Welcome to the Schneider Electric's third quarter 2022 revenues. Thank you for standing by. At this time, participants are in a listen-only mode until the dedicated question-and-answer session of today's conference. At any time, you may press star, then the number 1 on your phone to poll for a question. If you need to withdraw your question, press star and 2. 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, Head of Investor Relations.
Well, hello, everyone. Very happy to have you join us this morning as we talk about our third quarter revenues. I'm joined by our CFO, Hilary Maxson. We're gonna get started. The slides are on our webpage, and you can refer to them if you're not following on the webcast. Just a very quick reminder of the disclaimer on slide two. I'm gonna hand it over to Hilary, and then we'll make sure to keep enough time for your questions. Hilary, over to you.
Thanks, Amit, and good morning, everyone. I'm also happy to be here with you today to comment on our Q3 2022 revenue numbers and to update you on our outstanding offer for the remaining minority shares of AVEVA, as well as other portfolio actions. Starting on slide three with some highlights on the top line for the quarter. Q3 continues with strong growth, with third quarter revenues of EUR 8.8 billion, up 12.1% organic versus a strong Q3 2021, and despite continued impacts from supply chain and impacts from Russia, where we completed our exit from our Russian operations at the end of the quarter.
Both businesses contributed, with energy management finishing the quarter at EUR 6.8 billion and organic growth of 12.1%, and industrial automation finishing the quarter at EUR 2 billion and organic growth of 12%. Moving to the detail of our strategic growth pillars. More products continues to progress strongly, up 11% for the quarter, driven by both businesses and with strength in non-residential building and OEMs. Software was up 14% for the quarter, supported by energy management software and digital services, both up more than 20%, with our agnostic software companies in electrical design and build, plus our EcoStruxure advisors all performing strongly. AVEVA is focusing on its transition to subscription and drove double-digit ARR growth. This has a negative impact on its sales and profitability, which we expect to last for some time.
Field services were up 8% for the quarter, with relatively higher performance in energy management services and with an uptick expected in industrial automation services in coming quarters, driven by the recovery we see in our long cycle business. In our assets under management, where we're particularly focusing on our monitored and advised assets, which drive recurring revenue, continue to progress strongly, up 29% to EUR 6.8 million. We continue to see strong double-digit growth in our sustainability business, up more than 20% this quarter, with a continued ramp-up in sustainability consulting. I'll call out an exciting update we have here on the prior announced Gigaton PPA project we're collaborating on with Walmart to provide increased access to renewable energy for Walmart's U.S.-based suppliers.
Last week, we announced the first set of suppliers to enter into an aggregated purchase of renewable energy from a wind farm in Kansas. Combined, this purchase is equal to 62 MW of new wind power capacity, so it's a great start to the program. Turning now to our own sustainability journey, and what we do here for our customers and for our own operations is more important than ever, particularly as we see customers continuing to focus on their sustainability goals, even with the current macroeconomic backdrop. This continues to be a great opportunity for us. We achieved a score of 4.54 on our Schneider Sustainability Impact Index as of Q3, tracking well towards our 2022 target of 4.7 and our five-year target of 10.
Key drivers of our performance in Q3 were our FSI number two, where we've now helped our customers save or avoid 407 million tons of carbon emissions, and where one of our key products for delivering this result, our Altivar variable speed drives, were named the most climate positive carbon handprint product by the Vancouver Economic Commission and Climate Leadership Coalition. Our FSI number five, where we achieved 41% of our packaging transformation goal to eliminate single-use plastic and shift to recycled cardboard. Our FSI number nine, where we've now provided access to green electricity to 37.4 million people, well on track towards our five-year target of 50 million people.
I'll also mention that during the Q3, we became one of the first companies in the world to have its net zero commitment roadmap validated by SBTi in line with the new corporate net zero standard. The full detail of our sustainability performance is available in our press release and in appendix to this presentation. Turning now to the details of our Q3 revenues. As mentioned prior, we finished the quarter at EUR 8.8 billion in revenues, up 12% organic YoY. Sales were adversely impacted by around 2% from Russia, where we completed the sale of our Russian operations at the end of the quarter. With the closing of that sale, we'll deconsolidate Russia going forward.
