Schneider Electric Infrastructure Limited (SCHNEIDER) Earnings Call Transcript & Summary

Thank you, Stanford. Good evening, everyone. On behalf of Elara Securities, we welcome you all for the Q2 FY '21 and H1 FY '21 conference call of Schneider Electric Infrastructure Limited. I take this opportunity to welcome the management of Schneider Electric Infrastructure represented by Mr. Bruno Dercle, Managing Director and CEO; Mr. Arnab Roy, Full-time Director; Mr. Mayank Holani, Chief Financial Officer; and Mr. Vineet Jain, Head of Investor Relations. We will begin the call with a brief overview by the management, followed by a Q&A session. I will now hand over the call to Mr. Dercle for his opening remarks. Over to you, sir.

Thank you. So good afternoon, ladies and gentlemen. So I'm Bruno Dercle, Managing Director of Schneider Electric Infrastructure Limited. I am pleased to connect with you to share and update the progress of our company. Today, I will present you a few slides on the market outlook and company strategy. So we can go to the presentation directly to Slide #3, the Slide #2 being a disclaimer. So on Slide #3, you can see a set of broad economic indicators. And I remind the one that we are very sensitive to. So we are sensitive to the one on top, the gross fixed capital formation. And as you can see in Q3 2020, so Q2 fiscal year, the trend is still extremely negative. So we will come back on that point. We are sensitive as well at the bottom left corner on the electricity growth and the manufacturing growth, which are a very strong driver of our demand. So you can see that electricity growth is still in the negative domain, but has rebounded compared with its very low level of the lockdown period in this quarter 2. And the manufacturing growth is still also on a single-digit now negative trend, but still negative and rebounding from the low level of quarter 1. So these are the 3 indicators, which are on the macroeconomic, on which we are very sensitive to. The other one that I bring your attention to is the exchange rate versus euro. We are more sensitive to the euro than the dollar with the structure of our imports. And you will see that, hopefully, the downward trend of the rupee versus euro has stabilized in quarter 2 fiscal year with -- at a high level, but stabilized at least. So these are the 4 KPIs that we follow, especially for the structure of our company. If you go to the next slide, you will see the executive summary of this quarter. I will start with the right side of the screen, the priorities. So priority right now did not change versus last quarter. The cash remains a priority. It drives, in fact, our sales level. We dispatch the goods to the customer who has the means to pay us, in a few words. So cash remains a priority. We are chasing it. We have got very good results in quarter 2 in terms of cash collection, both on everyday cash collection and also on recovery of old cash outstanding. So the result was quite good in this quarter after a difficult situation that we faced during the quarter 1. We also launched initiative of cost reduction. You can imagine in the current situation that we had to chase cash cost reduction, both in the commercial organization and in the back office in the plants. You will -- you may have also noticed that we have a high inventory at the end of September. This is a conscious choice that we wanted to -- we want to maximize our manufacturing capacity. So we have advanced. We have preponed some manufacturing in August and September in order to free some manufacturing capacity for the very heavy quarter that we are currently living in quarter 3. We have a very high demand for quarter 3 and we preponed some manufacturing in quarter 2. So we have selected to do the spread off between inventory and capacity utilization. So these are the 3 priorities of the quarter 2. We faced some issues and challenges, which are summarized in this center of the -- in the center of this slide, mainly the wait and see market in some go-to-market in some segments, also some segments like mining metals or steel industry, cement industry or automotive. These segments have been completely stopped in quarter 2 this year. We have seen -- and this will be an introduction for the next quarter, but we have seen a revival or resurrection of these segments in -- starting from September, but it paid off in quarter 3 with some rebound of the order intake. But during the quarter 2, these segments were completely in standstill. Another domain also, which was in standstill and wait-and-see situation was the EPC market, so go-to-market through EPCs, our main contractors who were during quarter 2 in a wait and see situation and refraining from passing orders on heavy equipment like our transformers or our medium voltage switchgear. So we had a few pockets of activities and business, which were really re-disturbed in quarter 2. This is not a surprise. So some segment or some go-to-market. But in both cases, we have seen some signs of revival starting from September that we will see in the coming quarter in terms of order intake. All in all, orders were in the first semester, H1 and H2, at a minus 3% versus the previous year when we neutralized the important day booking, cancellation of orders that we have done in quarter 2. We are currently reviewing all our backlog and checking that some sticky orders are still live or not in the current context of the economic crisis and cash crunch that the country is experiencing, especially in the quarter we just finished. We also had the difficulty to flush our backlog. We could rebound. You will see this in the coming slides and especially in Mayank's presentation. We could rebound on our sales volume compared with the very low level of quarter 1 and also compared with last year. So we had a substantial growth of our sales volume. It could have been better. We have the backlog to deliver better, but the appetite of our customers, the cash resource of our customers is slowing down the rebound. We can see it. So we still have some sticky backlog to deliver to our customers. We could have done better than the -- thanks to the backlog that we have, but our customers -- some of our customers have experiencing cash issues and we follow their cash situation