Schneider Electric Sa

Thank you for being with us. We join you today from Paris with CEO Peter Herweck and CFO Hilary Maxson. The press release and presentation are already on our website. We'll make sure to keep some time for questions and answers at the end. I have to remind you about the disclaimer that you will see both in the presentation and the press release as usual. But without further ado, for the business highlights, over to Peter.

Well, thanks very much, Amit. Very happy to be with you today on the back of a very strong execution that has delivered record performance for Schneider in 2023. And I think we're well positioned to the next frontier. It's also 364 days until we announce the change in governance. And I can assure you this has been a smooth ride, as you can see in the results. Now, let me start off with the record revenue that we have, €36 billion in fiscal 23, a growth of 13%, delivering an adjusted EBITDA margin of 17.9%, a growth of 180 bps. Now, that results in an adjusted EBITDA up 25% on an organic basis, exceeding our targets. When you look at the end markets, you can basically see that we're much stronger, of course, in data center networks where we're the number one. We'll talk about it. The infrastructure has gained in weight as well. While, of course, as we've talked before in the buildings and industrial market, there is a little bit of some weakness in pockets and we'll talk about this in more detail. Now, a very solid print of energy management with 14% growth in the year, 28 billion of revenue. And the industrial automation, a little bit of a mixed picture. We talked about the weakness of the discrete market and OEM market. You see that in the result, but still the 7% and the longer cycle process automation market and software, very strong. We'll get into the details now, but let me start off with the key metrics that are really at a record level. And the net income and free cash flow also record levels. The first time ever, we're crossing $4 billion in net income, up 15%, free cash flow 4.6%. Thank you for joining us. We've proposed and we will propose to the shareholders at the AGM a dividend of €3.50 which is an 11% increase for the group. I think we're very well positioned with respect to the megatrends that we've talked about at the Capital Market Day. They deliver unprecedented opportunities for us. And let me give a couple of highlights. Of course, we're starting off with the digitization and AI, which is so important for the market and with the deliveries that we have with the most complete and best electrical Thank you for joining us. Climate change. January was the first time in history that temperature went up by 1.5 degrees. So it's urgent need to drive it. And of course, our sustainability business, where we've also closed the acquisition of Eco Act that has come in. There is a solid business with very strong sustainability. Thank you very much. 20-30 is going to be 30%. So you can see it's a tailwind that we have as a company. In 2050 it's going to be 50%. Now the evolution of wealth and you've seen in the file roughly 40% of our revenue is in new economies where we're on the back of very strong growth in India and the Middle East and some other countries. and of course, you know, as we've said during the year, China was also a contributor to our achievement and growth in 2023. Now, if you look at the new equilibrium, we do see quite a bit of reshoring because of supply chain, because of trade. Thank you very much. But let's go into a couple more numbers because numbers speak louder than words. And those are the priorities that I've mentioned, my priorities and with the priorities of the company. If we start off with a growth culture and we've invested into organic growth, and I said we also would like to see a return to it. And you can see 130 bps improvement on the ROCE. We're bringing us to 13.5%, ROSI well on track on our journey to 15%. Now on the sustainability side, and we have some more details, we're well on track to reach our target, approach our target of 10 in 2025 and we'll go into some of those KPIs as we speak. Now, we're number one positioned by the Global Corporate Sustainability Assessment with a score of 88 out of 100. Very nice. We've also said that we want to invest more into R&D to drive organic growth. And it's very nice to see that these efforts are paying off with around about 40% of the new orders that we have that are linked to products Thank you very much. Thank you very much. On the AI side, which is not only important for our data center business, but also for our own productivity, for products and for our clients, we've increased our AI hub to 350 people and accelerating the use cases in the company and with our clients. All of this is also leading to a net satisfaction score of our clients to 53.6%, an all-time high for the group. We're also aligning our engagements according to the megatrends to drive growth and drive thought leadership with the C-level of our customers. You've seen us at COP at WEF where we do talk about energy, demand, How to deploy AI respectively and how to do AI in a responsible way from a carbon-free energy perspective. Now, climate change continues to be, as I said, so important and will drive this in our factories as well. We're very proud that our Hyderabad factory is doing The third sustainability lighthouse factories that has been named after Levodroy and Lexington in Kentucky. Now, focusing on the new equilibrium and the evolution of wealth, India has become so important for the group where we've established our hub with meanwhile a lot of R&D, a lot of manufacturing and of course a lot of growth in the country. Talking about a couple of clients at the end of the day, that's where the rubber hits the road, and I'm not going to go through all of those examples. I want to point out two. The first one is Airtrunk, with whom we've built a data center in their Sydney 2 campus. Quite a nice project, and it's a little bit outside where you would expect some of this business is hitting us quite often. A great project that we've done. Other tendencies that we see when we look at the Vancouver airport where we've engaged into a five-year partnership with an option to increase by another five years, we help them on their zero-carbon journey until 2030. So you can see that the contractual engagements that we have with those clients is increasing from a length perspective and moving to more recurring revenue. I said we're going to be talking about the SSI in a little bit more detail. On the climate side, we've helped our customers to save and avoid 110 million tons of CO2 emissions in 23 alone. So that's been quite an accomplishment. On the resource side, we're aiming for 100% of our primary and secondary packaging to be free from single-use plastic and we're on a very good way to get to the target of 100%, 63% achievement in 2023. Also on the equality side, very proud to have been given access to now 46.5 million people since 2009. And again in 2023, we added 1.5 million to it in South Africa and South Asia, in Africa and South Asia, excuse me, and that's good to drive the sustainability index where we want to reach 10 in 2025. Now we've positioned the company to be an impact company. Our people want to create impact with the clients, with the society and also in respect to technology and innovation. I'm not going to walk you through all the awards we've gotten. Maybe two or three to point out from Fortune 2023, the world's most admired companies for six consecutive years. Bloomberg Gender Equality Index for the six consecutive years. BCG has named us as one of the world's most innovative company which makes us proud. So quite a few things in that regard. And then of course also the world's top companies for women by Forbes also an award in 2023. So I think we're on a very good way in respect to transforming the company to an industrial tech and, you know, with that drive, digitization, electrification and sustainability. And, you know, you see it also in the number, Hilary.

