Schneider Electric Sa

Welcome to Schneider Electric's Q2 and H1 2020 results digital event. We're joined today by Chairman and CEO Jean-Pascal Tricroix who joins us from Hong Kong and our CFO Hilary Maxson right here with us in Paris. The presentation and the press release are available for you to view on our website. And of course, after we're done with the presentation, we will have enough time for questions and answers. Thank you all for joining us. Hope everyone's well. And with having said that, I'm going to turn it over to Jean-Pascal in Hong Kong.

Thank you Amit. Hi to all of you. It's really good to reconnect with you after this unprecedented, I would say, extraordinary H1 that we've been through. First let me wish all of you, every one of you, to be safe and well wherever you are in the world. Today what I'm going to do with Hilary is to give you the main highlights of what went through during H1 and give you as many details as, I guess, you would wish. But let me dive straight into the subject. During the crisis that we are going through, our compass has been the strong fundamentals of Schneider. The fact that we serve two key transitions, the two Two of the largest transitions at the beginning of this century. Energy transition on industry 4.0. We do it with two synergetic business. Energy management on industrial automation. We deliver the following values to our customers. Sustainability. Efficiency and finally Resiliency which has increased or which has gone up into the priorities of our customers. We do it based of our integrated digital architecture which is EcoStruxure. We deliver EcoStruxure that integrated solution for our customers with a business model which is itself integrated, empowered, truly decentralized in the countries where we operate. Open to a large community of suppliers and integrators on championing sustainability in our industry. And we are focused on a strong return to shareholders based on a strong cash generation, based on the progressive dividend, now 10 years of progressive dividend, on the very disciplined capital allocation. What are the highlights of this first half? We have delivered a resilient financial performance through the crisis. Our revenue of course has been impacted by the COVID and has been decreasing by 10% around. Our adjusted EBITDA has decreased by 130 bps in H1, which if I dive back in my memory and go back to the Last crisis I met as a CEO in 2009 is three times better in terms of resilience than the performance we produced at that time which was an EBIT impacted negatively of 4%. So business model has re-evolved, the company has evolved so that we would ensure that much better resiliency. We have delivered an adjusted net income of €1 billion. We deliver a free cash flow of €1 billion, record high in H1, benefiting from disciplined working capital management, but doing that while building a significant stock, a significant inventory to make sure we serve our customers through the disruption of supply chain. We have a net debt of 4.8 billion after paying the dividend that we committed in February and which was voted by our AGM of 1.4 billion, recognized in 2019. If we look now at our two businesses, both of them show the same kind of top line evolution through H1. Energy management very resilient with a decrease of 80 bps in the adjusted EBITDA. Industrial automation a bit more impacted due mostly to the mixed evolution of the business which has been really impacted by the COVID on affecting principally our product business and our OEM business. What we've leveraged to ensure such a resiliency in H1 have been a consistent business model and organization. We have been following our strategy over many years, and we have an organization which has not changed, which is proven, and keeps working on delivering through the crisis. We have benefited also of our agility. Catalyzed or enabled by the fact that we are very local, that we empower local teams to react locally with local governments, respect the local conditions on benefiting from supply chains that we have built all the time to be very local again. We of course are agile also because our operations are digitized using Schneider technology. And we have also benefited from what we've done over the years, which is to balance our exposure in terms of geographies, in terms of cyclical exposure, rebalancing what we do into the construction on the data center space with what we do in industry and infrastructure. On building our business, with partners, basing our business on the relationship with our partners on a business which is fundamentally asset-led. We in H1 have kept taking good projects, sometimes large projects, like the Smart Grid project we took in Egypt, which has the objective to supply reliable electricity to 20 million people. We've kept working on digitization of industry in France, for instance, to collect structured data and build digital libraries, or in the Middle East with an oil and gas company to build its cybersecurity strategy. We've worked also on greenfield process automation. Of course, oil and gas are impacted by the crisis, but Oil and gas is digitizing for more efficiency and for better processes in dealing especially with the upstream but also the downstream part of oil and gas. We've kept working then also on booming industries. Data centers were overheated by the crisis, health care of course. and even building where people are looking to build on to develop smarter building like in Notre Dame in the US, an application that was built with Cisco. Not only we've kept working with our customers and been taking projects, but what we've seen is that the