RUEIL-MALMAISON, France — Schneider Electric announced its fourth quarter revenues and full year results for the period ending December 31, 2016.
Jean-Pascal Tricoire, Chairman and CEO, commented: "In 2016, we achieve[d] all our key financial targets, delivering slightly positive underlying growth and +90 bps improvement before FX in adjusted EBITA margin. We also accelerate[d] the execution of our strategy, which we shared during our recent investor day. As we go into 2017, we focus on growing our partner network through the launch of many new innovative offers, developing services and software, working on margin improvement through continued selectivity on projects and keeping strong attention on cost control. Additionally, we are very excited by the potential of EcoStruxure architecture in the domains of building, power, data centers, machines, plant and grids and by the greater value we offer our customers through this innovative offer."
FOURTH QUARTER REVENUES WERE DOWN -1.7% ORGANICALLY
2016 Q4 revenues were €6,783 million (USD $7,228.30 million), down -1.7% organically and down -5.8% on a reported basis. Excluding c.-€150-€160m (USD $159.85-$170.50m) from project selectivity and -1.1pt working day in the quarter, organic underlying growth stood at c. +1.6%.
Building: (41% of Q4 revenues) was down -1.2% organically in the fourth quarter, but posted continued growth in Wiring Devices & Final Distribution activities. North America declined, as the U.S. suffered from lower project activity in commercial & industrial buildings mainly due to selectivity and a high base of comparison in solar markets. Residential activity continued to show good growth in a favorable market. Mexico grew while Canada was about flat. Western Europe was stable. France posted solid growth thanks to good project execution and an improving residential market. Italy, Spain and the U.K. grew benefiting from commercial initiatives while Germany declined. Asia-Pacific was up slightly thanks to growth in India and residential activity in Australia. India continued to grow, avoiding substantial impacts from government demonetization policies through actions with partners. China was slightly negative due to some delays in projects in favorable construction markets in Tier 1 & Tier 2 cities. Rest of the World posted mixed results, with growth in CIS, Africa and South America and a strong decline in the Middle-East.
Industry: (22% of Q4 revenues) was up +1.4% organically. Globally, the Group benefited from its focus on OEM in a favorable market. Process automation declined organically, though showing early signs of improvement in order intake. China was up high-single digit in an improved OEM market, driving the growth of Asia-Pacific. Elsewhere in Asia, the Group continued to see growth in India and weakness in Australia. Western Europe declined slightly, with an impact from working days. Positive OEM demand in Italy and Spain could not fully offset a decline in France, and lower project execution in U.K. and Germany. The U.S. was down slightly as it continued to be impacted by low O&G investment but posted growth in the OEM market. The priority remains to enhance cross-selling through channel initiatives. Rest of the World was positive, led by strong growth in Russia and Africa while South America and the Middle-East declined.
Infrastructure: (22% of Q4 revenues) was down -6.7% organically as the negative impact from selectivity initiatives accelerated to ~-€100m (USD $106.56m) in Q4, in line with expectations. North America was down due to selectivity and continued weakness in resource and industrial markets in the U.S. and Canada. Western Europe was down. Germany declined mainly due to project selectivity despite continued growth in transactional and services business. In France, the business remained stable with strong growth in services thanks to targeted initiatives which compensated for a planned decrease in projects due to selectivity. In Asia-Pacific, China was down slightly on selectivity and weakness in traditional segments. Indonesia benefited from project execution while Australia continued to suffer from lower investment in resources. Rest of the World was down with a mixed picture, notably with weakness in the Middle-East but growth in Russia.
IT (15% of Q4 revenues) was up +0.3% organically. North America was up led by the U.S. with strong growth in IT channel sales, continued success in services initiatives and project execution in data centers. Mexico declined. Western Europe was down mainly due to declines in Germany and the U.K. Italy, France, and Nordic countries grew. Asia-Pacific was up as India continued to grow strongly with little impact seen from government demonetization initiatives. Elsewhere in Asia, the Group saw growth in South East Asia and Japan and declines in China and Australia. Rest of the World declined, mainly driven by Russia and the Middle-East. Services continued to grow strongly. Organically, the solution business was down -4% of which services were up +3%. The solutions business represented 46% of revenues in Q4.
