Schneider Electric S.E. (SU) Earnings Call Transcript

Good morning. This is the conference operator. Welcome to the Schneider Electric's Q3 2026 revenue presentation with Mr. Olivier Blum, Chief Executive Officer; Mr. Nathan Fast, Chief Financial Officer; and Mr. Antoine Sage, Head of Investor Relations. [Operator Instructions] 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. At this time, I will hand it over to Mr. Antoine Sage. Please go ahead, sir.

Good morning, good afternoon, everyone, and welcome to Schneider Electric's Third Quarter 2026 Revenue webcast. So thank you for joining this morning, and thank you for your continued interest in Schneider Electric. So I'm joined today with Olivier Blum, our Chief Executive Officer; and with Nathan Fast, our Chief Financial Officer. Before we get started, just a quick reminder to take note of the disclaimer on Slide 2 regarding the forward-looking statements. Olivier will start with a few opening remarks before handing over to Nathan to take you through the quarter in more detail. We'll then open the line for your questions. And so with that, Olivier, over to you.

Thank you, Antoine, and good morning, everyone. Great to be with you. Look, after the important strategic announcement over the last few days, net NIR, extremely pleased to be with you today. to discuss a strong Q3 for share electric. At the end of H1, together, we spoke about the momentum across the group and our focus on disciplined execution, which is part of our new company program next Q3 shows that momentum continuing and strengthening. You will see that we delivered EUR 11.5 billion in terms of revenue, which is a new record for Schneider, I think, not just for the third quarter, but for any quarter in our history. And it's very important for me and for the teams, and I'm sure for you, this performance is broad-based across both businesses, all our end market and all our 4 regions at clinic. For me, that breadth matter a lot, demonstrate the strength of our positioning and it gives us the confidence in our ability to sustain performance and create value over the long term. So against this backdrop, reflected on our performance year-to-date. We are upgrading for the second time in 2026, our full year target both on top line growth and adjusted EBITDA margin expansion, and I will come back on that after the presentation of Meta. So a very strong quarter overall. We are going to give you more detail, you will see that we have a broad-based momentum continued with a very strong and disciplined execution. And with that, mean,I hand over to you to go a little bit more in the details of the numbers for Q3.

