Schneider Electric: Finance Presentation
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Schneider Electric: Finance Presentation Emmanuel Babeau Deputy CEO & CFO Schneider Electric Confidential Property of Schneider Electric
Disclaimer All forw ard-looking statements are Schneider Electric management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forw ard-looking statements. For a detailed description of these factors and uncertainties, please refer to the section “Risk Factors” in our Annual Registration Document (w hich is available on w w w.schneider-electric.com). Schneider Electric undertakes no obligation to publicly update or revise any of these forw ard-looking statements. This presentation includes information pertaining to our markets and our competitive positions therein. Such information is based on market data and our actual revenues in those markets for the relevant periods. We obtained this market information from various third-party sources (industry publications, surveys, and forecasts) and our ow n internal estimates. We have not independently verified these third-party sources and cannot guarantee their accuracy or completeness and our internal surveys and estimates have not been verified by independent experts or other independent sources. Confidential Property of Schneider Electric | Page 2
We have delivered consistently sustained revenue growth and cash
generation over the past 10 years
Confidential Property of Schneider Electric | Page 3
We have delivered sustained revenue growth, strong cash generation,
and resilient profitability over the past 10 years
SUSTAINED REVENUE STRONG CASH GENERATION GROWTH IN ADJ. EBITA.
GROWTH THROUGH THE YEARS MARGIN ABOUT STABLE, NOTABLY
IMPACTED BY INVESTMENTS
30 +8.6% CAGR 2,275 20
+3.3% org. 27
2,045 17%
25 1,843
20 1,438
13% 3,641
15 10
12
10
1,669
5
0 0
2005 2010 2015 2005−2009 2010−2014 2015 LTM 2005 2010 2015
avg. avg.
Adj. EBITA margin (%)
Revenues (€B) Free cash flow (€M) Adj. EBITA (€m)
Confidential Property of Schneider Electric | Page 4Organic growth brings a compelling return on operational assets but M&A
has been limiting improvements in return on capital employed (ROCE)
IMPROVING CAPITAL HIGH LEVEL OF RETURN ON ROCE IMPROVED BEFORE FX
EFFICIENCY OPERATIONAL ASSETS
34 33%
32 ROCE improving
30 30% 30 bps pre-FX
37 ~15
28% since 2013
28 30
26 11.0 11.3
24
11.0
22 ~10
20
2010 2013 2015 2005 2015 ROCE range 2013 pro 2015
2005−2013 forma 3
Operational Assets / Revenues (%) 1 Return on Operation Assets (Post-tax) ROCE
1. Operational assets: Tangible assets + Net working capital (Inventories + Accounts receivables less payables)
2. Adjusted EBITA / Operational assets (year-average)
3. Pro f orma including Invensys
Confidential Property of Schneider Electric | Page 5We generated returns for our shareholders
PROGRESSION IN TSR ABOVE INDEX, CLOSE TO PEERS
DIVIDEND (TOTAL SHAREHOLDER RETURN)
+6% CAGR
150
110
2.0 100 100
68
50
1.1 23
0
-50
Sep- Sep- Oct-
06 11 16
2005 2015
Schneider Electric SE MSCI World Industrials
Dividend per share (€)
CAC 40 Peers1
1. Av erage peers index made of average TSR performance of ABB, Siemens, Legrand, Eaton, Emerson, Honeywell, JCI, Rockwell, Omron, Fuji Electric, Y okogawa
Confidential Property of Schneider Electric | Page 6We have an efficient model to create attractive shareholder value
over the next years
Confidential Property of Schneider Electric | Page 7We have an efficient model to create attractive shareholder value
over the next years
1. Our portfolio is capable of delivering superior organic growth
2. We have several levers to deliver significant margin improvement
3. We have learned from our M&A activities in past years
4. We remain focused on creating value for shareholders
Confidential Property of Schneider Electric | Page 8We have an efficient model to create attractive shareholder value
over the next years
Efficient
Operational
Solid organic capital
margin
revenue growth allocation &
improvement
use of cash
Confidential Property of Schneider Electric | Page 9We have an efficient model to create attractive shareholder value
over the next years
Efficient
Operational
Solid organic capital
margin
revenue growth allocation &
improvement
use of cash
Confidential Property of Schneider Electric | Page 10We confirm our long-term revenue growth objective of 3–6%
and target around 3%1 in average over the next 3 years excl. Infrastructure
Next 3 years: around 3% yearly average org. growth excl.