Indeed. Thanks, Peter, and happy to be here with you all today. I'll start with some key financial highlights for the full year. And as Peter said, we finished with record revenues of €36 billion, up 13% organic, record adjusted EBITDA of €6.4 billion, up 180 basis points organic, and record net income of €4 billion. We also drove record free cash flows of $4.6 billion with a cash conversion ratio of above 100%. And all of this translates into strong progression on our return on capital employed, now at 13.5%. Thank you for watching. Sales were relatively stronger in energy management, up 14.4% organic for the year, with industrial automation up 6.7%. The negative scope impacts are from our exit from Russia and our portfolio divestment program. FX Translation also adversely impacted our revenues by around 1.4 billion euros, mainly due to the weakening of the U.S. dollar and Chinese yuan against the euro. And as you can see in the footnotes to this slide, based on current rates, which are fairly volatile in a few places, we would expect Fx impacts of around minus 400 to minus 500 million to revenues in 2024 and minus around 30 basis point impact on adjusted EBITDA. Looking at our revenues in the context of our digital flywheel, our digital and digital enabling revenues grew faster than the overall group at plus 17%, landing our digital flywheel at 56% of group revenues. This is a step up of three points versus 2022 driven by strong growth in connectable products and in software and digital services despite the transition to subscription at Aviva. And software and total services, the parts of our flywheel we would consider the most sticky and recurring, now stands at 19% of our overall group revenues. And we progressed our recurring revenues in our agnostic software businesses by 5 points to 70%, primarily driven by the accelerated transition to subscription at Aviva. We report our backlog on an annual basis and you can see here that backlog has progressed from an average of around four months of sales historically to around six months in 2022. And if you recall, that was due to the supply chain constraints. And now in 2023, we have a backlog of more than six months driven by an increase in demand for systems. Our products backlog is primarily back to normal in terms of months, aside from in North America. And of course, this increase in backlog gives us higher visibility for 2024 and beyond. Turning now to our fourth quarter revenues, we were up 9% organic to 9.5 billion euros, with about half of that due to volumes from a strong step up in system sales. North America and rest of world are strong contributors, with impacts in Asia Pacific and Western Europe due to the as-anticipated decrease in discrete automation. In scope, you can see the impacts from our portfolio disposal program, and we no longer have impacts in Q4 from Russia. And in FX, there's a particularly strong non-cash negative impact in Q4 due to the significant devaluation of the Argentine peso, which took place in December. Turning to our diverse mix of business models. In Q4, products grew at plus 2% with positive volumes, with the softness in discrete more than offset by continued growth across most energy management end markets and continued stabilization in consumer-linked segments. Thank you for joining us. Software and services was once again up a strong 17% for the quarter, this time driven by software and digital services, with Aviva driving particularly strong ARR of plus 19%, driven by continued strong growth in SaaS and new contracts. Thank you for joining us. and due to that demand we're continuing to stabilize and invest in our supply chain in North America particularly for residential offerings and in our systems business. Western Europe was up 11% organic with strong growth across all of the major economies and across end markets with particularly strong growth in systems supported by demand in data centers and infrastructure and with growth in distributed IT and residential was stable against a low base. Asia Pacific was up 10%, with China up high single digit, where growth was supported by demand across most end markets, particularly transportation, new power, and electronics, and with some stabilization of residential building. The rest of Asia Pacific was up double digit, with particularly strong growth in India and double digit growth in Australia. Rest of world was up 19%, including some strong pricing actions in economies with significant devaluations. Middle East and Africa and South America were both up double digit, even excluding those pricing impacts, due to strong demand across end markets, particularly infrastructure and a return to growth in buildings in South America. Thank you for joining us. North America was flat with U.S. down low single digit and Mexico up double digit. Process markets were up across the region driven by growth in Mexico with discrete automation down in the U.S. as lead times and inventories across the OEM value chain continued to normalize. Western Europe was down 3% for the quarter after double-digit growth in the Q4 of last year with very strong growth in software and double-digit growth in process automation offset by weakness in the OEM market again as demand begins to normalize there. Asia-Pacific was down 2% for the quarter, where, similar to Europe, we see very strong growth in software and growth in process automation, offset by weakness in discrete automation. China was down mid-single digit, while the rest of Asia-Pacific was up low single digit as strength in India across categories and strength in software offset weakness in discrete automation across the rest of Asia. Rest of World was up 15%, including some strong pricing actions to offset currency devaluations, and with good resilience in discrete automation markets and strong growth in Aviva. Turning now to our full year P&L. We finished the year with record adjusted EBITDA of 6.4 billion euros and organic growth of 24.5%. This was driven by our top line growth as well as an expansion in our adjusted EBITDA margin of plus 180 basis points organic to finish the year at 17.9% supported by strong progression in our gross margin. At our Capital Markets Day, we outlined the growth opportunities we see in front of us over the next four years, and we are investing accordingly. We stepped up our R&D to sales ratio, including our capitalized R&D, to 5.6%. And in addition to investments, we did have some non-recurring items in our support function costs impacting our SFC to sales ratio, and I'll give a bit more detail on that in a moment. Our adjusted EBITDA margin in energy management was up 220 basis points supported by strong demand and strong pricing, whereas adjusted EBITDA margin in industrial automation was down 110 basis points impacted by lower volumes and negative mix impacts from the decline in discrete automation. Getting into a bit more detail starting with gross margin, we finished the year with gross margin of 41.8% or plus 200 basis points organic, supported by pricing actions primarily taken in 2022 to counter the inflation that adversely impacted our gross margin last year. We also returned to positive productivity, although we're not yet back to the levels we had prior to the supply chain crisis. And we would expect productivity to continue to normalize in 2024, although, as mentioned, we still have a few supply constraints due to continued high demand. Mix was positive, despite our higher growth in the systems business, driven by strong pricing in that business model. In terms of our OPEX, or as we call it, our support function costs, we did continue to drive structural savings this year, helping to offset in part a higher inflationary year than in the past. And we continue to make investments in our strategic priorities of innovation, support to our commercial footprint, and our digital transformation, including investments in AI. We also had some significant non-recurring items year over year, including a differential in bonus accruals and some technical accounting adjustments, outside of which we did realize some positive leverage on our costs as we would normally target. Turning now to net income. Including Scope and FX, our adjusted EBITDA is up 7%. Below the line, our other income and expense was positively impacted by gains related to our portfolio disposal program. Restructuring costs were $147 million for the year, $80 million lower than last year, and trending towards our target of around $100 million per year for normal years. In financial costs, we had a step up in our cost of financial debt tied to the Aviva acquisition, and we were additionally adversely impacted by around $100 million due to hyperinflationary accounting and other FX impacts. Our effective tax rate was 23.8% towards the lower end of our range, and we anticipate our ETR will remain within the range of 22 to 24% for 2024. and this all results in a net income of 4 billion euros, up 15%. Our adjusted net income, which excludes OIE and restructuring, was up 2% and adjusted EPS is at 726 euros per share. These operating results translated into our cash flow from operations up 3% to $5.5 billion. Despite an as-anticipated step up in CapEx to support growth, we realized a very strong cash conversion ratio of 115%, driven by improvements in working capital due to a normalization of supply chain constraints and a focus on ensuring the right cash profile for our systems business. and we'd expect to continue with free cash flow conversion of around 100% over the cycle. Our strong free cash flow supported a step down in our net debt and an improvement in our debt ratios. You can see here that we're back to similar levels in our net debt to EBITDA ratio as we had prior to the acquisition of the Aviva Minority Interest. As part of our Capital Markets Day, we adjusted our return on capital employed, or ROCE, ambition to 15% plus. Driven by our strong results from operations in 2023, we had a very nice step up in our ROCE, finishing the year at 13.5%, a 130 basis point improvement. and this is a good representation of the power of our underlying portfolio to drive returns to investors. Another component of our return to investors is our progressive dividend and I'm pleased to announce, Peter mentioned it earlier, we've proposed a dividend of €3.50 per share for full year 2023, a double digit increase in our 14th year in a row of progressive dividends. With that, I'll turn back to Peter to give an idea on the expected trends for 2024.

