Honeywell International (HON) Q2 2023 Earnings Call Transcript

Honeywell International (HON 0.22%)
Q2 2023 Earnings Call
Jul 27, 2023, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the Honeywell's second-quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded.

I would now like to hand the call over to Sean Meakim, vice president of investor relations. Please go ahead.

Sean Meakim -- Vice President, Investor Relations

Thank you, Liz. Good morning and welcome to Honeywell's second-quarter 2023 earnings conference call. On the call with me today are Chief Executive Officer Vimal Kapur, Senior Vice President and Chief Financial Officer Greg Lewis, and Senior Vice President and General Counsel Anne Madden. This webcast and the -- and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website.

From time to time, we will post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the second quarter, share our guidance for the third quarter, and provide an update to our full-year 2023 outlook. As always, we'll leave time for your questions at the end.

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

Vimal Kapur -- President and Chief Operating Officer

Thank you, Sean, and good morning, everyone. Let's begin on Slide 2. The second quarter was another strong one for Honeywell. We met or exceeded our commitments as our rigorous operating principles enable us to navigate a challenging backdrop.

We grew our adjusted earnings per share 6% year over year to $2.23, or up 13%, excluding a $0.15 noncash pension headwind. Second-quarter organic sales were up 3% year over year led by double-digit growth in commercial aerospace, process solutions, and UOP. Our aerospace business continues to perform at very high level. The second-quarter backlog grew to a new record of $30.5 billion, up 4% year over year and 1% sequentially due to strength in aero, PMT, and HBT. Similar to last quarter's, orders continue to grow double digit organically in aero.

But for other segments, unfavorable comparison to last year's peak supply chain disruption led to a single-digit decline in orders for overall Honeywell. We remain confident in our 2023 outlook as recovering end markets and operational excellence continue to deliver resilient results despite macroeconomic uncertainty. Our segment margin expanded 150 basis points year over year, exceeding the high end of our guidance range by 20 basis points, led by expansion in SPS, HBT, and aero. Our continued focus on commercial excellence and greater gains from productivity enabled us to remain ahead of our inflation curve. Free cash flow was $1.1 billion in second quarter, up 34% year over year, driven by strong net income and improved working capital in line with our expectations. Greg will walk you through the free cash flow drivers in more details in a few minutes.

We deployed $2.1 billion to dividends, M&A, share repurchases, and growth capex, including opportunistically repurchasing 2.4 million shares throughout the quarter, reducing our weighted average share count to 670 million. I'm pleased with the progress we made this quarter on our portfolio-shaping priorities. We invested in multiple new technologies utilizing our robust M&A playbook, including completing the acquisition of Compressor Controls Corporation for approximately $700 million. As always, we continue to execute on our proven value creation framework, which is underpinned by Accelerator operating system. The operating system, along with ongoing growth in our key end markets and technologically differentiated portfolio of solutions, is enabling us to navigate a challenging economic backdrop and deliver on our commitment again this quarter. Looking forward, I'm encouraged by the strength we are seeing in our long-cycle aero and energy verticals and remain confident in our position to outperform.

Next, let's turn to Slide 3 to discuss the important leadership announcement. Last month, we announced that Jim Currier will be succeeding Mike Madsen as Honeywell Aerospace CEO. I want to congratulate Mike Madsen on his retirement and extend my sincere gratitude for 37 years he has given to Honeywell. Mike has been an extremely effective leader and change in -- change in the company and the -- and the aero industry.

He has a rich history of exceeding expectations as aerospace won an unprecedented $35 billion in new business in these last two years. His leadership and commitment to customers, employees, and the community is unparalleled. During his tenure as aero CEO, Mike navigated the business to unprecedented pandemic disruptions while growing the top line and expanding margins by over 200 basis points. Because of Mike's passion and dedication to the business, he helped set up Honeywell Aerospace to be even more successful in the years to come. We're excited about the next phase of growth in Honeywell's aero business under Jim Currier's leadership.

We are fortunate to have someone with this level of experience and tenure ready to take the helm, a true testament to Honeywell's bench strength and focus on succession planning. Jim has been with Honeywell Aero for 17 years. And prior to his current position, he had held multiple roles of increasing responsibility across function and geography, most recently as president of our electronic solutions business. The medium-term setup for Aero is the strongest it has ever been. Flight hours continue to be strong, including widebody upside, which is now underway.

We have diverse and optimized platform exposure, particularly in business aviation. In fact, over the last few months alone, we have won $3 billion in business to provide OEMs and airline with our engines, wheels, and brakes, APUs, and flight management system, along with associated aftermarket services. In addition, supply chains are gradually improving, and we have returned to growth in defense and space. This momentum points to a robust multiyear trajectory for the largest businesses in Honeywell portfolio.

Let's turn to Slide 4 to discuss our recent corporate development activity. I'm excited about our recent capital deployment announcement, closing on our previously announced Compressor Controls Corporation acquisition and adding two strategic assets that will drive enhanced innovation and strength in our technology portfolio. This mix really exemplifies the type of deals that we look to generate on a consistent basis. Last month, we closed our acquisition of CCC, a leading provider of turbomachinery control and optimization solution, deploying approximately $700 million in all-cash transaction. CCC technologies, including control, hardware, software, and services, bolster Honeywell's high-growth sustainability and digitization portfolio with new carbon capture control solutions. CCC integrates seamlessly into our process control -- process solutions business and provides meaningful revenue synergy potential with Honeywell Forge. We are excited to extend Honeywell's leadership in automation and help customers accelerate their energy transition with this -- with the completion of this acquisition.

