AVEVA Group plc

Matt Springett - Head, IR James Kidd - CEO David Ward - CFO

Hannes Leitner - JP Morgan David Toms - Numis Michael Briest - UBS James Goodman - Barclays

Good morning, everyone, and thanks for joining the AVEVA Prelim Results Call for the Year Ended 31 March, 2017. My name is Matthew Springett, Head of Investor Relations at AVEVA.

Joining me this morning, James Kidd, Chief Executive; and David Ward, Chief Financial Officer. Before we start the presentation, as is customary, I would like to draw your attention to the Safe Harbor statement in the presentation.

This reminds you that during the course of the call, we may make statements that are forward-looking in nature and which are subject to risks and uncertainties that could result in outcomes different materially from those projected in these statements. These statements reflect our opinion only as of today, and we disclaim any further obligation to update such measure.

I will now hand over to James, for some opening remarks.

Thanks, Matt. Good morning everyone and thanks for joining the call.

I'll start by giving overview of the year. Overall, I'm pleased with the results for the year which again shows the resilience of the business and what continues to be a challenging end markets particularly oil and gas and marine.

Revenue for the year was £215.8 million, which is up 7% compared to last year and an adjusted profit before tax is up 7% to £55 million. This is a net result of a substantial FX tailwinds and success in delivering against our strategic growth initiatives more than offsetting the continued tough market conditions.

On a constant currency basis, revenues was down 3.8% with North America continue to be a drag excluding Latin, our revenue in the second half of the year was flat. Since taking over as CEO, I’ve made a number of changes to our organization and the executive team.

I’ve simplified and enhanced management structure with the focus on driving tangibility and greater customer focus. I was particularly pleased that we managed to win a number of key customers against competition during the year.

This highlights the strength of our technology and people and will help to underpin future growth. And finally, cash conversion was very strong and the Board is proposing to increase total dividend for the year by 11% to £0.40 per share with the final divined of £0.27 per share.

So just a reminder of our long-term vision which is to move the process industries to a position where they exists an AVEVA Digital Assets at the heart of every operating assets and a center of every major capital project, our Digital Asset vision provides owners with the access to all of the engineering and other data about the plant in one place, allowing them to run the plant more cost effectively. And for EPC, they provided with the software tools which give them the capability to design and create Digital Assets on a global scale bringing all the engineering disciplines into one model.

Some of the customer case studies I will share with you later are examples of our markets increasingly buying into this vision. Then moving on to our end market, our largest market of oil and gas and marine have continued to be subdued during the year.

Oil and gas is around 40% to 45% of our business whilst marine remains at 20%. In the oil and gas industry, CapEx reduced for the second year running, falling by over 40%, particularly impacting the large and more complex offshore projects that are designed software intensive.

Brownfield projects are helping to support EPC backlogs but these projects are lower in value and shorter in duration. At marine the market remains subdued with another reduction in new ship order last year.

Both oil and gas and marine markets are cyclical, we've seen a slight pickup in project awards in 2017. For example, in next phase of investment in the Mad Dog 2 project in the Gulf of Mexico was awarded this year and that is driving some projectivity for some of our EPC customers.

This pickup is consistent with other market analyst forecast and what we're hearing from others in the industry. Timing now is difficult to call, but it is clear CapEx will need to increase to maintain global oil reserves.

In marine, Clarksons are forecasting a recovery of new ship builds to levels closer to the historic norm. Power was a different story, the power market is both non-cyclical and growing over the long term.

We're benefiting from this growth from greater adoption of the Digital Asset and importantly the market share gain. Our other markets were also more stable and we benefited from some key customer wins in sectors including petrochemical, pharma and paper and pulp.

Moving onto our strategy, AVEVA has an enviable competitive position. 50 years of innovation help produce software that is used for our customers to create, build and manage some of the world's most complex engineering asset.

And as technology evolves our vision for the widespread adoption of the Digital Asset is becoming ever more compelling. We're leveraging AVEVA with inherent strength by expanding our business in each of the areas shown on the slide, and more than 3D we see a major market opportunity and leveraging our customer base and market position by selling additional engineering software tools, expanding beyond our core 3D design platforms.

