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

Welcome to Schneider Electric's 2024 Full Year Results with Olivier Blum, Chief Executive Officer; Hilary Maxson, Chief Financial Officer; and Amit Bhalla, Head of Investor Relations. Thank you for standing by. [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. I will now hand you over to Amit Bhalla.

Good morning, everyone. Very happy that you could be with us today, and thank you for your interest in Schneider Electric. I'm joined with Olivier and Hilary, our CEO and CFO. We will have the business highlights section followed by the financial highlights, and we'll keep time for Q&A. So I obviously want to remind everybody about the disclaimer, as always, on our slides and immediately hand it over to Olivier.

Thank you very much, Amit. Good morning to all of you. It's great to be with you today to share our '24 results. Of course, very honored myself after a couple of months as a new CEO of the company to report, first of all, that Schneider Electric has been named the most sustainable company in the world by Corporate Knights early 2025. And this is the second time in the past 5 years. So as you know, we always claim that we want to be an Impact company, but being an impact company for us starts to be a company that performs. And it's very important for us that we keep that in mind. If you want to impact the right impact, it should be coming from your performance, and we are very happy today to report that we have seen an accelerated growth -- execution of our growth in Q4. And as you can see, a 12.5% growth in Q4 itself, which has been supported, of course, by Energy Management that continues to be the driving force from a growth standpoint. But also, as you can see on that slide, after several quarters of negative growth in Industrial Automation, for the first time, we see a return to growth, which is quite encouraging for 2025. Moving on to '24 as a full year. We delivered a record level of sales at EUR 38 billion plus and 8.4% growth organically, which is slightly above our guidance, which I remind you was 6% to 8%. And what is really, really interesting is one is to see the acceleration of growth, both for Energy Management and Industrial Automation from H1 to H2. But also just to remind everyone that when you look at the past years, it's not only 2024, '24 follows a couple of years of really sustained growth for Schneider Electric, which demonstrates the solidity of our strategy, but also the way we execute the strategy collectively. All of that translates in a high level of profitability, where we have increased by 14%, here again, slightly above our guidance, with an adjusted EBITA of EUR 7 billion for the year 2024. And here again, when you look at the evolution of our profitability in terms of EBITA, but also adjusted net income, you see that it's not only the year 2024, but it comes after a couple of years of great performance. It translates in an increase of our dividend again. And here, I'm particularly proud to say that this is 15 years in a row that we are progressing progressive dividend and with an 11% increase for the year 2024 only. Looking forward, you've seen this slide in our Capital Markets Day end of 2023, you've seen for those of you just our India investor event. It's always important to remind you what we see for the coming cycle. So we continue to stick to what we say, which is a favorable market, addressable market in all our end markets for Schneider Electric. In total, 6% to 7% is the growth that we see, no change for the coming years. And of course, with different dynamics, all of them being positive, but in particular, from the left to the right, starting by data center, that continues to be a very, very good opportunity for Schneider Electric, and that represents 24% of our end orders in 2024 from an end market exposure standpoint. But I want to remind everyone that the strategy of Schneider Electric in the past and still today and for the future will be to continue to have a very balanced exposure in terms of end markets. While we love to capture as much as we can the opportunity in data center, for us, it's very important that we continue to deliver a solid and strong performance in buildings, industry and infrastructure, which are also offering, from an electrification and digitalization standpoint, a lot of opportunities for Schneider Electric. So at the end of the day, we confirm really this 7% to 10% growth across the cycle. We'll come back a little bit later on our guidance 2025, but no change and very encouraging for the future. Looking at Data Centers in particular, because we have always a lot of questions. Since 2017, more or less, we've seen an acceleration and for us, which was very, very important, when we look at the different drivers, which were Internet of Things, the acquisition of cloud computing and so on and so forth, definitely with AI and large language model, we've seen in the past 2 years an acceleration of that market. And I'm sure there will be some of you asking us questions on DeepSeek, but DeepSeek for us is just the illustration that the consumption of AI is just increasing. And that translates for us in our end market in really double-digit growth for the future, and it's very, very encouraging for Schneider Electric, considering that we have a unique positioning, because we are one of the few companies in the world that can go from the low voltage to the medium voltage to the digital building technology and also, of course, UPS. So that gives us a unique positioning in the market. As you know, we are a global company. We continue to reinforce our go-to-market, our access to the large customer. We continue to invest organically in R&D and our technology. But also as we announced last year, when there are good opportunities, we love to capture them, and we've decided last year to go with the acquisition of Motivair. All the conditions precedent, by the way, have been met. So we will get back to you very shortly in the coming weeks to announce the closure of Motivair. So all hand in hand, it confirms a very strong positioning of Schneider Electric, a very strong end market dynamic in Data Centers and definitely an opportunity for us to continue to differentiate in that segment. Now I'd like to take you through on how we want really to execute that strategy, what are really the key markers of Schneider Electric? Probably a lot of things that you know already, but I think it's always good to remind you, because we are convinced that we are pursuing a very differentiated strategy that benefits to all our stakeholders and, of course, in particular, our shareholders. So starting from the technology, let's never forget that we are a tech company. Our job at the end of the day is to innovate and to develop the best technology that will help our customer to benefit from electrification and digitalization. And that's why we have decided to launch EcoStruxure a couple of years ago, which helps us to build a complete stack of solutions from our customers from product, which is where you access to your customer, where you connect with your customer, where you can go either at the edge level or at the cloud level, and which gives you a unique opportunity to develop solution for your customer, again, across the entire life cycle from the design, build and operate. And we do that, as you know, in different segments such as building data center, industry and infrastructure. So I know it's something we've shared with you for many years. It was really a big transformation at the beginning for Schneider Electric, and I'm glad to report that we are really benefiting from that transformation of our portfolio that we keep on pushing to the next level, making sure that most of the new products that we deliver or equipment are connectable. We connect them, again, either at the edge or at the cloud level. And all of that supported by a very strong focus on our services strategy, not only in Field Services, but also in Digital services, where we do believe we can extract more value from our customers, translated in more recurring revenues, but also it creates also a lot of stickiness with our customer and much stronger loyalty with Schneider Electric. And on top of that, we continue to develop our agnostic software play with AVEVA, with AVEVA Group, where we have created, as you know, the Connect platform that comes on everything we do with EcoStruxure, combining Energy Management and Industrial Automation, and offering our customers to go to the next level when it comes to software agnostic in particular in the industrial world. So this transformation is not new. It's something that has been in the making in the past year, but we are really now in the middle of that opportunity, and we see really a strong demand on the customer side. So we will continue to accelerate the transformation of EcoStruxure. We will also continue to accelerate the transformation of our Software portfolio. And I'm glad to report that for the year 2024, our AVEVA Group has grown its annual recurring revenue or IRR by 15%, which is extremely good and in line with our plan, and we continue to be in the middle of that subscription transition, which will end probably in a year or 2. Last but not the least, I want to remind you that we continue also to develop advisory services activity. It's not a big part of our revenues, but it helps us to have a very different access at CXO level with large enterprise everywhere in the world. You know we've done that historically with sustainability, but we have developed capabilities in process electrification. You know how much it is important in the industrial sector to help our customers to go through the electrification of their process and also helping them in their industrial and digital transformation. Here, this is really an agnostic part of our portfolio, where we are providing advisory