Long-term: Organic growth objective of 3–6%
Infrastructure with progressive ramp-up over the period
Past headwinds beginning to ease:
• O&G & commodities industries More Electric
• China’s investment pull back
• Mature economies: Sustainability driving electricity share
• New economies: Growing electricity consumption
Market mid-term in key geographies:
• Solid growth in residential, growth in non-res.
• Industry moderate recovery in 2017; O&G CapEx Higher Efficiency
bottoming-out in 2017
• Mature economies: Energy efficiency, industry of the future
• Continuation of gradual recovery with French • New economies: Automation for higher quality and efficiency
construction improving from 2017
• Some uncertainties on short-term Brexit impact
Decentralized Energy
• Construction recovery to moderate
• Industrial markets stabilizing in 2016; some • Mature and new economies: Decentralization of power
overcapacity in heavy industries but opportunities generation with more renewable energy
in industrial automation
1. Y early average growth over the period
Confidential Property of Schneider Electric | Page 11We have a strong model to create attractive shareholder value
over the next years
Efficient
Operational
Solid organic capital
margin
revenue growth allocation &
improvement
use of cash
Confidential Property of Schneider Electric | Page 12In the coming years, we will focus on the positive levers
to drive adjusted EBITA up
ADJ. EBITA BRIDGE MAIN ORG. DRIVERS OUR OBJECTIVES
2012–2015 (€M) FOR BRIDGE
Adj. EBITA 2012 3,515
• Growth impacted by 1
Volume 18 1 slowdown in Europe, China, Target positive contribution from
commodities markets volume and net price
Net price 191 • Positive net price each year
Productivity 1,073 2
• Strong industrial productivity 2 Keep delivering strong
Prod. labor,
base costs & -487 • Limited base costs increase productivity and cost savings
others
Mix -766 3
Scope & FX 97 • Solutions: Main driver 2
Improve solutions and mix
for negative mix
Adj. EBITA 3,641
2015
Confidential Property of Schneider Electric | Page 13We target mix improvement from growth in higher-margin businesses
and positive contribution from net price
TARGETED GROWTH IN HIGHER- CONTINUING TO TARGET
MARGIN BUSINESS TO IMPROVE MIX A CONSISTENT POSITIVE NET PRICE
€294 M Gross Price1
~+50 bps per year
in past 5 years
Products
Services Driving positive mix
Software
2011 2012 2013 2014 2015 Last 12
months
Net price (Price less Raw Material impact)
1. Av erage gross price in 2011-2015 divided by average Products Revenues in 2010-2014
Confidential Property of Schneider Electric | Page 14Productivity and cash efficiency
targeted through our global supply chain
OUR GLOBAL SUPPLY DELIVERING CONSISTENTLY AND EFFICIENCY IN OUR
CHAIN IS A KEY ADVANTAGE A HIGH LEVEL OF INDUSTRIAL TANGIBLE ASSET BASE
PRODUCTIVITY
• Purchasing efficiency ~€1 B
targeted in 18 5
• Lean everywhere 2015−2017 14.0
15 4
• Industrial footprint optimization 11.4
359 12
• Logistics network expertise 309 329 334 2.6 3
• Transportation optimization 9 1.9
2
• Planning/Orchestration digitized 6
3 1
0 0
New 2 One Connect Schneider 2005 2010 2015
’05-’08 ’09-’11 ’12-’14 is On ’15
Tangible assets CapEx/Revenues (in %)
Average productivity per year (€M) Inventory/Revenues (in %)
Confidential Property of Schneider Electric | Page 15We are starting to improve our systems margin
and full financial benefits forthcoming
GOOD PROGRESS ON SELECTIVITY MIX TREND IMPROVING
AND PROJECT EXECUTION INITIATIVES
Hit rate improved >10 pts -15
since 2014
Systems (equipment + projects) -178
Gross margin up ~+1 pt in H1 2016 -215
H1 2016: No gross margin deviation
for projects booked after 2014 -382
2014 2015 Last 12 H1 2016
months
~2 pt improvement in Adj. EBITA margin
Infrastructure Mix effect (€M)
before FX in H1 2016.