Yes. Wonderful. Thanks, Olivier, and hello, everyone. I'll start with our key revenue highlights for the quarter. Our Q3 revenues reached EUR 11.5 billion having grown at a strong 17% organic year-over-year. Both businesses are contributing to the strong outcome with Energy Management delivering an outstanding 19% organic growth. taking revenues in that business to EUR 9.6 billion for the quarter. Industrial Automation continued solid momentum of 8% organic to reach EUR 1.8 billion of revenue. Turning now to demand across our end markets and segments. Once again, demand was broad-based in nature in Q3. We showed you the year-to-date demand drivers on this slide. data center continues to be exceptionally strong with another quarter of triple-digit demand growth in Q3, further improving our visibility into 2027 and 2028. Semiconductor, which is smaller in exposure is also seeing sustained high demand linked to the overall AI architecture build-out. We continue to see strong demand across most segments though the positive contribution from residential has not matched the level of the other segments. Turning to our mix of business models for Q3. Product growth accelerated to 17% organic. Price contribution continued to increase sequentially with product pricing in Q3 around the same level in value as we delivered in the whole of H1. The proactive price increases we made at the start of the year are now at full run rate and price realization is ramping up on the supplementary actions we continue to take. Product volumes are also therefore accelerated with contributions from both businesses. Our systems business model where we primarily sell direct to end user continued with high demand and strong execution, translating into sales growth of 22%, driven by data center but also supported by strong contribution from infrastructure. Software and Services grew 7%. With AVEVA's ARR and Q3 organic sales growth both at around 10%. Our EM software assets grew mid-single-digit organic, with strong performance at TAP as both ETAP and RIB continued their own transition to subscription revenue model. Services grew high single digit overall, with good traction in several aspects of digital services. Moving to an overview of Q3 revenue by geography. We were up 16.9% organic to EUR 11.5 billion. And as Olivier mentioned, a record for any quarter with all regions contributing. In particular, we have China and East Asia delivering an incredible 26% growth and North America showing consistent strength at 20%. India continues to track at high growth levels as well, demonstrating that our largest markets are all in good health. Scope impacts in Q3 were immaterial, while ForEx impacts became a tailwind to revenue in Q3 due mainly to the strengthening of the Chinese yuan and U.S. dollar against the euro. As you can see on the slide, if rates remain where they are today, we would expect ForEx impact of minus EUR 300 million to minus EUR 400 million in revenues, and negligible impact in adjusted EBITA margin for the full year. All in, this equates to a reported growth of 17.9% and maintaining momentum as we drive strong execution across the group. Focusing now on geographic drivers that accelerated energy management growth to 19% organic in Q3. North America was up 20%, with the U.S. driven by momentum in data centers where we saw sustained high demand for prefabricated solutions and cooling. We saw solid growth in total across the other end markets led by nonresidential buildings. In Canada, we also grew double digits, as did Mexico, although against a low base of comparison there. Europe grew at 9%, led by performance in data center and grid with nonresidential buildings, also making good contribution to growth. All the major economies of the region delivered growth with Germany and U.K. up double digit and single-digit growth from France, Italy and Spain. China and East Asia was up a super strong 32%. China was up strong double digits, led by everything to do with investment in AI infrastructure. driving growth in the data center and semiconductor segments in particular. East Asia also grew strong double digit with some very high growth rates in countries like Malaysia, Thailand, Indonesia on the back of execution on some large data center projects and with semiconductor also a growth delivery driver in the region. South Asia and international grew 16% with strong growth trends across most of the zones. Growth in India continues to be very strong and broad-based across all end markets. While Australia and Middle East also both grew double digits, benefiting from the strength in data center. And South America was 1 area that was somewhat subdued, partially due to a high basis of comparison. Turning to the geographic drivers of Industrial Automation, which grew 8% in Q3, maintaining good momentum with strong growth at AVEVA and in discrete. North America grew a strong 16% seeing strong growth in industrial software at AVEVA and an acceleration in discrete automation. These were the main trends driving double-digit growth in the U.S. with that strength in discrete coming across segments in industry and infrastructure. Canada was up mid-single digits and Mexico grew double digit against, again, a low basis of comparison. Europe grew 6%, also with double-digit contribution from AVEVA with growth in several countries across the region. Discrete Automation performance varied by country, with Germany and U.K. among the strongest performers. Sales growth in process and hybrid remains subdued overall despite some project execution in Spain and in France. China and East Asia delivered 8% growth. Across the region, we saw sustained double-digit growth in discrete markets. However, this was moderated by weaker process markets and some timing effects at AVEVA. China was up high single digit overall, with strong growth in discrete linked to export OEMs and an improved domestic market, partially offset by weakness in process. East Asia grew mid-single digit, where strong growth in semiconductor segment was partially offset by timing at AVEVA. South Asia and international grew 3% in the quarter with performance contrasted by geography. India saw strong double-digit growth, mainly from discrete automation markets, South America delivered double-digit growth across discrete, process and AVEVA, Australia was down impacted by renewal cycle at AVEVA, which also impacted Middle East and Africa combined with a high basis of comparison from a project in Egypt last year. Turning to our sustainability results. We are now 9 months into our 2030 road map, and we are seeing strong momentum with our solutions that have enabled customers to save or electrify 211 million-megawatt hours at the end of Q3. Across our value chain, we continue to expand our suppliers' decarbonization program with 135 strategic suppliers engaged so far. Regarding our expected trends for Q4, and we are focused on maintaining strong execution and operational discipline to achieve our upgraded full year 2026 target in a dynamic environment. For the details, our expected trends are largely unchanged from what we have presented back in July. However, in our geographic trends, we add China alongside U.S. and India in the countries we expect to drive growth. This is based on the strength of what we have seen over the recent quarters and which we believe is set to continue. We continue to expect strong growth in products supported by price realization from some of the ongoing actions that I spoke about earlier. And taking that thought further, we do continue to expect to offset in value for 2026 and the headwinds from raw material inflation and net tariff impact through our pricing actions. And with that, Olivier, I'll hand it back over to you to take us through the upgraded financial targets.