Excluding Russia, volumes contributed around 2.5 points to growth in our top line, with a step-up in industrial volumes QoQ due to continued easing of supply chain constraints. All of our regions contributed to our strong organic growth, with rest of world adversely impacted by Russia. Excluding Russia, rest of world would be at 12% organic growth. Scope impacts are now immaterial due to the shift of OSI into organic results as of Q2, and FX continues to impact strongly our reported revenue growth. Based on current rates, which remain volatile, we'd expect positive impact to top line for the full year of EUR 1.7 billion-EUR 1.8 billion, and around plus 20 basis points to adjusted EBITDA margin. Turning now to some highlights by our end markets.
On this slide, we speak to the combined end markets of Energy Management and Industrial Automation. Although we don't report on orders, we've incorporated some comments on the demand environment. Starting with buildings, we continue to see a strong sales and strong demand in non-residential buildings, with customers continuing to focus on energy transition and energy efficiency, digitization, and sustainability. Residential building sales remain positive, with particular strength in the US, where demand continues to stay strong, and with some as-anticipated slowdown in demand, particularly in Western Europe and China. Demand for residential was also impacted by some distributor destocking, although sell-out trends remain good and accelerated throughout the quarter. Data Center and networks also remain strong, with strong double-digit sales growth and continued acceleration in demand for Data Center in the Q3.
Sales in distributed IT remain positive despite supply chain constraints, and with some softness in consumer-led categories amplified by distributor destocking. In infrastructure and industry, demand trends continue to be strong across most sectors and geographies. Overall for the quarter, broad-based strong demand continued to support a buildup in our backlogs despite the as-anticipated slowdown in residential markets and some distributor destocking. We continue to be in a primarily supply-constrained environment. Turning now to Q3 results by business and geography. Energy Management grew by 12.1% organic despite some continued supply chain constraints and impacts from Russia. North America was up 18% with double-digit growth in U.S. and Canada and mid-single-digit growth in Mexico, driven by broad-based demand across our end markets, including residential buildings, and supported by some easing in supply chain constraints.
Matching the growth trends of the group, growth in field services was high single-digit, and growth in sustainability was strong double-digit. Western Europe was up 14% organic, with double-digit growth in all key geographies, excluding Germany, where we were up high single-digit. Sales were driven by strong demand across our end markets, with some deceleration in residential building and consumer-led distributed IT also impacted by distributor destocking. Energy management software saw high single-digit growth. Asia Pacific was up 9%, with China at mid-single-digit, with growth across all its end markets, with the exception of residential building, supported by both demand and backlog execution with an easing of supply constraints after the Q2 lockdowns.
Outside of China, the rest of Asia Pacific was up double-digit, driven by strong performance in all key geographies, particularly Eastern Asia, and supported by growth in non-residential buildings and Data Center. India was up mid-single-digit, with strong growth in buildings, including residential buildings, and in Data Centers, with some decline in sales in consumer-led distributed IT versus a strong baseline. Rest of World was up 2%, impacted by Russia, with double-digit growth in most other key geographies, including Middle East, South America, and Central and Eastern Europe, and with broad-based growth across the portfolio of Energy Management offers. Turning now to Industrial Automation, revenues were at EUR 2 billion, up 12% organic despite continued impacts from global electronic component shortages and Russia.
North America was up 9% for the quarter, with double-digit growth in both discrete and process and hybrid, supported by a project in Mexico, but with process automation now positive in all three countries due to a translation of the demand momentum in our longer cycle business now into sales. Western Europe was up 15%, supported by some easing in supply chain, and with double-digit growth in all key geographies, with the exception of the U.K., where we were up mid-single-digit, driven by continued strength in OEM as well as momentum in process and hybrid now translating into sales. Asia Pacific was up 18%, with China up double-digit and rest of Asia Pacific up more than 20%. In China, we saw continued strong sales growth in discrete automation, driven by OEM demand and strong backlog execution and good momentum in process and hybrid.