Strong improvement targeted before FX
in 2016
Confidential Property of Schneider Electric | Page 16Our Simplify initiative targets higher efficiency
and improving SFC/Revenue ratio...
Simplify: 3 objectives A 3-year road map (2015–2017) We aim to continue lowering our
SFC/Revenue ratio
Re-engineering of 4 key functions…
27
Simplify the organization • R&D (2015)
• Marketing (2015) 26
• Finance (2016) 25
• Sales (2017) 24
Optimize efficiency
23
…supported by global enablers 22
• IT improvement
21
Reduce costs • Shared services deployment
20
• Span & Layers optimization
2004 2008 2012 2016
SFC/Revenue ratio (%)
Confidential Property of Schneider Electric | Page 17...through a systematic review of our key functions
supported by global enablers...
WE CONTINUE TO SIMPLIFY SUPPORTED BY
KEY FUNCTIONS GLOBAL ENABLERS
• Refocus the portfolio on key offers • Optimize and globalize external works
• Accelerate platforming and IT purchases
R&D • Optimize R&D footprint IT • Implement a specific IT program for finance
• Accelerate lean engineering deployment • Reinforce the integration of our ERP
• Clean up overlaps in organization • Reinforce finance shared services
Shared
• Rebalance resources from offers to channels • Finalize global HR coverage
Marketing services • Mutualize customer care centers
• Mutualize resources when relevant
• Optimize communication spend
Span & • Set up a transversal governance
• Simplify performance management framework
Layers • Reduce layers and increase span
Finance • Reinforce back-office capabilities
• Standardize and optimize the global setup
• Optimize our customer coverage
Sales • Enhance back-office effectiveness
Confidential Property of Schneider Electric | Page 18...yielding a reduction in our support function costs (SFC)
SFC LEVERAGE c. €420 M SFC SAVINGS1 ACHIEVED IN THE FIRST
ON PAST 12 MONTHS 18 MONTHS OF OUR PROGRAM (2015–2017)
1
600
1.5 pt
leverage 500
~420
-0.7 achieved
400
by H1
2016
-2.2
Initial target in Revised Target
Revenues SFC
Feb15 in Feb16
SFC savings (€M)
Organic growth (%)
By H1 2016 (18 months later):
Non-manufacturing 1 headcount: -6%
1. 2015-2017 Gross SFC savings targeted before inflation and ~€200 M reinvestment notably in services, digital and marketing capabilities over the period
Confidential Property of Schneider Electric | Page 19We increase our efforts in Support Functions costs savings1
to €700–800 M over 2015–2017
SFC SAVINGS TARGET WE HAVE INCREASED OUR OBJECTIVE FOR
2015–2017 (€M) COST-SAVINGS TO ~€1.7–1.8 B FOR 2015–2017
800
~€1 B industrial productivity
600
500
700
€700-800 M in SFC savings1
400
Initial target Revised New revised1 Restructuring charge: around €900M
target range 16 expected over 2015–2017
Feb16
1. 2015–2017 Gross SFC savings targeted before inflation and ~€200 M reinvestment notably in services, digital and marketing capabilities over the period
Confidential Property of Schneider Electric | Page 20We target organic improvement in our adj. EBITA margin
and solid organic growth in adj. EBITA over the next 3 years
WE TARGET A YEARLY ORGANIC IMPROVEMENT WE TARGET A SOLID ORGANIC GROWTH
OF 20−50 BPS1 IN ADJ. EBITA MARGIN OVER THE IN ADJ. EBITA OVER THE NEXT 3 YEARS
NEXT 3 YEARS
Around 3% topline organic growth in the next
Positive topline org. growth
3 years outside Infrastructure
We confirm our
13–17% adjusted 13%
Positive net pricing EBITA margin to
target across the 17%
economic cycle A +20–50 bps average yearly organic improvement
in adj. EBITA margin
Improving mix
&
We target an average yearly
Industrial productivity organic improvement of
20−50 bps in adj. EBITA
margin over the next 3 years +4–7% yearly average organic growth in adj. EBITA
over the next 3 years
SFC savings
1. BPS: Basis points
Confidential Property of Schneider Electric | Page 21We have an efficient model to create attractive shareholder value
over the next years
Efficient
Operational
Solid organic capital
margin
revenue growth allocation &
improvement
use of cash
Confidential Property of Schneider Electric | Page 22We will continue to take advantage of low financing costs
while maintaining a solid balance sheet...