Thank you very much, Nathan. So Q3, as you can see, shows really the very strong and balanced positioning of Schneider Electric that we consider has been always our strength across the cycle. We are very pleased to see that all our businesses, all our activities are contributing to growth in our end markets. As you can see, all our regions, the 4 regions are contributing also strongly to this growth performance. And it shows also that the good balance of our business panel for products, system services and software also helped to have this strong growth acceleration. So in this context, for the second time this year, as I said in main solution, we are upgrading our end-of-year target with the goal to have our revenue to grow by the end of the year between 12% and 14% organically and to achieve an adjusted EBITDA margin up 100 bps to 120 bps organically which implies an adjusted EBITDA margin of around 9.7% to 19.9% by the end of the year. So we are closing the formal part of the presentation to make sure, as usual, we have enough time foreign exchange and Q&A on that end one, I hand over back to you.

Thanks, Olivier. Thanks, Nathan. Olivier, as you said, it's now time to open for the question and answer. Just as usual, to give time to as many speakers as possible, we'll ask you please to stay on the one question each room, please. And with that, operator, can we please open the line for the first question?

The first question is from Andre Kukhnin of UBS.

Can I ask, please, about the current cadence of the order intake to sales conversion in data centers, as you have been booking now consecutive quarters of very strong growth? And I think we've got now 3 out of 4 or to there with triple-digit growth. I just wonder if that's for the kind of normal time line delivery and i.e., a lot of that will be falling into and whether you're adding sufficient capacity to deliver that kind of implied growth. And if I just may clarify on something else entirely, Mylan get breaking up, but what's the message on pricing that you've got the same pricing in value terms in Q3 as you achieved in the whole of H1? So I could squeeze that one as well, please.

Yes. Perfect. Thank you, Andre. I'll answer the first 1 directly because that's an easy one. The answer is yes. What I said is that the Q3 pricing was at the level in value as it was for all of H1. So exactly you heard that correctly. Now from a data center perspective, you're absolutely correct, and we've commented how some quarters in a row that we continue to see good demand there. We don't give exactly the split of order delivery and the phasing of the backlog into sales, but you can also see, and Olivier already mentioned that the upgrade across the year. Remember, we started in February at a 7% to 10% guidance. We're now sitting 12 to 14, and we're confident that the end markets are still there to continue to deliver on that guidance. And that's part of the conversion you're seeing, right, after some quarters of triple-digit growth. Again, those are a lot cadence into 2027 and 2028 at this point. But you can see that we're delivering there. From a capacity perspective, I think what we've outlined in the past is that we continue to make capacity investments across our regional hubs, that includes data center, but remember, a lot of our product also goes to the other end markets. So there's investment programs there, specifically around liquid cooling. You know we've expanded from North America at the time we bought Motiver to India, to Italy to China. And then, of course, with partners like Foxconn, we continue to expand our capacity. So we're expanding our capacity there. that should allow us Andre to keep up with the triple-digit demand. And that's how we're operating the business today.

Thank you, Andre, for the question. Operator, can we please take the next one?

The next question is from James Moore of Redburn Atlantic.

Olivier, I wondered if I could ask about your strong materials on to results in China in terms of growth speed? But when it comes to data centers in China, is it a market that has common characteristics about in North America. Obviously, it's a lot smaller. But you've always been quite strong in China. Do they really prefer Chinese component suppliers. How do you find those dynamics? And if you could maybe just expand a little bit about the nature of that Chinese growth, that would be great.

Yes. Great. Thanks, James. And you're right, we've now seen quarters of good growth in China. And you -- as you don't mention the numbers, but in the region in Q3 in China, we see 26%. They're now sitting at year-to-date. We see most of that growth, as we've mentioned now coming in data center and semicon. Yes, we do see gigawatt build out there also when we talk to customers. We're a local of global partners, right? I mean we're tight in that local ecosystem. Now remember, the model goes a little bit different in China. So we're mostly selling into panel builders and equipment manufacturers. So it's a bit different business model than some of the other regions. But yes, we see data center and semicon continuing to be robust in that market, and we're benefiting from our position with many of the hyperscalers there who are continuing to do their build-out.

Operator, can you please take the next question?

[Operator Instructions] The next question is from Ben Uglow, Oxcap.

Yes. And thank you for the question. I guess everybody is going to be pretty interested. I hope we don't do too much on China. But I guess it's similar to James, I'm curious about the degree of customer concentration in China. And the reason why I say it is, obviously, we know what a lot of the big publicly listed cloud companies are doing. But in your press release, you sort of mentioned social media, colocation, this line and the other. I guess what I'm curious to understand is, is this just Barbara and a couple of others placing some really, really big orders? Or is this something much broader within China? So -- and there are lots of entities in China that are not publicly listed. So I guess it's really about the nature of your demand. And so a follow-up what -- those customer conversations are happening right now about 2027, a lot of the feedback we hear is pretty positive. What is your take on the customer conversations?

