RUEIL-MALMAISON, France — Schneider Electric announced its second quarter revenues and first half results for the period ending June 30, 2016.
Jean-Pascal Tricoire, Chairman and CEO, commented: “We deliver strong performance in the first half in a challenging environment. Our margin is up by +1.6pts before FX, and Free Cash Flow more than doubles. Adjusted EBITA and Net Profit both grow double digits. This strong performance is driven by our continued focus on executing the simple strategy laid out in Schneider is On, with good progress of cost and simplification initiatives. In an environment impacted by O&G headwinds and weakness in resource based markets, we see continued growth in Western Europe and the U.S. construction market, improvement in China’s construction market and slight growth in the rest of New Economies despite difficulties in Brazil and the Middle East.
Looking forward, our priorities remain to accelerate growth in Products, Software and Services, better select and execute systems, and continue focusing on our cost and cash efficiency in a mixed environment. We should also face a high base of comparison in margin, an accelerated negative impact on revenues from project selectivity, less favorable raw material tailwinds and a slowdown in the U.K. Taking into account these elements, and our strong performance in H1, we update our 2016 objectives and target about flat underlying organic growth in revenues before the impact of selectivity, and adjusted EBITA margin to improve +60bps to +90bps before FX“
I. SECOND QUARTER REVENUES WERE DOWN -0.5% ORGANICALLY
2016 Q2 revenues were $6,931 million, down -0.5% organically and down -9.4% on a reported basis.
Organic growth by business
Buildings & Partner (44% of Q2 revenues) grew +0.9% organically in the second quarter, growing in all regions except Rest of the World. Wiring Devices & Final Distribution was up mid-single digit. The execution priorities remained focusing on maximizing all businesses through its network of partners, launching new connected offers for “Power distribution redefined” and driving Wiring devices / Final distribution growth in all regions. North America was up driven by successful new offer launches in a favorable construction market in the U.S. and continued growth in Mexico. In Western Europe, Germany and Spain were up thanks to commercial initiatives. The Nordics grew in a mixed environment while France performed well in the residential construction market. Asia-Pacific was up. China stabilized thanks to construction markets in tier 1 and tier 2 cities and growth initiatives in targeted segments. India was up strongly in a favorable market. Rest of the World was slightly down as the growth in CIS couldn’t offset the declines in the Middle East and South America.
Industry (22% of Q2 revenues) declined -1.2% organically, at a slower pace than Q1 thanks to the focus on accelerating business through partners and integrators, developing OEM solutions, growing software in key segments, balancing end-user exposure and growing strategic accounts. The U.S. was down as it continued to be impacted by low O&G investment and a strong dollar, while the priority remains enhancing cross-selling by leveraging channels and new offer launches. Western Europe was up, driven by growth initiatives and project execution while the OEM market remained positive. France and Germany performed well thanks to channel initiatives in a tepid market. Italy was up benefitting from sustained demand from export oriented OEMs while the U.K. was down. China declined at a slower pace than in Q1 as the OEM market showed early signs of improvement. The Rest of the World grew. Services were up strongly in the quarter.
Infrastructure (20% of Q2 revenues) was down -2.3% organically in the quarter, about flat without the project selectivity impact, estimated to be around -$42m in Q2. This impact is expected to increase in H2. The business continued to focus on growing Services and Products while increasing selectivity and better executing systems (projects and equipment). North America was up thanks to project execution in difficult markets in the U.S. while Canada was penalized by a high base of comparison. In Western Europe, France, Germany & the U.K. were up due to solid project execution while Spain and Italy declined mainly impacted by project selectivity. In Asia-Pacific, China declined as the growth from emerging segments could not offset weakness from traditional segments. Australia was down while South East Asia grew. Rest of the World was dragged down by weakness in the Middle East, Russia and Brazil.
IT (14% of Q2 revenues) was down -0.9% organically. Launching new offers and expanding channels, integrating the total Group portfolio for targeted datacenter segments, leveraging new cloud-based software and driving services growth were the priorities for the business in a mixed environment. The U.S. was slightly up driven by reinvigorated channels and strong services growth. Western Europe declined slightly as the growth from service was offset by weak IT channel sales. Asia-Pacific was up thanks to strong growth in India and South East Asia. The Rest of World declined as growth in CIS was offset by declines in Middle East and Africa. Services continued to grow strongly.
Organically, systems & equipment were down -3% while products & services were up +1% in the quarter.