Further to this, information management tools such as AVEVA NET can generate revenue throughout the operational lifecycle of assets, therefore expanding the market that we address. Owner Operators such as energy and power generation companies also represent a major opportunity.

They currently account for around 16% of our revenue and we feel it's a strong area for growth. In terms of growth markets North America and China represent major opportunities too and we seek to use our competitive advantages and grow our market share outside of Europe.

We're also growing industry beyond our core oil and gas and marine markets with a particular focus in the short term on power, by applying strength of our core technology and the rich knowledge of our people. And finally SaaS represents an opportunity, as over time customers who want to explore ways of using the cloud to drive efficiency and improve collaboration through the supply chain and operating cycle of their asset.

To looking in more detail, more in 3D, which now accounts for 26.5% of total revenue. We've made steady progress in the year increasing constant currency revenue by 2% despite tough conditions in some of our end markets.

In particular I'm pleased that AVEVA NET showed good growth particularly with the Owner Operators and AVEVA Engineering is gaining traction with the EPC. Our integrated engineering design approach with the 3D application is seamlessly integrated in the other engineering tools such as instrumentation and electrical, allows the customers to share data between the different disciplined on a global scale.

This is a clear differentiator and has resulted in new customers, such as JFE in Japan, MODEC in Singapore, and a new large U.S. industrial.

So moving on to Owner Operators, they are important for two reasons. Firstly, as I said before, they want to create a Digital Asset replica of the physical plant, and they need the engineering data to do that.

And secondly, owners are also taking more control of their capital projects and the data and they’re mandating to the EPCs which software to use. It’s definitely important that we have those relationships to our software is the preferred solution.

We’ve had some good successes in the year, we won nine new Owner Operator customers, and some of which are very substantial in size. These included a range of companies in the Power sector and in oil and gas.

Sales cycles or with the owners are generally longer and can take 18 months in two years, but despite that, we still achieved constant currency growth of over 5% in revenue to several important wins. We have over especially mandates where owners have dictated the use of our tools.

And that’s great for us, because it makes selling progress, process with the EPC very straight forward on projects or orders. We’re also seeing strong interest in our SaaS platform from Owner Operators, and I expect this to being going forward.

Let’s now look at our growth markets where Owner Operator wins helped drive what really was the highlight for the year, an excellent performance in North America. North America as a key focus of business and we grew our revenue on a constant currency basis by 19%, but revenue just over £30 million.

The growth was on the back of some important breakthrough wins in the power and chemical sectors with Southern company and Eastman, which we’re using to leverage and win other accounts in those sectors. Our folks in the U.S.

is very much on the owners, and they attend from more than 40% of revenue with a higher weighting towards the non-3D products, and this leads nicely on to the power sector. Power is an increasingly important sector for us as we look to diversify.

We achieve constant currency growth of 11% in 2017, with a range of new customer wins including Southern, TerraPower in the U.S., KEPCO E&C in South Korea, and Japan Nuclear Fuel. We also did well in petrochemical, chemical pharma, again, winning some new customers and other verticals which are growing well from a relatively low base not lease fabrication where our sales growth 10%.

And a good example of where we have diversified in the UK highways project where Jacobs Engineering is using AVEVA NET and other tools for data management to meet the new BIM Level 2 requirement set by the UK government. Moving onto some of the operational highlights, and as I said, we’ve had a very good performance in North America and robust performances in EMEA and Asia-Pacific, and David will give more details about these later.

Overall the EPC market was challenging for us for some customers reducing the number of seats they license in response to lower levels of project activity. That said, we are seeing more EPC look at our technology stack and are looking to replace in-house systems with third-party-supported applications by hours.

So by ours, that there are opportunities out there. A good example of that is where we're working with major EPCs and replacing that enhanced material management system.

Despite many of our customers going through tough times, at a group level we won, we're attracting new customers and each contributed £100,000 and more in revenue during the year. Some of these were in growth sector such as Power but we also won new accounts in our more traditional markets of oil and gas and marine which positions us well for our market recovery.

One thing there no doubts where the AVEVA will exit the downturn in its end market and better shape in the entity. Our customer relationships are strong, our technology is market leading and we diversified our end market exposure.