with a very strong care. In terms of achievement, what we can be proud of in terms of execution this quarter was a very clear rebound, a very visible rebound in quarter 2. I mentioned that already. So almost 18% of growth in terms of sales versus last year. And of course, nothing comparable versus the previous quarter. We have, again, got some interesting orders in several segments. But as you can see, the resilient segment of utilities, DISCOM, is overrepresented this quarter. Delhi Transco, Adani, BSES, all these major order of medium voltage equipment are coming from the power and grid segment, which shows once again, like in quarter 1, it's resilient. And only Suez, a big order for water segment in Bangladesh for export, has been outside of the power and grid segment, in the water segment. So again, a very resilient segment as power and grid, and some major orders secured to ensure the sales of next winter. In our transformation, we cleared one licensee more. So in our jargon, we call this a SELL gate. So it means that now the project of creating this licensee is completed. It is for medium voltage switchgear avenue. We plan to have 3 additional licensees coming to the market for medium voltage switchgear, both secondary and primary switchgear, in quarter 3. And the digital move that everybody is talking about is a reality for your company with 14,000 and counting remote interaction with customers in the quarter we finished. We have -- we are monitoring this. It's an important indicator for us of the maturity of our sales force and our customers as well in the digital world. I go to Slide #5. Just to remind, we didn't change our strategy. In fact, the -- what we had in the pipe is paying off. We have seen it with the result of this quarter. So I just remind you what it is. It's in just 1 slide, most transactional business through partners; they will be the first one to rebound. And also, they allow us to grow our medium offer, which is a sizable chunk of the Indian market, the medium category of product. We need also to benefit from our position in the segment, which are resilient or showing growth. Typically, power and grid, the utility segment is very resilient. Transportation was a little bit slow in quarter 2. But is a recipient of a lot of investment from the government. So we expect a lot of growth in the transportation segment in -- so we need to position ourselves and that's what we did with some important tenders in this quarter. Better system. So the jargon that we have, EcoStruxure, which is our brand name for the digital and interconnected product and solutions. So we need to grow EcoStruxure. This is a very strong differentiator for our company versus the competition. And we also -- as I mentioned briefly at the beginning of the call, we also optimized our manufacturing capacity in line with the demand that we could see very -- some strong variation between pre-crisis and post crisis. Continuous item, item #4, the growth services, enjoying the smart grid and digital services growth that we see in the DISCOM, in the utility segment. Asset Advisor, this is a brand name for connected product and maintenance, and asset being connected and maintained remotely. We have launched this offer approximately a year ago and we can see the strong interest of our customers, especially post-COVID crisis. And this is connected with item 5, which is the Boost Digital. So we have launched in the past and especially in quarter 2, we have launched several medium voltage in a connected version, meaning that some of our offers, which were on the market for some time, are now connectable and can be remotely maintained in the -- for asset management. So this is on the one slide summary of the strategy that we have no reason to change as of today. If you go to Slide #7, you will see a quick update on what has happened, how we passed, in fact, the wave 1 of the COVID-19. So what you see on the Slide 7 is a few measures that have been taken in our plants. So partition, color code, segregation, ensuring that the families are also supported and not only the employees. And you know that our major plant -- 2 of our major plants are located in Gujarat, in Baroda, which was one of the cities in India, which was most impacted by the epidemic. So we had to take care of this situation. So I will not go into each picture that you can see here. I think that the most important thing is the protection and the set of procedure to avoid -- to limit interactions, the physical interaction and closeness of employees with each other, unfortunately. And also, the color code segregation in order that teams can be as segregated as possible from each other. So we had -- we divided the plant into 3 teams in order that they are as little as possible, if at all, interactions between the different teams. On Slide #8, you can see what has been our situation in our 3 plants. So we -- you see that we have had a very important wave in Baroda, especially. But this is a consolidation of the 3 plant, Kolkata and Baroda. But the peak that we experienced in September was related essentially to Baroda, had a lot of contamination coming from the family interaction, in fact. And so it's -- we had to manage that epidemic and wave 1 in Baroda, especially in September. It disturbed a lot, as you can imagine, our operation because whenever you have a case and we peaked at 50 active cases at one point of time in mid to -- I mean, the third week of September. When you have this number of active case, you can imagine that you have 2.0x to 3.0x more of contact cases. So we had to segregate and keep at home about 120 people. While we had 51 active case in addition, out of 1,000-plus employees. So that was the situation that we have gone through in the end of September. It was the end of the quarter. So it was a difficult situation as well also for ourselves. But you can see that now the situation is back to a much more appropriate or adequate level. We were not -- still not happy to have 5 cases, but it is on a much more sustainable and operational. And in terms of operation, we don't feel now the consequence. We felt the consequence of these disturbances, of course, in September. I will stop now and I will give the floor to Mayank to update on the financials.

