Schneider Electric Sa

Welcome to the Schneider Electric's first quarter 2025 revenues conference call with Hilary Maxson, Chief Financial Officer, and Amit 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 it over to you, Mr. Amit Bala.

Well, thank you very much, and hello, everyone. Welcome to our Q1 revenues release. I'm joined here by Hilary Maxson, our CFO. We'll go through a short presentation that you should already have seen, and then we'll move it on to questions. I might just make a reference to, as always, to slide number two, which is the usual disclaimer. And with that, I'll hand the floor to Hillary.

Thanks, Amit, and good afternoon, everyone. Happy to be here with you today to comment on our Q1 2025 revenues and to update you on our expectations for the rest of the year. Starting with slide three, I'm happy to report another strong quarter with sales of $9.3 billion. In energy management, we continued with double-digit growth in revenues, up 10% for the quarter, and we continue to see strong demand, particularly in data center and infrastructure, but not only, driven by trends in electrification and digitization. In industrial automation, we were close to flat for the quarter, with sales impacted by seasonality at Aviva, and we continue to see signs of turnaround in demand and discreet. Overall, we were up 7.4% organic in sales, reflecting our strong portfolio positioning tied to structural growth trends, plus the benefits we have from our multi-hub setup, our diversification across geographies and our business models. In terms of business models, in products, which reflects our shorter cycle business and sales through partners, we were up plus 1%, primarily driven by volume and not price, despite a fairly sizable working day impact for us in Q1. In energy management, demand and sales for products remain solid, with the exception of residential, where uncertainty and higher interest rates are impacting consumers. Our systems business continues with strong double-digit growth, driven by continued strong demand trends, particularly in data center and infrastructure. Software and services was plus 5% for the quarter, with reported revenues at Aviva impacted by timing and its continued transition to subscription. ARR at Aviva was plus 14%. In energy management software, where our pace towards subscription is a bit more measured, we saw strong growth at both ETAP and RIV. Digital and field services were together up high single digit, tied to strong demand in our suite of echo care offerings. Turning now to our own sustainability performance. As you know, this is our final year of our current Schneider Sustainability Impact Program, and we aim to finish with a high achievement of almost 9 out of 10 progression versus some very aggressive goals we set for ourselves at the end of 2020. Of note in Q1 is a 12-point improvement in reduction of CO2 emissions at our top 1,000 suppliers in North America, driven by the deployment of energy efficiency solutions and electricity sourcing from renewables. I'll also note our intensity building in Grenoble, France, where we've deployed our own solutions, achieved an LED platinum certification for becoming one of the world's most sustainable buildings. On this slide, we've highlighted just a few of our many customer examples from Q1. The first two are demonstrating the continued traction we have with our ADMS, or Advanced Distribution Management System software, providing real-time network monitoring and control. One customer is an airport that many of you likely know in Amsterdam, and the second, a grid operator in Italy. The third example is a customer you also likely know, ByteDance, the owner of TikTok, where we'll provide medium voltage switchgear and PDUs, as well as ETAP's digital modeling software to ensure accurate electrical data at the beginning of the project. Getting into more details on our Q1 performance, While we don't usually report on our orders, here we're giving you a sense of the order trends we've seen both year over year and in the Q1 2025 versus Q4 of 2024, as I know there have been a lot of questions about what's happening in some of our end markets and segments. First, in data center, we continue to see strong double-digit demand with continued strength in North America and East Asia. This strong growth trend already starts to include adjustments made by certain customers and is indicative, we believe, of the true underlying trend for data centers, which we expect to continue aligned with the expectations we shared at our Capital Markets Day and again in 2024. In building, we do see some weakness in residential, confirming the potential trend we mentioned in February – and driven by low consumer confidence and sustained higher interest rates, particularly in Europe and North America, as well as continued weakness in China. Non-residential building continues relatively stronger. In industry, where we sell the full portfolio of Schneider, we do continue to see positive trends in manufacturing and OEM, whereas mining and energy and chemical continue fairly weak, in part driven by lower oil prices and uncertainty. And in infrastructure... really power and grid a lot for us, we continue to see strong demand trends. So overall, we remain in a primarily strong demand environment for electrification and digitization with positive trends in industry. Of course, we do recognize we're now in an environment of heightened uncertainty, and I'll address that in our expected trends later in the call. Turning now to the details of our Q1 revenues. We finished the quarter at 9.3 billion euros in revenue, up 7% organic year over year, with a particularly strong contribution from systems, as I mentioned prior. In terms of geographies, we had North America as a continued strong double-digit contributor, driven by data center and data center services. Asia-Pacific is at close to double-digit growth, with continued