Welcome to Cyto Electric Third Quarter Results with Hillary Maxim, Chief Financial Officer and Amit Bala. Head of Investor Relations. At this time all participants are in a listen only mode until the question and answer session of today's conference. I would like to inform our parties that today's conference is being recorded. You have any objections, you may disconnect at this time.
I'd now like to turn the call over to Amit Bala.
Well, Thank you very much, operator. Hello to everyone and welcome to our Q3 revenue results. Very happy to be here with you today, joined by our CFO, Hillary Maxim, who will be taking all of you through our business highlights and our financial results. We will make sure to keep time for some questions at the end of the presentation. You can follow the presentation on the webcast but otherwise it's available on our website in case you're dialing in just through the phone.
With the usual disclaimer on Slide 2, which I must point you towards, I would like to get started, and I'd like to hand over the floor to Hillary.
Thanks, Amit. Good morning, and good afternoon, everyone. Great to be here with you today to comment on our Q3 revenue numbers which showed a through the uncertainties of this ongoing crisis. I'll start with some highlights shifted to positive year over year organic growth of +.3 percent. Both businesses showed sequential improvement versus a tough Q2, which we believe represented the trough in our sales Q2, I mean, as a consequence of the coronavirus lockdowns we witnessed.
You'll also see there's a divergence in performance in the quarter with energy management shifting to year over year growth, while industrial automation is still in negative territory. In terms of geography and you're aware we have a strong balance across our geographical footprint. North America, Asia Pacific, and Rest of World all shifted to year over year growth for the quarter with only Western Europe still negative. We're happy to see this broad based sequential recovery, and I'll speak through some of the factors behind that as well as our expectations for the future throughout the presentation. We're upgrading our 2020 target, and I'll follow-up on that at the end of my presentation.
Turning to the next slide, let's now go into more detail. And I'd like to start with our strategic growth pillars. As we've mentioned consistency, our execution priorities are more products, more software and services, and better systems. First, on products, we continue to leverage our unrivaled partner network, our innovation and our multi local setup to drive mid single digit growth. In software and services, we continued to grow services field services and digital services with positive performance in both Energy Management And Industrial Automation.
Internally developed software was dollars. In its trading update issued on October 12th, Aviva reiterated its full year outlook. Strong growth also continued in assets under management important metric we follow to track the potential for increased digitization and future possibilities within our installed base. In systems, our focus remains on profitable projects and management of our margins from pipeline to execution. The mid to late cycle portion of our systems business, particularly in industrial automation, continues to be impacted negatively largely driven by oil and gas, further exacerbated by impacts from coronavirus.
We continue to develop our pipeline for systems in BMS data center and infrastructure. Turning to Slide 7. And as we've mentioned a few times previously, One point becoming more and more apparent from the coronavirus crisis is that it's been an accelerator of digitization. Effectively all of the customers that we speak to nowadays have their have digital agenda as part of their top priorities. We also We have around 50% of our business within the flywheel of digital and services that we shared with you in July.
Customers can enter this circle at any point and then we and they have the opportunity to move across the wheel. From picking and choosing a few connected products to a full plug and play solution to drive their sustainability, efficiency and resilience. This also leads to a Turning now to the right It's no surprise that many of our new offers come with a menu of connectivity options and our R and D focus is geared more and more towards digitization. To give you some our new generation of LV switchboards featuring native connectivity to the cloud for enhanced simplicity, power availability and fire prevention. And our new generation of compact circuit breakers, also with native connectivity and in the same footprint of our previous models to simplify retrofitting.
We spoke in free medium voltage offer, but I think it's worth mentioning again as it well represents our focus on innovation for sustainability and digitization. The SM Air SET switchgear is a key innovation to one of our most popular classic product ranges. It uses air now for the are all coming from energy management where I was recently CFO, so super excited to see those launching in the market. And lastly, in Industrial Automation, our Eco automation expert is another great addition simpler and more efficient experience in designing, operating and modifying installations. Through this offer, customers can realize between 3 to 5 times reduction of their engineering time.
