Honeywell Aerospace Inc. Common Stock Morgan Stanley's 14th Annual Laguna Conference

Good morning. How are you today?

Yeah. First and foremost, I'll hit on the negative. It's undoubtedly very clear the most negative thing that has happened since the separation was the fact that we had to revise our guide on a full year basis for 2026. Some of the things that we were expecting from a supply base standpoint to unlock and some of the transformation initiatives that we had in works were not materializing at the pace that we had expected them to. It's largely attributable, a couple of things, some delays and transitions that were occurring, some delays in second sources that were coming online, and then also some yield and quality issues that were occurring with those transitions and/or those second sources.

As a result of those moving to the right, it required us to do an adjustment to our guide for 2026, and I would say understandably, and that is the most negative thing coming out of the spin, relative for us in our first couple of months. On a positive note, coming out of that revised guide, it's really reflective of the speed at which we can move as well as a standalone, as opposed to being a part of the conglomerate.

The way we've reacted as a result of that issue that we have encountered with our supply base, and the fact that some of that transitions were moving to the right, is the speed at which we were able to change the operating system, the speed at which we've been able to change some of the ways we wanted to invest in the supply base to continue to unlock more going forward. Those are things whereby without the layers of the conglomerate to have to go back and see how we want to invest and where we want to move capital and the like, that allows us that ability with none of those layers in place to be able to move at speed. That's actually been a very positive as a reaction from this.

I think the second positive I would make mention of is the resiliency of the demand that we have coming into Honeywell Aerospace. Even though we've had an inability to meet the current demand profile as required by our customers, whether it's commercial or whether it's defense, what we've noted is that the resiliency of that demand, the resiliency of the order book, the resiliency of the backlog that we have, has been untouched and is actually at record levels for us on a go-forward basis. I think those are the two that I would say are very positives, but obviously offset by the major negative that we had to do.

From a priority standpoint, I don't think anything has changed. The way we attack those priorities is changing as a result. I'll go back to the supply chain issue that I mentioned a moment ago. How we were addressing it, the level of focus that was being applied to it, the operating system that we have built around that is changing. Case in point is that as a result of what transpired here, we have roughly 10 or so suppliers that we consider to be constrained. Those are suppliers that just cannot meet the demands for our products and our portfolio across both commercial and defense.

I personally spend my time with them as a result of that, going to their facilities, working with my counterparts at those sites, looking at the root causes, identifying the action plans associated with resolution, and then a weekly cadence of follow-ups with them, making sure that we're on plan. We're seeing the benefits of that materializing as well as a result. We'd have sunrise meetings, sunset meetings. Sunrise meetings are associated with truly what is needed for this week, next week, the following week. The sunset meetings are strategically around the transformation initiatives that we have in place. That's how we're re-energized and refocused around the operating system to attack those particular issues. The priorities are the same. It's just the way we are going after them with a much higher sense of urgency and speed and reinvestment profiles is really what has changed.

Yeah, it's a really good question, and I think we have to go on a little bit of a historical journey here as part of the conglomerate of Honeywell as we were operating within. It really starts back in about the 2010 timeframe. From 2010 to 2019, as the industry for A&D was not growing at the levels that we see today, there was an initiative that was launched around maximizing our supply chain efficiency, maximizing the productivity. So we went very heavy in single sourcing across the supply base. We went very heavy on outsourcing across our supply base. I am not saying that others in the A&D industry did not do that, but I would argue, did they do it at the same scale at which we were doing it? The way I look at that is the data point.

If you look at how our margins were growing over that period of time compared to our peers, is sort of indicative of the scale upon which we exercised that operating playbook and the depth and the breadth that we did across that playbook. Now you pivot into the 2020, 2022 timeframe. COVID hits, and that was really a huge distinguishing moment between ourselves and the rest of our A&D peer group. Again, as part of the conglomerate of Honeywell, the focus was preserving margins at all costs. So there was a substantial amount of cost-cutting that was occurring across the organization, and doubling down on that supply chain initiative that I mentioned a moment ago. In the aerospace part of the business, we fully recognized that demand was going to come back.