Good day, ladies and gentlemen and welcome to the Honeywell's Second Quarter Earnings Release. At this time all participants are in a listen-only mode, and the floor will be opened for your questions following the presentation. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Reena Vaidya, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Jake. Good morning, and welcome to Honeywell's second quarter 2021 earnings conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; and Senior Vice President and Chief Financial Officer, Greg Lewis. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Note, that elements of this presentation contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our annual report on Form 10-K and other SEC filings. This morning, we will review our financial results for the second quarter of 2021, share our guidance for the third quarter and provide an update to our full year 2021 outlook. As always, we'll leave time for your questions at the end. With that, I'll turn the call over to Chairman and CEO, Darius Adamczyk.

Thank you, Reena, and good morning, everyone. Let's begin on Slide 2. We delivered another outstanding quarter, that exceed the high end of our second quarter organic sales growth, segment margin, and adjusted earnings per share guidance range, with top line growth and margin expansion in all four segments. We delivered organic sales growth of 15%, led by double digit growth in Safety and Productivity Solutions, Honeywell Building Technologies and Advanced Materials, and Performance Materials and Technologies. We also returned to growth in the commercial aerospace aftermarket and UOP, amid promising signs of recovery in all the oil and gas and Aerospace markets. Segment margin expanded 190 basis points to 20.4% driven by the impact of higher sales volumes. Adjusted earnings per share was $2.02, up 60% year-over-year and $0.06 above the high end of our guidance range. We delivered a strong second quarter and a first half of the year. I'm pleased with our performance and confident it will continue to execute and deliver through the ongoing recovery in our end markets. We're driving near-term growth in several areas of the portfolio, including warehouse automation, productivity solutions, building products and advanced materials. While the industries most affected by the pandemic, will continue improving throughout the year and into 2022. Orders were up over 20% year-over-year organically, driven by strength in Aerospace, PMT, HBT, and Productivity Solutions, creating a strong setup for growth. As always we continue to execute on our rigorous and proven operating system to drive outstanding shareholder value.

Thank you, Darius, and good morning everyone. As Darius highlighted, we had a very strong second quarter, with sales up 15% organically, to $8.8 billion. Segment margin expansion of 190 basis points to 20.4% and free cash flow of $1.5 billion. We over delivered on our commitments again, building on the strong start we had in Q1. Let's take a minute to discuss how each of the segments contributed to that. Starting with Aerospace, second quarter sales were up 7% organically, as flight hours continue to improve, resulting in double-digit commercial aerospace aftermarket growth. That was partially offset by lower commercial original equipment and software defense volumes. Business aviation continues to be very robust, where flight hours have already returned to 2019 levels, as a portion of customers that previously travel commercially have transitioned to business jets, for health and safety reasons. We continue to expect the recovery in business travel, to lag the leisure travel recovery, however. We do expect to pick-up as we enter the second half of the year. As expected, air transport flight hours are recovering led by narrow body flight hours, while widebodies remain soft, as domestic travel recovers faster than international travel. As a result, our business aviation aftermarket sales were up 90% organically year-over-year, while our air transport aftermarket sales were up 32% year-over-year organically. Sequentially, overall commercial aftermarket sales were up 12% from 1Q '21, a promising sign that the recovery is gaining traction. Aerospace segment margin expanded 490 basis points to 25.7%. Turning to Building Technologies sales were up 13% organically, driven by robust demand for building products and solutions. We are seeing broad based strength across the Building Technologies portfolio and around the world, as people return to schools, offices and transportation hubs. Building Product sales and orders were both up double digits year-over-year, driven by demand for fire, security, and electrical products, as well as building management systems. Orders for Building Solutions projects and services were up over 25% year-over-year and the services backlog is up more than 30%, positioning the business for future growth. In addition, our portfolio of healthy Building Solutions maintain strong customer momentum, with approximately $90 million of orders booked in the second quarter for our total of approximately $150 million in the first half.