Turning to Slide 8. And before I turn specifically to our Q3 financial performance, I'd like to speak on some near term trends and longer term opportunities in our end markets. We already positive in a third of this end market for us is residential, where we continue to see accelerating positive trends across most of the world. This strength is both across new build and renovation and home improvement, helped by increased consumer spending and working from home trends. We've also seen good recovery in smarter buildings.
However, we do think the outlook on new CapEx for office building is still uncertain for the near term. Longer term, buildings represent a significant portion of the world's energy usage and carbon emissions, and it's only through innovative and efficient new build, renovation and digitization that we expect this can change. Government stimulus, particularly in the EU, is focused on building upgrades to support sustainability and modernization. In the data center market, demand continues to remain strong, helped by increased trends in working from home, further digitization and IoT. I think about data center in 2 different buckets.
The first is hyperscale, which is around 25% of our data center business, and then we have the business of smaller enterprise data centers and colos. Both categories are of course driven by the key trends both short and long term mentioned on the slide. One point I'll particularly note is that 50% of IoT processing is now expected to be at the edge by 2024. And we start to see more and more signs of demand in smaller data data centers and the edge as latency becomes noticeably more important and there's also more concern about local resiliency and data security. And we're well positioned to benefit from that trend in Edge Computing.
In infrastructure, noticeable near term trends for us are in electric utilities through smart grid and a renewed focus on transforming toward a more sustainable world. Wastewater and mobility markets remain impacted by coronavirus. Longer term, we see significant growth in Trisity as a percentage of the energy mix driven by sustainability, which of course is also driving step changes in renewables and EV infrastructure. And of course, infrastructure needs in the emerging markets are also a big catalyst. In industry where we've now shifted oil and gas from where it was in infrastructure prior, we continue to see a challenged with mid to late cycle CapEx being negatively impacted by coronavirus and oil prices.
However, this is an area where we see demand for digitization to drive efficiency, sustainability and resilience. Longer term, shorter supply chains to drive sustainability and support resilience, as well as an expectation of four times efficiency in automation are key drivers. I'll turn now to our detailed top line performance for the third quarter. I'm on Slide 10 now. In Q3, revenues were 6 point $5,000,000,000 rate with North America and Rest of World also slightly positive.
Western Europe was still down at minus 8% with differing performance by I'll give some specific commentary on organic Q3 performance in the following slides. Scope impacts were slightly positive due to the consolidations of our recent acquisitions, RIIB Software, LNT, and ProLight mostly offset by disposals of Converse and the deconsolidation of a medium voltage business in Russia as previously disclosed. FX impact was negative around $300,000,000 in Q3 and full year impact is now estimated at minus 600 to minus $700,000,000 on the top line and around minus 40 basis points on adjusted EBITDA, assuming current rates for the rest of the year. This impact is largely due to If we turn to Slide 11, let's now look at our business our results by business, starting with Energy Management. Revenues in Energy Management were at $5,000,000,000, an increase of 2.5 percent organic, scope impacts were limited to LNT and RIV contributions offsetting the disposals.
Positive pricing actions contributed to this growth, and we expect to have net positive price for the group for full year 2020. Q3 results were also impacted by distributor restocking after Q2, particularly toward the end of the quarter. Excluding these factors, construction and renovation and from activity restarting in commercial and industrial buildings across many sectors following lockdowns in Q2. As expected, healthcare, life sciences and data center demand remain positive, although data center sales are still impacted by a high base in 2019. On Slide number 12, turning now to geographies, we saw positive sales in all geographies energy management in Q3.
Highlights were China and India, both with double digit growth for the quarter and the U. S. There's a lot of detail on this slide that I'm actually going to speak through in the following slide showing key countries. So Slide number 13, as I said, all regions were positive for energy management with many countries turning positive as well. North America was up 2% for the quarter driven by the U.
S. Where we saw demand for residential offers accelerating further and a primarily broad sequential improvement in services. Canada also showed a rebound to positive growth in the quarter, while Mexico remained slightly down. We continue to recover Western Europe had growth of +1 percent for the quarter and similar to the Q2 varied by country. Countries less impacted by coronavirus in Q2 like Germany and Nordics were positive in Q3 whereas the more impacted countries like France, Italy and Spain rebounded, but are not yet positive in positive year over year territory.