FINANCING CONDITIONS REMAIN WE CONTINUE TO INCREASE MATURITY
ATTRACTIVE (Yield to Maturity (%)) AND IMPROVE OUR COST OF FINANCING
Cost of debt could decline
10 close to 1 pt in next 3 years by
4.5 refinancing at current rates 1
8 4.0
6 3.5
3.0
4 4.4
4.4 4.64.6
2.5 3.3 3.3 3.1
3.1
2
2.0
2013 2014 2015 2016E
0
01/08 01/13 09/16
Bonds duration (years)
iBoxx € Non-Financials A 7−10 Cost of debt (in%)
iBoxx € Non-Financials BBB 7−10 1. Compared to 2015 cost of debt. Assuming full refinancing at maturity
of the f inancial debt outstanding at current market conditions
Confidential Property of Schneider Electric | Page 23...and continue to target sustained cash generation
2,187
2,082 2,045
Cash generative business model
1,734 1,704 102%
1,506 Conversion
FCF/Net Strong working capital management
income
Improving fixed asset efficiency
2010 2011 2012 2013 2014 2015 Targeting an average 100% conversion from
net income in free cash flow
Free-cash-flow generation (€M)
Confidential Property of Schneider Electric | Page 24We are targeting strong growth in underlying1 earnings per share
over the next years, driving growth in dividend
WE ARE TARGETING STRONG GROWTH IN ATTRACTIVE DIVIDEND POLICY
UNDERLYING EPS IN THE NEXT 3 YEARS
Solid organic growth • Dividend payout targeted at c. 50%, based on the net income
in adj. EBITA targeted excluding one-offs such as capital gains or losses and/or asset
impairments
• Progressive dividend policy with no year-on-year decline
Lower cost of financing 4 80
3 60
1.87 1.87 1.92 2.00
Invensys tax benefit reducing 2 1.60 1.70 40
1.03
1 20
Share buyback program 0 0
2
(confirming €1.5 B in 2015–2016) 09 10 11 12 13 14 15
1. Underly ing EPS growth excluding impact of scope and one-offs such
Dividend per share (€) − left axis
as capital gains or losses and/or asset impairments
2. 2015 pay out ratio based on adjusted net income (refer to FY2015 results financial release)
Payout (% basic EPS) − right axis
Confidential Property of Schneider Electric | Page 25Potential for further buybacks or special dividends
to complement shareholder returns
USE OF FCF OVER THE PAST 24 SHAREHOLDER RETURNS REMAINS
MONTHS (JUNE 2014–JUNE 2016) A PRIORITY
4,016
918
• Progressive dividend and c. 50% net
~80% of FCF returned
income payout
to shareholders over the
past 24 months • Employee share plans neutralization
2,235
with still c. €600 M to through share buybacks
buy back in H2 2016 • Potential for further buybacks
19 or special dividends
823
21
FCF Use of FCF
FCF Net acquisitions
Share buybacks (net) Net debt change
Dividends Others
Confidential Property of Schneider Electric | Page 26Efficient capital allocation & use of cash
Efficient
Operational
Solid organic capital
margin
topline growth allocation &
improvement
use of cash
Confidential Property of Schneider Electric | Page 27M&A Review Confidential Property of Schneider Electric | Page 28
What we got right: M&A on core activities and larger transactions
STRONG RATIONALE STRONG PERFORMANCE
• Global automation player with large installed base, strong • Revenues close to stability and adj. EBITA margin
process automation assets (Foxboro, Triconex) and strong up c. 6 pts from 2013 to 2015
electro-intensive customer base • Adjusted price 1 of €2.5 B (10.1x 2014 adj. EBITA)
• Significant synergies: €140 M costs synergies and €300 M tax • Strong software portfolio (~40% Invensys 2014 adj.