We also acquired SCADAfence, an Israel-based company that delivers operational technology, or OT, and Internet of Things, or IoT, cybersecurity solutions for monitoring large-scale networks. SCADAfence brings proven technologies in asset discovery, threat detection, and security governance, which are key to industrial and critical infrastructure cybersecurity program into our SCE portfolio. The OT cybersecurity industry is expected to grow to greater than $10 billion in the next several years, and the SCADAfence portfolio pairs seamlessly with Honeywell's cybersecurity business, providing an end-to-end enterprise solution that helps customers enhance enterprise resilience. In addition, we signed an agreement with Saab to acquire its heads-up display, or HUD, asset, bolstering Honeywell's comprehensive end-to-end avionics and safety offering. We'll partner with Saab to develop and strengthen the HUD product line, which enables pilots' increased situational awareness, specifically at night or in difficult weather conditions. Importantly, the HUDs will be integrated into Honeywell Anthem, our revolutionary integrated flight deck with an intuitive user interface and highly scalable design, in addition to Honeywell's Primus Epic flight deck and retrofit solutions. I'm excited about a new technology and an adjacency we have unlocked through a recent M&A activity.

We said before, and we have an active and robust pipeline, and this is further evidence that we are continuously enhancing our portfolio by investing in new opportunities. We look forward to continuing to deploy our capital in coming quarters to create more value for Honeywell shareholders. Now, let me turn it over to Greg on Slide 5 to discuss our second-quarter results in more detail, as well as provide our views on guidance.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Thank you, Vimal, and good morning, everyone. We delivered another strong quarter in a very challenging operating environment. Second-quarter sales grew 3% organically, led by double-digit organic sales growth in commercial aerospace, process solutions, and UOP, where demand strength continues to support Honeywell's short-term and long-term outlook. PMT growth -- grew at a robust 7% pace after four consecutive quarters of double-digit growth. Our long-cycle warehouse automation business is around trough levels as expected, which led to overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 5% across the remainder of the portfolio.

Our backlog remains at a record level, ending the second quarter at $30.5 billion, up 4% year over year, driven by strength in aero and PMT. Supply chain constraints continue to moderate our overall growth rate. However, we continue to record sequential improvements in aero output, as expected, and are reducing our past-due backlog across our short-cycle businesses. Our investments in Honeywell Digital have continued to yield commercial and operating benefits through surgical pricing actions, enabling us to expand segment margin by 150 basis points year over year to 22.4% and exceed the high end of our guidance by 20 basis points. Three out of four segments expanded margins in the quarter, each by more than 100 basis points, with SPS leading the way as expected. On cash, we generated $1.1 billion of free cash flow, up 34% year over year.

This increase was driven by stronger net income, as well as improved working capital performance, with higher collections and good progress on inventory, where we have improved our demand planning and optimized our production and materials management using our improved end-to-end process and digitalization capabilities. Now, let's spend a few minutes on the second-quarter performance by business. Aerospace sales for the second quarter were up 16% organically, led by over 20% growth in commercial aviation. This marks the fourth consecutive quarter of double-digit aerospace organic sales growth and over two years of double-digit growth for commercial aviation, supported by strong recovery in both flight hours and higher shipset deliveries. Growth remains strongest in commercial aviation aftermarket, up over 25%, led by over 30% growth in air transport as increased flight hours resulted in higher spare shipments and repair and overhaul activity. Commercial original equipment sales also increased double digits driven by increased build rates. Defense and space grew for the second consecutive quarter as we were able to execute on our strong backlog and increase our sales volumes.

The aero supply chain continue to make progressive improvements as better material availability enabled 20% year-over-year growth and original equipment and spare shipments again in Q2. Historically high past due backlog increased again in the quarter as orders growth outpaced our backlog burndown. Segment margin in aerospace expanded 120 basis points year over year to 27.7% due to commercial excellence and higher volume leverage, partially offset by cost inflation. Performance materials and technology sales grew 7% organically in the second quarter with double-digit growth for the third consecutive quarter in both HPS and UOP.

Process solutions sales grew 11% organically, driven by strength in our projects business and in life cycle solutions and services. In UOP, sales also grew 11% organically, led by gas processing and refining catalyst shipments. Sustainable technology solutions within UOP had another standout quarter in Q2 with strong triple-digit orders growth and over 30% sales growth. In advanced materials, continued demand for flooring products portfolio was offset by expected macro-driven softness in our electronics and chemicals business, leading to flat organic growth despite challenging year-over-year comps.

Segment margin contracted 60 basis points to 21.7% as favorable price-cost was more than offset by challenges in advanced materials including lower volumes and the previously communicated disruption in one of our plants. Safety and productivity solutions sales decreased 21% organically in the quarter. Sales declines were primarily driven by warehouse and workflow solutions and productivity solutions and services. While the projects portion of our business is around trough levels and the current low investment warehouse automation environment, the aftermarket services portion of the business continues to deliver solid double-digit growth. Sensing and safety technologies was flattish in the quarter with ongoing strength in our industrial sensing product portfolio offset by modestly lower volumes in safety.

Segment margin performance for SPS once again led Honeywell expanding 410 basis points to -- to 16.7% as a result of productivity actions and commercial excellence, partially offset by lower volume leverage and cost inflation. Honeywell Building Technology sales were flat year over year on an organic basis in the second quarter. Building solutions sales grew 2% organically despite expected year-over-year order softness as we continue to execute on a robust backlog with organic growth in our services business and no change year over year in projects. Turning to our product portfolio. We continue to see sequential improvements in the supply chain environment, and we're burning down our past two backlog as expected. Building products sales decreased 1% organically as continued growth in our world-class fire products business was offset by declines in security and building management systems. Our continued commercial excellence and productivity actions have allowed us to once again mitigate the effects of elevated inflation, expanding HBT segment margin by 200 basis points to 25.5%.