In general, we saw similar trends as the U. S. With recovery in residential and a pickup in demand for data center. We do see a renewed acceleration Asia Pacific was up 5% driven by double digit growth in China and India. In China, we continue to see broad based recovery across all end markets, notably real estate, infrastructure, transportation and industry, and India witnessed a significant rebound after the with lockdowns and impacts from coronavirus.
Rest of World was up 1%, driven by Russia and South America, particularly Brazil, Middle East was negative due to project delays in the Gulf, partly offset by good performance in Turkey. Turning now to Slide 15. Industrial Automation is a mixed story with strong performance in discrete offers and services contrasted with negative performance in process and hybrid. Industrial Automation results were further impacted by the quarterly results at Aviva that I discussed prior. Overall sales for Industrial Automation were at $1,500,000,000 down 2.5% With regards to specific segments, mining was positive, wastewater and consumer packaged goods showed good resilience while oil and gas was negative On the next slide, sorry, now slide 15, in terms of geographies, performance in industrial automation was also varied, but with across the board sequential improvement versus the Q2 of this year.
Highlights continued to be China and CIS. And again, I'll cover the detail in this slide, while speaking through the performance of our key countries. So moving to the next slide, percent growth was driven by strong performance in China, where we saw growth of over 20% for the quarter supported by domestic manufacturing and materials handling equipment. India had a noticeable recovery versus Q2, but it's not yet in positive territory. In Western Europe, down 10%, all countries remained negative, but with relative strength in France, Spain and the UK, driven primarily by the OEM business.
In North America, down 7%, the U. S. Was relatively stronger with low single digit declines, driven by strength in the discrete and OEM markets as well as software, partly offset by weakness in process markets due to oil price. In Canada, we started to see some recovery with a recovery there in the industrial market and in South America, mainly in consumer packaged goods and mining. I'll now turn away from the Starting with capital allocation.
As you know, it's been a busy Q3 for us. We've listed 4 key acquisitions here with the 3 on the left, RIB Pro Life and L And T all closing in Q3. All three are now part of our consolidated accounts. And we signed through Aviva, the $5,000,000,000 acquisition of OSI Soft. Although these are all recent, we wanted to give you a quick update.
We closed RIB Software, our cloud based construction management platform in July. Since closing, the company has announced a number of major contracts including one with the German federation auto bond. We've also now put together a robust revenue framework by geography and segment to ensure wheel for energy management and another brick in our ambition to providing the complete digital lifecycle so from design to build to operate for building. ProLight was a smaller bolt on acquisition in industrial automation focused on food and beverage, demand levels remained good in Q3 and the integration is proceeding as per plan. LNT, it was a bit long in coming as expected from a regulatory standpoint, but with some added time due to coronavirus lockdowns.
We spent that extra time preparing for integration, particularly in this tough environment, and we feel we have a strong plan and we're able hit the ground running. Demand trends were good in Q3 particularly in residential and agricultural markets. And we reflected the final cash component to be our 3rd largest market. We believe these acquisitions are a cornerstone of our strategy in the future and a key priority for us is successfully integrating these to realize the benefits for our customers and investors. So what does that mean for our strategy on capital allocation going forward?
The top priorities for us remain maintaining a strong investment grade credit rating and meeting our commitments to investors on dividends. Both of these priorities are based on our strong cash 2018 and expect to have further updates on that in 2021 and to finalize the program by 2022. In terms of acquisitions, as I said, we're primarily focused on the integration of our current acquisitions with only 1 or 2 smaller strategic bolt ons as a possibility in the near term pipeline. Turning
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crisis to create this fund supported by employee and company funding as well as time and resources with 3 goals. The first was to respond to The second was to restart education in countries to support recovery and the third was to allow our employees to volunteer in various activities. As you can see, we've reached well over 1,000,000 beneficiaries. As a group, we're committed to our social responsibilities and we've used our country organization set up to localize specific plans for tomorrow rising for the highest impact for the respective geographies. Turning now to Slide 19, I've already mentioned the clear acceleration of digital as an impact of the coronavirus and sustainability has also been reinforced course, at the heart against the main key performance indicators of the Schneider Sustainability Index.