services. It's a business by itself, but it creates, of course, a huge opportunity to engage at the second level when they want to execute their road map. So all of that translates for us in a very strong ambition to continue to move our digital flywheel to the next level. That's something we've presented to you. Our objective at the end of the day is to make sure that 60% to 65% of our group revenue by 2027, which will come from that flywheel, again, from the connectable product to the edge, to the cloud, including our services portfolio, which, again, is giving a lot of opportunity of growth and, in particular, in recurring revenues for Schneider Electric that we love to have in our performance. So when you look at this huge investment that we have in technology, every year, it translates in a lot of new products, which are very important for us in all our end segments. We continue to put a lot of investment in R&D, translated every year in a lot of innovation in different segments that you can see in the screen, just to take the example of AirSeT, which has been a massive transformation of our medium voltage portfolio, simplification, decarbonize, more value to our customer, just to take one example on that screen. We continue to be extremely focused on our customer on how we can differentiate our customer, how we can improve their satisfaction. We've presented to you multiple times our unique model, what we call the multi-hub approach, where we develop products in all our regions with our R&D center. We have a very, very strong focus also on local and regional supply chain for resilience purpose with a very strong connection with our commercial team, which gives us a very strong access to our partner, to end user, and which gives us opportunity also to leverage and have a strong pricing power. And as we said, we continue to move towards an objective at the end of the day, which is to make sure that 90% of what we sell in the region is sourced and manufactured locally. We have tested that in particular during the COVID time, and we do believe that's a unique capability that we have, which helps us to grow faster, but that creates also a lot of resilience in difficult times. And maybe just to mention, in particular, the situation of North America, where we have already 83% of what we sell in North America, which is manufactured in the region. So we'll continue definitely to develop this multi-hub approach in the next cycle, which I believe is the best answer to a world which is very, very volatile with a lot of geopolitics. So that's the best answer that we have on our side. We continue to make responsible investment. If you remember, we announced that we will invest EUR 2 billion of incremental capacity in the next cycle. It's super important. It has translated already in 2024 in new capacity, especially in North America, but not only, as you can see on the screen. As we said, we are in a favorable growth cycle, 7% to 10%. It's super important for us that we make the most of this opportunity, and we continue to invest in our capacity. So at the end of the day, what I want also to mention, all those capacities we are building, for instance, for Data Centers in low voltage and medium voltage are also capacities that we are using for the other segment of Schneider Electric, which gives us quite a lot of agility whenever the market turn in one direction or the other. And at the end of the day, we'll continue to have a very specific focus on U.S., India and Middle East and Africa, which are definitely market where we have observed already higher growth than the rest of the world, and we continue to believe it will be the same in the next 2 years. So just a couple of examples. I'm not going to go through all of them, but always our obsession at Schneider Electric is to develop technology that will create difference for our customer. And of course, what we have developed, which is unique at Schneider Electric, is a complete portfolio of solutions. I said it from Product to Automation Services, Software, but also in different categories, in Energy Management, Low Voltage, Medium Voltage, BMS, UPS, in Industrial Automation with AVEVA software. And when we are able to combine those solutions together, we deliver different values for our customers in the different end markets, as you can see on that slide. And it can be about energy saving. It can be about how you make your factory more efficient. So that creates a huge differentiation at the end of the day for the customer. And maybe just to pick up one that I like to pick personally, which is the example of Capgemini. Capgemini worldwide, like any company, they are looking at their evolution of their CO2 emissions, but more important, they are looking at energy consumption, and then turn to India, where they have more than 70% of their energy consumption in the world. And they turned to us, Schneider Electric, 12 months ago and said, "Hey, what can we do to achieve our objective?" And by bringing together all the EcoStruxure stack from product system, but also services contract, together with our Software portfolio and working hand in hand with Capgemini, we delivered a unique value proposition for the customer that helped us help them to save energy across all their campuses in India. So very strong focus on customer, making sure we translate innovation into differentiation for our customer, making sure we build capacity for our customer, and we continue to have a unique positioning in the market. I like, as usual, of course, to report on sustainability, which is really the third key pillar of our differentiation, as I said in my introduction, being an Impact company. As you probably know, we are, by the way, in '25 in the last year of the previous cycle of the previous strategy. But it's great to report that we have exceeded our objective for 2024 itself on multiple aspects of our SSI, our Schneider Sustainability Impact barometer. And just to pick up the first one, very pleased to report that since the beginning of that commitment, we've generated close to 700 million tonnes of CO2 saved and avoided, which demonstrates that the portfolio of Schneider Electric has a direct impact on energy consumption for our customer. And again, good recognition from the outside world, EcoVadis, CDP and many others. So we continue to have a very, very strong focus. We've been recognized externally. I've mentioned Corporate Knights at the beginning. I mentioned Time Magazine. For me, this is just the illustration that Schneider Electric continues to be recognized for all its commitments on the different aspects of what we are doing as an Impact company. Delivering short-term results is super important for us. And at the same time, making sure we find a way to impact positively our ecosystem. And I'd like to report in particular, the recognition we got from the World Economic Forum for our Lighthouse factory, which is for me a good illustration on how our technology can benefit. We are implementing ourselves those technologies in Schneider Electric. I can tell you, as the CEO of the company, I'm asking my team to deliver strong productivity every year, my supply chain in particular. And it's important for me that they can benefit, we can test, we can experiment all our technology, and it has been a great recognition by the World Economic Forum this year again in Davos. Moving to the last pillar of our differentiation, which is very, very, very important, which is a people one. At the end of the day, we differentiate, thanks to a unique leadership in our company, starting by the Executive Committee. I just want to mention on that, but you know it already, that Frédéric Godemel has taken over for me to -- in charge of Energy Management. Huge experience in the company, which will ensure a very strong continuity and acceleration of our strategy. But also important to mention, and I was talking earlier on the multi-hub strategy of Schneider Electric, with this unique operating model and our colleagues being located in different parts of the world, different nationalities, and very strong knowledge of what is happening in the different parts of the world, very strong focus on diversity, I think we are benefiting really from a unique experience in this management team, which gives me the confidence that we can continue to accelerate the execution of our strategy in the future, but we can continue, of course, to keep on reinventing ourselves to stay very, very, very competitive. This strong focus on people is also translated in everything we do for our employees everywhere in the world. We want really to continue to give access to training to our employees. We want to make sure that they continue to upskill their capability, especially in everything which is related to digital. You can also see that we continue to have a very strong engagement from our employees and close to 90% of them participating every year to this survey and giving us a lot of insight on how we can continue to improve as a company. And last but not the least, but something we are extremely proud, 61% of our employees worldwide have participated to our shareholding plan in 47 countries. So it's great to report that our employees are actually in the top 5, the #5 in terms of shareholding of Schneider Electric. So to conclude, we continue to be focused on our mission. Our mission is to be the trusted partner in sustainability and efficiency. What does it mean? With the need for more electrification and digitalization, we do believe that we have a unique portfolio, unique position by end market, very balanced revenue across different geography, which gives us the confidence that we can continue to drive strong results and consistent value for all our shareholders. I'm going to stop here for the recap of '24 and the recap on our strategy and hand over to you, Hilary, to give us more detail on our 2024 financial performance.