India was up strong double-digit against a strong base of comparison from 2021, with strong growth in discrete, particularly with OEMs. The growth in rest of Asia Pacific was also driven by strength in OEM and process and hybrid. Rest of world was down 2% impacted by Russia, but with double-digit growth in most other key geographies, including Middle East, Central and Eastern Europe, and Africa, driven by discrete automation as well as process and hybrid, particularly in Middle East and Africa. South America grew mid-single-digit, supported by process and hybrid, with some deceleration in discrete. I now move to slide 10 to give you an update on our portfolio disposal program and evolution of our share buyback program.
If you recall, we set up our current portfolio disposal program in 2019 with an ambition to sell businesses with revenues totaling between EUR 1.5 billion and EUR 2 billion by end of 2022. With one quarter remaining, I'm happy to share with you that we've now reached this target range. The main disposal we're announcing today is Telemecanique Sensors, our legacy industrial sensors business, which generated revenues of EUR 280 million last year. This transaction values the business at EUR 723 million and is expected to close in H1 2023. As you can see on the slide, we also disposed of some smaller businesses, including our Eberle Controls business and ASCO Load Banks during the quarter.
Including these transactions, we've now disposed of businesses with cumulative revenues of EUR 1.5 billion since we announced the program in 2019. In Q3, we also closed the previously announced sale of our Russia operation, which will subsequently be deconsolidated from our accounts. Just a small note that under the accounting for this transaction, there won't be a restatement of historic periods. The YoY impact of the deconsolidation will be treated as scope starting in Q4. The financial impacts of this transaction are in line with our previously communicated expectations, with an expected write-off of net book value of up to EUR 300 million and a non-cash reversal of the currency translation reserve associated with these activities now fixed at EUR 19 million loss.
On the buyback, I reiterate we remain committed to the completion of our current program of EUR 1.5 billion- EUR 2 billion. In light of the AVEVA transaction, we've been restricted on further progress on the buyback in Q3, but we do expect to complete the current program in the coming months. Moving now to slide 11, and to provide you with an update on the AVEVA transaction, which we announced in September. We're moving ahead under the rules of a U.K. scheme of arrangement for this proposed transaction. What this means is that the completion is conditional upon, among other things, a shareholder vote of all minority shareholders expected on November 17th. For the transaction to be approved under this scheme of arrangement, it requires the support of a majority in number and 75% of the minority shareholders to participate in the vote.
As things stand, this is our preferred transaction structure, although the UK rules do allow alternatives. As explained on the call we held with you in September and reflected in the transaction documents agreed with the AVEVA board, with this transaction, we'll be in a position to accelerate the execution of our software growth strategy and to ensure the acceleration of AVEVA's transition to a hybrid cloud-based subscription model. Of course, like any acquisition, while the underlying strategic rationale must be strong, the transaction also needs to be done on terms that make sense from a financial perspective. Our offer price delivers a very significant premium in cash to the minority shareholders in an increasingly challenging environment. As you know, this transaction is recommended by the independent committee of the board of AVEVA.
We think there's opportunity here to more rapidly deliver a unique proposition for our customers combining energy and process data. However, this is not an absolute must-do deal for us, and we could also maintain our 59% ownership. We look forward to updating you as to the progress of this proposed transaction and on our plans for the business in either case and in more detail in due course. I'll finish with an update on our market dynamics since our half year results. First, we continue to see a strong demand environment across most segments and geographies, driven by accelerating energy transition trends, continued acceleration in digital, and further recovery in late cycle segments. This strong demand continues to support a good environment for pricing going forward, despite our expectation that certain inflationary pressures may ease.
We do start to see some slowdown in demand in residential buildings, as expected, particularly in Western Europe and China, and in the consumer-led piece of our distributed IT offer. However, backlogs remain high globally, even in consumer-led segments with no signs of cancellation. We expect a partial offset as supply chain constraints continue to ease. Demand across the rest of our end markets remains strong. Overall, we primarily remain in a supply-constrained environment with continued strong momentum and demand. We'll continue to leverage our unique global supply chain setup to execute in the near term and to focus on redesign and our supplier strategy to ensure continued success in the medium term.