Honeywell Connected Enterprise is strong. Software franchise continues to be accretive to overall Honeywell and a powerful differentiator. Overall, double-digit organic growth was supported by strength in cyber, industrial, aircraft, and buildings. Double-digit orders growth in the quarter is supportive of continued strong performance for HCE. Overall, this was a great result for Honeywell.

Our operational efforts enabled us to grow second-quarter GAAP earnings per share 21% year over year to $2.22 and adjusted earnings per share 6% year over year to $2.23 despite a 15% headwind from lower noncash income from our overfunded pension. From a year-over-year perspective, segment profit drove 21 -- $0.21 of the improvement in earnings, the main driver of our EPS growth. A lower adjusted effective tax rate contributed $0.06 of improvement, and reduced share count added an additional $0.05. Excluding the pension headwind, below the line and other created a $0.04 year-over-year headwind due to higher net interest expense for a total EPS, excluding the pension impact, of $2.38, up 13% year over year. A bridge for adjusted EPS from 2Q '22 to 2Q '23 can be found in the appendix of this presentation.

Finally, as Vimal mentioned earlier, we continue to leverage our strong balance sheet, deploying $2.1 billion in the quarter, bringing the year-to-date total to $3.7 billion as we execute on our capital deployment strategy with meaningful portfolio updates. So, overall, disciplined adherence to our best-in-class Honeywell value-creation framework provided us with the operational agility to meet or exceed our guided financial metrics. Now, let's turn to Slide 6 to discuss our third-quarter and full-year outlook. While a number of challenges persist in the current environment, our rigorous operating principles enable us to increase our guided metrics for the full year. Our demand profile remains robust with record backlog levels, particularly in aerospace and PMT, and stabilized sequential short-cycle order rates across much of the portfolio. For our Q3 sales guidance, we expect to be in the range of $9.1 million to $9.3 billion, up 1% to 4% on an organic basis. We now expect full-year sales of $36.7 billion to $37.3 billion, which represents an increase of $200 million on the low end, incorporating our strong second-quarter results.

We're raising the low end of our organic growth range, now 4% to 6%, and we continue to expect a greater balance of price and volume versus last year. We've upgraded our full-year expectations in PMT while softening our outlook for SPS to reflect our latest views on the end-market speech. Moving to our segment margin guidance, we expect the third quarter to be in the range of 22.3% to 22.6%, resulting in year-over-year margin expansion of 50 to 80 basis points due to commercial excellence and productivity actions. For full-year 2023, we are upgrading our segment margin expectations by 10 basis points on the low end to a new range of 22.4% to 22.6%, or 70 to 90 basis points, of year-over-year expansion driven by improvement in HBT, SPS, and PMP. Now, let's take a moment to walk through the third-quarter and full-year expectations by business. Looking ahead, for aerospace, we continue to be excited about demand across our end markets and expect sequential sales growth throughout the second half, supported by ongoing sequential factory output increases and strong orders.

Commercial aftermarket, particularly in air transport, should lead growth in the aero portfolio as flight hours continue to recover and we see further recovery in the widebody market from increased international travel. On the commercial original equipment side, we expect build rate strength to drive volume progression in the second half. In defense and space, we expect sequential and year-over-year growth in the second half and continue to work through our robust backlog. As a result, we expect defense and space to grow at a mid-single-digit rate for the full-year 2023. We continue to expect modest sequential improvement in the aerospace supply chain as growing commitments from our suppliers year-to-date, coupled with a second consecutive quarter of 20% output increases, give us continued confidence in our outlook. Given these factors, we still expect aero organic sales growth and the low double-digit rates.

For segment margin, we still expect aero to be flattish for the year as we see modest mix pressure within our OE business offsetting overall volume leverage. In performance materials and technologies, encouraging fundamentals persist across our end markets, driving favorable growth. For the third quarter, we expect sales to increase year over year and sequentially, coupled with a seasonally strong fourth quarter. Growth will be led by smart energy projects and life cycle solutions and services within process solutions as the strength these businesses saw in the first half continues into the second half.

In UOP, our growth outlook for the year is supported by robust demand for petrochemical and refining catalysts. The sustainability technology solutions business within UOP will also provide growth as we capitalize on legislation-backed demand. For advanced materials, we see ongoing demand for flooring products, combined with improvements in electronic materials, supportive of sequential growth from the first half. Despite more challenging comps in the second half, these favorable market conditions and our strong execution give us confidence to upgrade our full-year sales growth expectations for PMT to high single digits compared to mid-single digits last quarter. For segment margin, we expect sequential improvement throughout the year, including robust expansion in the fourth quarter, resulting in modest year-over-year improvement for overall 2023. Looking ahead, for safety and productivity solutions, our outlook continues to be impacted by the decline in capex for new warehouse capacity. However, our short-cycle businesses appear to be stabilizing as we await a demand acceleration in the coming quarters.

For the third quarter, we expect this to lead to organic sales declines similar to Q2. However, we anticipate another quarter of strong growth in the aftermarket services portion of our intelligrated business, and sensing and safety technologies should return to growth. With the SPS portfolio bouncing along the bottom of the cycle, we now expect full-year sales to be down low double digits in 2023. However, segment margin continues to be a bright spot for SPS as we implement productivity actions and drive operational improvements, and we still expect strong margin expansion for the full year.

In building technologies, the macroeconomic environment remains challenging while our team continues to execute well and burn down our past-due backlog. For the third quarter, we expect sales to be relatively flat year over year as we continue to see more challenging comps and the timing of short-cycle recovery remains uncertain. For the year, we still expect sales in our long-cycle building solutions business to outgrow the more short-cycle building products. Our institutional verticals, such as airports and education, will remain strong as we continue to see stimulus spend come through. The business is well aligned to energy efficiency and sustainability megatrends. Given these dynamics, we still expect HBT sales for the year to grow low single digits organically, and we see potential for growth acceleration as we exit '23.