Thank you, Greg. Current end market macro dynamics are creating the best set of circumstances that I've seen in the last 10 plus years, that I've been with Honeywell. The commercial aerospace recovery in view, upcoming capital reinvestment in the energy sector, non-residential construction spending returning 2019 levels and the exponential growth we continue to see in e-commerce, we are setting up an incredibly strong runway for medium-term growth. This macro setup, coupled the strategies we have in place that our focus in driving uniquely innovative and differentiated technologies that address the world's increasing demand for digital transformation, process technology and sustainable solutions, gives me great confidence in our outlook for 2022 and beyond. Let me start by talking about the medium-term dynamics in some of our key end markets. In commercial aerospace pent-up demand for leisure and business travel is expected to drive approximately 20% growth in flight hours, over the next two to three years. Business in general aviation flight hours have already recovered to 2019 levels. And we expect air transport narrowbody and widebody flight hours to recover by 2024. We are seeing a slower defense business, we are absorbing that in our strong 2021 outlook, and our growth trajectory for the next two years should remain robust. The energy markets are gaining traction and stabilizing oil prices, support an oncoming wave of capital reinvestment in this sector. With downstream customer CapEx expected to grow at a 6.5% compound annual growth rate over the next three years. As I said before, the investment cycle post downturn is a consistent theme and will be well positioned to capture our unfair share of it. Acceleration, refining and petrochemical volumes will drive demand for our high-margin catalyst in new greenfield and brownfield projects, over the medium term will drive demand for licensing, engineering and equipment, as well as our software and automation solutions. Our Building Technologies portfolio will continue to benefit from the ongoing global macro trends of sustainability, digitalization and public safety. Building owners are looking for healthy building solutions to create safe public spaces while optimizing energy consumption and productivity. Non-residential construction is expected to grow by $230 billion to $2.5 trillion by 2024. With refurbishments for healthy building is growing at a high single-digit compound annual growth rate over the next three years. We also expect tailwinds from sizable U.S. stimulus programs targeting airports, education and healthcare, as well as potential government infrastructure plans, which will provide a favorable setup for our Building Technologies business. We remain very well positioned to address the rapid evolution, that we see in the click and the collect consumer buying behavior, which is creating complex fulfillment and delivery needs. In fact, e-commerce is expected to make up approximately 30% of total retail sales by 2024. To meet this growing demand, as well as to prepare for intensifying labor shortages, retailers are meaningfully stepping up investments, and work flow technologies and automation, amplifying our already strong trajectory in this market, with our growing installed base and ample runway for high margin aftermarket opportunities. So, you see our macro setup is a strong, that has been a very long time. Now, let's turn to the next page. I want to highlight a few of our strategic vectors and that will play into our growth algorithm. Let's start with urban air mobility or UAM, one space where we see significant growth opportunity. The total available market will be around $120 billion annually in 2030, of which we are positioned to address $30 billion. We have leading fly by wire systems for a urban air mobility, avionics, in-vehicle management systems. In addition to highly differentiated, high assurance detect and avoid systems. We have already won $3.4 billion of content and another $1.8 billion of wins pending. And we have $7 billion in projected cumulative pipeline over the next five years, growing to $55 billion in cumulative pipeline out to 2030. So this is a really exciting business where we are already generating substantial wins with significant future potential. We're also generating growth through the Honeywell Connected Enterprise, which is underpinned by Honeywell Forge, our suite of SaaS applications, that drive operational excellence and are essential to day-to-day management of companies complex operations. Honeywell Connected Enterprise delivered double-digit recurring revenue growth, in orders were up over 20% in the second quarter, which serves as an excellent proof point, as we continue to focus on driving software growth. We are also recently launched a cloud-based connected building solutions, jointly developed through our SAP partnership. Our portfolio of connected solutions is demonstrating great momentum with 1 million instances of Tridium's Niagara deployed worldwide and over 5,000 Honeywell Forge OT cybersecurity projects delivered, to name a few examples. One of the newest additions to our portfolio, Sparta Systems, is also contributing to Honeywell software growth, with orders up over 30% in the first half of 2021. Sparta SaaS customer base has grown double digits since year-end 2020 and Sparta ended the second quarter of a backlog of over $100 million. Sparta systems recently announced that a leading European specialty pharmaceutical company implemented track wise digital solution suite, that includes , in addition to complaints handling, supplier quality management, document management and training management, to seamlessly integrate quality processes in data across its manufacturing operations and suppliers. So the Sparta integration is progressing smoothly, and I'm pleased with the results thus far. Finally, we continue to see strong demand for our portfolio of healthy building solutions, which I mentioned earlier. We booked around $150 million of healthy building orders in the first half and have a global pipeline of over $2 billion. A few examples of our customer wins across major verticals, include the Pittsburgh and San Diego International Airports, Syracuse University, and Wuhan Changfu Hospital. We anticipate the demand for healthy buildings will remain strong for the foreseeable future, is building managers seek to support occupant safety and comfort for returning workers, students, travelers and visitors. All four of the technologies on this page are proof point for our strategy of focusing R&D and breakthrough initiatives around disruptive trends, that will shape the global economy for years to come. We have many other equally exciting breakthroughs including quantum, sustainable technology solutions and smart cities for as an example. These provide numerous growth vectors which will be accretive to the recovery in our major end markets, which underpins my confidence in what is to come. Now, let's wrap up on Slide 10. So overall, we are encouraged by the performance of the first half of 2021. Our second quarter results exceeded expectations and given our confidence in our businesses. We have a meaningfully raised our full year sales segment margin, adjusted EPS and free cash flow guidance. The Honeywell value creation framework continues to set us apart and we'll continue to deliver for all of our shareholders. With that Reena, let's move to Q&A.