strong growth in India and where both of the two brands we mentioned at our India Investor Day are driving strong double-digit growth. And we've updated in the appendix of this presentation the size of our total India business in 2024, as well as the piece we today own at 65%, together with Temasek as a 35% partner. India is now solidly our third largest country. And we returned to growth in China, up low single digit for the quarter in both businesses. Western Europe shifted to negative, and rest of world continued with solid growth against a strong base of comparison. Foreign exchange impacts were positive for the quarter, driven by strength in the U.S. dollar. Without taking a view on where rates may go in the future, based on today's situation, we would estimate a full-year impact on our top line of minus $1.15 to $1.25 billion, with estimated impacts on our adjusted EBITDA margin of around minus 40 basis points due to the significant depreciation of the U.S. dollar, also impacting currencies related or tied to the U.S. dollar, and the depreciation of the Chinese yuan, all of that being translational FX. Turning now to Q1 revenues by business and geography. Energy management was up 10% organic for the quarter to 7.6 billion euros. We saw continued double-digit growth in North America, up 17%, with growth across all three countries and continued strong double-digit growth in the U.S. due to strong demand in data center and in services. In products, the picture is a bit more mixed, with continued weakness in demand in residential due to uncertainty in high interest rates, with non-residential building relatively stronger. Western Europe was down 3% organic, with demand for products impacted by weakness in residential, with relatively stronger performance in non-residential buildings. System sales were impacted by the delays in data center projects we've been mentioning for quite a few quarters in this geography due to issues in permitting and some design and go-to-market discussions. Asia Pacific was up 13%, with China up low single digit, driven by continued acceleration in data center and growth in new energy. India was up strong double digit with continued strong demand dynamics across end markets. Australia was up double-digit driven by demand in data centers with some weakness in residential, and the rest of the region delivered double-digit growth driven by projects in data center and infrastructure. The rest of the world was up 3% against a strong base of comparison with growth primarily driven by South America. Turning now to industrial automation, revenues were down 1% organic to $1.8 billion in impacted by timing and the transition to subscription at Aviva, and continued weakness in discrete. We did see a strong sequential improvement versus Q4 in discrete, particularly in China and key countries in Europe. North America was flat, with strong growth at Aviva offset by continued weakness in discrete, although we do start to see some improving demand trends in the discrete markets there. Western Europe was down 5%, impacted by timing of bookings at Aviva. Discrete markets were close to flat and sequentially improved versus Q4, particularly in Germany. Asia-Pacific was down 1%, with China up low single digits, supported by continued growth in some early cycle products and a return to growth in OEMs. The rest of Asia Pacific was down due to software and process, with discrete automation flat due to growth in Australia. The rest of the world was up 5%, supported by process and in software. Before I move to our expectations for the remainder of the year, I wanted to mention we closed the Motivair transaction, a great addition to our data center offering, as we continue to be convinced of the significant demand opportunity for liquid cooling, we start to see that in Motivare's expectations for 2025. Plus, we closed the joint venture with Star Charge, through which we'll address the market in Europe for easy charging and storage. In terms of capital allocation, our priorities remain unchanged. Moving now to slide 12 with an update on our market dynamics. First, despite the heightened uncertainty, we expect continued market demand to drive growth in 2025, with contributions across our end markets and from all four geographies, despite weakness in residential buildings. We also expect continued strong demand for systems led by data center and infrastructure projects. We continue to expect a demand recovery in discrete automation, with sales growth weighted towards the H2. In software and services, no change in our expectations there, with expected double-digit growth in ARR at Aviva and strong growth in services. We already gave you information regarding our supply footprint in North America at our full-year call. Nothing's changed there, and we're already taking commercial and supply chain actions to counter the impacts of tariffs. And recognizing the heightened uncertainty, we're focused on ensuring we remain agile and take responsible actions to manage our profitability, our capital investments, and our cash flows. With this backdrop, we're reiterating our full year 2025 guidance of growth in our adjusted EBITDA of 10% to 15% organic, driven by revenue growth of between 7% and 10%, and adjusted EBITDA margin improvement of 50 to 80 basis points. I will mention we do expect to see strong seasonality in our free cash flows this year, as normal, but also impacted by a payment of the 200 million euro fine imposed by the French Competition Authority disclosed in Q3 2024. We're appealing that case, but we're required to make full payment up front. And no change to the expectation I mentioned in February that our cash conversion ratio will trend towards 100% for the full year. Given the tariffs, we also expect to be back to more normal seasonality in our profitability with higher margins in the second half. With that, I'll turn the call back to Amit for the Q&A.