For segment margins, we now expect HBT to lead Honeywell margin expansion as a result of strong inflation management and productivity actions. Turning to our other core guided metrics. Net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of negative $120 million to $170 million in the third quarter and negative $500 million to negative $625 million for the full year. This guidance includes a range of repositioning between $40 million and $85 million in the quarter and $225 million to $325 million for the year as we continue to fund attractive restructuring projects and properly position Honeywell for the future. We expect the adjusted effective tax rate to be roughly 23% in the third quarter, two points higher than our full-year guide of 21% and two points higher than 2Q, which is unchanged from our previous guidance. That implies a lower 4Q rate due to the timing of discrete items.

Importantly, this higher tax rate in Q3 reflects an approximately $0.06 headwind to EPS but will be offset by a commensurate tailwind in 4Q, leaving the full year unchanged. We expect average share count to be around 669 million shares in Q3 and 670 million shares for the full year. As a result of these inputs, our adjusted EPS guidance range is now between $2.15 to $2.25 for the third quarter, which would be down 4% to flat year over year. Excluding the pension headwinds, third-quarter EPS growth would be up 2% to up 6%. For full-year EPS, we are increasing the midpoint of our guide, upgrading the low end of the range by $0.05 for a new range of $9.05 to $9.25, up 3% to 6%, reflecting our continued confidence that 2023 will be a solid growth year for Honeywell despite the year-over-year pension headwinds. Excluding these headwinds, EPS growth would be 10% to 12% for the year.

After a strong first half and continued progress on inventory and receivables management, we expect to meet our original free cash flow guidance of $3.9 million to $4.3 billion in 2023, or $5.1 billion to $5.5 billion, excluding the net impact of settlements. So, to wrap up, our original thesis for '23 remains intact. Robust backlog of $30 billion underpins our strength -- our growth though the timing of the short-cycle recovery remains uncertain. We're encouraged by the strength of our portfolio and continue to execute on our rigorous operating playbook through a challenging backdrop to deliver outstanding results. Now, let's turn to Slide 7, and I'll hand the call back to Vimal for some long-term comments.

Vimal Kapur -- President and Chief Operating Officer

Thank you, Greg. I'd like to take a minute to zoom out from the quarterly results to emphasize the long-term journey Honeywell is on. As you can see from the charts on slide, Honeywell has made tremendous progress. Whether it is accelerating organic growth, expanding gross margins and segment margin or growing free cash flow, we have come a long way.

But we are not close to done, and we have identified the critical levers that will enable us to reach even higher level of financial performance. We remain committed to our long-term growth algorithm that we discussed during our May Investor Day and during 2023 guidance closely aligned with this framework. We carefully track our progression toward achieving our targets and remain confident in our ability to accelerate growth, achieve 25% segment margin, and expand gross margin to above 40%, and free cash flow margins to mid-teens and beyond. As I said in May, my priorities as CEO include accelerating organic growth and enhancing our innovation playbook, growing our sustainability and digitization capability and maintaining our leadership position in high-growth regions. I also plan to evolve the accelerating operating system to drive incremental value through business model optimization. Additionally, Honeywell has undergone substantial internal transformation, the result of which you can see in our top-line and bottom-line improvements over the last decade.

I plan to further optimize the portfolio through strategic capital deployment and reduce exposure to noncore areas. 3 Ds Analysis this quarter demonstrate the strength of our M&A pipeline and our commitment to deploy capital. I'm excited to lead the change for this next phase of transformation for Honeywell, and I'm confident in our ability to deliver superior returns for our shareholders. As we deploy our global design model across our portfolio, we are uncovering substantial opportunities to capture value, whether it is expanding margins, driving incremental sales growth, or generating more cash. And we will continue to update you as these efforts translate increasingly into enhanced financial performance.

Now, let's turn it to Slide 8 into closing thought before we move into Q&A. Honeywell executed very well in what remains a very dynamic operating environment. We'll continue to effectively manage the ongoing external factors while delivering on our commitment by relying on our value-creation framework. The macroeconomy remains challenging, and the timing of a short-cycle acceleration is uncertain. But with ongoing strength in our two biggest end markets, aerospace and energy, combined with operating rigor you have come to expect from Honeywell, we are confident in our ability to weather near-term challenges and meet our performance targets. Thank you all to our Honeywell colleagues who continue to enable us to outperform in any environment.

With that, Sean, let's move to Q&A.

Sean Meakim -- Vice President, Investor Relations

Thank you, Vimal. Vimal, Greg, and Anne are now available to answer your questions. We ask that you please be mindful of others in the queue by only asking one question. Liz, please open the line for Q&A.

Questions & Answers:

Operator

Our first question comes from the line of Andrew Obin with Bank of America. Andrew, your line is now open.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Can you hear me? Yeah, Can you hear me?

Sean Meakim -- Vice President, Investor Relations

Yep. Good morning, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yeah, good morning. Just a question on advanced materials. So, you know, it's a -- it's a good return business. When should we expect this business to return to growth? And also, you know, do you guys need to add capacity to grow this business? How strong the structural demand is? Thank you.

Vimal Kapur -- President and Chief Operating Officer

Yeah, thanks, Andrew. So, I think the -- the key is the comps of advanced materials to 2022, we grew more than 20% last year. So, combine that with some of the weaknesses we see in electronic material side, we are having a moderate year for advanced material this year. We do expect markets to turn better during second half and, more importantly, in 2024.

To your question on capacity expansion, we remain very excited. In fact, in the next track cycle, we expect more capital investment increase our capacity for advanced materials for some of the existing offering and potentially some new offerings. So, overall, we remain very bullish on advanced materials portfolio.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Our next question comes from the line of Steve Tusa with J.P. Morgan.