synergies delivered in 2 years. On-track revenues synergies EBITA) acquired 7x below multiple from trading peers 2
despite O&G weakness.
• Created the leading player in secure power • Revenues increased ~50% and adj. EBITA margin
• Unique offer to build integrated solutions for customers up c. 12 pts since 2006 (pro forma incl. APC)
• Strong synergies: ~€800 M revenues generated by other • ROCE of ~12% integrating synergies in data centers
divisions in the data center segment in 2015 from other businesses
• 2011: Steck, Brazilian leader in F. Distri. • In aggregate, >€1 B revenues generated in 2015
• 2014: #2 in wiring devices in Turkey • Double-digit growth rates since acquisition with successful
• 2011: Luminous #1 in inverters in India synergies in distribution channels and offers
• 2007: Delixi #2 in good-enough market in China • Multiple of acquisition was ~17x EV/EBITA adj.
and currently stands at ~9x adj. EBITA 2015
1. Purchase price of €3.9 B adj. for the Invensys Appliance disposal, €500 M tax synergies from transaction, ~€700 M in cash acquired upon closing and trust fund release
2. Trading peers selected: AspenTech, PTC, SAP, Dassault Syst. − average trading multiple EV/EBITA adj. 2015 of c.17x (as of 4 Oct-2016)
Confidential Property of Schneider Electric | Page 29Other significant acquisitions must still deliver value
TRANSACTION RATIONALE AND PRICE IMPROVING RETURN FROM THE
ACQUISITION
• Combination of Schneider Electric & Areva D created • Combined business faced challenging market
a specialist with a global reach in the field of medium voltage conditions in infrastructure markets (O&G,
• Acquisition at 0.6x revenues and ~12x EV/EBITA 2010 Mining, Utility among the customers)
• Targeting solid double-digit adjusted EBITA for
Infrastructure division in the coming years is set to
improve return for transaction
• Leading and highly-recognized software provider • Sold non-core IT and transport businesses
of real-time management of smart infrastructures • Exploring strategic options for DTN
• Acquisition price of €1.4 B with multiple more in line • Continue to drive growth in quality core portfolio of offers in
with industrial sector: c. 12x EV/EBITDA 2011E smart grid (recognized by Gartner in ADMS), pipeline
management solution, and SCADA (OASYS) and smart
cities and waste water
• Telvent acquisition has reinforced our portfolio
and is set to create further value in the coming years
Confidential Property of Schneider Electric | Page 30What we got wrong: businesses with different channels,
customers, or adjacent technologies
• Pelco Security Cameras and Surveillance Systems • Integration did not fully factor in specificities
• Acquisition by Schneider Electric in 2007 of the business model (faster technological cycle,
different customers)
• Adjacent offer to our portfolio with limited synergies
with the rest of the portfolio
• American supplier, which specialized in recessed and • Adjacent offer to our portfolio with limited synergies
track lighting fixtures with the rest of the portfolio
• Acquisition by Schneider Electric in 2005 • Business sold to Acuity Brands in 2015
• CST manufactured sensing, control and motion products, • Adjacent offer to our portfolio with limited synergies
addressing several industrial, transportation, and aerospace with the rest of the portfolio
end-markets • Limited customers overlap with other businesses
• Business sold to a private equity consortium in 2014
Confidential Property of Schneider Electric | Page 31Our experience and lessons from M&A drive our road map
for future potential acquisitions
2 KEY LESSONS LEARNED FROM M&A ROAD MAP FOR POTENTIAL M&A
M&A not mandatory
Investments in our core business 1
with strong knowledge of technology,