COVID-19 has been a massive accelerator of digitization. On one side you have 50% of the business of Schneider which is within that flywheel of digital and services. We sell to our customers software and digital services. That is 7% of our turnover. put in on the software monitoring their installations, they detect issues, predictive maintenance is detecting before they happen some outages, and they call, our customers call our field services, now 10% of our business. When our service people are on the shop floor, they connect more products which are generating more data. And connectable products in one year generate today 25% of our business. And once we've installed connectable products, they tend to be connected to our edge control. We generate data back to our software and there we go with our digital on-service flywheel. But the other part of our business, the other 50% of Schneider, is a business we are very proud of. It's our world leading product business. And there again, we've seen an acceleration of digitization. In the way we've interfaced and interacted with our partners, which has grown even more digital in these special times. In e-commerce, which has been growing by around 20%, on which represents already a significant part of our business. and in the way we've interacted with our customers through webinars, through digital events, replacing our physical events and actually giving us access to many more people than physical events. When we zoom on the digital and service flywheel, the most resilient part of it has been software and services. And we've been talking to you over the past reviews about that. That's already 17% of our revenues. It has been almost flat in terms of growth, much better than the average of the group. And it offers customer intimacy and recurring revenue. and it's more resilient, it's marginally creative, and it's a catalyst for growth, and it's buying more intimacy and more space for innovation as we go forward. Another highlight I really want to mention is the performance of our supply chain. Very, very difficult to operate our 200 factories, our 100 distribution centers in a landscape disrupted by the numerous All companies, all industries integrated on all over the world as number four supply chain in the world, mostly thanks to our digitization. Then we've really benefited of the regional setup of our supply chain. As I explained many, many times, we have always thought for many reasons, service to customer, low carbon impact, that on time of response to our customers, that our supply chain should be local. We have also benefited from the digitization of our supply chain. So we are focused today on business continuity, on quality, on delivery focus. We've allowed mid of the year to build an inventory which is much higher than usual to benefit to our customers. And we are now focusing on our productivity as our plants are coming to a normal regime. We still have some issues. The biggest issue is in North America and due to one factory which was in an outbed of contamination which has been stopped for some time on where we are catching up. This is in process of being resolved. We've resolved most of the other issues. Of course, we had a hot spot in India which has been the object of a very severe lockdown. But I would say that those issues are getting now resolved. Now we have to integrate also that the impact of COVID is increasing the cost of our operation because we have to mitigate challenges and disruption, because we have to pay supplementary freight costs, and because we have to incur supplementary costs to protect our employees through protection equipment, through are accentuated to a much higher level cleaning of factories and offices on dealing with the underabsorption that is coming from social distancing on equipment. We've also immediately decided at the beginning of the crisis the creation of the Tomorrow Rising Fund, which has supported 65 projects in the response time, and is really now focused on organizing the recovery, on the resilience of the communities where we operate, but a very, very specific focus on the youth Employment on youngsters and giving access to young people who will be probably the biggest victim of this crisis and making sure that they are not getting de-socialized and find a job after they go to school. We have been also recognized in the main dimensions of our employee and customer value proposition around our meaningful mission, our inclusive work environment, and the empowerment we give to our teams. And we have been keeping progressing in sustainability and progressing against the main key performance indicators of the Schneider Sustainability Impact. What is important is to realize that what we learn in the company is something that we propose to our customers in terms of sustainability services to help our customers to monitor their performance in terms of energy and resource consumption, as well as in carbon emissions. That shows this great contract we have concluded with Foresia to be their partner in their journey to sustainability. Very, very soon and very early in the crisis, we have decided that we were back in business. Back in business in unusual conditions, so we call it business as unusual, and it includes a safe de-escalation, new ways of working, Business growth on new business growth which have been actually accelerated by the COVID on reallocation of resources to those business. Structural efficiencies in many places on working on the trust on resiliency of our company relationship with its customers. What we've seen is that the crisis is actually accelerating some of the values we deliver to our