Thanks, Olivier, and good morning, everyone. Happy to be here with you all today. I'll start with our key financial highlights for the year, some of which Olivier has already mentioned, before diving into details on the quarter and the P&L. As Olivier said, we finished the year with record revenues of EUR 38 billion, up 8% organic. We also continued to progress our gross margins to 42.6% at the end of the year, up 80 basis points organic, which drove our adjusted EBITA to a margin of 18.6%. Our net income was impacted by a noncash impairment we took in the first half, with our adjusted net income better reflecting our strong operating results at plus 15%. Our free cash flow is greater than EUR 4 billion for a second straight year, and our cash conversion ratio is approaching 100%, both with and without that noncash impairment. These strong operating results all translate into a big step-up in our ROCE, now approaching the 15% plus we mentioned at our Capital Markets Day. And I'll speak in more detail to each of these in the next slides. Starting with revenues. In Energy Management, we continue to see strong demand and strong growth across our end markets, particularly in Data Center, but not only translate into strong sales. In Industrial Automation, as you know, we were impacted throughout the year by weakness in Discrete automation. However, we start to see positive momentum in the H2 and Q4. Overall, we were up 8% organic in sales, reflecting the strong positioning of our portfolio and the benefit we have from diversification across geographies and our business models. Negative scope impacts are associated with our Sensors business, which we sold in Q4 2023, and FX translation also adversely impacted our revenues by around EUR 400 million, mainly due to the weakening of the Chinese yuan and a number of more volatile currencies against the euro. And as you can see in the footnotes to this slide, based on current rates, we'd expect FX impacts to turn positive this year, contributing plus EUR 600 million to EUR 700 million to our top line and plus 10 basis points of adjusted EBITA. On this next slide, we show our backlog progression for 2024. We report on our backlog once a year, although we did give you some comments on its evolution throughout the year. As you can see, we have a strong uptick in our backlog of around 12% versus 2023, putting it at EUR 21.4 billion. This is driven by continued strong order growth in systems and services, partially offset in Q4 by the pickup in volumes in our North America business, driven by regularization of our supply chain there. And we expect to be fully normalized in our supply chain in North America in terms of customer deliveries over the next months, although as Olivier mentioned, we continue to invest in our capacity there to support strong demand. Looking at our revenues in the context of our digital flywheel, our digital and digital enabling revenues are now at 57% of our total group revenue with continued double-digit growth in connectable products and field services, offset by negative growth in Edge Control due to the weakness in Discrete automation markets. In Software, our revenues are still being adversely impacted by the transition to subscription. As Olivier said, you can better see past the accounting impacts of that transition by following the annual recurring revenues at AVEVA and how these translate into an uptick in our percentage of recurring revenue in agnostic software. We finished the year with plus 15% ARR at AVEVA. And as you can see here, we're now at 77% recurring revenues in agnostic software, well on track towards our target of 80% by 2027. Turning now to our fourth quarter revenues. We were up 12% organic to EUR 10.7 billion with Energy Management remaining strong double digit and Industrial Automation returning to growth. North America and Rest of World continue to be our strongest contributors with a good pickup in growth also in Asia Pacific and Western Europe, and scope and FX impacts aren't material to the quarter. Turning to our diverse mix of business models. In Q4, growth in products continued to improve with mid-single-digit growth in Energy Management, offset by Industrial Automation down mid-single digit due to the weakness in Discrete markets, but where we continue to see signs of improvement with growth in various product offerings like contactors and signaling. Our Systems business, where we sell directly to the end user, continued with particularly high demand and strong execution, translating into sales of plus 27%, driven by investments in Data Center and Infrastructure, partially offset by some delayed projects in Process & Hybrid. Software & Services was back to double-digit growth at plus 11%, supported by good growth in revenues at AVEVA and strong growth in our Digital service offerings for EcoStruxure and sustainability as well as double-digit growth in Field Services. Specifically in Energy Management, we were up 15% organic for the quarter. North America was up a very strong 25%, driven by our Systems business, particularly Data Centers, and with double-digit growth in products. We did see some weakness in residential, particularly in the U.S., likely tied to continued high interest rates there. Sales were also supported by a step-up in supply chain volumes in North America due to continued improvements in our supply chain execution and our capacity additions. Western Europe was up 7% organic with double-digit growth in Italy and Spain and high single-digit growth in France and the U.K., driven primarily by demand in Data Centers and Infrastructure. Asia Pacific was up 8%, with China continuing down low single digit and where we see continued weakness in the construction markets, partially offset by an acceleration in demand for Data Center. The rest of Asia Pacific was up double digit with particularly strong growth in India, where we see strong growth across our end markets as well as double-digit growth across various other markets, driven by Data Center. Rest of World was up 18%, including some FX-related pricing. Excluding that, South America was up double digit due to strong demand across end markets, while Middle East and Africa grew high single digit, including strong residential. Turning to Industrial Automation. Sales turned positive in the Q4, up 1%, driven by growth in Software and a return to growth in certain product offers, although Discrete remained down overall and Process Automation was flat. North America was flat with growth in Software offset by continued weakness in Discrete markets, as stock levels at our channel partners continued to normalize. Western Europe was up 1% for the quarter with high single-digit growth in Software, offset by weakness in Discrete, particularly in Germany. Despite continued weakness in sales, we do see some signs of demand recovery in Discrete markets in Europe, particularly in Italy, France and Spain. Asia Pacific was down 8% for the quarter with weakness across Discrete, Process Automation, and Software. China was down low double digit with the rest of Asia Pacific primarily down as well, more notably in Software and Process Automation. Discrete markets were stronger in India and flattish in Northern Asia. Rest of the World was up 20% with double-digit contributions from Software, Process Automation, and Discrete. Middle East and Africa and South America led the growth. Turning now to our full year P&L. We finished the year with adjusted EBITA of EUR 7 billion and organic growth of 14%. This was driven by our top line growth as well as an expansion in our adjusted EBITA margin of plus 90 basis points organic, to finish the year at 18.6%, supported by strong progression in our gross margin. Our R&D to sales ratio, including our capitalized R&D, increased by 30 basis points from last year to 5.9%. Despite this step-up, our SFC to sales ratio improved by 10 basis points organic for the year. Our adjusted EBITA margin in Energy Management was up 110 basis points, supported by the strong demand and strong Systems pricing, whereas adjusted EBITA margin in Industrial Automation was down, as expected, 150 basis points, impacted by the lower volumes we saw throughout the year in Discrete automation. Getting into a bit more detail on our adjusted EBITA progression. We finished the year with gross margin of 42.6% or plus 80 basis points organic. This was driven primarily by industrial productivity despite the as expected impacts from the actions we're taking to support our North America supply chain and strong pricing in our Systems business. Pricing on products went back to more normal levels as anticipated. In 2025, we would continue to expect some gross margin progression, but at a more muted level, as we continue to take advantage of the strong demand trend in our Systems business and to expand our capacity. In terms of our OpEx or what we call support function costs, we continue to drive some structural savings to help offset inflation, and we continue to make investments to support our strategic priorities of innovation, of capturing the growth opportunities in our markets and our internal digital transformation, including ERP upgrades. Turning now to our net income. Including scope and FX, our adjusted EBITA is up 10% Below the line, our other income and expense was negatively impacted by a provision of EUR 104 million tied to the fine communicated by the French Competition Authority that we disclosed in our Q3 reporting. We also lodged an appeal against this decision in December 2024. Restructuring costs were EUR 141 million for the year, and financial costs were lower year-over-year due to increased interest income and lower FX costs. Our effective tax rate was 23.1%, and we anticipate our ETR will be in the range of 23% to 25% for 2025. This all results in a net income of EUR 4.3 billion, up 7%, and adjusted net income of EUR 4.7 billion, up 15%. These strong operating results translated into strong cash flow from operations of EUR 6.3 billion, up 14%. Our cash conversion ratio for the year came in at 99%, including the impairment we took earlier this year, or 94% without that charge, aligned with our expectations of approaching 100% for the year. Our free cash flow was impacted by a strong uptick in trade working capital, tied with purchases of inventory to support our focus on supply chain execution and our program of capacity additions. Free cash flow for the year again surpassed EUR 4 billion, finishing at EUR 4.2 billion. And in 2025, we'd expect the cash conversion ratio to again be approaching 100%, including a step-up in our tangible CapEx we showed a bit earlier on one of our slides. Our debt ratios remain very strong, supported by our free cash flow generation. And based on the strong results we've been discussing throughout this call, we did see a significant step-up in our ROCE to just shy of 15%, close to our target of 15% plus as disclosed in our Capital Markets Day. Lastly, we're proposing another progressive dividend for the 15th year of EUR 3.90 per share, and this is subject to shareholder approval at our AGM in May. With that, let me pass the call back to Olivier to discuss our expectations for 2025.

