationally or fundamental within the Honeywell Aerospace portfolio that doesn’t mean we can achieve 100 free cash flow conversion at the end of the day. I just got to we just have to unwind all of this inventory buildup that we’ve been doing over the last couple of years to support the demand and to support our customers.

Operator: And anything on for large global integrated organizations as they come apart a bit? And anything on taxes and cash taxes that you see as being a moving part in this discussion at all, whether it’s on a book or a cash basis?

Jim Courier, Head of Aerospace, Honeywell: Yes. I’m sure that’s part of the discussions that are ongoing right now. At the Honeywell corporate level in terms of some of the decisions that I haven’t seen anything personally. So I wouldn’t be able to comment on how we’re handling that.

Operator: Any questions out there? Know it’s early.

Steve Toussaint, Analyst, JPMorgan: Seth?

Seth, Analyst: Hey, morning. Morning. Wondering if you could talk about when you think about that mix dynamic going forward as the OE rates come up, and we start to see more retirements, what impact that will have on mix and on profitability going forward?

Jim Courier, Head of Aerospace, Honeywell: Yes. So you will definitely start to see some retirements, but the net net of everything going forward will be accretive in that space. What I will tell you about retirements of aircraft, it actually produces opportunities for Honeywell. We have a business within Honeywell, we call our Honeywell Aerospace Trading business, where we look at acquiring assets off of the market, bringing them into our facilities, bringing them into our factories, do a repair and overhaul and be able to put an OEM ticket on those and get them back out into the aftermarket to be able to support customers going forward. So we actually view that as an opportunity for us to be able to continue to drive the growth that we see on a go forward basis.

Operator: How big is that business?

Unidentified speaker: It’s

Jim Courier, Head of Aerospace, Honeywell: not to quote a number specifically within that portion of the portfolio. It’s significant enough that we could see a lot of growth happening there.

Operator: Okay. Sean didn’t even move. I was expecting to like wink or something like that. But I think that’s a good question from the aero expert in the room, of course. Like how was that accretive?

I guess, you’re saying, I guess, but from a mix perspective, retiring a plane, replacing it with a new one, like for like, that is a pretty nice revenue, but pretty dilutive event for you guys, right? I mean, like, you guys make really good money on some of the older stuff. That is the right kind of mindset.

Jim Courier, Head of Aerospace, Honeywell: Yes. You should definitely think about it in terms of that mindset as well. Okay. But what happens is, is that what we’re putting into the market today is what I call that seed planting for the future that will generate those aftermarket revenue opportunities for us going forward.

Operator: Are you seeing any of that in this year’s numbers or it’s too early for that given we’re not really seeing the

Jim Courier, Head of Aerospace, Honeywell: Yes. I would say if you look at the fleet mix today, what I call classics, right, the classic 737s and the CEOs that are out there, the ratio of those aircraft to Maxes and Neos that are in the market is about a three:one ratio today. And so that creates a lot of that opportunity. And so I think it’s too early to say near term what that will represent. What I can tell you is the demand is substantial and they’re keeping those aircraft flying longer and longer than they had ever anticipated.

Even with the outputs that are increasing on the OE side, they want to keep those aircraft line to support the demand that is out there.

Operator: So I guess from that perspective though, if you do start retiring more and the inventory of these parts grows, but you’re serving less planes, why isn’t that like a negative for the trading business as well?

Jim Courier, Head of Aerospace, Honeywell: Well, when we think about supporting the aftermarket, you can support it through a repair and overhaul of an asset, you can support it through spare sales of an asset or you can support it through a used serviceable material asset into the market. And when some of those assets become used market, there are other potential individuals who would want to buy those assets as well to kind of resell them. But there’s a lot of value when you take that asset and bring it back through the OEM to do a refurbishment back to OEM standards, back to OEM requirements. Got it. And so there’s value in that used asset that we would acquire, bring it through our shops.

We can either use those parts to support R and O activity or if you can use those parts, repair them, put an OEM ticket on it with the value of having an OEM certified piece of equipment and then resell that into the market. Right. So some of those assets come in to be able to support R and O. Some of those assets come in to be able to support a rebuild and a refurb and then resend it back out. Then you have your spares assets that you sell into the industry.

Steve Toussaint, Analyst, JPMorgan: So it’s a

Jim Courier, Head of Aerospace, Honeywell: little bit of a balance.

Operator: And you guys are such a global organization with like a tremendous distribution channels and customer relationships. You guys are positioned well-to-do that. Correct. Any questions? One last one out there.

Okay. I think you’re good. Thank you. Awesome. Steve,

Seth, Analyst: thanks so

Jim Courier, Head of Aerospace, Honeywell: much for your time. Really appreciate it.

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