With this backdrop, we're confirming our full year 2022 target of organic growth in adjusted EBITDA of +11%-15%, supported by organic growth in revenues of 9%-11% and expansion in our adjusted EBITDA margins of 30-60 basis points. Although I'll note that due to the inflationary environment, we currently expect to finish towards the lower end of that adjusted EBITDA margin expansion range. With that, I'll turn the call back to Amit for the Q&A.
All right. Thank you very much, Hilary. We'll move now to the Q&A. I think we do have sufficient time to try to take questions from all the analysts. I'll again ask you to be respectful for the others and ask one question and then come back to you time permitting. With that, I turn it over to the operator for the first question.
The first question, sir, is from Alasdair Leslie of Société Générale.
Yeah. Hi, good morning. Just maybe a few questions on the, I suppose on the digital flywheel businesses. You saw very strong growth in EM software. That's now I think 40% of your software business. Just kind of thinking how sustainable is that growth more than 20%? Was there something one-off in the quarter? And then maybe if I can just pick up on the comment you made about strong progress in monetizing sort of digital assets under management. I'm just wondering if you can elaborate on that a little. Are you seeing kind of an uptick in interest in assets in sort of asset management and predictive maintenance services, those kind of things, due to the energy crisis? And how much is that already reflected in your growth?
You know, do we see the benefits now, or are they gonna flow through in the coming quarters? Thank you.
Sure. Indeed, we were quite happy to see the continued acceleration of the growth in energy management software. I think that's something that we've been working on with our agnostic software companies over the past quarters and past years. I think that that's not something associated with one-off with this quarter, and we're quite pleased to see it. Now, that said, we would expect that all of our agnostic software businesses will, at some pace and over some timeframe, start to make a shift to subscription. Similar to AVEVA, we may have some differing growth rates among various of the energy management softwares in the future, but that'd be included in the Capital Markets Day guidance that we gave.
In terms of the assets under management, I think we've talked a few times in the past that we have basically a couple of major categories of assets under management. We have the monitored and advised assets under management, where we're driving recurring revenue, and we continue to see great progress there, including, you know, similar rates of growth that we see at the overall assets under management. Part of the assets under management, we're also including those are more than 60% of the assets under management that we have today. The rest is gonna be logged assets, so we're not yet driving recurring revenue, but important from a field services standpoint, identifying our assets in the field and opportunity to shift those to driving recurring revenues, you know, becoming monitored and advised in the future.
Great momentum there as well. Again, that's something that progress and that strategy is something we've taken into account our Capital Markets Day.
Thank you, Alasdair. Next question, please.
The next question is from Philip Buller of Berenberg.
Oh, hi, good morning. Thanks for taking my question. I know you scale things like rev by geography and also products versus service and software, but I was hoping you could help us scale some of the other buckets which you're referring to when it comes to the outlook. You talk about a continuation of the accelerating energy transition trends, and you talk about a deceleration in consumer-linked segments, which all makes sense intuitively, but I'm trying to get my head around those buckets. I was wondering if you could help us scale as a percentage of sales, let's say, of how much is consumer-linked segments, or how big as a percentage of revenue would you say the accelerating segments towards energy efficiency are, please?
Sure. Of course, it's not perfect, but what I would say here is, sales growth in residential remained good overall. However, like we called out, we did see a deceleration in demand in Q3, mostly in Western Europe and in China, and a few other countries. You can see them in the press release. Demand in the U.S., parts of Asia Pacific and rest of world remains robust. Our overall exposure to residential globally, we've talked about in the past being around a third of our overall building end market. We'd estimate the total exposure globally, including all markets that are both in good demand trends, as well as those that are a bit weaker today, probably around 10%-15%, with relatively lower exposure in China.
Our best estimate in terms of overall consumer-linked exposure in entirety, we would put at 15%-20%. Really, we consider that the majority of our end markets remain in very strong demand, driven by the mega trends that we've discussed.
Great. Thank you.
Thank you, Phil. Next question, please.
The next question is from Andre Kukhnin of Credit Suisse.