10 and we expect we can meet our target of 9 out of 10 for the full year. In terms of customers, I'm showing here a great example of how we support customers' sustainability needs. We recently signed a contract with Henkel to address 100% of the electricity demand of their U. S. Operations, comprised of more than 30 sites and to support them in becoming climate positive by 2040.
I'll also mention that we'll be having a specific ESG Investor Day event on November 16th to discuss our sustainability strategy further. Lastly, and before shifting to our thoughts on year end, we continue to be recognized for our distinctive story and culture. Just to pick a few points from Q3, we were recognized by Climate Group's RE-one hundred as a first clean energy trailblazer as well as by Gartner as number one supply chain in Europe. And our Lexington Smart Factory in the U. S.
Earned 4th industrial revolution advanced Lighthouse designed by World Economic Forum. Lexington is the 3rd smart factory designated at Advanced Lighthouse and the 1st end to end Lighthouse. I'll turn now from a macroeconomic standpoint, whether through governments again imposing lockdowns in some of our key geographies, or through some of the upcoming key milestones in our sales. With this and based on the momentum we see in Q3 results, we're upgrading our 2020 guidance. For full year, we the range is 20 basis points and plus 10 basis points organic for the year, another reflection of our resilient performance.
And with that, I'll turn back over to you Amit for the Q And A.
Thank you very much, Hillary. And we have exactly about 30 minutes left. So I think that's probably should be sufficient time to take questions. I'm sure there's a longer a long list of people wanted to ask questions. So just in respect of the others, let's stick to one question per analyst so that we can maximize the number we can take within 30 minutes.
So with that, operator, can we please have the first question?
Our first question over the phone comes from Alastair Lasey from Societe Generate may ask your question.
Hi, good morning. I was wondering if you could elaborate a little on the comments you've made in the statement with regard to price increases. Supporting organic growth for energy management. I'm not sure you can kind of quantify those, but really whether that was broad based or focused on 1 or 2 markets, does it reflect kind of proactive news perhaps ahead of a rebound in input prices, some more kind of price cost dynamic or is it something more strategic and value orientated. So just some context there.
Thank you.
Sure. So I made the comment in terms of energy management. And I also had suggest I also said that, and sorry, I'd combine them there, but for the full group, we also remain to expect to be positive, for the year end So in regards to price increase, we spoke on the H1 about additional costs, in coronavirus, we've pointed to around $50,000,000, for example, additional costs in direct costs only in the H1 and that we were focused on pricing to ensure that we were or really is an opportunity to cover those costs for this year. So we continue with that with some acceleration of the price increase, really broad based in the, in the Q3. To give you a sense of the number there, it's more than one point in terms of in terms of price.
On the second half of your question, certainly we see the moves in raw material prices So in this year, we're focused on pricing, continue to focus on pricing, both for coronavirus efforts as well as strategic pricing, which we continue to talk about associated with innovation. We see the moves in raw materials and we're preparing the teams for and I think we've proven to be pretty at around pricing, in order to continue to deliver net positive pricing over the cycle.
Great. Thank you.
Let's move to the next question, please.
Our next question comes from Andreas Willie from JP Morgan. Your line is open. You may ask your question.
Good morning, Hillary, good morning, Amit. My question is about the Q4 implied guidance on organic growth, which implies obviously a slowdown versus Q3. You mentioned the restock and some pent up demand benefit in Q3. And maybe you could elaborate a little bit more on that range for Q4, maybe what you see in terms of early trends in in October? And how long do you believe that pent up demand and restock will benefit?
Has that already completed now? Until Q4 is more of an underlying run rate versus what we have seen in Q3. Many thanks.
Certainly, you can see that the implied Q4 growth rate is a pretty wide range in the guidance. And I think I to that a little bit at the end, we do see rising uncertainties, macroeconomic uncertainties, the potential for increased block downs in particular. But no doubt, like I said, we expect Q2 to be the trough in our sales across the across the coronavirus crisis. So what I would say here is that restocking for us, we would put it seem in the range of probably a couple of points for the Q3, but we now believe and broadly speaking, of course, there's always going to be some pluses and minuses, but broadly speaking worldwide, we think that our distributors have normalized their inventory levels, at the end of Q3. The range at the end of Q4, like I spoke to is we see and I spoke to them I think in the call some underlying good trends of rebound.