Thanks, Bruno. Let's move to Slide 10. As Bruno was mentioning, the market continues to be challenging, though we are seeing attraction in few pockets. So we continue to be cautious in order booking in terms of cash security and margins. Our order intake for the quarter stood at INR 2,043 million, which was lower than last year by about 30% from last year's quarter 2 and about 12.6% lower versus in H1. So -- however, if we look at the IG order, it grew by 3.8% in this quarter. During this quarter, based on current situation, we have debooked about orders of close to INR 600 million, which was sticky and not moving. So without debooking, if we compare gross orders, our order intake was 11.7% versus last year and minus 3% lower versus H1. And this is -- I'm talking only for the OG orders outside group order. Next slide. We have seen a strong comeback in sales after lockdown impact in Q1. And as you can see, our Q2 sales is higher by 17.7% versus last year. Next slide. So on P&L, you see the results in line with our strategy. We have selective and conventional orders, which are available in the market, but have negative impact on margin. The gross margin improved by 1% and EBITDA improved by 11%. Exceptional cost is related to employee severance pay as part of cost optimization. So I'll stop here and leave the floor open to Q&A.

[Operator Instructions]. The first question is from the line of Viraj Mithani from Jupiter Financial.

So my first question is regarding this restructuring costs. You've been doing restructuring since last one -- almost a year. How long we expect to go ahead with restructuring? In how many quarters we'll be doing this restructuring cost? The second question is what is our order book position as of now?

So I will take the first question regarding restructuring. It's true that we have restructuring of our operations in the plant mainly for the past 2 years. We had a first wave 1.5 years ago, approximately. And we are continuously engaging into adaptation of our manufacturing capacity to our selected portfolio. So we can expect that this will continue. Not in the same magnitude than what we experienced, especially 18 months ago. Typically, what the -- in the quarter 2, it concerned approximately 60%. But -- so it is a much lower figure in terms of job shedding than 18 months ago. But you can consider that we will have to continue the restructuring of our operations in order to adapt our capacity to the demand and to our selected product.

How long will we be continuing like this? Another 4 quarters, 8 quarters? Can you give any sense on that?

So I can expect that in quarter 1 -- sorry, quarter 2, 2021, we will have another wave.

That will be in line, is it? It's...

Regarding your second question.

So our order backlog as of 30th September is close to INR 8,440 million. So which is the more than 6-month sales pictured in.

Okay. And sir, my next question is on data center. You mentioned last con call about data center opportunity. Now there's a press -- there is an article saying that Amazon is planning to put INR 20,000 crores in data center in India. Do we benefit and till what extend is from there?

So Amazon is currently building 3 major data center in Hyderabad. So we are positioned on one of them.

And is the size of the opportunity substantial? Can you give some sense? And if you can't give figure, at least some ballpark -- some sense on the size of the opportunity?

So size, a typical size of opportunity on this type of project is several -- is EUR 2 million to EUR 3 million for the segment that we are -- the activities we are talking about.

Okay. And sir, you talked about this medium voltage switchgear. I wasn't clear on that as I didn't get it. What -- have we introduced some new products in medium voltage switchgears?

We have launched a new connected product on medium voltage switchgear, meaning that it is a function of medium voltage switchgear than usual, but connectable to -- with the smart devices and sensors, connectable to software in order to do asset management -- remote asset management. So this is quite an important breakthrough and giving us an edge on competition with this possibility of remote access and transforming our medium voltage switchgear into smart switchgear.

And sir, regarding L&T, this thing, you made -- any -- do we have any synchronization with that? Like anything -- any synergy happening with DISCOM and at Schneider, our company? Is any news on that?

So there will be synergies. But for the time being, we are discovering each other. This is very recent. We will first get to know each other and then the synergies workshop will start. It is just the beginning.

Okay. And sir, last 2 questions. What is the meaning of recurring services you mentioned in the presentation? And what is our capacity utilization? That's 2 questions.

So recurring services is either associated with what I was just mentioning before, the fact that some equipment and some systems can be remote managed. So this is an example of when we sell this type of services of remote management, usually these are evergreen contract that can last several years, during which we ensure the maintenance, the supervision remotely of the medium voltage equipment or low voltage, by the way. And we -- against a fee. So this is a type of recurring service. Another one recurring service is more traditional, something that we have been doing for years, which is having some maintenance contract, which can last 1 year, 2 years, 5 years. That's what we call recurring and which are invoiced on a monthly or quarterly basis. And we maintain an installed base either of Schneider Electric equipment or sometimes also our competitor equipment. So these are the recurring services.