Thank you very much, Hilary. And let's talk what we're seeing for the year that has just started. Now, the expected trends in 2024, there is a strong and dynamic market demand to continue on the back of the structural megatrends that we've talked about. We also see strong demand for system offers, notably driven by the trends in data center, grid infrastructure investment, and increased investment across process industries served by both businesses. There is a continued focus on subscription transition in our software business and growth in services. And we see a gradual demand recovery for product offers weighted towards H2 and this is linked with a recovery in consumer linked segments and discrete automation. All four regions to contribute to growth. It will be led by the US, India and the Middle East. Now how does that translate into our 2024 targets for the groups that we're setting as followed? The 2024 adjusted EBITDA growth of between 8 and 12% organic. The target would be achieved through a combination of organic growth and margin improvement. Currently expected to be a revenue growth of 6 to 8% organic and the adjusted EBITDA margin up Thank you very much. Thank you. Now, if we recap also our medium target targets that we've set last November at the capital markets, they call the next frontier in respect to financial targets and across the cycle ambitions, you can see that we're well on track. to achieve those in the first year as we start the journey to the next frontier to be a company of 25 and have organic growth from 23 to 27 of 7 to 10% and the respective margin appreciation. With that, I'll hand over to Amit to host the Q&A session that we're looking forward to.