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

We will begin with Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning.

Good morning. There's a lot of to ask. Actually, I'm just -- to the quantum, one thing that interested me in your comments there Darius, obviously the technology stuff is interesting. But the commercialization revenues of $1 billion, as soon as two years. I wonder if you could kind of talk a little bit about the difference between the two year and the five year framework there? Is there something in terms of a technical breakthrough -- further technical breakthrough that's required? Or it's more an issue of just developing the business model and kind of getting a customer set onboard with what you're doing here?

Yes. Well, I think, Jeff, more importantly it's a toggle between focused on progressing that technology versus focusing on commercialization. This business is generating revenue today for CQC and it's generating revenue today for Honeywell Quantum Systems. And we could focus on energy -- our energy and continuing to drive commercialization, but we're trying to be balanced between -- yes, driving some commercialization, securing some blue chip customers, but also continue to advance the technology. I mean, this isn't necessarily an instant gratification kind of a business, because if we just over function to commercialization, although we have a year or two lead on just about everybody else in the industry, that could get short change, if we don't continue to advance it. But I think that's more than anything. So the two to four year kind of a number is based on both how we see the technology evolving or two to five, and also how we see really us focusing on technology progress versus commercialization. And I think we want to maintain both, and not necessarily just full toggle to commercialization, because I think that could sacrifice progress on the technology.

Understood. Thanks a lot.

Thank you.

We'll now move to Scott Davis with Melius Research.

Hey, good morning guys.

Hey, Scott.

Good morning.

Good morning. You didn't fixate as much on supply chain and logistics of some of the other folks out there so far this quarter. But you did allude to it, potentially holding back growth, 0.4. Did it in fact hold back some growth this quarter? Is there anything that you can kind of report measure on there?

Well, it's got to be honest, the answers is yes. I mean, I think, our results for Q3 would have easily been $100 million to $200 million higher than what we're saying because of supply chain constraints. So, it is we're dealing with the two, it's a daily battle. Some of the areas that were particularly challenged are semiconductors, resins, those are probably our top two. But we're kind of seeing some supply chain pressure across the Board. And our orders are super strong, particularly in SPS and we could easily do $100 million to $200 million more in revenue this quarter in Q3, if we didn't have those challenges. So what we projected is kind of our reasonable best estimate of the supply we're going to get, based on, what our suppliers are committing. But it's a daily battle and where we've stood up a team on the supply side, stood up a team on the pricing side to really kind of manage both those things, because we're continuing to see inflation and we're actively managing price, which actually has been a good story, as we are able to pass most of that through.

Okay. I'll stick to one question. Thank you. Good luck, Darius and Greg.

Thank you.

Thanks.

Now we'll hear from Steve Tusa with J.P. Morgan.

Hey guys, good morning.

Good morning.

Good morning.

Can you just maybe talk about, you've mentioned before, kind of a mid-20s margin potential and you guys continue to do very well on the operating margin front. You sound obviously pretty bullish, even though you're markets aren't really firing on all cylinders yet. Is there a point in time, we are going to kind of officially update and kind of put a number like that up on -- as a mid-term target? And similarly on the growth side -- your current organic growth guidance is okay, longer-term, but like -- if you're just bullish on these growth vectors shouldn't it be a bit better than that? And again, is there a time where you would kind of update those medium term targets?

