Bloomberg News

Schneider Cuts 2011 Earnings Target on Rising Costs, Charges

October 20, 2011

(Updates with CFO’s comments starting in third paragraph.)

Oct. 20 (Bloomberg) -- Schneider Electric SA, the world’s biggest maker of low- and medium-voltage equipment, reduced its 2011 profit goal for the second time in four months because of rising labor costs in emerging markets and said it may cut jobs.

Earnings before interest, taxes and amortization will probably amount to about 14 percent of revenue this year, down from a July forecast of about 15 percent, the Rueil-Malmaison, France-based company said today. Schneider fell the most in almost three years in Paris trading.

“Western Europe is stagnating in the third quarter, which points to a more uncertain and difficult environment,” Chief Financial Officer Emmanuel Babeau said in a phone interview. “We’re going to make more restructuring and adjustments.”

Chief Executive Officer Jean-Pascal Tricoire, who pledged in July to boost prices in the second half of this year to make up for rising raw-material costs that held back profitability in the first six months, now faces the prospect of a global economic slowdown triggered by Europe’s sovereign debt crisis. Restructuring that includes workforce reductions will affect countries such as the U.S., Spain and Egypt, Babeau said.

Schneider dropped as much as 9.9 percent to 40.20 euros, the biggest intraday decline since Oct. 24, 2008, and was down 7.4 percent at 12:43 p.m. in Paris. The stock has fallen 26 percent this year.

Additional Charges

Additional charges this half will cut the Ebita margin by a range of 0.2 percentage point to 0.4 percentage point, and increase full-year restructuring costs to within 140 million euros ($193 million) to 180 million euros from an initial 100 million-euro estimate, the CFO said.

Third-quarter sales rose 4.6 percent, led by China and India. Revenue growth stalled in western Europe, Schneider said.

Wage inflation in emerging economies, stagnating revenue in Europe and a higher-than-expected increase in sales of lower- profit service contracts such as security-systems management and renewable-energy projects contributed to the reduction of the 2011 target, Babeau said. The target excludes acquisition and integration costs and the effects of consolidating purchases this year.

“For most of the big geographies, China, India, Russia, we are between 5, 6, and 8 or even north of 8 percent inflation,” the CFO said on a conference call. Pay increases in such markets need to exceed inflation to enable the company to attract talent, and Schneider will have to compensate for those costs with price increases “over time.”

Raising Prices

The company is likely to achieve its full-year target of raising prices by 1 percent to partly offset about 400 million euros of increased raw-material costs, Babeau said. Schneider’s plan to trim inventories by about 300 million euros in the second half “isn’t a walk in the park,” as sales growth varies across divisions and “we have to manage various objectives at the same time” in terms of production.

Schneider lifted inventories in the first half to minimize a potential disruption in its supply chain caused by the earthquake in Japan on March 11.

Third-quarter sales rose to 5.70 billion euros, Schneider said today, beating analysts’ estimates of 5.56 billion euros. Excluding acquisitions and currency effects, sales climbed 7.7 percent. Exchange-rate fluctuations held back growth by 3.3 percentage points. Schneider reiterated a full-year target of a 6 percent to 9 percent increase in like-for-like sales.

“Beyond 2011, we are getting our organization prepared for our next company program covering the period 2012 to 2014,” Tricoire said in the statement. “We are also preparing for different 2012 economic scenarios in order to generate a solid margin and cash performance.”

--Editors: Tom Lavell, David Risser

To contact the reporter on this story: Francois De Beaupuy in Paris at fdebeaupuy@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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