All right, thank you, Peter. Thank you, Hilary. So I think we're in good time, time enough to have a question from all the analysts, in fact. So I'd request to keep it to one question, and then we come back to you if the time allows. So please respect that. I'll hand it back to the operator for the first question.

Thank you, sir. We'll now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone. The first question comes from Andrew Wilson of JP Morgan.

Hi, good morning. Thanks for taking my question. I just wanted to, I guess, dive into the discrete automation commentary a little bit more. I guess it's probably a comment around China. If I sort of take that in most regions, it's actually been relatively resilient for you. But just give us, I guess, a bit more color on where you think you are in terms of some of the stocking, where you think underlying demand is, and whether we're kind of confident in whether we think we've seen the trough and when we might start to see a bit more of a tangible recovery. Thank you.

Well, thank you very much for the question. Again, maybe on the discrete automation, we've, in general, I think have talked about this for two quarters. It is there. It's there in China. We have a pretty good visibility on stock levels at our distributors and at our OEMs. And we can say this as a This is normalizing. The underlying trend, we're expecting a recovery in H2, while we already see with some clients some positive momentum. But it's too early to call the cycle being over. And it's been cyclical since I'm in the business, so not a total surprise. We should see that come back in H2.

Thank you, Andy. Next question, please.

The next question here is from Phil Buller of Barenburg.