Yes, it's a fair question. I think we are tentatively planning an Investor Day in November, that's probably a good time to really look at our targets. But as you hear, we are very, very optimistic about our markets here in the short to mid-terms. I mean, that we're going to have a strong tailwinds, you're just now starting to see some of our higher margin long-cycle business, as you saw very first evidence of that pickup in PMT. Aero is going to continue to improve. Widebody and narrowbody traffic is going to continue to improve. We absorbed some of the defense and space challenges this year, so that's already embedded, and we expect that to normalize. So, as we look into next year and the year after, and the year after, I mean, we are going to be -- we're looking at our growth and margin expansion algorithm. As well as, don't forget we still have plenty of firepower on the balance sheet, which we plan to deploy and the pipeline is good, and we plan to be using it a bit more aggressively as we move forward. So, I think the set up for Honeywell, and I mean this, I haven't seen it be any better, since I've been at Honeywell and that's 13 years. So, I think, I couldn't be more excited about what the future holds.

Yes. I mean, I guess, I would...

Go ahead. Sorry, Greg.

I was just going to say, Steve, I agree with all that. I mean, as you know, we're pretty close to our targets in HBT. Already we've made really steady progress in Aerospace. SPS has a lot of room to run with rolling out all of the project business and Intelligrated, and all of the services and software that we expect to come behind it, still to come. So yes, I think we'll talk to you about that in the back half of this year, as we get closer to the year-end and our guide for 2022.

Yes, I guess I'm just trying to reconcile like a 3% to 5% growth outlook longer-term. It doesn't really jive with how bullish you sound on kind of the top line opportunities, including quantum and these other things that are out there. So that's kind of the genesis of the question.

Yes. Look forward to sharing more with you at our Investor Day and so on.

I think .

Go ahead, sorry. Got it. One last quick .

Go ahead.

One last quick one, just on the masks. Is there any difference in profitability on the PP&E side with those masks that are beginning to roll down here? Are they particularly profitable or what's kind of the earnings contribution? Because I think you set those up in a hurry, a year ago. Just curious as to what the profit impact is?

Yes. So, as you may have heard within the quarter, I mean, some of our production, we basically shutdown because when we set it up in a hurry to literally within 30 days, when the pandemic struck in April 2020, we didn't optimize for cost we optimized for speed. And frankly that wasn't a very high margin gain for us. We did that because the country needed us to do it. We didn't do it to maximize profit. So now when we reduced production, we reduced production and highly inefficient -- highly manual sales, that we were, that we could bring up quickly. But what we replace that production, is with highly automated sales, which will drop our cost per mask under range of 50%. So, positioning the business for the future is still going to be very, very strong. And you know, our IRRs and that's assuming there is not a pickup in future of masks. And as we read more and more about Delta variant, that we don't know what's going to happen. But even that IRR is greater than 20%. So better than any other investment. And like I said, this wasn't done to sort of optimize profitability. So, we got some revenue, we didn't necessarily get a ton of margin with it. And now we're in a better position, because we got production, that's done through automation, which will drop our cost profile by about 50% per mask.

Right. So actually accretive to incrementals as that kind of rolls down and your other stuff rolls on?

That's right.

Yes. Great. Okay. Thanks a lot.

That's correct.

Yes.

We'll now take a question from Sheila Kahyaoglu with Jefferies.

Thanks so much and good morning, Darius and Greg.

Good morning.

Hi, Sheila.

Since I'm the Aero person, I guess, I'll ask on defense, stellar growth over the last three years. Maybe can you talk about, the decline you saw in the quarter. What drove it with the U.S. budget and internationally, kind of, how do you expect that trajectory to improve from here? And the impact on maybe profitability? Thank you.

Sure. So maybe I'll start. One is, obviously the defense and space segment is the one that's been a bit worse than we expected this year, it's the bad news. The good news is that, we expect that to normalize 2022 and 2023. So, we're kind of taking a little bit of what I'd say, hits this year. The narrowbody, the widebody flight hours, you see that in the deck, we expect it to continue to progress. The AT ROE after business is also going to continue to progress, we kind of see steady progress here in Q3, Q4 and so on. Business aviation has been strong, both on the aftermarket, as well as the OE side, that's going to continue to progress. So overall, there is, we have great deal of optimism for what we're going to see in Aerospace and the margin performance will be very commensurate with that. Because some of the widebody narrowbody aftermarket revenue is still not kicking in, which as you know, it's going to be some of our highest margin profile. So we're -- it feels like we're kind of taking a hit on defense and space this year, next year that looks can be much more normalized. And then next year we also expect to see a high level of growth in the commercial aerospace.

