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

Thank you, Kunal. So I am Bruno Dercle. Good afternoon, everyone. I'm the Managing Director of Schneider Electric Infrastructure Limited. I'm pleased to connect with you to share and update the progress of our company. Today, I will present you a few slides on market outlook and the company strategy, how we intend to take -- to make the most out of the current context. And then we'll see the financials with Mayank. So let's go to the presentation, and we'll start with Slide #4. Here on the -- you see a few KPIs that we -- macroeconomic KPI that we monitor, especially. So of course, the GDP, but also mainly the one that you see at the center of this slide, which is the gross fixed capital formation in the catalog, which is one of the most impacting key performance indicator of our activity in general voltage and low-voltage equipment. You can see a very strong dip in the formation of the growth of fixed capital in the April to June in quarter 1. This is not a surprise to you, but this is very impacting our activity, and you will see that well. In the second quarter, it was still negative, but much better in terms of volume, and we expect that to continue seeing a recovery in the third quarter, the quarter that we just closed. Then we will also mention in the forthcoming slide, the impact the new budget of the Indian government can have on our activity. So I then go to the next slide. With this time, on Slide 5, you see the market trend and the growth driver by segment. You know that our entity is majorly focused on 4 overall segments: power and grid, the distribution company, sometimes the translation company, mainly the distribution company in our case; oil and gas and petrochemical, the second segment; the MMM that, which is, for us, mining metals and -- which is also an important segment for us; and finally, mobility segment, which covers highway, metro and airport infrastructure, tunnel also, road tunnel and rail. So these are the 4 major segments. And I will go a little bit of -- on to some points. I will not go into each and every item that you can see on this slide, but I will highlight the most important one. You would have read, I'm sure the -- all the other items, which are impacting our activity. In power and grid, we are mainly sensitive to the government initiatives to modernize the grid, improve the quality of service and electricity, the distribution to the customer. So for us, it can reflect into smart grid or smart city, smart road initiatives, but also strengthening the distribution network. Strengthening the distribution network typically is when a distribution company at DISCOM shift from an overhead line distribution network to an underground line distribution network. And in this case, we have a very good offer in medium voltage that we call the RMU or the smart RMU. And this investment to strengthen the distribution network is very positive for our company. Also, the initiative of smart metering. We don't have an activity of smart meter itself, but we have an activity of software to control the smart meter in our company, thanks to the technology developed by Schneider Electric in overseas. So very strong initiative in grid modernization, and our company is having quite a good presence and an offer to satisfy this initiative. The second item that I will highlight and pick up for the power and grid segment is related to the renewable power segment. We have -- there is an important share of our transformer, high-voltage transformer activity. The plant is located in Baroda in Vadodara which is going to the solar segment in the renewable segment. And the push of the government to set ambitious, a very ambitious target of power generation from renewable is also a key driver for us in our transformer and medium-voltage switchgear activity. In oil and gas, we are still in a situation today where the CapEx investment of the companies are mainly driven on the downstream part of this segment, enhancing the refinery more than the upstream part, finding the resource itself. So it's a so-so situation. It is stabilized at rather low level with some activities in the refinery, mainly, sometimes ethanol refinery, by the way, which is also an important point to mention that the plan of the government to develop the ethanol activity start to be visible into projects and other [ caliber. ] I go to the third segment, the MMM, mining minerals and metals. Here, this was -- I mentioned this in our last call and our last 2 calls. This was a segment which was the most impacted by the crisis, the COVID-19 crisis and the lockdown. We have seen -- last quarter, we have seen some sign of recovery in the cement subsegment. We bagged several order from cement factory, not always to increase capacity but to improve the operation of the cement, existing cement count in order to reduce the cost of the operation. So we have bagged several orders in cement plant for improving the operation by investing instead of increasing the capacity. So cement industry in MMM segment started to pick up. While we do not see -- in last quarter -- we started to see them in this quarter, the current one. But in last quarter, we didn't see yet steel industry rebouncing and recovery. We expect a lot from the new laws that liberalize the mineral sector. We expect a lot of fresh capital inflow, but this is not yet visible in terms of last quarter. In terms of the last segment, the mobility segment, last year, an overall delay in the execution of existing projects in metro with the shortage of manpower that most of the contractor have experienced. So there was an overall delay in this metro project and in -- but we can see in last year, last quarter, a lot of projects becoming are being tasked to this EPC. The overall EPC gets the order, you can expect that after 1 or 2 quarters, it will come to our entity, where we supply the medium voltage or the low voltage equipment to the EPC. So after year of 2020, where most of the projects have been delayed in metro segment and railway segments, we expect to see a very strong rebound in -- starting from 2021, but still not in last quarter. Also a major trend in this segment, not visible in last quarter figure, but should start to be visible in the second half of this year is the fact that the plan to privatize airport and to give new licenses to a private operator should boost the airport segment in the coming 1 to 3 years. So that was the point that I wanted to mention. Then we can go to the next slide about how we see the budget, the country budget impacting our activity. So I turn to Slide 6 now. And you can -- the interesting thing is the pie chart where we see percentage share of -- doing by segment. No surprise, you see a major share in transport, it can be the road, it can be the tunnel, it can be also the metro and