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.