customers. Of course, you know that Schneider has been working on digital solutions for efficiency and sustainability for the past many years. What we've seen is a renewed need for resiliency. And that brings me back in the past in 2007 when we bought APC. You remember that tag of APC, legendary reliability of everything we supply. In the past 13 years since APC joined, this has become the tag on the motto of the whole company. And what we've seen is that this agenda of reliability and resiliency have come very high on the agenda of our customers. Another part which has reinforced the need for our systems is remote everything. Automated operations, remote maintenance, training, remote monitoring, all of this has been accelerated. And the common thread to all those values is an acceleration of the digital systems on the EcoStruxure. When we speak about resilience, what our customers are discovering is that you are as resilient as the weakest link of your installation. And we supply a complete resilient solution for each part of our customers' solutions. It goes with local automation that can manage locally and automatically a lot of the processes without human intervention. and it goes with a full set of software and digital services which are put in those automated installations under monitoring. What we have kept working on also as we are going is to make sure that we are digitizing the full lifecycle of those installations. Of course, we do it in industry with Aviva, but we've complemented in H1 what Aviva does with their junction or with the addition of RIB that joined actually the company just one week ago. Remind you what AIB is bringing to us at Schneider, to Schneider and to Aviva. It's bringing a brick of functionalities that we didn't have in our catalog, a completely cloud-based solution enabling planning, scheduling, and construction orchestration for all our customers who work on complex worksites. The other thing I want to share here is that we are expanding the capabilities of Aviva beyond their traditional segments of industry. Working closely between Schneider and Aviva, Aviva developed a full solution of management of data centers on IT networks that can plug into Schneider systems on anybody else's system. but taking the capabilities which have been developed in complex industrial processes, visualization technique, alarming capabilities, planning, scheduling, and putting them to the service of data centers, to manage the data centers on the complex interaction between edge computing and data centers. Just launched on the market and ready to be proposed to all the customers we have in the data center space. We are also keeping on pushing sustainability to customers who really are passionate about it. It goes with new technologies and new innovation that we bring in energy management. And I want to cite again the fact that we are coming with a tremendous revolution this year, which is SF63, and in fact, gas-free medium voltage solution. The air set completely based on air. coupled with the deployment of digital solutions for more saving, for more circularity on using decentralized and decarbonized generation. What you see is that sustainability during the crisis has rather been reinforced on the agenda of companies and it is at the top of the agenda of most of the stimulus packages that we see developing around the world. For many countries, it's about green and digital at the same time because all of the countries have understood that digital is your best path, your fastest and cheapest path to higher levels of sustainability. So we work with the local communities, local cities where we work, and local governments to help them and support their research on more sustainable and more digital solutions. Some examples of what we keep doing, green data centers, working on smart cities like in Los Angeles, saving on energy which means saving on carbon. And to be mentioned that in the past two years and a half, we've helped our customers to take out 110 million metric tons of CO2 from their installations. When we look at our markets, our segments, our customers, everybody is impacted by COVID. Of course, there are some negative impacts, some segments are impacted negatively, but we see also development of needs which are positive for Schneider in all of the segments we address, all of them. It's about getting everything smart, smart buildings, smart manufacturing. It's about sustainability, we spoke about it. It's about use of software. It's about full lifecycle efficiency. It's about more products, more things connected, more IoT, catalyzed by 5G on its development. It's about reshoring some production which goes necessarily with automation and digitization. It's about government stimulus which are affecting all of those dimensions. So when we look at our market, of course, some segments are more under pressure and they are looking for cost and efficiency. Some of those segments are looking actually boosted or ask for more capacity and they are really challenged on their resilience. But all of our customers, all of our customers in the world, all have today A sustainability, an efficiency, a resiliency agenda powered by a digitization agenda. This is work we work with them on today and that feeds The engines of our resiliency, software, digital services, ecostructure, cybersecurity, sustainability services and the unique capability of Schneider to integrate energy and automation solutions, digital solutions for sustainability and efficiency. So that's about how we've lived through the crisis of COVID. Now I'd like to hand over the mic to Hilary so that she goes into the details of H1.