Steve Tusa -- JPMorgan Chase and Company -- Analyst

Hey, good morning, guys.

Vimal Kapur -- President and Chief Operating Officer

Good morning, Steve.

Steve Tusa -- JPMorgan Chase and Company -- Analyst

The underlying -- I guess, on the positive side, the very strong margin in aerospace, tough to kind of, like, cut through, you know, the OE incentives. Was there anything unusual there, like, with the OE incentives? You know, we just don't know the quarterly timing of those. I mean, I'm -- I'm kind of getting to an underlying incremental of around, like, 40% for that business if we adjust for some of these OE incentives. Can you just maybe talk about some of the moving parts there and whether I'm roughly right on the math?

Greg Lewis -- Senior Vice President, Chief Financial Officer

Yeah, so the OE incentives is -- we -- we haven't disclosed the exact amount of them, but the first half is going to be a little lighter than the second half in terms of those OE incentives. So, that's why, you know, when we talk about the full-year margins, still being flattish even though we had a pretty strong Q2. I think that's -- that's really what's going on in that regard.

Steve Tusa -- JPMorgan Chase and Company -- Analyst

OK. And then, just one last one on HBT. You know, that business just perhaps should be growing better in this environment. I -- even -- even building solutions was kind of, like, you know, weak.

So, there's really not a function of these that's really can't be a function of destocking. So, maybe, you know, what -- what are the moving parts there? And why are you guys not keeping up with, you know, the other non-res players out there? Thanks.

Vimal Kapur -- President and Chief Operating Officer

Yeah. So, Steve, we -- we are conscious of our margin rates in HBT and make careful selection of our projects, which have adequate margins and strong service tail. So, we think, given that choice we make, you can see impact of that in margin expansion of building technologies. And that comes, to a certain degree, at the organic growth, you know, rate. So, it's a choice to be made.

And we want to deliver both in ideal world, but we remain biased more toward growth in margin expansion versus the top-line growth.

Steve Tusa -- JPMorgan Chase and Company -- Analyst

Great. Thanks a lot.

Operator

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

Sheila Kahyaoglu -- Jefferies -- Analyst

Good morning, guys, and thank you.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Hi, Sheila.

Sheila Kahyaoglu -- Jefferies -- Analyst

I wanted to ask an aerospace space specific one if that's OK. Last quarter, you raised your aerospace guide to upload double digits. And I think the bulk of the raise had come from the OE side, which you guys are doing well in. But there's been a bunch of moving pieces this quarter with the MAX officially going to 38 per month yesterday. And then, of course, engine issues could force, like, a build -- newbuild versus spares issue at Airbus on the A320.

So, kind of how are you thinking about the puts and takes for aerospace OE as we get into the second half following 15% growth in the first half?

Vimal Kapur -- President and Chief Operating Officer

So, Sheila, our deliveries for the year are pretty well aligned with all OEs, both on 8 -- on air transport as well as on the business -- business jet side. We have our commits to all key OEMs on for Q3, Q4, and our projections are based upon those commit rates. So, I can't comment on their -- their commitments to their customers, but we are pretty well aligned, our commits to them, and our revenue growth and our volume growth is linked to that. And it's going to be pretty strong.

I mean, we expect the momentum in aerospace not to change in 2023 or, for that matter, even in 2024. Our backlog is extremely strong, and our supply chain continues to improve every quarter.

Greg Lewis -- Senior Vice President, Chief Financial Officer

And the recent events have not changed their expectations of us to this stage.

Sheila Kahyaoglu -- Jefferies -- Analyst

Got it. Thank you very much.

Operator

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

Julian Mitchell -- Barclays -- Analyst

Hi, good morning. Maybe just my question would be on SPS. Just wanted to try and understand, you know, how the sort of orders and backlog there is moving. I can imagine it's not moving well, and that's why the revenue guide has come down.

But any finer points on the -- the orders and backlogs? And I suppose -- and the conviction level around warehouse accelerating next year if that's starting to get sort of tested now because of the ongoing backlog pressure. And, you know, if we're thinking about the shorter-cycle businesses, you know, how severe do you think the -- the inventory depletion needs are in that business? And what does that mean for exit rates in SPS from this year on the top line?

Greg Lewis -- Senior Vice President, Chief Financial Officer

Sure. So, I would say if we take IGS first, you know, our order rates are down, you know, meaningfully as we've -- as we've talked about as -- but when we look at the overall pipeline, we're starting to see the pipeline build back to a little bit better levels. That may not occur, you know, immediately, but we see there is a chance that we may be growing again in 2024. That will really be dictated by how the back half orders really -- really come in.

But we are starting to see a little bit more strength in the pipeline, which I think is a positive. As it relates to the short-cycle business, what we talked about, it's -- it's down year on year because the first half of the year was particularly high. But we're seeing stabilization, and the last two to three quarters have been either going up sequentially or staying roughly flat. So, I think we've reached a stabilization point on the short cycle.

And, you know, as and when some of those markets begin to recover, you know, then we'll see some growth. So, as we think about SPS overall, I would expect it's going to grow in 2024. It's probably not going to be at the high end of our -- of our growth rate for our SBGs, but that's how we see it with the data that's coming through right now.

Julian Mitchell -- Barclays -- Analyst

Thanks very much.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Yep.

Operator

Our next question comes from Scott Davis with Melius Research.

Scott Davis -- Melius Research -- Analyst

Hey, good -- good morning, everybody, and welcome, Vimal.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Hey, Scott.

Scott Davis -- Melius Research -- Analyst

A couple of small things here. One, I mean, you guys are spending a couple of hundred million a year on quantum. Well, do you have a kind of an evolved vision of, you know -- of -- of -- of where this business goes and how you can monetize it when you can monetize it? If, you know -- is it a -- you know, can the cash flow bleed go down, you know, a little bit over time? Or is there some kind of positive end game that you -- you see here?