Western Europe: (27% of Q4 revenues) was down -1% organically in the fourth quarter, about flat after adjusting for working days (approximately -1pt impact). France was up with continued growth in Wiring Devices & Final Distribution in a favorable residential market and good execution of projects, particularly in commercial & industrial buildings. Industrial markets remained weak. Italy grew on successful commercial initiatives in all businesses, particularly datacenter and OEM markets. Spain was up while Germany declined. The U.K. was down mainly due to a high base of comparison. The Group continues to prepare for a potential impact of Brexit on its U.K. operations.
Asia-Pacific: (27% of Q4 revenues) was flat, mainly due to weakness in Australia (Asia-Pacific was up ~+1% excluding Australia). Australia continued to be strongly penalized by the weakness in commodity-based segments and project phase down, though the residential market remained favorable. China grew benefitting from commercial initiatives and a better OEM market on consumer-driven segments while building markets showed a contrasted picture between Tier 1 & 2 and Tier 3 & 4 cities. South East Asia had a good underlying performance but was penalized by a high base of comparison. India continued to grow well as commercial actions limited the impact from the government demonetization initiative.
North America: (27% of Q4 revenues) was down -4% organically in the quarter. The U.S. decline was mainly driven by weak infrastructure and O&G markets and a continued focus on selectivity while the Group saw continued growth in its Wiring Devices & Final Distribution and benefited from improvements in the OEM and IT markets. Canada declined in weak infrastructure markets while Mexico remained mixed.
Rest of the World (19% of Q4 revenues) declined -2% organically, dragged down by the Middle-East where the impact of prolonged weakness in oil prices continued to dampen economic activity in the region. Excluding the Middle-East, Rest of the World was up c. +2%. CIS grew with successful execution of channel initiatives in an improving market in Russia and the execution of infrastructure projects in the region. Africa was up while South America declined mainly due to weakness in Brazil.
Q4 2016 revenues in new economies were flat and represented 43% of total revenues. Q4 2016 revenue growth in new economies outside the Middle-East was up +2%.
Consolidation and foreign exchange impacts
Net acquisitions had an impact of -€226 million (USD -$240.84 million) or -3.1%. This includes mainly the deconsolidation of Delixi (consolidated under Building business), the disposal of Juno Lighting (consolidated under Building business), and Telvent Transportation (consolidated under Infrastructure business), and some minor acquisitions and disposals in other businesses.
The impact of foreign exchange fluctuations was negative at -€72 million (USD -$76.73 million) or -1.0%, primarily due to the weakening of the Chinese yuan, British Pound and several new economies' currencies against the euro.
Based on current rates, the FX impact on FY 2017 revenues is estimated to be around +€400m (USD +$426.26m). The impact on EBITA adjusted margin is expected to be about neutral.
II. FULL YEAR 2016 KEY RESULTS
ADJUSTED EBITA MARGIN AT 14.1%, UP +0.9 POINT BEFORE FX AND +0.4 POINT VERSUS FY 2015 THANKS TO STRONG PRODUCTIVITY, NET PRICE AND IMPROVING MIX TREND
Gross profit was down -4.6% but Gross margin improved strongly +1.0pt to 38.0% in FY 2016 thanks to positive net pricing and industrial productivity, and improving mix trend.
- Net price contributed +0.5pt and industrial productivity contributed +1.5pt
- Negative mix of -0.2pt, showing an improving trend vs. FY 2015 thanks notably to systems selectivity initiatives
- Production Labor inflation had a negative impact of -0.4pt, of which increased R&D accounted for c. -0.1pt
- Currency had a negative impact of -0.5pt
- Scope & Others had a positive impact of +0.1pt. Divestments & the deconsolidation of Delixi contributed +0.4pt
- Volume had 0.0pt impact
Support function costs decreased -0.5% organically, and decreased -4.7% on a reported basis. The SFC on Revenues ratio increased to 23.9%, up 60 bps. The main driver of this increase is the change in scope as divestments & the deconsolidation of Delixi contributed c. +0.4pt.
2016 Adjusted EBITA reached €3,480 million, increasing organically by +4% and the Adjusted EBITA margin improved +40 bps to 14.1%.