Thanks Jean-Pascal and good morning everyone. Great to be here with you today to comment on our H1 numbers and to give some thoughts on expected H2 trends. I'm starting on slide 28. As expected, our results were strongly impacted by COVID in the second quarter and first half. For first half, revenues were down 10.5% organic with negative results across all regions. I'll give some specific commentary on Q2 performance on the following slide, but country by country performance was primarily linked to the level of containment actions taken by governments across the world in efforts to combat the health crisis. Scope impacts were negative due to last year's disposal of Pelco and Converse and the deconsolidation of a business in Russia. FX impact was negative 221 million in H1 and the full year is now estimated at negative 500 to negative 600 million for the top line based on the current volatile rates and minus 30 to minus 40 basis points on adjusted EBITDA. This impact is largely due to the strengthening of the euro against a majority of currencies. Turning to slide 29, to give you a little bit of commentary on Q2, we thought for this quarter it would make sense to give you more detail on top line performance in some of our largest countries as this crisis is leading to a differentiated performance based on contagion levels and government actions. Starting with Western Europe, down 18% organic, with a significant differential in performance across the region, with France, Italy, and UK substantially down, versus Germany, where we experienced only single-digit declines, and Nordics, which remained positive. In Europe, we saw a stronger rebound than we had originally expected in second half June, particularly in France, partly due to distributor restocking. Asia Pacific was down only 5% organic, with a recovery from Q1 levels driven by a strong rebound in China, partly offset by declines in the rest of the region. Similar to Europe, we see a differential in performance between countries, with India substantially down and Australia performing relatively better. North America was down 20% organic. We were impacted in this region by some supply chain challenges, as already mentioned by John Pascal, as well as some market impacts from COVID. The rest of the world was down minus 15% with relatively good performance in Middle East, particularly in industrial automation. Let's turn now to our results by business, starting with energy management. Revenues in energy management declined 11% organic, with declines across all regions. Sales were most strongly impacted in April and May, with a turnaround in June driven partly by working days and distributor restocking. Non-residential building performance was strongly impacted as lockdowns caused delays in construction worldwide. We primarily saw a reopening of construction sites in the later part of H1, but with some lag versus other parts of the economy. Residential demand was relatively stronger, particularly towards the end of Q2. And we saw resilience in some sectors, like healthcare and life sciences, and data center demand remained strong, with sales still impacted by a high base in 2019. Demand for our EcoStruxure Power in Building offers, which provide digital intelligence across segments, increased. Adjusted EBITDAs were relatively resistant with a decline of 80 basis points organic driven by volume declines offset by positive price, productivity and mix as well as strong tactical cost actions. Industrial automation was also strongly impacted by COVID in H1, with revenues down 8.9% organic. Discrete as well as process and hybrid markets were down, but with relatively better performance in discrete, with process automation also impacted by project phasing. We saw relatively more resiliency in certain segments like wastewater and consumer packaged goods, and software and services were a high point with continued growth in H1. Adjusted EBITDA margin was down 200 basis points organic, driven by lower volumes and a negative impact from product mix, partly offset by strong tactical saving actions. Now to focus on Q2. On slide 32, in energy management, Q2 sales were down 15% organic with a similar performance across regions with the exception of Asia Pacific due to China. In North America and the U.S. in particular, we saw resilient demand in residential with Q2 performance impacted by supply chain issues now under recovery. Non-residential building was impacted by lockdowns with some recovery at the end of Q2. Data center in the U.S. continues with good demand with sales impacted by a high base of comparison. In Western Europe, there was the same differential in performance across countries that I discussed at the group level. Rest of the world was also heavily impacted by COVID with some resilience in Central and Eastern Europe due to smart grid sales. COVID impacts in South America and CIS were on a slower timetable than other regions with more visible adverse impacts on demand towards the end of the quarter. Asia Pacific performed relatively better due to a strong rebound in China with