Vimal Kapur -- President and Chief Operating Officer

So, Scott, I mean, we have publicly stated that we would like to monetize value of the quantum investment we have made in continuum. And as the markets are more ready for IPO, which probably are here for a while, we are -- we are getting prepared for that. So, we are doing everything toward that end game, and the strategy hasn't changed to create more value for our shareholders at -- at appropriate time through -- through an IPO for that business.

Scott Davis -- Melius Research -- Analyst

OK, fair enough. And just quickly, I -- just following up on Steve's question, I mean, I would have thought Forge for Buildings would have given you a little bit of a lift given the timing of when you rolled that out, you know.

Vimal Kapur -- President and Chief Operating Officer

Mm hmm.

Scott Davis -- Melius Research -- Analyst

I -- I understand project selectivity, but I would have thought that would have given you a little bit more of a tailwind into the quarter. Is there timing issues there, and that those orders haven't really kicked in yet, and we'll see that later in the year? Or is there other competitive dynamics?

Vimal Kapur -- President and Chief Operating Officer

Look, I mean, we are definitely seeing better bookings for Forge for Buildings, but one fact I would like to state is that business runs on a SaaS model. So, even a large booking, the revenue recognition process is different from traditional perpetual license-based model. So, the revenue accretion is going to spread over multiple years for that. And we have consciously made that decision because rather than showing a short-term win, we are more biasing ourself toward more recurring revenue model there as I stated before. So, that's why you see lesser impact.

But we are scoring wins in Forge for Buildings, and I continue to remain very, you know, bullish on that segment.

Scott Davis -- Melius Research -- Analyst

OK, fair enough. Best of luck, Vimal.

Vimal Kapur -- President and Chief Operating Officer

Thank you, Scott.

Operator

Our next question comes from Nigel Coe with Wolfe Research.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. Good morning. Thanks for the question. Just wanted to -- to maybe just put a final point on Julian's point -- question on SPS.

So, obviously, encouraging signs of a bottoming process here, but it does feel like the guidance embeds a flat to maybe -- maybe flattish, plus or minus growth, in the fourth quarter. I just want to make sure that's the case. And you have a good answer on that. And maybe on HBT, just -- just break down geographically what you're seeing versus, you know, North America, Europe, and China, and whether there's any channel dynamics here that we should think about as well.

Vimal Kapur -- President and Chief Operating Officer

So, I'll start with this, then I'll turn to Greg for -- respond to the SPS question. I think HBT, from a geographic perspective, we -- Europe continues to be, you know, where we want to have better -- better outcome. I think that's a bit of a drag at this point. The strength is in high-growth regions.

We see strength in Middle East, India, and China in buildings. And North America is more of, I would say, sequentially no change within the business. So, that's kind of our overall dynamic. On the channel side, I mean the channel demand will be determined by the end market demand. So, we -- it's a very short-cycle business.

So, we don't see any dynamics of channels having less or more inventory in the HBT business. Maybe, Greg, you want to respond to the SPS question?

Greg Lewis -- Senior Vice President, Chief Financial Officer

Yes. So, SPS, it's -- it's likely to be down in the fourth quarter. So, I would say it's not going to be flattish; it's going to be probably more, like, down. I think 3Q and 2Q are going to look pretty -- pretty similar to one another, and then we'll get a little bit of a normal seasonal bump in the fourth quarter.

So, that's -- that's the way I would think about the progression for SPS top line overall.

Nigel Coe -- Wolfe Research -- Analyst

Great. Thanks.

Vimal Kapur -- President and Chief Operating Officer

Yeah, thank you.

Operator

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

Jeff Sprague -- Vertical Research Partners -- Analyst

Hey, thank you. Good morning, everyone.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Good morning, Jeff.

Jeff Sprague -- Vertical Research Partners -- Analyst

I was going to ask -- I was going to ask a near-term question, but then, well, given your response about margins in HBT, I wonder if we could maybe just zoom out and just kind of think philosophically about kind of the trade-off between growth and margins, right? You know, we have seen situations in the past where companies with high margins get, like, a -- for lack of a better term, a little bit trapped and wanting to maintain and grow the margins, right, and growth ends up suffering as a result. So, could you -- and you addressed this to some degree, obviously, when we were together in New York. But could you maybe elaborate a little bit more on your philosophy, you know, relative to managing those two metrics and how you make sure you don't hinder growth by overly focusing on margins?

Vimal Kapur -- President and Chief Operating Officer

Yes. Our business model in HBT is combination of serving the market, both through direct and channel. So, we have to make choice what -- what business we want to serve direct and what business we want to serve through channels. And in direct, we want to pick projects which have a strong first-party content and aftermarket services. So, given that algorithm, we -- we make choices with that rule. And I -- you know, we are sensitive to drive top-line growth, but we are not going to compromise to book projects which are lower margins and show shiny top-line growth without any margin expansion.

That has been our principle. And the reason we are quite determined on that principle is it takes one bad project to deteriorate the entire business and the portfolio. So, we remain, you know, committed to that model. And I'm not suggesting that we will not see growth in building technologies. I do believe that, as energy efficiency becomes more prominent across the board, our energy business there will do well, and we will deliver more growth in the project side of the house too. But that remains our -- our overarching --

Jeff Sprague -- Vertical Research Partners -- Analyst

Yeah, thank you. I sort of meant the question on a total Honeywell basis also, though.

Vimal Kapur -- President and Chief Operating Officer

OK. On total Honeywell basis, I mean, organic growth on the top end of our range is my biggest priority. I stated that in Investor Day. It's something I want to make my contribution in my tenure is how we grow at a higher rate.