Yes. So I'll start with this one and maybe Olivier can supplement as well because he's talking, and we're talking to some of the same customers in China. But it's -- I think how I would generally categorize it is the level of gigawatt and compute that China is installing is robust what we see into the order book today and what you see in into the revenue that's delivered so far year-to-date. Of course, the China market, you have Alibaba, you have Tencent, you have some of these big players that are, of course, installing capacity. We play through, as I mentioned in answering to James, we play through the channel partners and the panel builders there. But we see robust demand 4 gigawatts, whether it's coming from those big players, which are putting in a lot of the gigawatts or some of the other smaller players that you're describing. And technology partnership is super important there. Even if you sell through the channels technology partner with the end customer is super important. I don't know, Olivier, if you have anything else to add there as far as what we hear from customers on the ground in China.

Sure, sure, Nathan, with pleasure, and I understand the question of James. And by the way, we were in China with the management team 3 weeks ago. So a good opportunity also to have a strong update on what's happening there. What is very, very obvious is the Chinese government, I would say, is not offset by the local demand and the local economy at that part time. So the biggest driver that you see really in China, one, what you mentioned, which is AI data center, Sumit, which is, of course, connected to some extent to data center. Let's keep in mind also that there is a strong demand for export also in the industry that support a solid growth in the country. And I would say the only segment which is not super exciting at that point of time, which has been the case for the past years. is building in the residential segment, which is, again, a bit more related to the policy of the code government. As Nathan explained very well where we have a very strong competitive advantage is we are present, of course, in electrical distribution across the entire power trend. We are present in UPS. As Nathan said, we are also accelerating our investment and our manufacturing liquid cooling in China? And what is the major difference, as Nathan has highlighted, we are the largest network of partner in the country. So when the demand is accelerating and to be back to your question, but even if it comes from large players, both large players, they are leveraging all those big system integrators panel builder to deliver. And here is a little bit more of other business model but it is where we have the strongest part in the market, the strongest positioning benefit a lot from that acceleration of the market. And I know you have asked, and it's a bit too early to speak about '27, but we continue to see that demand quarter after quarter. If you remember, at the beginning of the year, we were a bit more cautious in our answer because we are not too sure if it was just a short-term phenomena, but we see clearly from what we have discussed with our customers, this demand continuing over '27, which is a good news. And everything we've heard when we were in China recently, give us the confidence that this level of growth could continue at least across '27. So it's a fairly good news. And again, China has been a historical very strong position for Schneider Electric in the local market in our go-to-market, in our supply chain. And of course, in R&D as well because that's a place where everything is moving in our industry. and that's a place where we continue to invest and innovate. But yes, that's a good news and that contributed well to work with performance.

The next question is from Ben Heelan of Bank of America. .

I wanted to come back on some of the questions -- the comments you made, Nathan, on price increases running at full run rate at the moment. As you think about pricing into 2027, can you just talk a little bit about how the customers are expecting those price increases? Because when you look at the data it indicates there's probably another round of price increases that need to come through. So you're offsetting the negative headwind from cost this year. Is that something that you think we can expect into '27 as well.

Yes, Ben, I won't give exactly guidance for next year, but I'm happy to answer your question. I mean, yes, we've seen continued inflationary pressures across the year. I think you can find those in memory and semicon in different areas, if not also in copper over the year. And yes, I mean what we talked about and what we launched last year with Olivier was a pricing discipline and pricing muscle that allows you to price across the cycle, and we've been proactively across the year, right? I mean we took proactive pricing in January. That was primarily on copper and silver and other input costs. We took a second round in April as we saw the conflict in Middle East and knowing that's going to impact oil and transport and oil derivatives such as plastics. And now we see the next wave coming with the dimensions I already mentioned. Semicon, memory, copper, which has also spiked again a bit over the last couple of months and quarter. And yes, we -- I mean, the reason you do that pricing discipline, pricing muscles that you price over the cycle. And to the extent there's inflationary pressures coming into 2027, we'll be flexing those muscles from an execution perspective. So that's how I would think about how we're positioning ourselves for 2027.

Operator, can we take the next one?