You can see in the range that quite a bit if the range is still around, a Q4 that would indicate sequential growth between Q3 and Q4. And again, we do recognize some uncertainties as well.
And comment on early October?
So really, I October, I would say no major danger signs at the moment, but again, we recognize the major uncertainties that are that have continued to rise.
Thank you very much.
Thanks, Andreas. Next question please.
Our next question comes from Shane McKenna from Barclays. Your line is open. You may ask your question.
Good morning, Hillary and Ahmed. You flagged in the presentation how data center capacity continues to grow. What seems like an exponential rate And according to one of your podcasts, we're seeing years of digital adoption in just 3 months. So as we sort of add in the emerging demand that we're seeing from Edge Data Center, where do you see the 15% of revenue for data center and networks and say 2 to 3 years' time. And specifically with Edge, do you have a particular lead in that end market in terms of product offering?
Thanks.
Sure. So what I would say is we're well positioned in data center and network with the most complete portfolio of Secure Power distribution. In terms of Edge, we've made we've that's something we've been talking for a number of years and as we focused our portfolio around addressing that market as well. So I believe that we're well positioned there. It's been, as you know, one of our fastest growing end markets for MBLV, in recent years customers are interested in resilience speed of deployment and we're well positioned to offer both.
And then of course, you'll notice in our H1, we also shared that through Aviva, we're developing unified control offerings for data centers. So even more completing the portfolio that we have there. And I talked to the long term trends in data center. We do remain bullish on data center in the long term. We've seen in the past couple of years and a lot around the hyper the hyperscale that it can be a bit cyclical.
But we think there's enhanced opportunities as I mentioned, both in the near term and long term trends that I showed in one of the slides. So I can't give you a specific percentage of sales numbers in the next couple of years, but we do expect it to continue to be an exciting end market for us and where we can add value to customers.
Thanks.
Thank you, Shane.
Our next question comes from Anjay Kukney from Credit Suisse. Your line is open. You may ask your question.
Good morning. Thanks so much for taking my question. I wanted to ask about industrial automation. I'm wondering if you could give us some numbers on how much discrete grew versus the rest of the business in talked to a similar order of magnitude that you mentioned earlier for the group. And just on the exit run rate in the process side, Which way are we pointing, just direction?
Are we still kind of sequentially declining or is there evidence of finding a trough for that part of the market? Thank you.
Sure. So, in terms of, so I'll address the first part first, In terms of Discrete And OEM, I can say we were in positive single digits there. In terms of distributed restocking, sure industrial automation similar to energy management on the product side will have some impact, although not at the same level, in terms of distributor restocking. I think what we really see is a different between the short cycle business and particularly you can see with OEM tend to be on the short cycle side of the business. Where the medium and long term
All right. Next question please.
Our next question comes from Martin Wilkie from Citibank. Your line is open. You may ask your question.
Thank you. It's Martin from Citi. Just coming back to a comment you made earlier in the call about the CapEx being uncertain in certain commercial and industrial buildings. Just to get some sense there ordinarily, what sort of lead time can you see on that? I mean, obviously, we know your installed relatively late in the construction process.
But through tenders and so forth, you must have some visibility to just understand ordinarily what sort of outlook would you normally see as sort of how much visibility do you only have in that business? Just to get some sense of when you might know Do we see a pickup in 2021? Are there still some risks going into first half of next year? Thank you.
Sure. So even through the partner side of our business, with partners and with distributors, we remain close to, we remain close to customers in many cases. The sales process for us is, is including prescription. So we have decent indication, I would say, in the short term around projects. So we look from pipeline all expecting uncertainty around CapEx there.
We can see external signs pointing to this. We can also see with the work from home trends, I think the jury is a bit out probably in the next month as companies make decisions between there's work from home trends, but there's also the need for health and safety, more social distancing, So what we can see is, customers thinking through these points I would say. And that's, and that's really the genesis of the comment that I made there.
Thank you, Martin. We go with the next question.