Okay. The new recurring service is more of a transactional in nature. I mean for whatever data transaction we get some money, something like that?

It's not transactional. It is a maintenance contract, which is a -- or with a long duration period.

Okay. And so my last question, what is our capacity utilization as of today?

Yes. So Viraj, the capacity utilization varied because if you look at this quarter, July to September, in July, we were at about 55%, 60%. August, September, we were close to about 80%, 85%. But in the coming quarter, we are expecting close to 100% capacity utilization.

[Operator Instructions]. The next question is from the line of [ Sarita ], an individual investor.

So I have an observation and a question. The observation is that very honestly, no hard feelings, but I'm finding your accent extremely difficult to understand given that the line is not the best, okay? So I don't know if anyone is having the same problem, but I thought I'd share it quickly. Okay. So that's one thing. And the second thing is that I have been an investor for about 5 or 6 years now. I want to know when I can start expecting some return on my investments because I see your brand, I see your advertising, but I see no working line.

Okay. Ma'am, on your second question, if you look at this performance this year, and I think there are 2 or 3 parameters you need to look into it. First, you look at the underlying performance which is happening, irrespective of the abnormal items. So if you see the first H1 performance, and we have to keep in mind that the first quarter we had the COVID impact, and there almost the entire country was closed. So if you neutralize that part of it and look at the performance.

I've been with you 6 years.

Yes, I'm talking about it, I am coming to the same thing. So year-on-year, there has been a transition and we have -- if you follow the transcripts of the past years, the company has been progressing and closing the gap. But this year, if you take out -- the short answer is this year if you take out the abnormal events, you will see that we are already in the kind of a profit zone compared to the abnormal items. And if we get a normalized year, which hopefully should be the next year, we should come back to a profitability performance. So that should answer your questions broadly. So study the company's performance, take out the abnormal items and see where do we stand. And if you extrapolate, you'll be able to kind of form an opinion then.

The next question is from the line of Manish Goyal from Enam Holdings.

I have a few questions. First on the -- we have seen a very strong margin improvement in the current quarter and congratulations to the entire management team for the same. So I just would like to know that going forward, how sustainable do we see in terms of some of the fixed cost reduction initiatives what we have taken. And so maybe in Q1 and Q2, there could be certain costs which may be like travel costs, which we would not have incurred, but do we expect some of those costs to come back? Or maybe if you can kind of give us a perspective that how much fixed cost savings can we see as a sustainable basis going forward? Maybe as a percentage to revenue or absolute fixed cost number, if you can share, which will probably give us more perspective on the sustainability of the margin improvement, what we have seen. And related question as to, we have also seen that material cost has reduced. And I believe that company has been focusing on a better revenue mix with higher transactional products and services. So maybe if you can throw more light as to, even in this revenue mix or the lower material costs sustainable. That is my first set of questions, and then I come -- and also relatedly, are there any onetime benefits in terms of ForEx or anything in this quarter, which would have helped our margins to be better? So this is my questions on the margins related charge.

Manish, if we look at results top of the mix for this quarter has improved. Transaction and solutions has improved by about close to 4%, so which is what is reflecting in the numbers. And as you self said, we continue to do work on improving the mix. On the...

So this 4% is like -- so transactional, if you can maybe give us a revenue breakup, that will give us a better perspective out to...

Yes, transactional services put together is about 30%. Last year, it was 26%. So 17% and 13% this year versus 16% and 10% last year.

Sorry, sorry, on what? 17% is what?

Transaction is 17%. Services is 13%. So last year, it was 16% and 10%. And on cost part, there are certain aspects, some of the technical actions which were taken in Q1 so were not there in this quarter. So that is not there. But yes, some costs. And the some of the costs like lower travel cost and all, that will partly come back. So with the actions we have taken, partly it's going to be structural in nature. So we'll have savings continuing in next quarter. But some of the costs, like especially the travel costs, that will, to some extent, go up once we are into a normal situation.

So Mayank, maybe if you can say, definitely you would have taken a lot of cost-cutting measures, but just to get a sense that -- and we have been doing employee rationalization and on the factory optimization in terms of production. So like what kind of fixed cost reduction can we see going forward?

So see, on the structural front, we have done about close to 50-plus headcount reduction, would say 60 in the last quarter, with the last 2 quarters that is, and where you see this exceptional cost related to fee space is coming here. And that is kind of structural savings that will continue on the people front.

Sure. Okay. So my second set of questions on the -- I missed on the order book number. So if you can give it and if you can give us a breakup of the order book.

So orders in this quarter were INR 2,043 million versus INR 2,943 million in last year.

Mayank, I'm asking for the outstanding order book not the order...

Backlog. So backlog is INR 8,448 million as of September, about INR 844 crores.

Okay. And if you can please provide the breakup between the systems and transactional and services?

73% is systems.

Yes.

And 15% transactional, 12 services.