Thank you very much, Hilary, for this clear explanation of 2024. Indeed, let's move now to speak about '25. But before we speak about numbers, I'd like to give you a bit of color on what are the key trends we see for 2025. First of all, I said it in my introduction, but we continue to see a strong and dynamic market demand, which is giving really a favorable opportunity for Schneider due to our positioning. And we see that, as I said initially, in all markets. So all markets will contribute and, of course, Data Center being an important one, but not the only one. Second point, which is very, very important. We have a unique portfolio from products to systems and services. Systems will continue to contribute strongly to that growth in 2025, led by the Energy Management business, in particular, in all our end segments. We see, as we said with Hilary, demand recovery in Discrete automation. We've seen that already in Q4, and we expect to see that probably accelerating a bit more in the second part of the year 2025. Then as we said, we continue to progress on our journey to subscription in all our AVEVA portfolio, and it has translated already in good results in '24, and it will continue in '25. We continue to see an acceleration of all our services portfolio, both Field Services, but also Digital services, which will translate in the core part of our business also in more recurring revenues for the future. As we said, all the regions will contribute to the growth. And of course, with very, very different dynamic. And in particular, the growth will be led by the U.S., India and Middle East, where we continue to see a very strong momentum and opportunity for Schneider Electric to make the difference. We will continue to execute on what we communicated previously on our capacity investment to support that growth. It's very, very important that we can deliver this demand everywhere in the world, and we are quite confident that the plan we've put in place is really in line with all the opportunities we have in '25, but beyond 2025. So last but not the least, and I'm sure it will be some of the questions, depending on the evolution of all the geopolitical developments, we will continue to stay very, very close to what's happening on a day-to-day basis and getting ready to prepare any kind of commercial action to make sure that we can protect our profitability in line with our guidance. So talking about guidance and talking about '25 target, we have set up a target with an improvement of our adjusted EBITA from 10% to 15% organically. And all of that will be supported by both really strong growth organically between 7% and 10% for the year 2025, and an improvement of our adjusted EBITA margin between 50 and 80 bps. So these are basically our targets for '25, ambitious targets, and it will imply at the end of the day, an adjusted EBITA margin around 19.2% to 19.5% at the end of 2025. So we'll stop here for the formal part of the presentation and hand over back to you, Amit, for the Q&A. Thank you.