high single-digit growth in Q2. Australia was also more resilient, driven particularly by delivery of system backlog. Rest of the region was more strongly impacted. Turning to slide 33, industrial automation was relatively stronger in Q2, down 10% organic, and with Asia Pacific swinging positive for the quarter. In North America, we experienced disruption in process and hybrid markets due to oil price, partly mitigated by demand in downstream services. We also had weakness in OEM demand with some resilience in wastewater, mining, and consumer packaged goods. Software performance was a highlight. In Western Europe, we saw differentiated performance by country aligned with the group, with Germany the most resilient driven by our end user business. Rest of world was relatively stronger with double digit growth in Middle East and CIS due to backlog execution, OEM demand, and software. Asia Pacific grew by 3% organic, supported by strong double-digit growth in China, primarily driven by OEM demand and packaging, hoisting, and materials handling. Singapore also grew during the quarter, supported by software sales. Turning to slide 34 and coming to our sales broken down into our priorities or our different execution models, Jean Pascal already mentioned the strong resilience demonstrated in our software and services with H1 at close to flat in year-over-year sales. Products performed relatively better than systems with a strong recovery in second half Q2, partly boosted by distributor restocking. And our systems business was more strongly impacted by lockdowns and our inability to access sites in many geographies. We'd expect that this mix between products and systems would begin to normalize in the second half with a pickup and backlog execution. I'll turn to profitability in a minute, but of note, we continue to see positive progression on systems gross margin. Turning to slide 35, despite the backdrop, we continue to see positive evolution in our gross margin, a great reflection of the strength in the underlying factors leading to our gross margin expansion over the past years. First, we were able to continue pricing up on products in this difficult environment, further boosted by raw material headwinds. Price is a big focus of our management team, and we expect this positive price evolution to continue in H2. Productivity is positive, although quite a bit lower than you've seen in prior years due to lower volumes and around $50 million in increased costs in PP&E, freight, and other costs directly tied to COVID. This strong productivity performance was supported by the underlying action plan that led to our acceleration of productivity in H2 2019 plus reactivity through tactical savings actions. We'd expect to continue to see positive productivity in H2 despite continued COVID costs due to stock consumption from inventory buildup in H1. Mix was also positive in H1, driven by the differentiated sales performance across geographies and relatively stronger growth rates in products, software, and services. Plus, as I mentioned prior, we continue to see a positive margin evolution in our systems business. We would expect Mix to be around flat for full year 2020. Regarding R&D, we have tactical savings here, but not enough to offset the drop in volumes. Plus, we look to preserve our key innovation projects despite the crisis. Forex was negative, with some additional negative impacts from Scope and other. On slide 36, in terms of adjusted EBITDA, you can see we're only down 18% organic due to quick actions in cost savings both in gross margin and in SFC to adjust for the volume declines. I'll speak more to this on the next slide. Our SFC to sales ratio did increase over the half, but I think the swift actions we took are a great reflection of the agility and reactivity of the company. In H1 and beyond, we also believe it's important to keep capacity to invest in our strategic priorities, including innovation and digital. So we'll continue to balance our focus on efficiency and effectiveness with a focus on targeted reinvestment to ensure the future. Turning to slide 37, to give some additional detail on our costs, both in H1 and expectations for the future. Our SFC savings totaled around $350 million in the first half, partly due from the benefit from our ongoing efficiency plan announced last year, which delivered H1 savings of $150 million. As a direct response to COVID, we also drove an additional $200 million in tactical savings in H1 and primarily in Q2. Those savings were derived from a variety of measures, some global and some country-specific, including a deferral of salary increases worldwide, shorter working weeks or furloughs, and a freeze on travel and hiring. Government subsidies were immaterial. We expect these tactical savings to progressively reduce starting in second half as we're now fully back to work and focused on the future, although some of those tactical savings we'll expect to translate to structural in the future. At the same time, we continue to look at opportunities to accelerate and enhance our ongoing operational