Hi, good morning. Questions on data centers. There's quite a lot of excitement out there in the financial markets, and it looks like from your slide four that it's now 21% of orders, which is two points higher than what you shared at the capital market today. And how should we think about that translating into sales? In the press release, I think it's referenced as being strong double-digit growth. But perhaps you can frame that a little bit, please. Is it 20%, 30%, 40%? Really just trying to get a handle on the moving parts of data centers.

Well, thanks very much, Phil, for the question. Let's maybe start breaking this down a little bit when we're talking about data centers. The 21% on orders that you've well recognized, the plus 2% since 2022, of course, gives a strong demand. We're usually talking about data centers. We're talking about companies. Thank you very much. In that market coming back, the data centers, hyperscalers and colos, very good demand, very good visibility and a very good backlog that we've talked about. So we expect this to continue for quite some time. Now, maybe we can put a little bit more color on some of the numbers, Hilary, that we've buried in the press release.

So indeed, we don't give specific growth numbers on each of the segments, but I think we've talked for quite some time about data center being double digit in our actual sales results. So that's been translating into sales now for quite some time. And I think you can put the math together probably between the backlog that you see and what we're talking about here. No doubt this is probably our fastest growing segment and a big opportunity for us. At the Capital Markets Day, we'd mentioned that we expect over this four years that the growth rate for data center and network would be 10% plus.

All right. Thank you, Phil. Next question, please.

The next question is from Andre Kuknin of UBS.

Good morning. Thank you for taking my question. My question is on pricing. I wondered if you could talk about, please, what you expect for 2024, what your intentions are, maybe splitting it across the categories in terms of products, systems, and services. And if I may just clarify, Hilary, the $315 million in support function costs, is that a run-off, and is it adjusted out from your adjusted EBIT, or not?

So maybe I start off, André, thanks for the question. In respect to the mix, we've said that we see products come back and there are some good signs in some of the categories that we have. Some of the categories have been We've outlined the consumer-linked, so that's more on the residential side. I talked about the single-phase UPSs already, and then of course there are products in the industrial world. Systems is growing very nicely, and the solid, solid backlog that we have with good visibility Thank you very much.

Yeah, sure. So I'd encourage on the support function costs that if you take a look at the slide, we give some detail around those costs. I think it's sort of around 300 million euros plus. Those are non-recurring in nature, so we've called them out. But they are included in our adjusted numbers. We don't take them out for purposes of adjustment. We just particularly had some items this year that we called out in that bridge, and you can see it there in impacting our SFC to sales ratio.

All right, Andre, we'll come back to you if you have follow-ups later. Next question, please.

The next question is from Alastair Leslie of Societe Generale.

Hi, good morning. Thank you. So I'm just wondering if you could unpack the organic margin guidance a little bit, maybe comment on the puts and takes around pricing, productivity. Mixon and wage inflation. You see each of those elements driving, I suppose, or weighing on margins. And linked to that on FX, I mean, sort of close to a basis point hit the margins in 2023. It's quite a significant headwind. Another 30 basis points expected in 2024. I mean, if you go back over the years, FX has kind of been a consistent headwind. even if there's some arbitrage with the organic line. So are you planning any changes either in pricing policy or operational structure maybe to mitigate those types of moves in the future? Thank you.

Quite a few questions baked at one question. Let me start off and then hand over to Hilary. In respect to pricing, we've seen an extraordinary year in 2022 and there was quite some carryover in 2023. In 2024, we expect this to normalize to... Thank you very much. To deliver and from that perspective productivity was maybe a priority too. Now that will change and has changed in the last month and into 2024. Of course we said earlier that we're seeing extraordinary demand in some geographies and there we continue to have delivery opportunities Thank you very much.

Indeed. Maybe to give a little context from a numbers standpoint. So in terms of gross margin, like Peter said, we would expect price to be in more normal levels. At the Capital Markets Day, we talked about driving around 35 basis points of gross margin improvement due to pricing over long time periods. Thank you for joining us. In terms of mix, I did say in the Capital Markets Day that due to the systems business and that increase in system business over time, we'd expect it to be negative to mix. And we would expect that to be the case in 2024. While we're still focusing on the transition at Aviva to subscription, so that gives you a sense hopefully of the gross margin line. Labor inflation, we don't expect it to be fully back to normal in 2024, but not at the levels that we saw in 2023. So some retraction, but not quite back at the levels that we saw before 2023. In terms of FX, indeed, it's a key focus for us across particularly the areas where we're impacted. We have good market shares in the emerging markets in particular. And so we have a keen focus on this in terms of pricing, but also some other potential actions in order to address some of the More, I would consider, extraordinary impacts that we've seen from FX over the past year and into 2024.