All right. Thank you very much, Olivier and Hilary. We do have around 25 minutes. I'm sure there's lots of questions, and I want to make sure I try to get to every analyst. So just stick to one question as always. And with that, let's get started. Operator, first question, please.

The first question is from Simon Toennessen at Jefferies.

My first question is just on sort of order trends you're seeing. I presume you're not surprised that since DeepSeek, there's a lot of questions around this. And I know you historically haven't given orders, but have you seen any changes in customer behavior at all? Or is it basically just confirming the trends that you've seen generally throughout Q4 or the majority of '24, as you enter '25? And maybe just as an add-on to that, obviously, Motivair is a recent acquisition from you. Well, lots of chat, obviously, what DeepSeek implies in the end. But I think the concern, I guess, lies around less power intensity potentially and maybe air cooling for longer, less liquid cooling. Just a bit of a comment on that, I guess, and then your views since Motivair.

Thank you for the question, and it's a very important one. Look, first of all, if you step back a little bit on DeepSeek, on our side, our first take, it's a good news, because if you remember, where we were all of us 1 or 2 years ago, AI was still fairly new. We knew that will be important, that will create a lot of infrastructure. But for us, DeepSeek confirmed the fact that the consumption for AI will get bigger and bigger. And I can tell you, we see it at our customer side. We see it even at Schneider Electric for our own company, for what we can do for our customers. We will consume more and more of AI. So AI will be everywhere. DeepSeek will help to make the technology more accessible. Now to answer specifically your question, we are working every day with our customer, and there is no change in the trend. The pipeline that we have in front of us remains the same. It's a very robust pipeline, and that gives us the confidence that we can benefit really from that opportunities in '25 and beyond. Going to the last part of your question, and I'm going to keep it very, very short. But if you look at the impact of AI from a technology standpoint, starting from the chips. And as you probably know, we have a partnership with NVIDIA. It's increasing drastically the need to have data centers, which will have more power, more cooling, and you need to optimize that anyway. So if DeepSeek is helping by design to have more optimized data center, because less energy and a bit less attention on the good side, it's pretty good. But I can tell you, we are closing, in the coming days, the acquisition of Motivair. The pipeline that we have for Motivair, the demand that we have is just tremendous. So we are quite confident that this acceleration for AI is, at the end of the day, a good news for Schneider Electric in the coming years.

The next question is from Jonathan Mounsey of BNP Paribas.

I have so many. I will try to stick to one. The net debt ratio, it's just 1 now. And given the guidance for the P&L and the excellent free cash flow conversion rate you're expecting for 2025, just wondering in the absence of M&A, that leverage is going to get very low by the end of 2025. Have you got any thoughts on where the ratio should be, how you might maintain it, maybe more buybacks, why haven't we had those today? Or perhaps is the M&A pipeline such that you expect to relever via more spend?

I'll let you take this one, Hilary.