Now, we are having favorable macros in two of our biggest SBGs, both in aero and PMT. So, on the strength of that and if we couple that with the right new products, I see no reason that we should be delivering our growth in upper end of our four to seven algorithm. And that's what I work on every day and continue to drive our new product execution, and then M&A accelerating our overall growth algorithm. You know, that -- that remains my top commitment.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you for the perspective.

Operator

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi, Good morning.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Hey, Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hey, just want to maybe flip around the HBT question from the other perspective. On PMT, I mean, you're seeing some of the bulk chemical guys go through destocking. I think traditional oil spending has been OK but maybe not as strong as what you guys are seeing -- seeing and some of the other process guys are seeing. I guess, just how much are we getting away from kind of traditional oil versus either some of these megaprojects or energy transition? Like, is this business really transcending its roots of even kind of five, six, seven years ago?

Vimal Kapur -- President and Chief Operating Officer

Sure. So, Josh, if I look at each of the three segments, the -- our automation business process solution has increasingly reduced its dependence on oil and gas. It has diversified very well in other end markets, energy storage, you know, the gigafactory, metals and mining, etc. So, we can see that in the growth rate of revenue generation for process solution, and we remain very bullish on that business for 2023 and 2024.

The UOP segment, our strategy has been to grow our business into sustainable technologies, renewable fuels, clean hydrogen, carbon capture. And we see pretty strong bookings in our, you know, sustainable technologies business. Just as a data point, now we have licensed 40 renewable fuel projects till Q3 and on a path to be 50 by, I would say, Q1 of 2024, which we -- I mentioned in a couple of earlier investor meetings. So, UOP business is becoming also less linked to traditional refining petrochemicals but fast moving toward renewable technology. And in advanced materials, our business is very specialty chemicals.

Solstice product line continues to grow. We see some pressure in electronic materials, which is reflected in our overall growth rates. But we do expect that to turn back into normalcy in 2024. So overall, the -- extremely positive outcome and bullish, you know, view on PMT for second half of 2023 and 2024.

The booking rate remains strong. Backlog is very strong. New innovation pipeline is very, very strong. So, all good news there.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Understood. Thanks.

Operator

Our next question comes from Joe Ritchie with Goldman Sachs.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning, guys.

Vimal Kapur -- President and Chief Operating Officer

Hey, Joe. Morning.

Joe Ritchie -- Goldman Sachs -- Analyst

It's just -- just real two -- two quick ones. I guess -- I guess, just on SPS, we've talked a little bit about the growth dynamics for the -- the year. I'm just curious how the reduction in the short-cycle businesses is perhaps impacting margins for the second half of the year. And then, the other question was really around the defense business. It's nice to see the inflection there.

I'm just curious, at what point do you really start to see an acceleration in defense growth, just given what you know about your production schedules?

Vimal Kapur -- President and Chief Operating Officer

So, the -- with the way we have guided it, we are, you know -- short-cycle orders have stabilized, and we are expecting similar trend over the next few months. And our guidance is based upon that. We are expecting stronger performance in warehouse automation orders because the pipeline has become better. But that will really strengthen our 2024 position given the long-cycle nature of the business. And that's our forecast right now, and we'll continue to update you if things change.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Yeah, and I would just say, Joe, you know, we have -- the teams have, you know, resized their costs envelope to the current reality. And as and when the short-cycle businesses reaccelerate, you know, you can imagine those are very high margin at the DCM level.

Vimal Kapur -- President and Chief Operating Officer

Yeah.

Greg Lewis -- Senior Vice President, Chief Financial Officer

And that will create a lot of acceleration from a margin rate standpoint. So, you know, the margin rates that we're going to be printing now are going to be within a tighter band until we see that acceleration come, but the business is poised for it. And we'll see. Is that going to be Q4, is it going to be Q1, you know, remains to be seen, but we've sized the business properly. And there's going to be a fairly substantial leverage opportunity, you know, when that acceleration happens.

Joe Ritchie -- Goldman Sachs -- Analyst

And then, here, a question on defense, when we could see an acceleration in demand there?

Vimal Kapur -- President and Chief Operating Officer

Yeah. So, yeah -- so, on defense, we -- our bookings remain very, very strong. So, we are working our supply chain constraints there, and we do expect our delivery performance to be better in second half versus first half. So, we had low single digits in the first half of the year.

We expect the year to finish more on the mid-single digits for the defense business.

Greg Lewis -- Senior Vice President, Chief Financial Officer

And from here, though, the -- we've passed probably the -- the comps where, you know, small increments are going to create meaningful growth from a percentage basis. So, it should be all -- all, you know, accretive from this point on.

Vimal Kapur -- President and Chief Operating Officer

And also -- I should also mention, we see, you know, longer term, for the defense business pretty strong demand outside the United States. As we can all imagine, the recent war in Ukraine has created more -- higher budgets by different governments. And we clearly see those signals coming to us in terms of demand from NATO countries, other friendly countries. And that will play out even more stronger for the defense business in the times to come.

Joe Ritchie -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Vimal Kapur -- President and Chief Operating Officer

Good morning.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Hey, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, just want to circle back on SPS if we could. On warehouse automation, what are you seeing in the pipeline that suggests a bottoming? And then, a related question is, can you give us any sense of when you'll hit this targeted critical mass of installations that will drive that flywheel of attractive aftermarket? How close are you to that? You know, what kind of time frame?

Vimal Kapur -- President and Chief Operating Officer

Sure. So, the pipeline is growing very nicely, and that gives us a little bit more optimism on better orders performance for the business in the second half of the year. And the part of the pipeline growth is driven by much more diversified end markets we serve now. So, we are not limited to e-commerce.