the railway, it can be also the airport. All this transportation is 7% growth, but at a very high level. That's a major component of the CapEx of the government that will have an impact on our activity. Here, of course, you have understood that I'm talking about 2021 more than the last quarter that we will see afterwards. Another important point is the fact that the electric utilities share of expense is growing by 75%. We are very sensitive to this investment. It is mainly recapitalization of DISCOM and investment into improvement of the medium voltage production network, strengthening the distribution network. As I mentioned before, this 75% of our investment and recapitalization will definitely help us knowing that foreign bid is approximately 50% of our -- a small 50% of our order intake. So these are the 2 points that we can mention. You will see that the MMM, the mining sector, especially and oil and gas with a decrease of the value of investment as a whole. So we do not expect a very strong rebound from the government-pushed initiative, but we expect a rebound on the private-owned cement and steel industries in this segment. I continue to the next slide. And somehow, what I had mentioned on Slide 7 already, so high impact on Schneider again for the transport investment, metro, rail, ports and highways, lesser extent, more for the tunnel, being supported by the investment of the government 2021. We see also good development for the investment water segment. The smart meter is offering opportunities for us, I mentioned, not as the smart meter manufacturer but as a smart meter software component. Then it's a repeat of what I have already said. So I will not push further. If we take some distance beyond the strict budget of this year and macroeconomic situation. On Slide #8, you have a very compact summary of the strategy of our company. Just give me one second. So we start from the observation that the world is more electric, more decentralized and more digitized, okay. So that is the observation. It's more a trend. In fact, it's already we received. So we are starting from the left side. They tend to have One System approach across the division. We are organizing by segment. We propose to our customer who are end-user, we propose One System approach across the divisions of our company by segments. So as I have mentioned several times, what are the most important segments for us in the previous 10 minutes. So we sell more complex system, including software. The group -- the Schneider group has acquired several software companies in the recent past -- in the past 6 months or 9 months now, sorry. And we get benefit of these different acquisitions to propose seamless solution and more competition to our customers. The most visible for our company was introduction of ETAP, which was announced in September. The closing remains to be done. We expect the closing to be done in a few weeks. But this will definitely offer us a possibility to offer to our user more complete and seamless solution. The second key driver is that we are offering -- most of our offer now -- most of the product and equipment that we deliver offer now service ready. Service ready means that they are collective and natively connected, and the second will be accessible from a remote or from a local point in order to check their status, have anticipate the potential failure, anticipate the potential service requests. So this is a very strong investment that has happened last year. And in the last part of the year, in the last quarter, several of our offers were launched in a digitized, I would say, collectable version. Finally, on the right side of this screen, we have now, thanks to the digitization of our installed base, we have now enriched our solutions in order to support our customer in this make most of their installed base in -- and it can be remote now, while before it could only be local service. Now we can offer remote services to our installed base. I continue -- briefly, I want to highlight 2 success stories as of last quarter. It's on Slide #10. It's the first time that we could supply to Nestlé, the food and bev giant, a complete solution for their 9th factory. So it was a moment of great pride that the Sanand factory for Maggi product was sold as a solution by Schneider Electric. The interesting thing in this success is that it involves several top-notch offers, such as the ester oil transformer, connectable medium voltage switchgear. Also the low voltage panel is also connectable and all this equipment are for the transformer, so I can say a smart transformer. The LV switchgear, the local touch switchgear, all of these are connected to an asset adviser solution, an EcoStruxure asset adviser, which can -- which is a good illustration of what I was mentioning before, service ready and the equipment being interconnected and serviceable from a remote place and from a local place for the benefit of the service and the lifetime of the equipment. So that's quite an interesting project that is now under execution. It is not yet commissioned. So we will have to follow it as soon as it will be commissioned to the benefit of the Nestlé. Another example is on Slide 11. Here it's not a big amount. I'm not giving detail about the price of this type of solution, but it's not a big amount of money, but it is replicable and can be multiplied by 100. And it is also very interesting because it is new way to protect people and to protect installation, electric installation of an [indiscernible] installation. It is arc flash protection. The principle of the arc flash protection, while you have heard about protection relays installed, this is a core product of Schneider Electric. But we intended to sell arc flash protection, which is a specific type of -- only in the Europe or Japan, China and USA. I'm insisting on this one because it's quite -- the principle of this protection that detects the light. So it goes at the speed of light. When you start to have an explosion in a medium voltage equipment, which is extremely rare, but it happens. And when we -- you start to have an explosion, it stops with some light. And while detecting the light, you can immediately switch off the device and protect your equipment. And of course, because we are talking here about exposure, you protect the people which are around, which might be around the device -- the equipment. So it's quite interesting in terms of safety management, and it's quite interesting in terms of new technology being launched on the Indian market, and it's quite interesting in terms of protection concept to protect the equipment and the investment. Here in this case, it is a cement factory, cement plants from LafargeHolcim, and it protects their investment and their employees. I will now give the floor to Mayank Holani to update on the financials of the last quarter.