Sure. So indeed, we do have a particularly low net debt ratio at the end of this year. You can see actually a couple of things there. First, well, from a capital allocation standpoint, I think we've been quite clear. We focus on maintaining our investment-grade credit rating, strong investment-grade credit ratings, the progressive dividend. And then in terms of M&A, we've mentioned we maintain our agility and opportunistic view that we've had over the past many years, I would say. So this year, we have a couple of particular things. Of course, we continue with the progressive dividend, but we also have quite a bit of debt maturities this year, EUR 3.5 billion. So there's a particular reason that we put a little bit of additional debt in the market in 2024. So I think in general, we feel comfortable with where we are there. We mentioned at the Capital Markets Day a couple of things. We'll continue share buybacks to neutralize our employee share plans, and that continues to be our plan. And then, of course, if we started to build a lot of cash on our balance sheet, again, this year, we have a particular level of cash for a particular reason, we're not averse to some sort of special distribution to our shareholders in some particular form.

The next question is from Alasdair Leslie, Bernstein.

Quick question just on Energy Management. Clearly, very strong growth again in North America suggests another step change. Just kind of curious how much of that further acceleration was down to new capacity coming online? I suppose more importantly, how much more is still to come in terms of the ramp-up and higher loading of those new facilities? And if I could just attach on to that, how much do you kind of still bake in, in terms of kind of maybe a negative impact on margins from productivity in H1 from these measures? Or is that headwind now largely behind you?

Thank you for the question. I'll start and let you compete, of course, Hilary. Definitely, as you said, North America has been a strong growth driver for Schneider Electric. But I want to remind that the capacity we are building is not only for North America, it's also for India and Middle East, where we have seen tremendous opportunity already in '24, but moving forward. And you see that, by the way, when you look at our results by region, you will see that the rest of the world continues to contribute significantly to our growth. So we are benefiting definitely from the additional capacity that we have created in the U.S., but also in the rest of the world. And as I said in my introduction, we'll keep on definitely investing to be ready for the next cycle. I'll let you maybe complete on some element of capacity, if you want, Hilary?

Sure. So in North America, just to give you a sense here, and it's not just new capacity, we've talked about 2 things, the supply chain execution and new capacity. In the Q4, we had a particular step-up impacting the group probably within the range of just a couple of points there. So we're quite pleased with the execution that we have there. And how much more is to come? We already, I think, gave you the EUR 2 billion incremental CapEx over the course of the Capital Markets Day. So happy to discuss further offline, but that should give you a good sense. In terms of gross margin for 2025, I mentioned it would be a bit more muted. We do expect more normalized industrial productivity, not the big step-up we might anticipate from new capacity, but sort of in a normal range, I would say, for 2025. The impact there leading to the more muted gross margin that I discussed is more around pricing. We would expect more normal pricing or continued normal pricing in products, but also more normal pricing in Systems after we've had the big step-up over the last couple of years.

The next question is from James Moore at Redburn Atlantic.

I hope you can hear me. I wanted to ask a question about Data Centers. I think you mentioned that we've gone from 21% to 24%. And last year, you very helpfully said Distributed IT was 7% and hyperscaler 5.5% behind that 21%. Could you give those splits behind the numbers for '24? And I'm really trying to get down to hyperscaler. You say most of the growth is cloud. Would that be fair to say that cloud has gone from 5.5% to, say, 9% of group, which I calculate would mean that hyperscaler is growing 70%, 75% in orders in 2024. I'd really love some confirmation if that's the kind of magnitude of order growth in hyperscaler. And how do you see that number growing in the coming 3 to 5 years?

Well, look, it's an important question. Definitely, we see a growth coming from the hyperscaler, but not only it's very important, we see that growth everywhere in the world and coming also from the rest of the market. We don't communicate any specific number moving forward. And maybe you want to react, Hilary, to give a bit more granularity on the split?

Yes, sure. So happy to give you a little bit more information on that split. So in terms of pure Data Center and then the Distributed IT side, like we said, the whole thing is 24%. Around 20% of that is pure Data Center, around 4% is Distributed IT now. So you can see a bit that differential in growth rates that we've discussed. Of that 20%, a bit less than half of that will be with hyperscalers. It's a bit difficult, frankly, to calculate all that back to our orders rates. There's lots of things going on. But suffice to say, I think we feel that there's healthy growth in that segment. And for all the reasons we discussed here, we would expect there to be healthy growth to come. As we've said before, not exponential, but healthy growth as really this new infrastructure backbone is built out and continues to be built out in the future.

The next question is from Andre Kukhnin with UBS.

I just wanted to take the opportunity to dig into Medium Voltage systems a bit more. Could you just remind us of the exposure to that segment if we put the whole Data Center piece aside and think about just Medium Voltage for kind of utilities and industrial and other buildings applications? And could you talk about the kind of the normalization of lead times and the pricing comment you made earlier, effectively, do we need to worry about the sort of pricing of those rush orders that we've heard some of your peers and some of the industry experts talk about? Did you take an advantage of that during 2024? And is that what's normalizing? Or is it more of a normal trend? And is there like an SF6 free kicker to expect in 2025, if I can pack all of that into one question.

Thank you. It's a lot in one question. To start with on the Medium Voltage, it's indeed an important part of our portfolio. It's a business that contributes highly to Data Center, but not only, everywhere in the world. And of course, with the demand for more electrification, it's a part of our portfolio, which has grown pretty well in the past cycle. We don't communicate any specific number on how much it represents in the total. But talking about where we are in the future, you are well aware, and it was part of my presentation, that we have completely renewed our range in Medium Voltage with the AirSeT range, and it's definitely already a strong contributor to our growth and our performance in 2024, which gives us really the opportunity to gain the market share in different parts of the world. So that's really a very important part of our portfolio, which is helping us again in Data Center, but outside as well. And definitely, AirSeT is coming at the right time, because it's a full revamp of all our products. And you know that in some parts of the world, the ban will be put in place and Schneider Electric is really ready to make the difference and to capture most of the opportunity. So I'll stop there, maybe and if you want to complete on some points, Hilary.