Organic growth by geography
Western Europe (28% of Q2 revenues) was up +3% organically in the second quarter. Germany and France were up thanks to growth initiatives in the construction and industry markets and the execution of infrastructure projects. The Nordics grew strongly driven by good market momentum in some countries and project execution. Italy and the U.K. grew while Spain was impacted by a high base of comparison.
Asia-Pacific (27% of Q2 revenues), was down –2% organically. China continued to post a slower paced decline thanks to stabilization in tier 1 and tier 2 city construction markets. New Economies outside China were up, driven by India and South East Asia. Australia was penalized by the phasing down of some projects and continued weakness in commodity-related segments while the residential construction markets continued to grow.
North America (28% of Q2 revenues) was about flat organically in Q2. The U.S. was up thanks to growth in the construction market and infrastructure project execution, while industry markets remained weak. Additionally, there were signs of improvement in some data center segments. Canada was down while Mexico continued to grow in a favorable market.
Rest of the World (17% of Q2 revenues) was down -4% organically. Middle East turned negative as a result of weak investment caused by a low oil price and lack of financing. South America was dragged down by weakness in Brazil, while the rest of region grew. CIS was up thanks to growth in medium range offer and project execution.
Revenues in new economies were down around -2% and represented 41% of total second quarter 2016 revenues. Revenues in the new economies outside China were up 1%, while China was down low single digit in the first half 2016.
The Working Day impact in H1 was estimated at +0.9pt, which is expected to be -0.9pt in H2.
Consolidation¹ and foreign exchange impacts
Net acquisitions had an impact of -$326 million or -4.3%. This includes mainly the deconsolidation of Delixi² (consolidated under Buildings & Partner business), the disposal of Juno Lighting (consolidated under Buildings & Partner business), Telvent Global Services and Transportation (consolidated under Infrastructure business), and some minor acquisitions and disposals in other businesses. Delixi remains a 50/50 joint venture and the deconsolidation had almost no impact on the Group’s adjusted EBITA margin evolution in H1, and no impact on net profit at the Group level (see table in appendix).
The impact of foreign exchange fluctuations was negative at -$360 million or -4.6%, primarily due to the weakening of the U.S. dollar, Chinese yuan, British Pound and several new economies’ currencies against the euro.
Based on current rates, the negative FX impact on FY 2016 revenues is estimated to be ~$1.12bn. The negative FX impact on adjusted EBITA margin for FY 2016 is now estimated to be -50bps to -60bps due to increased currency volatility since April.
II. HALF YEAR 2016 KEY RESULTS
- ADJUSTED EBITA MARGIN AT 13.3%, UP +0.8 POINT VERSUS HY 2015, UP c. +1.6 POINTS BEFORE NEGATIVE FX IMPACT
Gross profit was down -4.7%, up 3.1% organically, and systems gross margin improved by ~+1pt
Gross margin increased +1.2pts to 38.2% in HY 2016 as positive net pricing³ and productivity offset negative FX and production labor inflation:
– Net price contributed +0.8pt and productivity contributed +1.4pts
– Negative mix of -0.1pt showing significant sequential improvement compared to H2 2015
– Production Labor inflation had a negative impact of -0.3pt
– Currency had a negative impact of -0.7pt mainly due to the depreciation of the U.S. dollar, Chinese yuan, and several new economies’ currencies against Euro
– Scope and Others had a positive +0.1pt impact, mainly due to the deconsolidation of Delixi, the disposal of Telvent Transportation and some negative one-off adjustments
Support function costs decreased -1.0% organically, a 1pt greater decrease than organic growth and decreased 6.1% on a reported basis.
