Schneider Electric Sa

Welcome to the Schneider Electric's first quarter 2024 revenue conference call with Hilary Maxson, Chief Financial Officer, and Ahmed Bala, Head of Investor Relations. Thank you for standing by. At this time, participants are in a listen-only mode until the dedicated question and answer session of today's conference. At any time, you may press star, then the number one on your phone to poll for a question. If you need to withdraw your question, please press star and two. I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now hand you over to Mr. Amit Bala.

Well, thank you, operator. Good morning, everyone. Very happy to be with you today to share our first quarter 2024 revenues results with Hillary. We go through the presentation and then get into Q&A. All of you have seen the press release and the presentation. So just a quick mention of the disclaimer, as always, on slide number two, but we dive right into it. Over to you, Hilary.

Thanks, Amish, and good morning, everyone. Happy to be here with you today to comment on our Q1 2024 revenues, as well as to update you on expected trends as we currently see them for the rest of the year. I'll also comment on our capital allocation policy in the context of the press release we sent out last Friday regarding preliminary discussions with a US traded software company. Starting with slide three, I'm happy to report another strong quarter with sales of 8.6 billion euros, a new record for a Q1. In energy management, we continue to see strong demand and strong growth across most geographies supported by the mega trends we introduced at our capital markets day. In industrial automation, we did see the impacts of the decline in discrete automation play out as expected, and we had some timing impacts at Aviva due to the change in fiscal year there to align with Schneider. Overall, we were up 5.3% organic in sales, reflecting the strong positioning of our portfolio, much of which is tied to accelerating secular trends, plus the benefits we have from diversification across geographies and our business models. In terms of business models, in products, where we have primarily shorter cycle business and business through partners, we were up plus 2% despite the weakness in discrete automation and against a strong baseline. Price on products is back to a normal level, so around one point in terms of that growth. In energy management, our residential business continues to stabilize, and we're back to solid growth in distributed IT, with the rest of the energy management product portfolio remaining with strong demand. Our systems business, which includes medium voltage, continues with strong double-digit growth driven by secular demand trends, particularly in data center and infrastructure. Software and services was plus 5% for the quarter, with Aviva impacted by a particularly strong baseline as Q1 2023 was the last quarter of their fiscal year before we shifted them to calendar year reporting. ARR at Aviva was plus 13%, also impacted by this shift, Can we expect to finish the year with ARR growth back at the 15% plus ambition we shared at our capital markets day? We've included on this slide a bit more information regarding our agnostic or one software business at year end 2023. We've made a number of disposals from our RIB business as announced last year. So looking at those on a pro forma basis, the sales from One Software was 1.9 billion euros for 2023. And as you know, One Software is a key focus in our strategy going forward. We continue to be quite pleased with our accelerated transition to subscription at Aviva, as well as the steps we have underway to transition our other agnostic software companies, all progressing as per plan. Lastly, services grew double-digit, continuing with strong execution of our strategic growth plans there. Turning now to our own sustainability performance, we started the year with a score of 6.43, well on track to achieve our year-end target of 7.4 and tracking towards our 2025 ambitions. We've also highlighted a couple of recent initiatives on this slide that we're particularly proud of, and that illustrate our commitment to sustainability beyond our scope of operations. First, at our Paris Innovation Summit, we announced the global winners of the second edition of our Sustainability Impact Awards, where 12 global partners, customers, and suppliers have been recognized for outstanding performance in either decarbonizing their own operations or the operations of their customers. The awards are recognizing the contribution of Schneider's ecosystem in creating a more sustainable and electric world. BlackRock was one of the five winners recognized in the impact to our enterprise category for their efforts to operationalize sustainable business practices in their new headquarters in New York. We're also proud to have recently launched the materialized program for scope three decarbonization of the mining sector. This program follows the Energize and Catalyze programs, addressing pharmaceutical and semiconductor supply chains, for impact at scale throughout industry's value chains. Moving to a few customer examples, Digital Realty, one of our impact makers, is a world leader in data centers and depends on Schneider not just for its energy infrastructure and digitization, but in ensuring its facilities are as energy efficient and as green as possible. A good example of partnership between our key strategic focuses of digitization and sustainability. And we have here an example of our work with a large water utility using Schneider's SCADA solutions to deliver one and a half billion liters of safe drinking water to its customers daily while treating a similar volume of wastewater. This opportunity translates into reliable ARR and opens doors for many new types of business in software, hardware, and services. Turning now to the details of our Q1 revenues. We finished the year at 8.6 billion euros in revenues, up 5% organic year over year, with particularly strong contribution from systems. In terms of geographies, rest of world continues with strong double-digit growth driven by strong demand, particularly in Middle East, and supported by pricing. North America continues with strong growth driven by U.S., and in Asia Pacific, we're particularly pleased to see China with mid-single-digit growth overall, driven by growth not only in energy management, but in industrial automation as well. Western Europe is negative against a relatively high baseline and impacted primarily by discrete automation and timing at Aviva. And I'll further detail the comments by geography in the coming slides. Scope impacts of around