All right, thanks, Alistair. Next question, please.

The next question is from James Moore of Redburn Atlantic.

Yes, good morning, everybody. And my question is on the 6% to 8% organic sales rate guidance for the 2024 year. And it's really in two parts. Firstly... Why is it below the 7-10 mid-term four-year target when you've got so high visibility up front? Are you saying that you expect the next three years to be higher? Or that the mid-term target's too high? And secondly, as data centres the fastest engine behind the 6-8 this year, If you won't say what the growth number is, because obviously it's going to be above 10, it could easily be 25 and the difference is huge, but could you say what the book-to-bill last year for data centre was and how much of the 19.2 billion backtalk of the group is data centre? Thanks.

Thanks, James, for the question on the 6.8% guidance, which we think is very balanced as we go into 2024 and supports what we've said at the Capital Markets Day in respect to 7 to 10, given the environment on some of the products aside. Now, in respect to data center and infrastructure, and Backlog and what's the book to bill ratio. We don't go into those details, but you can see from our disclosure that we've built up well over 2 billion of Backlog in 2023. And you should expect that a majority or a lot of this is coming from infrastructure and from data centers. And you see it in the percentages of the end market coverage that we've laid out. So 19 to 21 for data center on the infrastructure, if I recall correctly. And please correct me, Hilary, I think it's also a point up. in that respect. So that gives you a good color of where we are with what we believe is a balanced outlook or guidance in respect to growth for 2024.

All right. Thanks, James. And that growth of backlog for the year 2.7 billion, so well above 2 billion. Next question, please.

The next question is from Jonathan Mouncey of BNP Paribas.

Hi, everybody. Thanks for letting me ask a question. Back to the price, actually. I don't know, maybe I didn't hear it, but what was the price contribution in Q4? And then I think, Hilary, you just said that price was likely to be 1 to 2 in 2024. Is it fair to assume that there's quite a bit of bias for that towards H1, especially when we see how much price was needed in the rest of the world? What's that hyperinflation in certain economies? So, Can I sort of imagine maybe this is sort of 3% in H1 that passed only 1% in H2? Is that a fair assumption? Please go ahead.

So in the Q4, starting with the Q4 question, around half of the 9% growth we saw in the Q4 was due to price. In terms of pricing in 2024, yes, you did hear correctly that we would expect to be in the range of 1 to 2 points. Of course, that might change depending on differentials in FX or differentials in inflation than we have in the scenarios that we've put out today. In terms of a bias between the H1 and the H2, I'd mentioned that a lot of our 2023 price was due to carryover, so we don't enter into 2024 with a lot of carryover from price. Agile pricing for FX we do consistently. So this one, I wouldn't call out anything in particular between the H1 and the H2 for 2024. Again, we said that pricing should be sort of a normal year with, again, agile pricing in the hyperinflation economies.

Thanks, John. Next question.

The next question is from Gael of Deutsche Bank.

Thanks very much. Good morning, everyone. My question would be around the construct of the guidance. Did you assume any significant order decline this year and any substantial backlog consumption for the backlog, maybe to come back closer to the normalized level of performance? And if I may, can you perhaps say how much of the $3 billion supply framework agreement with Compass Data Center was included in the backlog at the end of December?

So, you know, as we said, the backlog gives us good visibility into 2024. And so, you know, that's part of how we made up the guidance. Plus, you know, some pricing, as we've discussed in the earlier questions, Gail. And then, of course, when you look at the products with the mixed picture, some already... Pretty good, and some we expect to come up in H2, and all of those results into the 6-8%. I don't know, I think I missed one or the other point of your question buried in there. Hilary?

Yeah, maybe I'll just add, as usual, we create the guidance based on a bunch of different scenarios on what we think is going to happen in terms of macroeconomics. We don't have any concerns about the backlog. We don't see any uptick in terms of cancellations or anything like that. So we are going into 2024. Thank you for joining us. Like we said in the expected trends, we expect to be still in a strong demand market, particularly for systems. But also, you know, we've called out in particular a recovery in the consumer linked and the discrete markets in the second half. But as you can see in the Q4, the rest of our markets, so the vast majority of energy management remains well positioned. How much of the Compass data center of the 3 billion would be included in the backlog? It's not entirely included yet, if that's the question.