And since taking on the CEO role, I've restructured the organization to refocus on driving growth. As part of this, I've appointed more customer facing people to our executive team including a recently recruited Chief Revenue Officer, who'll taking a wider responsibility leading global sales, partnership management and marketing with a clear remit to drive organic growth and sales productivity.

Partnering is also an important part of our future strategy and our ability to scale. And that's an area that we've recognized we need to improve upon.

I've also added the leaders in each of our 3 regions to the executive team, which will help there was more feedback from what's happening on the ground and provide more input to our strategy. I've also simplified AVEVA's management structure with sales secondly priorities in the region to drive business making decision making faster with direct accountability for the performance.

The regional executive incentivize on revenue and contribution. These changes are helping the organization to get closer to our customers and drive sales productivity, which is an area I'm keen that we sharpen up on.

So let's now look at some of our key customer wins. As you can see, there are some divestments in the slides both in terms of end markets and geography.

Southern Company is a great example of a new owner operated customer make the entire AVEVA portfolio to improve project execution efficiency and asset performance. And key acquirer for them with ability to able to find specific engineering information on power plant components within 3 minutes.

I saw this first time when I visited in Alabama last year where they're using AVEVA Engage to help project execution and decision support. KEPCO E&C adopted our integrated engineering and designing solutions for new nuclear power plant projects.

Nuclear is the key growth opportunity for us and it's pleasing to see other wins in the year including Japan Nuclear Fuels and TerraPower a company developing next generation nuclear energy technologies. Sinopac also an adaptor of integrated engineering design solution for effective design and collaboration and improved efficiency.

This is a major Chinese state advanced state and approaching customer. So moving on I'm really pleased to say that E2D is giving real traction.

As you can see from the graph, we're now achieving the pure revenues from the E2D with the sharp growth trajectory growing 35% in constant currency to nearly £28 million of revenue. On average, we get 50% price premium also be for us in terms of our corporate tax rate which David will explain later.

We have around 25% of our installed base is actually the E2D there is 20 more to go after it. One of the features that AVEVA has the close partnership we have with our customers to help develop technology solutions which are best in class.

A good example of this is a next generation of instrumentation and electrical applications which we're developing in conjunction with a large U.S. industrial.

Another example is our materials management solutions to the plant market which is been done in partnership with a major EPC who're helping to define requirements to ensure it meets the needs of the market. One of the other highlights of the year was the launch of both our Cloud Platform and SaaS product.

Innovation is the lifeblood of AVEVA and we continue to look to new technology in developing our solutions. We're actively exploring virtual reality and augmented reality and how that can be used to assist the visualization of the Digital Asset.

And finally before I hand over today I'd like to touch on AVEVA's 50th Anniversary. Having been founded in 1967 of a government funded research institute created by the then UK Ministry of Technology at Cambridge University.

We've more than achieved the Company's original mission which was to develop computer aided design techniques for use by British industry. The opportunities ahead of us are exciting as they've ever been as our industry look to drive efficiencies by adopting a Digital Asset approach throughout the lifecycle of the physical asset.

We'll continue to invest in innovation to develop our customer relationships and my mission personally is to drive a meaningful return through organic growth. So, with that I'll now hand over to David who'll run through the financials.

Thank you, James and good morning everyone. I shall now take you through the financial results in more detail including a summary of how each of our geographic regions have performed.

Okay, first let me begin with an overview of this set of result. As James has said these results represent a resilient performance against the backdrop of touch market conditions in two of our core markets.

Assisted by currently translation revenue was up 7% to 215.8 million and excluding the boost provided by currently translation revenue declined to 3.8%. We replaced the proportion or revenue accounted for by our recurring revenue streams remain high at 77%.

Slightly ahead of the increasing revenue adjusted profit before tax increased 7.4% to 65 million. And just as when we announced the first half result this has been a really successful year in cash terms with our year-end balance increasing 23 million despite higher dividend payment.

And finally today we've proposed a final dividend for the 2017 financial year of $0.27 per share taking the total dividend for the year to $0.40 per share which is an increase of 11% over last year. Now specifically looking at the income statements, revenue in the year was 215.8, it was up 7.1% on the previous year.