Okay. Thank you very much.

Thank you.

Next question will be from Andrew Obin with Bank of America.

Yes. Good morning.

Good morning, Andrew.

Good morning.

Can you just talk, sort of big picture on what are you seeing on PMT, very good to see your outlook improve. What is sort of the big trends that made your customer base more positive? And what are the big sort of data points of trends we should be watching out for to gauge? And what are you trying to look at to gauge --sort of the direction of the industry into '22 and '23? Thank you.

Yes. Thank you Andrew for the question. I mean, I think the first thing we always look at is UOP. UOP is a leading indicator of that business. HPS trails, UOP orders by anywhere from 12 to 18 months. And UOP orders for the quarter were nearly 30% up, just to give you a perspective. So that's probably the single best data point. For our overall total, every business was up just about double digits, in terms of orders in PMT. Our backlog was up in PMT. So, all good signs. The other part that we're starting to see strong level of presence both for our Honeywell Process Solutions business, as well as UOP in some of the renewable projects. And you probably saw the Wabash Valley announcement, around carbon capture, capture that UOP one. Process solutions is winning in a lot of the wind farm projects, solar farm projects. So we're shifting focus to where the future is, while maintaining our presence in some of our traditional markets. And as we know and we saw this movie before in the '15 and '16 timeframe, you can only depress that downstream investment for so long. And we saw that come back strong in '17 and '18. We anticipate the very same thing will happen in '22 and '23. And by the way, a lot of these petrochemical refining facilities are going to have to get reconfigured for the future of energy, which is going to be incremental growth, which is yet to see. So, we're actually very, very bullish on that market, and it's being reflected today in some of our orders -- order like rates.

Thank you very much.

Thank you, Andrew.

Moving on to Joe Ritchie with Goldman Sachs.

Hey, good morning guys.

Good Morning, Joe.

Good morning.

As I think about your portfolio and then also your capital structure, it just seems like the -- one of the biggest levers you have really to move the needle is putting your capital to work via M&A. And I know we've talked a lot about the organic growth opportunities. But I'm just curious like as you think about prioritizing capital in the areas that you're looking to invest from an inorganic standpoint, like how are you thinking about the priority? I know, you mentioned the pipeline looks good and any additional color there Darius, would be great.

Yes, let me take that one, Joe. We are obviously -- our balance sheet as we've talked about all through last year is incredibly strong. It is a world-class balance sheet, whether you look at -- our pension funding, our cash position and so on. And M&A is a priority for us. We're -- as we've always talked about, we're not going to overpay and spend silly multiples on things. But we definitely are prioritizing M&A, you saw that in the first half of the year, with some of what we've done with Sparta and Fiplex. And you can imagine, quantum is essentially an M&A deal if you will, in terms of the $200 million, $300 million that we're going to be plowing into that here and that will happen, as we close out on that combination. So, we're very excited about using our balance sheet to drive M&A and add accretive business to our portfolio.

Yes. And just to maybe add one other point to that is, our balance sheet is more pristine than it's ever been. Because if you look at our pension funding, it's now around 120% mark. If you look at our liabilities, which are either dropping or their secured through other instruments. So we have a very, very different balance sheet that we did, even five years ago. And we're going to be a bit more comfortable in terms of having a greater level of leverage, given the safety of the balance sheet, which actually provides even more potential for capital deployment. And I agree with you, I think, capital deployment is a big lever. So this is kind of goes back to my prior point, that I made in the presentation, which is our markets are at a tailwind and we've got tremendous capacity on our balance sheet. This is kind of a rare point in the Honeywell history, where you've got good tailwinds from the markets. I talked about our strategies are working, and we've got a lot of deployment capacity on the balance sheet. I don't think there has been a better time to really -- for our position .

Hey guys, that's super helpful. If I could just one quick follow-on there, because this has been brought up a few times around the balance sheet. You guys were referenced recently in a settlement with 3M, on PSOA and that is a concern in terms of like their ability to deploy their capital in their balance sheet? Just, I guess, focused on typically think if you guys are being pride into those liabilities. And so any comments just around that settlement or potential liability from ?