Good morning. Thank you very much for taking my question. Can I focus on the guidance construct? You obviously chose not to move it this time around, and we've got a range there. Just looking simply at what you've printed for Q3 and at the run rate kind of for Q4 staying at the same pace, it kind of clearly points to the top end of that 9%-11% organic. So I just wanted to check whether that makes sense to you and whether there is maybe some notion of moving within the range without moving the range itself.
Is there anything kind of beyond what you've already put out to us on the expectations for Q4 trends that we need to look out for in Q4 that might catch us out in this math?
Sure. As you know, the formal guidance that we give is the adjusted EBITDA growth of 11%-15%. Underneath that.
Mm-hmm.
What I would say is that just in the H1 call, we already upgraded our top-line guidance to 9%-11%, and then we've stuck with the same margin guidance throughout. What I would say there is that we do still remain in a dynamic and uncertain environment from a supply chain standpoint. That's probably the key point that I would say that we see a bit of uncertainty that I would point to. Other than that, you're right, that as of the Q3, we've continued QoQ to track well in terms of supply chain, and we hope that's the case for the Q4 as well.
Thank you.
Thanks, Andre. Next question.
The next question is from Gaël De Bray of Deutsche Bank.
Yes, good morning, everybody. Thank you. Maybe just to follow up on this, more on the margin side of the guidance. Because in your comments for Q4, you mentioned a gradual easing in supply chain challenges, some deceleration of inflationary pressures, a positive price cost equation and continued good volumes. All of this, you know, bodes pretty well for margins in the second half, at least in theory, right? Is it fair to say that you're now perhaps leaning more towards the upper end of the margin range rather than the lower end or is there something I'm missing here?
No, I think, maybe I went over it quickly. I did confirm in the script that we currently expect to finish towards the lower end of the adjusted EBITDA margin expansion range. We do expect to see continued supply chain easing. We do expect to start to see some lower inflationary pressure, particularly in raw materials. We are hedged, however, if you recall, you know, on a quarter-to-quarter basis over 12 months. That easing in raw materials will impact us more in 2023. Indeed, you know, between pricing, where we certainly expect to remain net price positive for the full year versus raw materials, as well as a couple of those inflationary elements that we've pulled out in productivity, we still expect because of timing there, to finish towards the lower end of the range.
Okay, understood. Can I have a quick follow-up on the
Yes, Gaël, we'll come back to you, I promise.
Okay. All right.
Next time.
I'll get back in the queue.
Yeah. Thanks. Next question, please.
The next question is from Jonathan Mounsey of BNP Paribas Exane.
Hi. Yes, thanks for letting me ask a question. I wonder, just thinking about, obviously you don't disclose orders, but you have talked about book-to-bills. The fact earlier on in the year that revenue growth was lagging. But you did have a very strong order intake. Obviously, supply chains were weighing. I guess you're starting to hit tough comps now for orders. I'm just thinking about both year-on-year and sequentially. Are orders still up on that basis year-on-year and sequentially? Also, what's the book-to-bill like now? Is it still above one or is it below one? Could, as the comps get increasingly tough, we expect the book-to-bill to fall below one, say in Q4 or through into the early part of next year?
If it does, I think you mentioned at the end of your script that backlogs remain high. How long before that backlog becomes exhausted and revenues become under pressure?
Indeed. I did mention that, in fact we continued to see record backlogs in the Q3. We continued to see positive evolution from a backlog standpoint. You know, we don't report on our orders, but I think that gives you a good sense. Also, I talked about demand sort of as a proxy for what we're seeing on the ground with orders. In general, strong demand across the board, aside from those few points that I called out, that aren't enough to make a difference in the overall demand equation. At the moment, we still remain in that strong order environment with backlogs increasing.
Now, I think what you're asking about is, look, some of that backlog increase is probably associated with an increase in delivery times because we have supply chain constraints, and some of that is associated with demand from the market, and we agree that that's the case. In the constrained areas, we would anticipate at some point to see some normalization. From an order standpoint, you might see in your orders, technically they fall into negative range. But at the moment, we continue to see a strong demand environment, so we don't see a scenario where on the whole, we would expect to have a loss of momentum in overall sales, in a going forward basis.
All right. Thanks, John. Next question, please.
The next question is from Simon Toennessen of Jefferies.