HY 2016 Adjusted EBITA reached $1,753 million, down -1.9%, up 12% organically
The key drivers contributing to the earnings change were the following:
– Volume impact was negative -$31 million
– Solid execution of tailored supply chain initiatives contributed $191 million, higher than H1 2015
– The net price impact was positive at $111 million, comprised of a favorable raw materials tailwind of ~$112 million and price stability at Group level (positive outside China). The raw material tailwind is expected to be close to zero in the second half of the year
– Production Labor inflation was -$41 million
– Support function costs reduced by $35 million in H1. Total gross SFC reduction in H1 2016 is c.$134m thanks to solid execution of the Group’s simplification program
– Currency fluctuation decreased the adjusted EBITA by -$160 million, mainly due to the depreciation of the U.S. dollar, Chinese yuan, and several new economies’ currencies against the euro
– Mix was negative at -$17 million
– Acquisitions, net of divestments, were a negative -$61 million for H1 mainly driven by the deconsolidation of Delixi and the disposal of Telvent Transportation and Juno Lighting. The impact on adjusted EBITA margin was positive at c. +0.1pt, mainly due to the disposal of Telvent Transportation
By business, adjusted EBITA of Buildings & Partner for HY 2016 amounted to $1,144 million, or 19.8% of revenues, up +1.9 points year-on-year thanks to strong gross margin improvement. Industry generated an adjusted EBITA of $473 million, or 15.9% of revenues up +0.4 point, up c. +1.2pts before FX thanks to strong cost control. Infrastructure adjusted EBITA was $176 million, or 6.9% of revenues. The underlying trend was positive at +0.7 point year-on-year, driven by system gross margin improvement and stringent cost control. The adjusted EBITA margin was up c. +2pts before FX.IT business reported an adjusted EBITA of $297 million, 15.7% of revenues, down -0.4 point, up c. +0.1pt before FX. Gross margin was up, while adjusted EBITA margin was impacted by FX.
Corporate costs in H1 2016 amounted to $338 million, about the same level as in the previous year.
- NET INCOME UP +13%
The restructuring charges were $147 million in HY 2016. Restructuring Costs are expected to be c. $335 million in FY 2016 to drive efficiency and simplification initiatives
Other operating income and expenses had a negative impact of -$9 million, vs. -$84 million in HY 2015
The amortization and depreciation of intangibles linked to acquisitions was $93 million compared to $154 million last year, a significant decrease mainly due to the end of the depreciation of several previously acquired brands
Net financial expenses were $275 million, compared to $252 million in HY 2015 as the cost of net debt decreased by $20 million, but was offset by a loss on exchange
Income tax amounted to $307 million reflecting a tax rate of 25%, an increase from last year mainly due to the ramp down of Invensys tax synergies, in line with the 2016 expected tax rate of 24% to 26%
Share of profit on associates amounted to $14.5 million including the effect of the change in consolidation of Delixi.
The Net Income was $903 million in HY 2016, up +13% from HY 2015
- FREE CASH FLOW OF $498 million, more than double HY 2015
Free cash flow was reported at $498 million for the first half, more than double the cash flow from HY 2015 thanks to strong growth of operational cash flow. This figure included net capital expenditure of $449 million. The trade working capital increased by $280 million, a lower increase than in HY 2015 thanks to better control over receivables and inventory management.
- BALANCE SHEET REMAINS SOLID
Schneider Electric’s net debt at June 30, 2016 amounted to $6,390 million, an increase of $1,219 million compared to the beginning of the year, mainly due to dividend payments and share buybacks.
III. SHARE BUY BACK
Since the beginning of the year, the Group has repurchased 6,192,623 shares for a total amount of c. $357 million with an average price of $58. The share buyback was accelerated after Brexit. The Group has repurchased 16.8m shares, investing ~$1bn cumulatively on share buybacks since 2015 against the Group’s target of ~$1.7bn.
IV. 2016 TARGETS
In the first half, the Group delivered solid organic growth around Products & Services and a strong improvement in adjusted EBITA margin in a challenging environment. While headwinds from O&G and weakness in resource based markets remained, growth continued in the U.S. construction market and in Western Europe, China’s construction market showed improvement and New Economies outside China were slightly up. Additionally, the Group’s organic growth was negatively impacted by project selectivity. The impact of this selectivity is estimated at -$78 to -$89m in H1, and is expected to accelerate in H2.
In the second half the priority remains to accelerate growth in Products, Software and Services, better select and execute Systems, and continue to focus on cost and cash efficiency. The Group should also face a high base of comparison in margin, an accelerated negative impact from project selectivity, less favorable raw material tailwinds and a slowdown in the U.K. due to Brexit.
Based on this, and given the strong performance in H1, the Group now targets for full year 2016:
- Revenues: About flat underlying organic growth before project selectivity impact (currently estimated to be c. -2% in H2).
- +60bps to +90bps improvement on adjusted EBITA margin before FX. The negative FX impact on margin is estimated at -50bps to -60bps at current rates.
1. Changes in scope of consolidation also include some minor reclassifications of offers among different businesses.
2. Delixi remains a 50/50 JV but from 2016 is consolidated through the equity method (previously fully consolidated) in application of IFRS10
3. Price plus raw material impact
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