No, no, I think you said it all.

The next question is from William Mackie from Kepler.

My question relates to some of your comments earlier about commercial agility and the actions that you might take as sort of geopolitics and particularly tariffs evolve. I want to go to North America specifically, where you've said you have 83% in region for region, but I'm guessing that includes Mexico, which is a large manufacturing base for you into North America. So maybe generally to talk about how you might adjust specifically with relation to tariffs and particularly how the Mexico-U.S.A. relationship could develop?

Yes, sure. I'll start. What is very important when I was talking about commercial agility, and of course, we are very much focused today on the case of U.S., but that's not something new. That's something that happened in the past cycle in all geographies. So we try to stay very, very, very close and put in place a plan that we can implement as soon as possible. What we said, which is important, that commercial agility gives us the confidence based on the information that we have in front of us today that we will be able still to deliver our profitability guidance in 2025. Now as you know, we look at the news every day, and we are following U.S., we are following also any kind of reciprocity, which could happen from other parts of the world. But I think we are confident with the team that we have a different plan in place that we can activate immediately. Now going a bit deeper, Hilary, maybe on the North America side and Mexico. I don't know if you want to bring a bit more color here?

Sure. So we did give you the 83% North America for North America. And also, I think we mentioned that 17% out of that 17% that's remaining outside of North America. Nothing particularly material to call out. It's across various countries. You're right that within the 83% North America for North America, of course, Mexico is also included. To give you a little bit of a sense of the magnitude there. And to be fair, the tariffs are ever evolving, right? Each and every day almost, we see something new in the news, not exactly solidified yet. But if some of the aspects of the current trade agreements between Canada, the U.S. and Mexico were to stand. So for example, the special tax zones, we would have an exposure in terms of imports from Mexico to the U.S. only in a few hundred millions. So any impact to us in terms of tariffs, we would expect to be immaterial. If that's not the case, if those special tax zones aren't to hold, that magnitude will be some times higher than that few hundred million that I said. That's where we're really preparing the commercial actions that we would put into place to protect our profitability. So we watch each and every day, like you do, I'm sure, to see this ever-evolving scope and where it might land and therefore, what we would need to do as a company.

Yes. And we'll keep you updated as there's more detail in the coming months as well. Next question, please.

The next question is from Gael de-Bray, Deutsche Bank.

If we start to see an acceleration towards inference and perhaps less training, taking DeepSeek into consideration. So what does that mean exactly for you in terms of the content, in terms of the type of product or maybe the margin differential between what you have with large-scale AI training data centers and what you would have for the rest, maybe more on the enterprise and at the hedge level?

Thank you. It's a very important question. And I was mentioning before that, for instance, we have announced last year this partnership with NVIDIA. What is super important for us is to stay upstream in the value chain, to stay very, very close on the latest technology to understand what is the impact. What we see today is definitely it increased the power capacity in the racks. It increased the need for liquid cooling. It is true with training. It is true with inference. And our job at the end of the day is to help those customers really to co-design and to make sure they make their data center more efficient. So it translates, at the end of the day, in more data centers, in bigger capacity and also power capacity for data center and cooling, and which is the reason I mentioned before why we have done the acquisition of Motivair. So from a top line standpoint, it's definitely a strong driver for Schneider Electric. From a margin standpoint, it does not have any particular impact. It's still, I would say, fairly neutral. It remains, at the end of the day, a competitive market, of course. But for us, Schneider Electric, as I said, the more we are upstream in the value chain, co-designing, co-architecting the data center, in particular with hyperscaler, that gives us the confidence that it's a long-term relationship. And you know that in many cases, by the way, we signed contracts for 2, 3 years across the cycle. So no major shift in terms of margin, but a strong opportunity in terms of top line.

Next question is from Philip Buller of Berenberg.

My one is really a follow-up to Jonathan's earlier question, but for Olivier, if I may. Given the balance sheet optionality and given how good everything is organically, I guess the question is, what is the next leg in terms of strategic priorities for you over the medium term? I'm wondering if there are going to be some inorganic avenues that you could be pursuing via M&A? And where would you like to focus those efforts, be that technology, end market or geography, please?

Sure, sure. So look, on M&A, Hilary said it, the plan that we have presented by '27 is without M&A. We'll stay very attentive. We'll stay also opportunistic every time it makes sense to achieve our strategy. Coming back to the strategy and what I described, but I'll repeat it, 2 important elements. We continue to transform our portfolio from hardware to more digital, more services. It's great in terms of recurring revenues. From EcoStruxure to Connect, we have everything in place. Now it's really about going to the next level and delivering that value to our customer. Again, we talked a lot about data center today, but I repeat it's not only in data center. When you look at the opportunity we have between Energy Management, IA, together with One Software and AVEVA, it gives us a tremendous opportunity in the industry to continue to grow, to differentiate from design, operation, and maintenance. So that's very important. That's the first one, which is important. Continue to increase the digital part of our portfolio. And that's why we always communicate to you about the digital flywheel improvement, which is basically the illustration of that strategic dimension. The second one which is very, very important is to continue to have a very, very balanced exposure by geography. And of course, across cycle, both geographies might be different. We have historical strong position in different parts of the world. In this specific cycle, our focus is really to keep growing and make the most of the opportunity in the U.S., I said it already, but also continue to build on what we have done in India, which is a very important country for Schneider Electric and when we see the market still quite dynamic. And last but not the least, preparing and accelerating probably the next part of the cycle with Middle East and Africa, which is still, I would say, a fairly new opportunity from a size standpoint. But when we see the opportunity there, there is really something for Schneider Electric, because in those regions, you need more homes, you need more buildings, you need more industry, you need more everything. And when you look, by the way, at the growth of our rest of the world, it gives you an illustration of the dynamic on that market. So that's the second pillar, continue to develop strong geographical footprint and benefiting from those new geographies, which will continue for Schneider Electric to have a very differentiated positioning and strategy.