Yeah, good morning, Hilary. Good morning, Amit. Hilary, I just wonder if you could talk a bit about trends in discrete a bit more. I think you mentioned on the IA slide that you're seeing it slowing in some parts. You obviously mentioned the late cycle recovery continuing in your Q4 outlook, but maybe a bit more color on discrete trends also by end market would be helpful. Thank you.
Sure. Probably the couple of areas that I might cover there, maybe there are probably the one that I would point to is the demand dynamic that we're seeing in China. In China, we saw good turnaround in sales after the Q2, supported by both demand and supply chain recovery. In demand, we continue to see momentum across many segments, with the exception of construction side. That includes residential, but also some OEM segments correlated to construction, like HVAC, hoisting elevators, and then our equity investment, equity method investment Delixi is also impacted. Good news, despite those weaknesses, we're now positive year to date in respect to both orders and sales, and we expect to finish the year positively and with good momentum in 2023.
That's the one area that I would probably point to a deceleration from an OEM standpoint in demand. The other one I think that we called out was one of the countries in South America, but in general, we continue with good demand trends.
Thanks, Simon. Next question.
The next question is from James Moore of Redburn.
Morning, everyone. Can I please follow up on Jonathan Mounsey's question, please? I mean, if we have an industrial downturn globally next year, I'd just like to understand a little about how you think you might behave this time compared to previous cycles. Schneider's always seen a downturn in the past when we've had a cycle, but I guess you've increased your percentage of revenues that are growing more secularly. I wondered if you could give us a flavor for what percentage of revenues you think are growing above and underlying end markets like green, and how much that's changed really over the last five or ten years. I'm really trying to decouple the secular versus the cyclical.
Yes, understood. For us, you know, I think that we think, and obviously we run many scenarios, right? There's lots and lots of different scenarios that everyone can talk through. We believe that most of our markets remain with good momentum, even in that scenario, based on the mega trends that we've talked about, and only accelerated really, really with the issues with Russia and Ukraine, with countries more focused on energy costs, on energy security. I called out the level of portfolio that we expect is more consumer linked, that 15%-20%. As you know, like you mentioned, we've also shifted our revenue mix over time to more recurring revenue, more software.
Much of that digital flywheel we think is more resilient than just purely cyclical than it is in the past. I won't give a particular breakdown of numbers, but it's really that 15%-20% we think is probably less cyclical with a mix in the rest where we would expect to continue to see a good amount of momentum based on the megatrends that we've talked about.
Wonderful. Thanks, Hilary.
Thank you, James. Next question, please.
The next question is from Ben Uglow of Morgan Stanley.
Good morning, Hilary and Amit. Thanks for taking the question. I was hoping you could elaborate just a little bit on some of the comments around the AVEVA transaction. Hilary, I think you sort of said that this is our preferred transaction structure, but under, you know, under U.K. regulation, there are alternatives. I guess what are you sort of implying there? What could be the alternatives? In terms of this being a sort of “not a must-do deal,” it is a major capital commitment. It's a EUR 4 billion sort of cash outflow from Schneider. If you weren't to do this deal for whatever reason, do you have other M&A opportunities in the pipeline that you could simply switch to?
If it's not a must-do deal, what else could you be thinking about?
Again, on the call, I think I discussed about the opportunities that we see there, and we talked about that in September as well. As to the alternatives, there's a number of technical possibilities there. I don't wanna get into those today. We'll expand upon those only if we expected to move in that direction. In terms of the not must do, that's frankly how I feel about every acquisition, right? The strategic rationale has to be there, but the financial rationale has to be there too. If they don't meet, they simply don't meet. In terms of other M&A opportunities, we've said in the past, we said in September, and I think it continues today, that in general, we're happy with the portfolio that we have.
In fact, we view the potential proposed AVEVA transaction sort of as a reflection of that. In terms of other M&A opportunities, you know, there's nothing that would be glaringly jumping out at us at the moment.
All right. Thanks, Ben. Next question.
The next question is from Guillermo Peigneux-Lojo of UBS.