We are diversified into retail, into fashion, into logistics. So, that's why their coverage is giving us a better pipeline, and, you know, we -- we are -- we are anticipating good progress in the orders in the second half of the year. On the aftermarket flywheel, I would say it's been working now. We are growing double digits in aftermarket in 2023 and will cross our aftermarket business more than half a billion dollars in bookings and pretty much nearly the same revenue for the year. And we don't expect that momentum to stop. That's our strength.

Honeywell has a strong playbook on how to drive aftermarket services, and that's where value will continue to add into the business. And our, you know, strength in that business in 2024, therefore, we anticipate, you know, low to moderate growth but very strong margin expansion because we continue to build more business with more first-party content and very strong aftermarket. And we coupled the two together, we do expect pretty healthy margin growth in warehouse automation business in 2024.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Yes, I mean, that that business was around 200 million of the total in '18. By 2022, it doubled to roughly 400 million. As Vimal said, this year is going to be over 500 million.

Vimal Kapur -- President and Chief Operating Officer

Aftermarket business, yeah.

Greg Lewis -- Senior Vice President, Chief Financial Officer

So, that aftermarket is happening.

Deane Dray -- RBC Capital Markets -- Analyst

Great. Thank you

Vimal Kapur -- President and Chief Operating Officer

You're welcome.

Operator

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

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah, thanks, guys. Good morning.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Good morning.

Nicole DeBlase -- Deutsche Bank -- Analyst

Just maybe on PMT, if you guys could talk a little bit more about the order activity you saw within UOP and HPS in the quarter. And then, on the margins, you talked about the challenges in advanced materials. I guess, how does that kind of phase through the second half of the year? Thank you.

Vimal Kapur -- President and Chief Operating Officer

The orders -- orders remain pretty strong in first half for UOP and HPS. And then, we expect to finish the year strong in both the businesses. I would say high single-digit orders growth in both UOP and HPS. And I explained the rationale of it.

In HPS, it's more diversified end markets and our -- strength of our aftermarket business there. In UOP, it is diversifying to renewable technologies. And as they become more and more important part of our portfolio, it continues to grow the business. And in UOP, the catalyst business continues to have a lot of strength in both refining and petrochemical catalysts.

Advanced materials, as I mentioned, 22 -- 22 -- 2022 was an outstanding year, 20% plus growth. So, our comps year on year are tough. The margin rates are, you know, driven by some of the plant shutdown which we had announced earlier. So, that certainly put pressure on our cost positions. And then, some contraction in electronic materials business, which is depressing our margins.

But overall, it's a still highest-margin business in the PMT portfolio. And as mentioned before, with the potential capacity expansion coming in years to come, this business is poised to, you know, perform very well in our portfolio.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Yeah, Nicole, if you think about this year, we're -- we're literally going to progress each and every quarter or sequentially a little bit better. You know, we picked up about 110 basis points sequentially from 1Q to 2Q. We expect, you know, some additional sequential improvement in Q3 and then again in Q4. So, you know, I think, as we get to the end of the year, it'll look like modest year over year for the full year, but it's going to be a nice sequential step-up quarter to quarter to quarter.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks, guys.

Vimal Kapur -- President and Chief Operating Officer

Thank you.

Sean Meakim -- Vice President, Investor Relations

Liz, we have time for one more question.

Operator

This question comes from the line of Andrew Kaplowitz with Citigroup.

Andy Kaplowitz -- Citi -- Analyst

Good morning, everyone.

Greg Lewis -- Senior Vice President, Chief Financial Officer

Hey, Andrew.

Andy Kaplowitz -- Citi -- Analyst

Vimal, could you talk about the stepped-up level of acquisitions you did in the quarter? Would you expect that kind of activity to continue over the next few quarters? Have you changed any of your methods for assessing potential acquisitions? I think, you know, given the Investor Day, you probably didn't, but could you talk about the pipeline of opportunities going forward?

Vimal Kapur -- President and Chief Operating Officer

So, look, Andrew, the pipeline remains extremely strong. We are actively working more outbound activities in M&A and remain very optimistic if we can get the deals done at the right price, because one thing we are not going to compromise is our deal metrics. We want to stay disciplined to create shareholder value, but at the same time, our number of opportunities in the play are at a much higher elevated level compared to, you know, this time in the past. So, Anne, if you want to add any comment, you know, from your perspective?

Anne Madden -- Senior Vice President, General Counsel

Yeah, I would just add, the pipeline is growing, it's rich. We feel good as a strategic acquirer. We -- we maintain the view that it's a hospitable environment for strategic acquirers while the private equity community still -- you know, is having a harder time financing. So, it's a good time for us to be a buyer, and we expect that environment to continue into 2024 and beyond.

Vimal Kapur -- President and Chief Operating Officer

Thank you.

Andy Kaplowitz -- Citi -- Analyst

Thank you.

Operator

Thank you. I'd now like to turn the call back over to Vimal Kapur for closing remarks.

Vimal Kapur -- President and Chief Operating Officer

Thank you. Our value-creation framework is working. We are deploying our rigorous operating playbook to navigate near-term uncertainty. Honeywell remains well positioned to outperform in any environment as we capitalize on recovering end markets combined with solid operational execution. Thank you, all, our Honeywell colleagues, who continue to drive differentiated performance for all our customers and shareholders. Thank you for listening and please stay safe and healthy.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sean Meakim -- Vice President, Investor Relations

Vimal Kapur -- President and Chief Operating Officer

Greg Lewis -- Senior Vice President, Chief Financial Officer

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Steve Tusa -- JPMorgan Chase and Company -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Julian Mitchell -- Barclays -- Analyst

Scott Davis -- Melius Research -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Andy Kaplowitz -- Citi -- Analyst

Anne Madden -- Senior Vice President, General Counsel

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