Our next question comes from Ben Youglow from Martin Stanley. Your line is open. You may ask your question.
Good morning, Hillary, good morning, Amit. I hope everyone's well. I wanted to come back on a previous question and kind of tied into China. I don't quite understand the 4th quarter guide. If we look at the growth that you've achieved, you've done 1% in the third quarter and you've got you've sort of suggested that roughly two points or something of restock you're not that far from 0.
I'm looking at a range best case minus 0.5 to worst case minus 8. So at the mid point of that range, that implies minus 4. So I guess coming back to an earlier question, what is it that's giving you that sort of pause why wouldn't 0 be the kind of midpoint of your new range? And is there anything beyond just coronavirus and a sort of cushion in terms of guidance. Is there anything qualitatively that you see that could actually be fading a bit in 4Q?
Is it U. S. Non res? Or is there anything in your outlook, which is making you appear conservative around 4Q? Related to that is just on China.
And can you the China growth rate was plus 20 in AA in the quarter, double digit in EM. Can you just tell us how you see China progress seeing into the end of this year?
Sure. So I made a comment. So what I would say is all I'll remind that we usually give, a range. We look back a few years. We usually give a range on our top line of one point in the, in the Q3.
Here, and I spoke to it already, we've kept the range wider to reflect the uncertainties that I mentioned, really government law downs, upcoming key milestones with the U. S. Election and Brexit. I do think we're in a higher time of uncertainty from I don't know if you consider lockdowns macroeconomic, but let's say the macroeconomic impact of these points. I do think we're at higher time of uncertainty than we would ordinarily be, which like I said on the call is why we the range wider than usual.
So instead of a 1 point range, we've given a 2 point range on the top line. And then I talked through the trends that we saw in the Q3 with mid to late cycle still a bit under stress. So in terms of China, we talked about the results in China and really the broad based store the in China, we really think that they're back to business. And just as a reminder, we are really mostly a China for China business. So we're mostly exposed to the domestic market So not as exposed to anything that might happen in terms of export.
So I think from our business perspective, therefore, we see we still see solid trends.
Okay. Thank you.
Thank you, Ben. Next question please.
Our next question comes from Gail De Bray from Dutch Bank.
Thanks very much. Good morning, everybody. Here is since you have a dedicated slide to capital allocation, Can I ask you, how you think of, all your recent transactions in terms of return and capital employed because I calculated a potential dilutive effect on ROCE of around 200 bps in total? So what's the time horizon in which you expect to be back in your historical return and capital employed range? Thank you.
Sure. So you can see that our recent acquisitions are a little bit outside of what would have been sort of traditional capital goods, I guess, or to the core, we're really focused on our on our business transformation towards software and services. And with that, for example, with OSI Soft, this is a company that the transaction is at different multiples than you would see in the capital goods space Although, I will mention that it's at a similar multiple to Aviva where I think we've, we've felt very comfortable that we've driven you over the past couple of years together as 2 companies. So the way that I think about capital allocation and the way that I think about transactions is really in terms of basically cash on cash value add. So need to have the strategic purpose, of course.
That's why we want to get into it for the long term. L and T, for example, is a to me is a great example of a strategic choice where we have opportunity to build a great platform in India right when they'll benefit from the trends that we have that we continue to and are well positioned to benefit from digitalization, automation, electrification, But at the same time mixed with the strategic, I'm very much focused on making sure that we get cash on cash returns that makes sense. So we do quite a bit of work on the acquisitions to make sure that we believe that there's good value in those. From a return standpoint for investors over a reasonable timeframe.
Thank you, Gil. We move to the next question.
Our next question comes from Jonathan Nelson from Exane. Your line is open. You may ask your question.
Yes, good morning, and thanks for letting me ask the question. You mentioned during the slide presentation, the impact in North America from most supply chain issues, I think, out of Mexico. Where do we stand there now? Is it always is all behind us. Can you quantify kind of the impact that we've seen over the period?
How much of the growth you might have enjoyed you've actually been unable to capture? And is that now totally behind us? Is there even some capture potentially as you move back to where the market has been trading?