Good morning. Guillermo from UBS. Thank you for taking my question. Maybe I want to elaborate a little bit on the net pricing comments. If I go back to your previous half-year results, you use the word aspire to be net price positive, whereas you use now the word expect or the verb expect to be a net price positive. Do I sense that there's a little bit more conviction on today's statement versus previous statements? And how can we put a number to that conviction, if I may? Thank you.
Well, good spotting. I'm not sure that we actually changed that necessarily on purpose, but what I would say is that anyways, we've already gone through three quarters of the year, so we have far more visibility now than we did at the beginning of the year. We do expect to be net price positive. Numbers-wise, we'll definitely show you at the end of the year like we usually do in the full year results.
Thanks. Thanks, Guillermo. Next question.
The next question is from Alexander Virgo of Bank of America.
Thanks very much. Good morning, Hilary, Amit. Thanks for taking the question. I guess it was just a question of expectation, and thinking about how your inorganic growth has actually accelerated versus Q1, Q2. I suppose a little bit to Andre's question earlier, what is it that surprised you about this? What is it that you're expecting in terms of softness to manifest in Q4 as you work through the back end of the year? Surprise in Q3 versus expectations, and then, where do you expect to see the greatest softness in Q4? Is that just on the resi side? Thank you.
I think in Q4, the comments that we said there were the entirety of what we expect. As is, some continuation potentially of what we already called out in terms of consumer-led weakness. From our perspective, the expectations primarily per plan. One thing I would call out is interesting to see a bit of distributor destocking despite good sell-out. Anyways, that is what it is. In general, I think we've talked about an expected slowdown in residential already over the first quarters of the year. On plan.
All right. Next question, please.
The next question is from Lars Brorson of Barclays.
Thanks. Hi, Hilary, Amit. I wanted maybe to just touch briefly on the Data Center piece, Hilary. I think it's clear that you're seeing some destocking in networks. Maybe you can help us understand whether that's behind us. On the pure Data Center side, that 10% or so of the business, you talk about accelerating demand, which I take to mean orders. That's quite consistent with what we've heard from U.S. peers so far this earnings season. Where are lead times now and backlog currently? Are you taking orders, some of the longer lead time items within that business for 2024 at this stage? Maybe just on the downside, I'm trying to understand what a downside might look like in your Data Center business.
Should we think of that as being sort of roughly 50/50 between white space and gray space, and how to think about the cyclical risk in the latter? Particularly, I guess your uninterruptible power supply business. That would be my question, please.
Sure. Maybe I'll start with the breakdown. We talk about one of our end markets as Data Center and Networks. I think the last number, Amit to correct if I'm wrong, that we gave there was around 16% of our total revenues.
16 % -17 % .
16%-17% of our total revenues, with around half of that associated with more pure data center, and half of that again associated with more hyperscale data centers. That can give you an idea. The other half being distributed IT with a good portion of that more B2B and then some of it associated with consumer-led, if that gives you a good sense. In terms of momentum, like we said, we continue to see good demand, very strong demand in data center with continued acceleration. You know, in terms of, you know, I won't really comment too much on lead time. Certainly that's part of the area where we continue to build up backlog, obviously with that acceleration of demand, with orders that would go out for some time.
In terms of downside, I think you'd asked me about the downside as well. You know, we always expect to see at least part of that business to be somewhat cyclical, right? It's a CapEx-driven business, probably a little bit more tied to the hyperscale side of that business. You know, that's the kind of thing that we look at in our scenario planning and that we would've assumed in the Capital Markets Day.
All right. Thank you, Lars. Next question, please.
The next question is from Daniela Costa of Goldman Sachs.
Hi, good morning. Thanks for taking my question. I just wanted to ask regarding your own working capital trends, and you commented on distributors, the stocking in portions of the business. I was wondering by yourself sort of how has working capital been evolving, and should we also see you maybe destocking a bit, being able with easier supply chains to destock a bit more than normal in the second half and into 2023? Thank you.