efficiency program with a goal to now complete the entire program by the end of 2022. We'll take the opportunity with COVID to push further on simplification of our SFC to ensure we're best positioned for the medium and long term. Taken all together, we expect to deliver 1 billion SFC savings in aggregate by 2022. We also expect an industrial productivity of around $1 billion over the same three-year time period, partly driven by structural savings. In order to prepare the company for the future and to deliver on these savings, we expect to incur total restructuring charges of around $1.15 to $1.25 billion over the three-year timeframe, with the majority to occur in 2020 and 2021. If you recall, we were already on track for around $250 million per year to support our prior plan, so this is an increase of $400 to $500 million versus prior disclosures. On slide 38, moving now to net income, you'll see we've already experienced part of the higher restructuring costs discussed on the previous slide in H1 with costs of $220 million. Net income was impacted positively by a decrease in other income and expense, primarily due to the impairment charges from PELCO in 2019. Financial costs were slightly increased due to a write-off, while costs of net debt remained steady. Our effective tax rate was at 24%, and we still expect to finish the year in the range of 22 to 24%. Turning to slide 39 on cash flows, a big focus for us, we did experience a decline in operating cash flow as you would expect given the results of H1. However, our free cash flow increased year over year to almost $1 billion due to lower capital expenditures and management of trade working capital. To give some additional details on working capital, we saw a decrease in receivables not only aligned with our lower sales, but also driven by a decrease in overdues. We also saw an increase in payables due to ongoing efforts from our procurement team to ensure optimal contractual terms with our suppliers. This increase is net of some actions taken to support critical suppliers throughout the crisis. In inventory, we made a conscious decision to run our plants at capacity in order to ensure necessary stocks for a turnaround. We'll continue to keep agile in our inventory decision-making in H2. As we saw at the end of 2019, the underlying drivers of our free cash flow remain strong. We're growing in software and services, less capital-intensive businesses, and we acted to manage our trade working capital with agility. Jean-Pascal will speak more to our expectations of free cash flow going forward. Turning to slide 40 on capital allocation, I'd like to start by emphasizing that the capital allocation policy of the company remains consistent. We remain focused on value-accretive M&A transactions in the core and on adding technological bricks as can be seen from our recent acquisitions. To give you an update, and John Pascal already mentioned, we closed the transaction for acquiring RIB Software after receiving CFIUS approval earlier this month. We've received a large shareholder stake and we're very excited to welcome our colleagues at RIB and work together to extract the synergies from this transaction. The teams are excited and collaborating with a clear plan of action. On L&T, we look to close the transaction in H2. As we've mentioned, we had to delay the closing due to the nationwide lockdowns in India in Q2 and the continuing COVID situation that's still impacting the country. We're also expecting the close on the transaction of ProLite that we announced in the Q1 results. Both RIB and ProLite demonstrate our view on adding specific technological bricks to our existing software and digital suite for the benefit of our customers and to enhance our existing offers in specific end markets. I'm also happy to report that our other recent acquisitions Aviva, IGXAO, ASCO, and Alpi all continue to perform well including through the crisis. At the same time, we continue to work on our portfolio optimization or disposal program as we previously announced. Our plan to divest between $1.5 to $2 billion is high on our priority. We don't have much to announce in H1, but we continue to prepare the necessary actions for disposals to come. Given disruptions in H1 due to the pandemic, it's reasonable that we'll take an additional year to implement this plan, and of course, we'll keep you updated on the progress. Moving to other topics, Jean Pascal already referred to the dividend, so I won't repeat. In terms of buyback, given we're today re-establishing the targets for 2020, the buyback plan as approved by the Board is technically no longer suspended. However, given the continuing economic uncertainty, we'll exercise caution as we implement the buyback plan in the near term. I'll finish with a last slide on liquidity. We continue to maintain a strong liquidity position through the crisis with three successful bond deals done during H1. And with that, I'd like to hand over to Jean Pascal to share our 2020 as well as our longer term targets and also to share our current management priorities.