Sure. So you're right in the H1 we talked about, an issue at one of our plants in Mexico primarily serving residential really impacted by contagion in that community in particular. So as of today, we have largely recovered, but we're working on recovering the capacity, that was locked during that timeframe. So in the H1, we talked about around half of what we saw in In Q3, we also continue to have impact as we build up capacity. So there is we look to recover that in total over the next month.
And is that gone in Q4? Is a problem?
In terms of capacity build and backlog, could continue into the Q1 as we recover. This is an area that we have big acceleration in demand as well.
Next question comes from James Moore from Redburn. Your line is open. You may ask your question.
Good morning everyone. Hillary, Amit, I've got 3 quantification questions, if I could. You mentioned the discrete low single. Could you put a quantification on process and hybrid? For organic growth in the quarter, also on data center, please.
And finally, on September, could you say if it was above or below the plus 1.3 for the whole of the quarter as a single month?
So I think I'll start with your last, with your last first. So in terms of September, and actually, well, in an ordinary year. Anyways, the 3rd month of each quarter is usually almost almost always. It's the strongest for us. In September, what's particular in this year that we followed is that we did see sequential improvement across the quarter which I think is, is something that we were watching for.
But September, and again, I don't think this is so out of usual, but was the particular month that benefited most in September, positive working day impact. So we closed the month at the high certainly out of the Q3. In terms of discreet, I talked through the number there. I'm not going to give a specific number on data center or on process and hybrid.
Our next question comes from from RBCB. Your line is open. You may ask your question.
Hi, good morning.
And thanks for taking my question. Just for the half year, you mentioned about running with kind of elevated working capital just in order to be able to continue to supply your customers. And maybe that has been indicated in Q3. But does that mean you normalize working capital into that strong demand and restock from your customers or think you'll be running with a higher level for the foreseeable future just to be ready for any potential further shocks or lockdowns?
Sure. So what we talked about, in the H1, we talked around the strong free cash flow that we had in the H1 of around $1,000,000,000, even despite the fact that we decided to prioritize inventory for customer delivery and customer demand. In the second in the second half, I would expect that what we said on the first half around cash flows broadly holds, So we would expect strong, cash conversion ratio, for example, Although, of course, when we're in a growing demand environment, we'll see a bit of the opposite in terms of some working capital with receivables for example, or payables, that you would see in the negative demand environment. In terms of inventory, we do expect that we will continue to prioritize customer demand and, customer demand and customer delivery, I wouldn't say that's because we want to be a little bit, but offset by some other factors. But really the idea is to have a finished goods inventory strategy prepared for customer delivery and demand and making sure that in a demand environment that we're customers.
So and then I think I would add that we have, I think, demonstrated in the past that we're able to be agile from an inventory standpoint in case there are fluctuations in demand. So it's something that we're seeing very those do on a week by week basis to make sure that we, that we're really making the right decisions from both a strategic standpoint and from a working capital standpoint.
Right. Thanks, Wazee. I think we have a few more minutes. We're going to take another question, please.
Our next question comes from Alexander Virgo from Bank of America. Your line is open. You may ask your question.
It was just a sort of a follow-up really on the balance or relative growth of the 2 divisions within your guidance for Q4. And wondering particularly in light of your comments and Aviso's comments around phasing, whether or not we can see a sort of a big kick up in software growth helping IA in particular in Q4. So I just wondered if you can give us a little bit more help on that Q4 outlook between to divisions? Thank you.
Sure. So I think we gave a decent amount of commentary on the Q3 where we see accelerating trends, between the two, and probably for the Q4, I wouldn't say that we would guide anything different than that. In terms of Aviva, We really can't speak further beyond what they put into their own trading update. And I'll just remind on Aviva their calendar year is different than ours. So our year, we're entering our Q4.
They're entering their Q3.
That's right. Next question please.
Our next question comes from Denise Molina from Morningstar. Your line is you may ask your question.
Hi, Hillary. I have a question on the digital products you've been talking about. I'm just wondering what the margin is on those relative to the non digital or connected products. If you take the digital switchboard, for example, in the low voltage category, Are those do you anticipate those to be higher margin products? And is the adoption dependent on greenfield projects like new construction or new plants versus upgrades or retrofits?