Sure. Obviously, this is just a revenues update, but what I would say here is that I think across the industry, what we start to see is, you know, and you can see it, everyone can see it, right? Some higher inventories, mostly associated with, not associated so much with demand, but more associated with this golden screw problem, right? There's some supply constraints in the market, and then everyone has inventories prepared to fulfill their own backlog. I can't speak to our own distributors, but hypothetically, I might assume that that's something that they might have taken into account, right? As they were looking at their own numbers. Ourselves, I would say mixed. You know, we also obviously we're focusing on working capital trends.
We confirmed in the H1 that while we don't give free cash flow guidance, we would expect our free cash flows this year to be around EUR 3 billion. Part of that being good inventory management. Although we'd mentioned that we still wouldn't expect to see any sort of big decrease or adjustment versus the increase in days that we saw in 2021 associated with the demand environment and the supply chain constrained environment where we've built up some strategic stock.
Thanks, Daniela. Next question.
The next question is from Eric Lemarié of CIC.
Yes, good morning. Thanks for taking my question. I got a question about Telemecanique Sensors, and I would like to understand why you divest this business. Because I used to believe that industrial sensors and sensors in general were part of your EcoStruxure ecosystem. Should we understand that sensors are now just commodities for the industry? Thank you.
For us there, this is more our legacy industrial sensors business, so not directly tied to our IoT strategy. For me, this portfolio disposal is a good example of where, you know, this is a solid business, but one that's not within the core of the strategy that we see going forward. Not to say that sensors aren't, but this industrial, this more legacy business for us, not the case. That might give you a bit of a sense of what the reasoning is there.
All right, we'll take another one or two questions. Next question, please.
The next question is from William Mackie of Kepler Cheuvreux.
Good morning, Hilary, Amit, thanks for the time. My question would go back to the pricing trends. I hear what you're saying about net pricing, which has always been a strong characteristic of your products business. Could you give, as you have done in the past, a little more flavor of the absolute price contribution across EM and IA to the recorded organic growth? Perhaps some flavor on what you think about how pricing should evolve as you've called out that some of the input costs begin to stabilize or maybe even decline. Thank you very much.
Sure. I'd mentioned on the call, you know, we have around 12% organic growth with an adverse impact from Russia of around 2 points. Excluding Russia, the volume contribution that we see in the Q3 is around 2.5 points, so of that 12 + 2. What I would say there is that here we start to see a little bit of a divergence in that, part of that volume is driven by the increase in industrial volumes that I talked about based on the supply chain easing. Then part of that, particularly in the product business, is impacted by the deceleration in the consumer linked IT and residential, which are more on the product side of the business, if that gives you a sense.
Net, between Q2 and Q3, in terms of overall volumes, we're about flat in terms of EUR. Again, excluding Russia. I think maybe that gives you the.
Yeah.
The right information.
All right. Thanks, Will. I think we've probably covered most analysts. Let's just see. Is there another question on the line, operator?
Yes, sir. We have a follow-up from Philip Buller of Berenberg.
All right.
Sure.
I guess it's a follow-up to Will's question, really. If I look at consensus for next year, it's around 2% organic. Assuming there is no incremental price ups from here, what would the purely mechanical carryover effect be from pricing for 2023 at this point, please? I appreciate price can go both ways, but just as it stands today would be great. Thanks.
Yeah, apologies, I didn't answer that on the last question. Indeed, today you can see the amount of pricing therefore. I think you can parse through. I just gave you the volume. You can, I'm sure, subtract and get the level of pricing that we have today. You can see that we would anticipate a decent level of carryover into 2023. I won't give a number there, but it would be higher than this around 2% organic. In general, we talked through it on the call, we see the environment for pricing still remains good. We see that likely to be in 2023 as well, by which I mean, of course, we will. Pricing for us is obviously both about value add.
It's also about market dynamics and remaining competitive. It's important to us to balance all of that together. In general, we expect to be in a decent pricing environment with normal pricing power as we've demonstrated over the past decade in 2023.
Thanks.
All right. Thanks, Phil. I think we'll probably call the end of the call now. You'll probably see on the slide in front of you that, you know, we are going to be at a couple of conferences, so look forward to seeing many of you there. Of course, you know, reach out to the IR team if there are any further questions, and we'll be very happy to engage with you. Thank you very much for your time, and have a good rest of the day.
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