Thank you, Gail. Next question.

The next question, sir, is from Max Yates of Morgan Stanley.

Thank you, and good morning. Could we just talk a little bit more about the industrial automation margin? Because it's stepped down, obviously, Thank you very much. Maybe some clarity on discrete versus process growth rates within that division might give context as well.

Thank you. Let me start off with the different growth that we've seen and then also how some of that translates into margin and margin differential in H1 and H2. As we've said over the last two quarters, the The discrete automation and in particular the OEM space for us has had declines as we anticipated. We do see in some geographies stabilization, so it's too early to call it a recovery. But we've seen some of those in the past, so I wouldn't be too worried about that. Thank you very much. Thank you very much. The transition should probably be 25-26. We should be through with what we've said before. Now, on the quarterly or half-yearly phasing of the margin, Hilary, maybe you can support here a little bit with some insights.

Yeah, sure. So there's, you know, and I think we gave the breakdown anyways of growth between the businesses, the different business models that we have there. So like Peter said, good growth in process automation, Actually good growth in software you can see this year as well with the impacts from discrete. Now of course we don't manage quarter by quarter and I've mentioned that a few times before in terms of cost. So much of what you see from the impacts between the H1 and the H2 is the impact from the lower volumes in discrete. I wouldn't call out anything in pricing. I think it's really volumes here in terms of discrete. where we continue with industrial automation like with energy management to make some investments for the future. We've talked about things in electronics and things that we're doing in platforming in industrial automation. So much of what you see in the second half is tied to the differential between volumes and costs. And secondly, we have a big mix impact between discrete and process automation. And of course, for 2024, we'll be watching carefully. But again, we wouldn't make an adjustment from a cost structure standpoint simply because of what we would consider to be sort of normal cyclicality in the discrete automation space.

All right. Thanks, Max. Probably another two questions, two or three, if we can fit them in. Next question, please.

The next question is from Martin Wilkie of Citi.

Yeah, thank you. Good morning. It's Martin from Citi. The question I had was on the profitability and the margin in the systems business. So I understand that systems is mixed negative relative to products. So just as we think about that systems profitability over time and given how big that backlog is, has that structurally become more profitable given the demand in data center and region voltage, these kind of areas? So does that gap

Thank you very much, Martin, for the question. Excellent question. We've talked about this at the Capital Markets Day, in fact, that our systems business has had a solid margin improvement, and that has come out of price. It has come out of also... Thank you, Martin, for the good question. Next, please.

The next question is from Daniela Costa of Goldman Sachs.

Hi, good morning. Thanks for taking my question. I'll keep it quick. Just given the strong free cash flow and the balance sheet, can you comment a little bit in terms of sort of your thinking regarding triggering further inorganic growth and how you're thinking about the portfolio from that angle at the moment? Thank you.

I think we're attached to our capital allocation that we've set at the Capital Markets Day and we'll follow that one. I think from a portfolio perspective we are ideally positioned to the megatrends and of course in respect to M&A we will remain opportunistic in the fields that we have talked about at the Capital Markets Day where we are active right now.

Thanks, Daniela. Next question.

The next question is from William Mackey of Capital Chevreux.

Good morning. Thank you for squeezing me in. My question relates to the supply-demand imbalances or rather the capacity tightness that you're seeing Thank you.

Thank you very much for the question, William. As we've said in the presentation and with multiple questions already, we're focusing on productivity in many geographies. That means we're We've pivoted away from supply constraints. Now, in the United States or North America, that's a different story. We also said that there is unprecedented demand where we want to... Thank you very much. and then in the other geographies I think it's around the normal investments that we have planned.

All right. Thank you, Will. I think just mindful of everyone's time, I just want to spend a minute on the slide that you probably see on the screen. We're going to be on roadshows pretty soon, so look forward to seeing many of our investors. Also on a couple of conferences that are lined up. So look forward to that. If you need to reach out to the team, you can reach out to us by email or by contacting Lorna and our team. Thank you very much for your time and attention and your shareholding. and we look forward to seeing you soon thank you very much