end-markets, customers, high level of
synergies have been successful Potential M&A:
• Strengthen our leading positions in our core
Move to new areas, adjacencies,
2 priorities (power, automation, software)
• Profitability enhancing
with lower knowledge of technology,
customers, channels, or a road map for
integration have resulted in difficulties Disciplined approach and value accretive M&A
and failures • Particular focus on highly synergetic transaction
3 • EPS accretive1 in year 1
• ROCE > WACC after 3 years
1. EPS bef ore acquisition and integration costs
Confidential Property of Schneider Electric | Page 32We continue to focus on core activities through
constant portfolio optimization
DISPOSAL OF NON-CORE ACTIVITIES
• We continue to review our portfolio and contemplate
disposal of non-core, non-strategic businesses
APPLIANCE • We announce a strategic review for DTN
• The disposal of potential non-core/ non-strategic assets
might generate a capital loss or asset impairment of up
to several hundred millions Euros
TRANSPORTATION
• Such potential one-offs from divestments would be
adjusted in the dividend calculation
~€1.4 B generated through disposals
of non-core activities with an average
multiple of ~11x EV/EBITA adj.
Confidential Property of Schneider Electric | Page 33We target an improvement in our return on capital employed (ROCE)
in the coming years
KEY DRIVERS FOR ROCE OUR FOCUS IS ON IMPROVING THE ROCE
IN THE NEXT 3 YEARS
Strong return on operating assets
11.3 15.0
excluding FX
impact
Org. growth in adj. EBITA
Adj. EBITA margin improvement We target
a regular 10.9 11.0 11.0
improvement
Further capital efficiency through in pre-tax
ROCE
working capital optimization
2013 pro 2015 Medium-
forma term range
Disciplined approach and value
accretive M&A
ROCE (%)
Confidential Property of Schneider Electric | Page 34We have an efficient model to create attractive shareholder value
over the next years
STRONG REVENUE OPERATIONAL MARGIN EFFICIENT CAPITAL
GROWTH IMPROVEMENT ALLOCATION & USE OF CASH
• A leading technology company • Mix improvement from growth • Strong free cash flow generation
with a strong growth potential in higher-margin businesses (goal of c.100% net income
• 3 years: around 3% yearly average • Positive contribution from net price conversion in FCF across cycle)
org. growth excl. selectivity • Improvement in systems margin • Optimized leverage to benefit
• 3% to 6% organic growth • Continuing efforts on efficiency: from low cost of financing while
across the cycle €1.7−1.8B cost-savings1 targeted maintaining solid rating
in 2015–2017 • Rewarding and predictable dividend,
• Yearly org. improvement of 20–50 bps2 complemented by potential
in adj. EBITA margin in 3 years targeted buybacks/special dividend
• Potential M&A only if highly synergetic to
core and contributing to deliver clear
1. Industrial productivity and gross SFC savings
extra value to shareholders
2. Av erage yearly improvement over the period
An efficient model to keep on generating attractive shareholder value over the next years
Confidential Property of Schneider Electric | Page 35Our model for continuing to generate attractive shareholder value
over the next years
ATTRACTIVE
SHAREHOLDER VALUE
OVER THE NEXT YEARS
EFFICIENT USE OF
CAPITAL
STRONG GROWTH IN Progressive dividend
UNDERLYING EPS IN THE
+4–7% ORGANIC GROWTH NEXT 3 YEARS Potential share buyback or
IN ADJ. EBITA OVER THE special dividend
NEXT 3 YEARS STRONG CASH
NEXT 3 YEARS: AROUND GENERATION Potential M&A on core if clear
3% AVERAGE YEARLY IMPROVING MARGIN BY value creation to
ORG. REVENUE GROWTH +20–50 BPS ORG. IN AVG. Lower cost of financing shareholders
EXCL. INFRASTRUCTURE OVER 3 YEARS Working capital efficiency
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