Sure. So, you know, I spoke a bit, so taking the second half of the question, I mentioned, for example, in the new, contact offer, that in fact, we've specifically designed it in the same footprint as the prior product. So in fact, the idea with most of our products is that they can both be used from a Greenfield standpoint. As well as in retrofit. That doesn't hold across the board, but it's certainly something that, that we take into account.
In terms of margin overall, what we think is that more technology in the product means more value to the customer. And we do expect that we have the ability to either have higher prices or get value across part of or all of that chain that I spoke to in the flywheel of digital and services.
Thank you. I think we're going to take probably 1 or 2, maybe 2 more questions. So, operator, next question, please.
Our next question comes from Guillermo Pena from UBS. Your line is open. You may ask your question.
Thank you for taking my question. Guillermo Pena from UBS. Thanks, Hilary, and thanks, Amit. Good morning, everyone. I wanted to asked on China, maybe assuming even a little bit on both energy management and Industrial Automation on first on energy management, have you started to see any change of direction driven by maybe some of the less less incentives that you're seeing from the government on the residential and nonresidential markets.
And on Industrial Automation and specifically to Discrete Automation, have you seen an acceleration, especially on the more, let's say, cyclical sectors there, maybe consumer electronics or automotive? Thank you.
Sure. So what I would say, you know, I spoke a little bit before about the trends that we see in China. I think that, like we said, we really see a broad based recovery in China. I think that was only help by China is one of the areas where we do see already some direct impact from the stimulus package that they've put in place. For example, I talked about strength in transportation projects.
So these are areas that, that I think we see, that where government stimulus is really just an added factor, I would say, in the in the turnaround. In terms of starting to see any change in direct option due to less incentives by government and energy management? No, I don't think we've seen anything that I'm aware of In industrial automation, I spoke to some of the trends that we see in China there. Again, I think across the board, we've seen, we've seen pretty broad based improvement. And again, stimulus for us is, I think, just a part of what's driving that market.
I think it's really back to business.
Thank you.
Right. I think we take maybe one more question.
Our next question comes from William Mack excuse me, William Mackie from Kepler Cheuvreux. Your line is open. You may ask your question.
Hello, good morning, Amit. Good morning, Hillary. Thank you for the time. My final question would be based around how you are using the pandemic or the change in conditions to optimize the structure of the company. The guidance that you've given is very much based at the adjusted EBITA level.
Should we expect, any adjustments to the sustained level to optimize your manufacturing footprint
Sure. So we've spoken on the H1. In 2020, a lot of what we did upfront was focused on tactical savings in the company. So delaying of salaries in certain markets furloughs, this type of thing. But we also talked about the plan, for the next couple of years.
What we've said there was we had an operational efficiency program already going. We with the pandemic, we're looking at some additional opportunities that we see from that, whether from digitalization or other opportunities. To drive around $1,000,000,000 in FSC savings between now and 2022 And also that despite the lower productivity as would be expected in 2020, that will drive around $1,000,000,000 in productivity over that industrial productivity over that same time period. So we are using the pandemic to look at what I call, effectiveness through operational efficiency and really using it as an accelerator for business transformations and effectiveness.
In your presentation, you mentioned selectivity also, which has been a feature for the a number of years now. Can you quantify the impact of selectivity, particularly in the systems business in the quarter?
So selectivity, I think what I mentioned is still focusing on good projects. So I won't give any numbers around selectivity for the, for the Q3
Thank you very much.
Yes. And, yes, and will the selectivity program is over. So I mean, that a selectivity program was over a few years ago, and the focus, of course, remains on profitable growth in systems. Just to conclude as we are at the end of the hour, I'd just remind everyone to a point that Hillary made in her, in her presentation around ESG investor event. I think ESG is an important element of our story, and we have lots to say.
So that's going to be on 16th November. We will be sending out invites. It's going to be, I would think about maybe around 2 a half to 3 hours in a digital format. So please look out for that, but just mark your calendars so you could join us. Of course, the IR team is available to interact with you further as you need, but thank you.
Very much for your timing today.
Thank you everyone. And this does conclude today's conference call. Thank you for your participation. You may disconnect your lines.