The key drivers contributing to the earnings change were the following:
- Volume impact was negative -€113 million (USD -$120.42 million) in the full year
- Solid execution of tailored supply chain initiatives contributed +€377 million (USD +$401.75 million) in the year thanks to purchasing efficiency, quality value engineering and logistics efficiencies with improved container loading factors
- The net price impact was positive at +€102 million (USD +$108.70 million), benefitting from a favorable raw materials tailwind of c. +€130 million (USD +$138.53 million). Price (gross) was slightly negative but remained positive outside China. In China, despite price investments, strong industrial productivity and cost efficiency protected the margin. Given the resurgence of raw material inflation, the Group expects a negative raw material impact in 2017 of c. - €200 million (USD -$213.13 million).
- Cost of Goods Sold inflation was -€107 million (USD -$114.02 million), of which the production labor cost and other cost inflation was -€78 million (USD -$83.12 million), and an increase in R&D in Cost of Goods Sold was -€29 million (USD -$30.90 million).
- Support function costs reduced organically by €28 million (USD $29.84 million) in the year. Total gross SFC reduction in 2016 is c. €240 million (USD $255.76 million), enabling reinvestments of c. €60 million (USD $63.94 million) in strategic initiatives. Gross SFC reduction amounted to c. €540 million (USD $575.45 million) for 2015 & 2016, in line with the Group's target to reduce gross SFC by c. €700 million (USD $745.95 million) to €800 million (USD $852.52 million) between 2015-2017.
- Currency decreased the adjusted EBITA by -€199 million (USD -$212.06 million), mainly due to the depreciation of the GBP, Chinese Yuan, and other currencies against the euro.
- Mix was negative at -€50 million (USD -$53.28 million), showing a strong improvement in trend compared to last year.
- Acquisitions, net of divestments, and others, were negative at -€199 million (USD -$ 212.06 million) for the year due mainly to the deconsolidation of Delixi and the disposal of Juno Lighting and Telvent Transportation.
By business, the 2016 adjusted EBITA for Building amounted to €2,099 million (USD $2,236.80 million), or 19.6% of revenues, up +1.6 points (c. +1.5pt organic) year-on-year mainly thanks to industrial productivity and cost control. Industry generated an adjusted EBITA of €918 million (USD $978.27 million), or 16.7% of revenues, down -0.4 point (c. -0.2pt organic) from 2015, penalized by volume decline. Infrastructure adjusted EBITA was €477 million (USD $508.32 million), or 9.7% of revenues, up +0.6 point year-on-year (c. +1.3pt organic) thanks to higher system gross margin and strong cost control. IT business reported an adjusted EBITA of €604 million (USD $643.65 million), 16.8% of revenues, down -0.8 point (c. -0.5pt organic) compared to 2015, impacted by mix and investments in digital and services capabilities, but remains resilient at a high level.
Corporate costs in 2016 amounted to €618 million (USD $658.57 million) or 2.5% of revenues.
NET INCOME UP +24%
The restructuring charges were -€313 million (USD $333.55 million) in 2016. Restructuring costs are expected to be towards c. €900m (USD $959.08m) in 2015-2017 to drive efficiency and simplification initiatives.
Other operating income and expenses had a negative impact of -€63 million (USD -$67.14 million), vs. -€522 million (USD -$ 556.27 million) in 2015.
The amortization and depreciation of intangibles linked to acquisitions was -€153 million (USD -$ 163.04 million) compared to -€572 million (USD -$ 609.55 million) last year [which included a €295 million (USD $ 314.37 million) impairment on Pelco]. The decrease in amortization comes mainly due to the end of the depreciation of several previously acquired brands.
Net financial expenses were -€462 million (USD -$492.33 million), €16 million (USD $17.05 million) higher than in 2015. Cost of debt (net) decreased by €23 million (USD $24.51 million) but this decrease was offset by -€35 million (USD -$37.50 million) higher exchange losses due to volatile currency markets.
Income tax amounted to -€712 million (USD -$758.74 million), including an exceptional -€119 million (USD -$126.81 million) adjustment of the net deferred tax assets following the planned reduction in the Corporate Income Tax rate in France. Without this exceptional item, Tax rate was 23.8% in line with expectations. For 2017, given the evolution of global tax regulations, the Group expects an effective tax rate of 26% to 28%. At this stage the impact of any proposed legislative tax changes in the U.S. is not considered.
Share of profit on associates amounted to +€34 million (USD $36.23 million).