Yes. The only comment I would make Joe is, our environmental reserves cover everything that is, that we're working on. We've done a ton of work over the last, gosh, probably 15 years relative to all the environmental obligations that the company has had. We've done tremendous things to clean up the areas that we've had involvement in, I think those have been some of our greatest accomplishments from an ESG perspective. And so, this announcement that you're referring to is, is no big news for Honeywell and is captured in our financial position, as we have continued to report this data.

Yes. I would certainly not reiterated any new news or incremental or some new liability that surfacing. I mean, it's a matter of fact, I think that there was a subset of reporting and actually a false thing to a close. So, I wouldn't read anything more into that.

Great. Thank you both.

And next we'll hear from John Walsh with Credit Suisse.

Hi, good morning.

Good morning, John.

Wanted to ask, kind of a question, combo question here about pricing and also kind of the margin you're booking in backlog here at a couple of your longer cycle businesses Intelligrated, HBT, PMT, clearly strong demand, you have stimulus dollars flowing into these markets. We're not hearing, there is really much excess capacity. So, how should we think about kind of the margin profile of the projects that are now coming into the backlog, and the visibility that gives you going forward? Thank you.

Yes, Yes, so maybe first on the pricing side, as Darius mentioned in some of his comments, that's something that we have always and continued to have a very strong eye on. And so, everywhere in our books of business that we can, we continue to pass through the inflation, that's being seen and materials and also in the labor, because in the projects business, labor is also important as well. So, I would say, as we're looking at our margin and backlog, we're not seeing any material challenges to them. It doesn't mean that, because we are being able to price these things in. So, I wouldn't call that as -- any like a big change in our profile, but it's something we keep a very strong eye on. We talked about it, in Intelligrated, the project business, there is lower than the line average for the business overall. And that's part of the hypothesis for the business in general. Capture the -- capture the volume and then follow that through with services and software, just as we had done in process solutions. So, I think, what we're doing is, we're finding success in being able to price with the inflationary environment, that we're seeing. And we're going to continue to manage through that, I think quite well, and in all of our project businesses, but it is something to keep an eye on.

Yes, I was actually even coming at it from it could it actually be an unexpected tailwind, just given how tight some of these markets are, right. I mean, there is only players that can stand up an automated warehouse or do some of these really large performance contracting projects, that sounds like, you're seeing a good pipeline of that develop, but I appreciate the color. Thank you.

You got it.

Our next question will come from Nigel Coe with Wolfe Research.

Thanks. Good morning. Thanks for the question. Just want to go back to Steve's question on the medium-term margins. Greg, did you endorsed 25% medium term margin, just has been to clarify that. My real question is, in terms of the cadence from here on. Number one, can you just confirm again, Greg, if the cost base is now fully loaded with the temporary costs? I think they meant to be all back in, in 2Q. But are there any big investment spending on the horizon? Doesn't feel like Aerospace has a big investment cycle ahead of it. But some of these breakthrough initiatives maybe quantum, might. So, maybe just talk about that. Thanks.

Yes. Yes. So the temporary cost we still have the third quarter to go, because if you think about last year as an example, we furloughed in the second quarter and in the third quarter of 2020. And if you think about the return to things like travel and the cost that comes along with T&E, I mean, we're just now in the second quarter, starting to get the organization back out on the streets, to see customers and to go visit our businesses. So, I would say, you're still going to see another step up here in the third quarter, in terms of the return of those temporary cost. And then the majority of those will be gone, those still be a little bit to trickle in 4Q, but third quarter is still yet to come. We are investing in the business as though, and that's again part of the reason when we talk about the $1 billion net cost reduction and that $0.5 billion of increase, that is also absorbing some increase in R&D, which is happening in places like quantum, it's happening in places like Aerospace, it's happening in our Honeywell Connected Enterprise, just to name a few. And we continue as the environment strengthens commercially, we're going to invest back in the business in terms of sales resources and feet on the street and so on. So, we have a lot of confidence in being able to deliver the year with the net $0.5 billion increase, that we talked about, and that is going to encompass both the temporary cost return and some additional investments.

Okay. Thank you very much.