Thanks, Bruno. Good afternoon, everyone. So as Bruno has pointed out that the market continues to be challenging, we are seeing a traction in few pockets. Hence we, at Schneider, continue to be cautious in order booking and in terms of cash security, along with our margins. So Slide #13. See, our order intake, OG order intake for the quarter stood at about INR 1,673 million, which is down by about 51% over last quarter and lower by about 28% for year-to-date 9 months' period. And during last year, this 9 months' period, based on current market situation and delay in projects, we have canceled orders for close to INR 1,100 million due to a variety of reasons, primarily related to price validity and some of them also from customer side. Next slide. We have seen a strong comeback in sales execution after lockdown impacting Q1, and Q3 sales were flattish versus previous year. Next slide. Coming to P&L, you see the results are in line with our strategy. We are selective in conventional orders, which are available in the market, but have a negative impact on margin. Our EBITDA margin improved by 0.6 points -- 0.6 percentage points, and the profit after tax is 7.1% for the quarter, while it was 6.2% in the previous year, same quarter. Next slide. Year-to-date period, if you see our gross margin has improved by 1.9 points, EBITDA is improved by 3 percentage points, and profit after tax is positive by 1.3 percentage points. So overall, the profit -- there is good improvement in profitability in spite of the opening sales. And this exceptional expenditure is completely related to the employee severance pay, which has been part of our cost optimization initiatives. I will close here and leave the floor open for question and answers.

[Operator Instructions] We have first question from Mr. Ankit Merchant from Quest Investment.

My first question is related to the breakup. Can you give us the sales breakup for the quarter as well as quarter for the 9-month period? Which particular segment is contributing how much?

So for quarter, our sales systems have been 73%, transactional 16% and services 11%. While for 9 months period, systems have been 74%, transactional 15% and services 11%.

Okay. And about this order, which we have debooked of close to INR 110 crores in the -- I believe it's in the oil and gas segment, right?

No. This is across the segments, not just oil. See, there have been -- we have consciously debooked the orders, which have been continuously getting delayed, and there was no clarity on the execution period. And also because the orders, which were, say, booked 2 years back and because of delay, obviously, they can't be executed at the same margins. And if customers were not willing to give you the price valuation, we have debooked because the validity was already out.

Okay. So then going ahead, are we seeing any revival in the orders for us over the next -- or over the last few months? Have you seen any real pickup in activity on the order book?

So for the order, you can see the dip of the -- 3 quarters ago, there was a very strong dip into investment, CapEx formation. So we are impacted as vendor of our equipment. We're impacted something like 2 quarters later. So this is what we have seen last quarter. Now we see some rebound in metro segment with several metro projects coming to maturity. We see it in the cement industry, in the cement segment. We start to see a rebound on the steel industry, just starting. So yes, definitely, we see some rebound of some segments, which were the most affected last year by the lockdown, followed by the COVID-19 crisis. This being said, we have also seen, in the past 6 months, a steady decrease of the investment and the CapEx of the DISCOM, distribution company. So it's a present strong component of our order intake. And we see the new project, the new creation of projects decreasing. That's why we welcome the initiative of the government to recapitalize the DISCOM.

