Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Schneider Electric SE (SBGSF, Financial) reported record revenues for Q2 2024, reaching EUR9.6 billion with an organic growth of 7.1%.
- The company achieved a gross profit increase of 8.8% organically, with a stellar gross margin of 43.4%, up 100 basis points.
- Adjusted EBITA margin improved to 18.6%, with an adjusted net income up 10% to EUR2.2 billion.
- Strong performance in key growth markets such as the US, Middle East, Africa, and India, all showing double-digit growth.
- Significant progress in the software business, with AVEVA showing an ARR growth of 16% and cloud revenues up 140% in H1 2024.
Negative Points
- Industrial automation sales were down 3.5% for Q2, with discrete automation showing particular weakness.
- Western Europe showed negative growth, impacted by discrete automation and continued weakness in residential markets, especially in Germany.
- The company faced supply chain issues in North America, necessitating significant capacity investments which may impact short-term productivity.
- Net income was impacted by a non-cash impairment related to Uplight, resulting in a net income decrease of 7% to EUR1.9 billion.
- FX translation adversely impacted revenues by around EUR300 million, mainly due to the weakening of the Chinese yuan and other volatile currencies against the euro.
Q & A Highlights
Q: The question is on everyone's favorite topic of data centers. I was hoping you could add a bit more meat around what you're seeing here, please? What should we infer in terms of the current growth rate you're seeing? I assume it's accretive to the growth rate you're reporting in systems. You say you're on track for the 10%-plus medium-term CAGR offered at the CMD over C&SP quite a way ahead of that. Is that fair? And how should we think about margins in systems? It feels as though it used to be very dilutive and perhaps that's no longer the case. So really, just as much further insight as you can, please, on the demand growth and pricing dynamics, I guess, in data centers would be super helpful. Thank you.
A: Thank you very much for the question. I'll take a first stab at it, and then Hilary can complement. Now, the data center space indeed, is dynamic. Now if you look at the midterm growth that we've set out for our C&SP business and data networks. So it's a combination of several markets. You would expect that data centers are a little bit more dynamic to that one. And we feel very good and well positioned with the portfolio that we have to participate in the growth that is there and in the increased investment that you've also heard from some of the folks that just reported over the last couple of years -- a couple of days, sorry. And this business also comes, of course, largely as a systems business. And you see it in the growth numbers, respectively, and this is a very excellent contributor to it with respective margins. There's also quite some services attached to it, which we really like. And I think I missed out on maybe one or two points that you've asked. Hilary?
Hilary Maxson: Yes. I think, Peter, just suffice to say, as you mentioned, certainly, data center was a great contributor to the Systems number that we saw. We won't confirm the exact growth rate, but you can see what others are reporting in that space. We're the market leader there, and I think we would expect that to continue to be the case. In terms of margins, we mentioned at our Capital Markets Day that the systems business has already actually closed quite a bit in terms --
Operator: Ms. Maxson, could you please speak a little closer to the microphone. We can't hear you very well.
Hilary Maxson: Sorry for that. I guess you're not hearing me very well. So indeed, actually, we -- hopefully, you can hear me a bit better now. But indeed, we confirmed at the Capital Markets Day that we'd already closed a decent level of that differential between the margins between systems and products. We wouldn't expect that to close in entirety. But suffice to say in the systems business where we have great demand, as you can see, we also have good pricing power and we're working with our customers to have the right level of margins for ourselves, but also to have the right level of relationships with those customers over what we would expect a fairly lengthy period of good demand.
Q: I wanted to ask around the backlog development. I think in previous results that was said, you've helped us a little bit with at least some commentary on backlog development and book-to-bill type, I guess, metric. So hoping you can give us an update on that as well, please?
A: Yeah. Hi, Andrew. Thanks very much for the question. As I said, we've -- I think we have an unprecedented demand environment, and as you would expect, a positive backlog. Short question, short answer.
Q: I've got one question on the margin that's implied in the second half. Looks very conservative on a first-look basis. I think, Hilary, you mentioned the low productivity in North America. Maybe you can just talk a bit around this in a bit more detail. I think if I take the midpoint of your guidance, it implies 90 basis points roughly down on the H2. Obviously, last year was down, I think, 30 bps, but last five, six years, you've always had north of 100 basis points higher margin in the second half. So just a bit more clarification on that, please. Thank you.
A: Yeah. Maybe I start off, Simon, with some of the elements that we're seeing, and then Hilary can go further into detail. As I've said, we really have an unprecedented demand environment at the moment. And we did have some issues in the supply chain in North America. So we've been investing and continue to invest in a very responsible way to address those -- this unprecedented demand. From that perspective, as we're hiring and bringing in more people, they won't be as productive as people that are there for a long time. As you would expect, we are ramping up some new machinery and new lines and we're fitting out factories to serve our clients. And the priority number one is to bring the service levels up to where the clients would believe them in respect to delivery time, in respect to on-time delivery, that's going to be priority one as we want to follow the market demand that we have there.
Hilary Maxson: Indeed, Peter. So we do expect industrial productivity, like I mentioned, would moderate in the H2 versus the H1 because of what we're -- all the actions we're taking in North America. We also expect continued strong growth in systems with a more gradual improvement in Products. So it's possible that mix could be a bit less positive between the H1 and the H2. And of course, you can see we're investing in various areas with R&D, digital. And we'll continue to do that, not just in the H2, but over the course of the Capital Markets Day like we shared with you in November.
Q: Just in terms of those comments around productivity, and I guess, we can understand the impacts on margins. But is this also a limiting factor now potentially on growth? Or could it disrupt growth in the short term, particularly in North America? Obviously, that's the core growth driver. I was just wondering if that's the message here or we can rule that out? I just wonder if that's maybe one of the reasons behind the top line guide remaining unchanged. Thank you.
A: No. Alasdair, as you've seen, we have had a good dynamic from Q1 to Q2 and that sets the stage for the following quarters to come. And the guidance fully remains intact with 6% to 8% as were -- as all our facilities are running at full speed and we're bringing in new people and new capacity to be able to fuel the growth that's there. So nothing to be concerned about both the guidance that we've given, and also the midterm target remain fully intact.
Q: How much capacity are you adding in North America versus the current capacity that you have
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