one point are due to our exit from our sensors business and FX impacts are primarily due to the weakening of the US dollar and Chinese Yuan against the Euro and further devaluation in various emerging markets. Estimated full year impacts on our top line based on current rates are minus 200 to minus 300 million euros, with estimated impacts on our adjusted EBITDA margin remaining minus 30 basis points. Turning now to some highlights by our end markets. Starting with buildings, we continue to see strong sales and good demand in non-residential buildings, where we particularly benefit from our exposure to what we call technical buildings, like hotels, hospitals, schools, stadiums, etc. We also see positive renovation trends, particularly in Europe, and we expect this to continue based on building regulations there. For residential buildings, demand continues to stabilize overall, with growth in rest of world offset by continued weakness in parts of Western Europe on a year-over-year basis. Demand for data center and networks remains very strong, driven by strong trends in data center, both AI and traditional, and with demand and sales growth in distributed IT continuing positive and to pick up sequentially. Demand continued strong in infrastructure, supported by strong demand in grid. And in industry, we continue to see negative demand overall for discrete automation versus last year's high baseline, but with a sequential improvement across key geographies. Overall market trends continue to be positive for process and hybrid, with the Q1 impacted by a high baseline. Turning now to Q1 revenues by business and geography. Energy management was plus 9% organic for the quarter, with continued double-digit growth in North America, up 10%, driven primarily by strong double-digit growth in the U.S., due to continued strong demand trends there across end markets, particularly data center and infrastructure, services with a double digit across the region. We do continue to have some constraints in our supply chain in North America in the face of unprecedented demand, particularly impacting our residential offerings and systems business. This is a top focus across our leadership team for 2024, and we continue to invest in capacity and resilience in North America. Western Europe was up 4% organic, against a relatively strong baseline, with strong demand from data center and infrastructure and good growth in distributed IT, partly offset by year-over-year weakness in residential. Services also saw strong growth, driven by trends in renovation. Asia Pacific was up 6%, with China up high single digits, supported by demand in new energy and transportation. India was up strong double-digit with continued strong demand dynamics across end markets. Australia was up mid-single-digit, driven by demand in data centers and with continued modest growth in residential. The rest of the region was varied, with growth in Japan offset by softer performance in some Southeast Asian countries. The rest of the world was up 23%, including some strong pricing actions in economies with significant devaluations. Middle East and Africa was particularly strong, even excluding these pricing actions with double-digit growth driven by Saudi Arabia and the UAE. Turning now to industrial automation, revenues were down 7% organic for the quarter, impacted by discrete automation and by timing at Aviva, while process automation continued with mid-single-digit growth for the quarter. North America was down 10%, with U.S. and Mexico both down double-digit, impacted by higher inventories at distributors and OEMs in discrete automation and by timing at Aviva. Process and hybrid were also down in both countries due to project timing, while Canada was up double-digit due to project execution in process automation. Western Europe was down 16%, impacted primarily by the as-expected downturn in discrete automation markets and against a strong base of comparison. Timing at Aviva also impacted most geographies. France was down mid-single digit, with Germany and Italy each down double digit, all impacted by trends in discrete automation. Process markets were relatively flat for the region, with some pockets of growth particularly in the U.K., Asia Pacific was down minus 3%, with China up mid-single digit, driven by strong growth in process automation and a return to growth in discrete. India also saw strong growth in process and growth in discrete, although it was down slightly overall, impacted by timing at Aviva. Australia was up double digit, with strong growth across process and software. And our other key geographies here, Japan and Korea, were both down, impacted by weak demand in OEM and semiconductor. The rest of the world was up 10%, supported by strong growth in the Middle East and pricing actions to offset devaluations. Moving now to slide 11 with an update on our market dynamics. These remain unchanged since the year end. The year started primarily as we expected, with highlights being continued strong demand across most of our end markets in both products and systems. Discrete automation continues to be under stress as the market normalizes, and residential building is still showing softness in Western Europe. And we continue to see a gradual recovery for both of these product offers weighted towards the H2. With this backdrop, we're reiterating our full year 2024 guidance of organic growth in our adjusted EBITDA of between 8% and 12%, which we expect to be driven by organic growth in our revenues of 6% to 8% and by expansion in our margin of 40 to 60 basis points. As I'm sure you noticed, we did put a press release out last Friday following some press articles confirming that we're in preliminary discussions with Bentley Systems, a U.S. publicly traded software company, in regards to a potential strategic transaction. While there's no certainty that any transaction will be agreed upon, we did want to put this into context of the capital allocation priorities we discussed at our Capital Markets Day, and which remain totally unchanged. As I said then, we're focused on disciplined capital allocation with an emphasis on shareholder returns over the short, medium, and long term. Our current focus and priority remains organic growth, and the financial targets we gave at our Capital Markets Day are tied to our current portfolio. We also mentioned that in terms of acquisitions, we expect to remain opportunistic and agile towards acquisitions that reinforce our unique portfolio positioning in growth markets. And of course, I can't comment further on the specifics of this particular transaction. With that, I'll turn the call back to Amit for Q&A.