Sure. So what is the total order book size right now, which we have in our hand?

So it's close to INR 630 crores.

Close to INR 630 crores. And do you have the breakup of that INR 630 crores, how much is which particular segment?

So it's pretty much...

Ankit, segment-wise breakup, we don't have. We don't give the segment-wise breakup. We are tracking as a breakup of system, transactional and services businesses. So which is -- this breakup we can provide.

Yes, yes. That would be helpful, if you could.

So it's about 74% system, 14% transactional and 12% services.

Okay. And just one last question is related to the working capital. So have we seen any changes in the working capital? And how would it be going ahead? Are the payments -- are we be able to receive our payment on time?

So we have -- we had seen an increase on our outstandings in the mid of -- in the quarter 1, so with our day sales outstanding shooting up in May and June month. And then -- but in terms of year-end if you see, we have been able to close the year at almost pretty much, very close to the level of December '19. And even the -- whether it's overall receivables or the day sales outstanding, we are pretty much at the same level, which we are a few days slightly higher in terms of day sales outstanding, but overall our outstandings have reduced, the receivables have reduced from what it was December '19.

Year-end means the [indiscernible]

Yes. I'm talking of the last quarter end versus the same quarter in previous year.

Okay. So from the perspective of the financial year, should we be closing at also similar level from the last year?

We have seen some positive signs in the market. But as of now, as you know, market is not stable. So we cannot comment on the year-end situation. But yes, things are improving on ground. That's something we can comment right now.

And just one last question related to the system business. Is there any impact of import because of China, as such? Are we seeing any import related delay affecting our project execution also on the ground?

No, not material, not material. We have a few components that's been from our own plants in China, mainly for the low voltage activity. But it's not really material in terms of size. And we are currently looking at localizing in India, the activity, which is the most impacted by the higher stocks, which should be completed by quarter 3 this year.

Sure. And any orders of our competitors flowing into our books? Is that -- is there a possibility because a few of our competitors who are relying on completely sourcing it from China, so are we seeing any trend change on that front for us?

Pardon, please, your question is not clear.

Sorry, it was just a follow-up question. So if our supply has been slightly impacted because of the China factor, then our competitors also would be suffering, who would be importing most of their stuff from China? So are we seeing their orders getting canceled or delayed and flowing for us? Is that a possibility, which is happening for us?

Ankit, we already mentioned that we are not seeing any major challenges for import in China...

But competitor could be more impacted than us and then typically, the GIS activity [indiscernible] is importing from China and can be more invested than us because we are importing the components from Germany. So in this example, yes, in the GIS activity, which represents [indiscernible], we could beneficiate -- benefit from a competitor situation.

[Operator Instructions] We have a question from Mr. Manish Goyal from Enam Holdings Private Limited.

Just, first, I would like to have some housekeeping questions on the order inflow. If you can give us the breakup of order inflow also in systems, transactional and services?

You mean the value of orders?

Value of -- yes, basically, for INR 167 crores order inflow, if you can give us a breakup?

So out of this INR 167 crores, close to 43% is in equipment and 18% in projects, so about 61% in systems, 23% in transaction and 16% in services.

Okay. And can you also provide what is the intergroup revenue and the order inflow number?

Intergroup revenue has been about 16% of the system. So you can say about 11% to 12% of the order.

How much -- order inflow...

So order inflow is around INR 75 million for the quarter.

INR 75 crores, right?

INR 87 crores.

INR 87 crores.

Order inflow is INR 87 crores. Okay. Okay. Hello, sorry?

Yes. It's intergroup, yes.

Yes. Okay. Okay. And what is the -- our debt outstanding as on December?

Manish, this is not published information. So for September, it's INR 640 crore, around INR 640 crore, which includes our preferred classified as a debt and without preferred, it's INR 504 crores.

Okay. Okay. Fair point. And sir, we have seen a very good amount of cost cutting, both on employee side. No doubt, we had done VRS last year as well as and in current year as well. And other expenses also has been in control. So I believe there were certain things, which were under kind of a travel restriction or such similar change. But going forward, sir, how should we expect our fixed cost base to behave, sir?

See, Manish, we expect this year, obviously, has been seeing some of the structural changes and a lot of technical savings also and in which travel is one of the technicals. But we expect part of at least 50% to 60% of technical savings to convert to structural. So as you mentioned about travel, so with people getting more comfortable with digital ways of working, we obviously look at even as the travel to reduce considerably from what it was -- used to be pre-COVID period.