And next we will hear from Josh Pokrzywinski with Morgan Stanley. Go ahead.

Hey, good morning guys.

Hey, Josh.

Maybe just to follow up on Nigel's questions there either . On the Aero side for margins, obviously, if we look back over the last -- call it 18 months, there is some pretty high watermarks and low watermarks. Where do you see that trending over the next kind of couple of quarters here? I understand, you maybe the mix implications of what's going on, on the defense and space side. But maybe sort of a unbound by calendar year-end timeframe of what that progression maybe looks like, as that business normalizes?

Yes. I would say, Josh, what you're going to see -- I mean, we talked about the fact that 1Q was abnormally high. We had a $30 million one-time benefit that flew through the P&L. We also, we're still getting the benefit of some of the big cost-outs that we had taken last year. We came in 2Q, just about where we had expected, and that call it high 25 type of range. I think, we printed something like 25.7%, and I expect you're going to see that just kind of creep up through the third and the fourth quarter, as we go forward prospectively. And again more of the aftermarket business starts making its way through the P&L.

Yes. I mean, the segments that we actually, are looking forward to enjoying the benefits from a margin perspective more, is just return the flight hours, particularly for widebodies and some more to narrowbodies. And we project that will slowly improve. I know, it's going to be correlated to vaccination rates throughout the world. We're seeing traffic pick up, the consumer traffic is strong. Actually, there is a lot of pent-up traffic demand for international travel. And that's what I said, is that, as we look at the next two to three years, it's going to get gradually better and better. And probably if there was a drawback, we absorbed it this year, in terms of the defense and space, and we expect that to normalize next year. So, that's probably the only segment, that we had some concerns about, but that's already reflected in our 2021 guide. And as I said, 2022 and beyond looks better.

Got it. That's helpful. Appreciate the question guys.

You bet. Thank you.

And our final question today will come from Nicole DeBlase with Deutsche Bank.

Yes. Thanks for squeezing me in guys.

Hey, Nicole.

Good morning.

Hi, there. So I guess, maybe a follow-up to -- Josh's follow up or Nigel's question. I'm thinking about margins for SPS and PMT in the second half. Margins in both segments are usually pretty heavily influenced by mix, and there is a lot of moving pieces. So, can you just talk a little bit about, along the lines of what you discussed for Aerospace, what you're thinking for SPS and PMT in the second half?

Yes. It's going to be a pretty similar theme again, as we think about the mix for SPS in particular, that's actually going to improve. I talked about the fact that we hit the peak for this year, in terms of the project rollouts in Intelligrated. So, that's going to come down a little bit, which will provide a little bit of a mix benefit on the overall profile. So, I expect to see again sequential improvement in margins in the back half of the year, in SPS. And again the same thing being true as we think about PMT ramping up and starting to see what we did here this quarter, in terms of the catalyst shipments coming through, as Darius highlighted, our UOP backlog is very strong. And so as that begins delivering particularly around the catalyst side, that brings with it, some nice margin accretion. We've always talked about the fact, that you can't look at what PMT margins in any one quarter. As indicative that moves around a bit with the mix around catalyst. But I do expect that to also improve in the back half of the year, as we continue to see that strengthening growth rate. So, again, that's why we feel very good about where we are right now, as we exit the first half, and we look forward to a very good second half of the year. And a nice finish, that's why we upgraded our margin range on the low-end, by the 10 basis points that we did. So, I think things are trending nicely across all of the -- all other segments.

Yes. And I think maybe just something else to add which may be goes unnoticed, but, if you look at sort of as deep as we were hit in 2020, with some of our end markets, we're now projecting for EPS range. We're basically going to be right back where we were in 2019. So, think about that as a one-year pause, for business that's better positioned with more tailwinds than it's ever had and a strong balance sheet. So, I think that, I think from where we said, things look quite strong.

Got it. Thanks, Darius and Greg.

You bet. Thank you.

And this would conclude today's question and answer session. I will now turn the call back over to Darius Adamczyk for closing remarks.

I want to thank our shareholders for your ongoing support. We have delivered strong results in the first half of an uncertain year, and we're well positioned to capitalize on improving conditions in key end markets, while driving near term growth opportunities across our portfolio. I've never been more excited about Honeywell's future, than I am today. Thank you for listening, please stay safe and healthy.

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation. And you may now disconnect.