The next question is from Max Yates of Morgan Stanley.

Could I just ask about your Data Center business? So it looks like you did around EUR 9.7 billion of orders in Data Centers. Could you give us a feel for how much of your sales are Data Centers today? And would we be right in thinking maybe the percentage of orders last year at 21% is a good reflection of where sales are today? And then as an extension of that, when we look at your growth through the year in that Data Center business, was there any major deviations? Was there any single quarter where the Data Center growth rates were much larger than others and that obviously influenced the overall growth rate for the group?

Yes. I'll start and I'll let Hilary complete. What is very important to have in mind in Data Center, Data Center is, as we said, made of very large projects with hyperscalers. So it's extremely difficult on a monthly basis or quarterly basis even to look at the detailed trend, because you can have one specific quarter where you will have a large order from a hyperscaler and that will -- so we have really to be careful on how we look at this trend on orders in Data Center quarter-by-quarter. I think what is super important is to look at the 12-month basis. And for us internally, we are looking pretty much of our pipeline and what we have in front of us. I'll stop here, but I don't know if you want to bring more color on the specific number, Hilary.

Yes. I mean it won't be a perfect translation to look at the 21%, but it's not a bad indication of the trend. Of course, since we have -- this is our fastest-growing segment, we have orders that are -- and there's an execution time in terms of Data Center, we have a lag, therefore, on the sales side in terms of the percentage that would be there. So that's not a bad way to look at it. I would just point to the fact that we've talked about the fact that we have orders that go into '26. And so there's some execution that will be in there, but not a bad place to look.

All right. Thanks, Max. I'm mindful that we are at the hour, but I want to probably give another few minutes just to make sure we cover any other analysts who might not have had the questions. So operator, in case there's more questions, let's go to the next one.

Next question is from Alexander Virgo, Bank of America.

Maybe I could just come back on Andre's question on pricing. If the 400 basis points of gross margin in the bridge is predominantly driven by Systems' gross margin pricing, that sounds like it's sort of 15% or so or more given the rush pricing that Andre mentioned. So I wonder if you could just comment on that with respect to 2025. Is that what we're talking about in terms of moderation?

Well, I'll start quickly, and I'll let you finish, Hilary. What is very important, and I think we've demonstrated that in the past cycle, we are always very attentive at the evolution of our gross margin and the mix in particular. So we have demonstrated in the past cycle, with an evolution of our mix, that we are still able to sustain our gross margin and translated in strong profitability at the end. So we'll continue definitely to do that in all parts of the world. As I said, we have a multi-local strategy, which gives us the opportunity to have a decent pricing power in different parts of the world. But I'll let you elaborate a little bit more on the specific question on gross margin, Hilary.

Yes, sure. I mean if you look at the gross margin evolution, and we show it each half, you can see actually that, that Systems pricing has been there for some time. So I'm not aware that we saw anything in particular, I would say, in the second half versus the first half in terms of Systems pricing. There's a lot of demand in Systems generally in Data Center, but not only, and therefore, we've done what we believe is the right pricing strategy, not just this year, but even for a couple of years now in Systems. So I think probably nothing to call out there aside from, like I mentioned and exactly what you said, we've done some strong pricing there over the past couple of years. We would expect some normalization of that in 2025.

Right. I think we'll take one final question, if there is, before we stop.

Yes. The final question is from Ben Uglow of Oxcap.

Yes, I guess it was more color on the situation in China. Hilary, I remember back in October, November, you were indicating that you had seen a sort of pickup in the smaller Discrete automation products. And it sounds as if that's continued. But when we look at the overall China number, it still looks pretty muted. So could you give us an update on what's going on, on the ground? Why we're not seeing a more broad-based recovery on the Industrial Automation side? And then if there's time once you've done that, can you just give us an overall sense, how would you describe, in very broad terms, the kind of recovery that we're seeing in China, i.e., is it broad-based? It seems very different from end market to end market.

Thank you for this question. It's definitely a very important market for Schneider Electric. Look, I can share a couple of thoughts. I was in China recently. I can tell you if you speak with customers, if you speak with, by the way, other companies in the industry, we don't expect any major shift in 2025. The market will stay more or less at the same level that it was last year, which is fairly moderate. Even if there is a certain number of measures that have been taken by the government, it will really take time to be implemented and to translate in a much higher demand. As far as Schneider Electric is concerned, in China, we have a fairly good balance of exposure between the different end market and historical very strong position in building, which will continue to be moderate. A slight recovery, as we said, in industry and in particular, the OEM sector, but we cannot expect something super big in 2025. And like the rest of the world, definitely a peak in demand in Data Center in China for China, which is also an important part. So I would say, if I summarize, we don't expect, and we are not the only one, by the way, talking to any kind of company operating in China, we don't expect a very strong recovery in '25 itself, maybe beyond '25, a little bit better, but that will stay fairly stable at the level where it was last year. For us, it's important that we continue to get prepared, we continue to innovate, we continue to do a lot of R&D in China for China, in different parts of our portfolio to continue to stay very, very, very competitive. And when the market will pick up, I think we'll have the opportunity to make the most of the rebound. But to keep it short, fairly stable compared to what we have seen in '24.

All right. Thank you. Thanks for your patience for running a bit over. I think we'll stop over here. Of course, we are going to get on to the road show quickly and meet several of you on the road, as well as the IR team is available to engage. Thank you very much, and have a good rest of the day.

Thank you.