We managed cost close rate and as a result saw a decline in constant-currency terms. This led to adjusted profit before tax increasing 7.4% to 55 million.

We saw a slightly larger percentage increase in diluted earnings per share to $66.81 as a result of a reduction in the group's effective tax rate. I'll talk more about that later.

We've seen significant movements in foreign currency rates this year and these have been favorable to AVEVA. This boosted the reported revenues by approximately 11%, but also increased the reported costs of our overseas operations leading to approximately 40% of the revenue impact dropping through to profit.

Let me now provide a more detailed review of the revenue type. As I’ve said, in total, revenue was up in reported terms, but did show a small decline in constant currency terms.

In the first half of the year, revenue in constant currency terms was found just over 6% and when we announced those results or refer to the fact, but we have seen two rental deals delayed until the second half, as well as quite significant decline in Latin America. I’m pleased to say both of the delay deals close in H2, but a very weak condition for us in Brazil have continue to be a drag on the good results for the full year.

In fact, excluding Latin America, revenue for the year was down only 2.3% on 2016 and was flat in H2. Strength of the AVEVA business model is our right to use on consumer oil.

Customers can choose to pay initial license fees, followed by mandatory annual fees to cover support, maintenance and upgrade, or they can choose program to licensing. The latter are usually paid in advance on an annual basis.

This drives a higher proportion of recurring subscription revenue, which remained broadly flat at 77% for the period being reported. Within recurring revenue, we were pleased that annual fees held up very well and remained broadly flat in constant currency turns.

On the same measure, rental fees declined 4.6%. In the first half of the year, rental fees were down 13% with the two delayed deals close in H2, this contributed to rental fees for the second half being flat year-on-year in constant currency terms.

We had a relatively strong year for initial licensing, partly as a result of some of the earn-out Operator wins that James mentioned earlier. Training and service revenue is still less than 10% of group revenue and declined 14% year-on-year as a result of fewer larger scale implementation project.

Once again, this year we kept tight control of the cost base. And as a result of the actions we as a management team have taken, we’ve successfully counteracted inflationary impact.

Total costs for the year, we’ll of course in currency basis actually $0.02 lower than the prior year. In R&D, we contain cost well and actually increased headcount during the year as we expanded our team in India.

Within selling and distribution costs, we have a lot of charge for bad debt, which combined with the benefit from the cost reduction initiative, led to costs reducing year-on-year. Admin expenses were marginally up as a result of a small increase in corporate costs and a small allowance of staff bonuses this year.

Looking forward, we expect to see some modest inflationary costs increases in 2017-18 and we were still please close on any discretionary spending. Moving to a breakdown of the exceptional items in the period, overall the effect was smaller in 2017.

You might remember in the previous year, we incurred more than £10 million and exceptional cost associated with the aborted transaction with Schneider Electric. In 2017, the main items classified as exceptional including 4.2 million of exceptional restructuring costs.

This includes the costs associated with the simplification of our organization as James described earlier. And this was partially offset by a credit of 1.8 million that we have classified as the exceptional as it related to a partial refund against the original acquisition price of 8-over-8 Limited.

Looking now at the balance sheet, we have a fantastic year for cash generation with net cash in deposits at the end of the year up to £130.9 million and we have no debt. Most of the balance sheet line items have been affected by the weakening of sterling which is increased the reported values of our working capital line items.

But despite this, accounts receivable were lower at the year-end than the previous year as we did well in collecting cash against some of our large Q4 rental renewals before the year end. Overall, net assets increased £220.7 million during the period.

A report, we believe this is as important for us to maintain the strong balance sheet as this demonstrates the strength of the business to our customers and provides us the firepower and flexibility to invest in our future growth. AVEVA continues to deliver very strong operating cash flow and in the year just completed, operating cash flow before tax £57.2 million which was 58% up from the previous period.

This raised our period end cash and bank balance to £130.9 million either of to the payment of dividends of £27.5 million. You'll recall from the half year announcement that we significantly increased the interim dividend with the view to rebalancing the proportion of dividend paid at the interim stage.