The Adjusted Net Income was €2,117 million (USD $2,255.98 million) in FY 2016, stable vs. FY 2015. The Adjusted Earnings Per Share (EPS) was €3.77 (USD $4.02), up +1% from 2015, c. +2% at spot end-of-year share count.
The Net Income was €1,750 million (USD $1,864.89 million) in FY 2016, up +24% from FY 2015.
ALL-TIME HIGH FREE CASH FLOW OF €2,206 million (USD $2,350.82 million), up +8% from FY 2015
Free cash flow was reported at a record €2,206 million (USD $2,350.82 million), thanks to strong operating cash flow and working capital management. It included net capital expenditure of €764 million (USD $814.16 million), representing ~3.0% of revenues. The trade working capital improved by €82 million (USD $87.38 million) thanks to strong control over inventories.
BALANCE SHEET REMAINS SOLID
Schneider Electric's net debt at December 31, 2016 amounted to €4,824 million (USD $5,140.70 million) -- [€4,631 million (USD $4,935.03 million) in December 2015] after payment of €1.2 billion (USD $1.28 billion) in dividend and a share buyback of €853 million (USD $909 million) in 2016.
CASH CONVERSION & PROPOSED DIVIDEND
Cash conversion was 118% in 2016, above the Group target of ~100%.
The proposed dividend is €2.04 (USD $2.17) per share, up 2% vs. 2015.
III. SCHNEIDER IS ON UPDATE
The Group executed well on its initiatives as laid out in its company program, "Schneider is On" which runs from 2015 through 2020.
Within our Do More initiative:
- c.+1% organic growth for the Group excluding Systems & Transformers
- Systems Gross Margin up ~+40bps (~+70bps before FX) thanks to greater selectivity and better execution
- Services are up +5% organically in 2016
- Global Strategic Account orders up mid-teen
Within our Simplify initiative:
- c.€620m (USD $660.70m) Gross Support Function Cost reduction plus industrial productivity in 2016 [c. ~€1.3bn (USD $1.39bn) since 2015]
Within our Digitize initiative:
- The number of connected assets increased +15% vs. 2015
- Unique connected customers, +40% since 2015
Within our Innovate initiative:
- Numerous key launches of products, control platforms and software within Ecostruxure.io
- Planet & Society barometer reached 8.48/10
IV. SHARE BUY BACK
The Group has repurchased 6,621,503 shares for a total amount of c. €400 million (USD $426.26 million) in the fourth quarter. In the full year 2016 the Group has repurchased 14,879,319 shares for a total amount of €853 million (USD $909 million) with an average price of c. €57 (USD $60.74) per share. As of December 31, 2016, the total number of shares outstanding was 592,498,759. In line with plans, the Group has repurchased 25,502,783 shares for a cumulative ~€1.5bn (USD $1.60bn) between 2015 and 2016, at an average price of c. €57 (USD $60.74) per share.
V. 2017 TARGETS
In 2017 the Group expects more positive momentum in its major end-markets. In North America, modest growth is anticipated with improvement in industrial activity and continued growth in residential markets. Western Europe is expected to grow moderately, benefiting from an environment with a lower Euro and still relatively low oil price, while some Brexit-related risks remain. China is expected to improve in Industry and Infrastructure markets while the construction market should grow at a slower pace due to policy tightening. The Group will still face headwinds from O&G and continued weakness in some resource driven economies, although these may ease towards the end of the year.
Additionally, in 2017 the Group will face a strong increase in raw material costs estimated at c.-€200m (USD $213.13m) at current prices. In this environment, the Group's priorities are to grow its partner network through the launch of many new integrated offers, accelerate services and software, working on margin improvement through continued selectivity on projects and keep a strong attention on cost control. In addition, the Group should benefit from the recent deployment of its EcoStruxure architectures in several domains to create further opportunities for growth.
Therefore, in line with the objectives announced at the 2016 Investor day, the Group targets for 2017:
- Organic revenue growth between +1% and +3% for the Group outside Infrastructure. For Infrastructure the priority remains margin improvement and the organic growth target for the division is to be about flat underlying, before an expected -4% to -5% impact from project selectivity for the division in 2017.
- +20bps to +50bps organic improvement on adjusted EBITA margin. The FX impact at current rates is expected to be about neutral on margin.
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