Today, we have proposed a final dividend of £0.27 per share taking the total dividend for the year to £0.40 per share, an increase of 11% over 2016. We closely manage the group's effective tax rate which is steadily declined in recent years in line with reducing rate of UK Corporation tax.

The effective tax rate on an adjusted basis for 2017 was 22.1% , down 40 basis points from 2016. This years was the first year where we benefited from the UK patent box incentive.

AVEVA have registered patent on technology with our E3D product and this means profits from sales of this product and has to only 10%. This represents a great opportunity for earnings growth and I would expect that this benefit will only increases more of our customers' transition to E3D over the next few years.

Changes we mentioned, momentum we are beginning to see in the rate of transition. Let's now look at how we preformed in each of our 3 regions during 2017.

Starting in Americas, it was a contrast. Our business in North America had a great year and grew strongly with the multiple wins away from our competition.

As James already described, our strategy of focusing on owner operated is really working well and there is a real buzz within our team there, but as you have also heard, in Latin America, our business started from the challenging market condition. Currently, our business there is now significantly smaller than it was 4 years ago and the revenue from that market is now really not material to the group of only single low-digit million now.

We took action in H2 to manage the cost base in Latin for the reduced levels of activity. Our focus for 2018 is to capitalize on the momentum we currently have in North America.

Looking now at Asia-Pacific, revenues up 6.6% over 2016 to £76.3 million but declined 6% in constant currency terms. We saw strong performance in Japan with a few significant new wins, business marginally weaker performance in South Korea and India in spite of a tough market in Marine.

Our businesses in China and Southeast Asia were broadly flat when compared to the prior year but both seemed did well in winning new business to balance out the negative pressure from general market conditions. Our cost base in Asia Pacific was particularly affected by currency translations and as a result we saw an increase of 9.6% in reported terms, but in constant-currency terms this was minus 3.6%.

And finally in EMEA, revenue increased 5%, market conditions in EMEA have been recently stable but remain challenging for customers with heavy exposure to oil and gas, however we saw real growth in Germany and in Finland where we won business in paper and pulp. Revenue from Central and Southern Europe was higher in reported terms but performance in constant-currency terms was slightly down from the prior year.

Our businesses in Russian and the Middle East performed broadly in line with the previous year. Training and service revenue declined as the number of implementation projects were completed.

That now concludes the financial section of the presentation. Thank you for listening.

And with that I would like to hand back over to James to sum up.

Thanks, Kidd. Just to sum up, we believe that AVEVA has both the market opportunity and the right strategy to deliver substantial growth over the long term.

Our current markets of oil and gas and marine which together claim for over 60% of the group have been in a cyclical trough over the last three years which has impacted growth. There're early signs of improvement in oil and gas although the timing of the full recovery in demand is still in question.

We do expect headwinds will lessen, and we expect resulting growth from our strategic initiatives to begin to show at the group level. The Board remains confident in the long term strength of AVEVA's business model, the deliverability of our organic growth strategy and our positioning to benefit from the recovery in our end market.

So, with that I'll now hand back to the operator for the Q&A. Operator please can we start the Q&A?

Thanks.

I have two questions, if I may. The first one is on the margin recovery.

I think, 2014, we saw the peak in revenues, around 240 million and with margins of 33%. Do you expect from the non-3D business that you can lift the margins to this last peak margin?

And how does it fit also with your current -- with the 3D margins? Do you see that order recovering with your current business?

And the second question is on LatAm. You said it's now on a non-significant level, could you elaborate it a little bit more?

It’s David Ward. So, just picking up on first question, margin recovery.

As we talked about several times specifically at the Capital Markets Day, our priority is to get us returning to growth, I think we can get that top-line growing, then I think margins of 30% plus are a perfectly reasonable expectation. And actually, the product mix, we don’t see a significant in that dynamic.

So your second question is Latin America. As I mentioned revenue now there is low-single-digit millions for us.

This is David Toms at Numis. Thanks for taking the question.

Can you give us a little bit more color on North America? Because, obviously, it’s been an area of strategic interest for quite a while, it’s now started performing very well.

Would it be dangerous to extrapolate a near 20% growth? Are there any particular sort of one-off things in the period?

Or do you think something has changed in North America that’s starting to help the business now?

Hi, David. I think North America, it’s been a long-term ambition for the Company to have a bigger share of the market.

I think for the merger team we’ve now got in place, I think we feel pretty prospects. We’re really attacking it more from the Owner Operators side rather than going after the EPCs, EPCs are still important, but it’s really with the Owner Operators that we’ve had the success, and that can drive through into supply chain with EPC.

I think it tends the sustainability every growth rate, I think it can grow very well there. I think I would say, that we’re selling into Owner Operators, the sales cycle tends to be longer.

So you need to be building your pipeline overtime. So I mean, that can have an impact in the sort of short-term on growth rates.

But momentum there feels good. We’re leveraging all expenses has for the rating, particularly in the power center, and we continue to feel good about the future there.

Hi. Good morning.

Can you talk a little bit about how the consolidation ongoing at the EPC is affecting, what are you think any of the transaction that are pending there might have an impact on growth rate this year or to your position as a supplier. And then in terms of your own acquisition pipeline, what sort of profit do you think drop deal this year?

What sort of areas would you be interested in? And if nothing is forthcoming, is there a sort of current point, which point do you consider returning capital?

And just finally, any sort of comment you can make about the competitive environment, whether there’s any change changes of constituents of their behavior? Thanks.

Okay. Hi, Michael.

In terms of consolidation in the all services space, it’s very dependent on who is involved and it has on us in terms of our business. We’ve got relationships with pretty much all of the major EPCs, but within most of the accounts, they obviously use competitor technology.

So it depends, to some extent, on the extent of usage within those accounts. So rather than give you a sort of blank answer, it’s very dependent on who’s involved.

In terms of the M&A pipeline, yes, we’ve had a very good year in terms of cash. We are actively looking at a number of opportunities.

It continued to be competitive in terms of interest from private equity and other strategic. So they are difficult to execute, but we continue to look for things.

We don't have any firm deadline in terms of cut off and we'll keeping and have the open mind from that we'll continue to pursue those as the target is hard as we can. And I'll see currently firepower the balance sheet is been moving relatively quickly.

In terms of competitive environment, no real change in terms of what we've seen in the last year. It's the normal people that we tell across in our space.

There is really no real entrants at all.

Right. And just in terms of seasonality this year, would you expect the same pattern we've seen over the couple of years between H1 or H2?

Yes, we would. Same kind of split between H1 and H2 with the second half to be more heavily weighted because of our rental use.

Good morning gentlemen, thanks very much. Looking at the outlook for FY '18, I think consensus implies low-single digit organic growth.

You had a couple of big deals in the first half, and as you look at the pipeline here, are there any large deals either outside your budget that could either come in or slip to next year? Is there anything particularly large that you're focusing on?

Secondly, the maintenance revenues in the second half of the year declined on an underlying basis. Would that expecting is there anything specific there?

And just finally on the intangible spend been to pick up in the cash flow this year. Could you remind me what's caused that?

Yes. So the first question with regards to the product line, there are no major large deals either over the pipeline that that we have a major being on this year pretty much business as usual.

Obviously, we're continuing to work on our pipeline and we'll continue to pursue opportunities that there’s nothing but real note there.

Yes. Hi James, it's David.

So on the maintenance revenues, yes we were a little bit down in the second half, but I think for a lot that we can point to unfortunately that continue to press market in Latin, which is continue to have an impact on us. And your first question on intangible spent, we have a good spot but there were a couple of minor pieces of technology that we acquired during the year.

One of them is component that as we said into our 3D tool a more of them is a component. These are technology that we fit into our information management so as we deploy that in a SaaS environment.

They're relatively small acquisitions, but just basis technology.

Thanks very much. And would you anticipate more IT acquisitions of that for the small type deal?

I think we've said that something that we come across that we think is additive to the mix. As James always talked about in our overall M&A strategy, I think to the extent that something out where that we think it can add to the mix then I certainly will consider it.

And sometimes it's quite efficient by adding some extra functionality.

Okay, thanks for joining the call everyone and we'll see you all very soon. Thank you very much.