AVEVA Group plc

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

David Toms - Numis Mohammed Moawalla - Goldman Sachs Michael Briest - UBS Stacy Pollard - J.P. Morgan Charles Brennan - Credit Suisse

Good morning, everyone, and thank you for joining us to discuss AVEVA's first half results. With me are our CEO, James Kidd; and CFO, David Ward.

Before we start, I would like to draw up your attention to the Disclaimer on Slide 2. And with that, I'll hand over to James.

Thanks, Matt, and good morning everyone. We'll run you through some of the highlights for the first half before handing you over to David for the detailed financials.

I'll then come back and talk about our markets and deliver against our strategy and give you a brief update on the combination with the Schneider Electrics Software business. So let's start with the highlights of the results.

I think we have every reason to be pleased with AVEVA's prominence in the first half. Total revenue was £93.9 million, up 11.5% and adjusted profit before tax was £10.3 million, up just over 13% compared to the same period last year.

Overall, we delivered constant currency revenue growth of nearly 6%, representing a significant improvement and performance seen over the last years, which have been impacted by tough market conditions. So that 6% improvement compares to the decline for FY17 of 4% and is evidence of the improvement in our end markets we were cautiously signaling back in May.

There have been some profits of growth in marine which are the second largest end market and signed a stabilization in our large end market of oil and gas. This improved performance is also driven by sharp focus on execution and delivering against our strategy.

The changes we announced and made to the business last year when we simplified AVEVA's management structure is giving both greater decision-making capability and a direct accountability for performance in our regions and is starting to create real value. Our new Chief Revenue Officer joined us in June with overall responsibility for leading global sales, partnership management and marketing and has made media impact in terms of sales execution.

On a regional basis, we delivered a strong performance in Asia Pacific, which grew 23% in constant currency, where growth is driven by strong initial license fees particularly from marine customers. We have continued to make good progress against our strategic objectives where we're seeing growth of 50% in AVEVA E3D as more customers adopt the new product.

And we've also seen an excellent performance in China in the first half, one of our key growth markets and our strategy is to diversify into other markets is also going well with new wins in pharmaceuticals and chemicals. And finally, having announced the deal on September 5, the combination with Schneider Electrics Software business will create an unrivaled global leader in industrial software that will accelerate our strategic objectives and help our customers realize the vision of this additional asset.

I'll come back to this later in the presentation. I now like to hand over to David to take us through the detailed financials.

Thank you, James. AVEVA delivered a good performance in the six months to September 30, 2017.

Total revenue for the period was £93.9 million, which was up 11.5% compared to the first half of the previous year. And as we expected, we did benefit from a foreign currency translation tailwind, but we still grew 5.9% on a constant currency basis.

It was good to see leverage in the P&L with adjusted PVT up 16% due to the growth in revenue and good cost control, and earnings up by well over 20%, held by reducing tax rate. We still expect to see benefits to our tax rate as reductions in the UK headline rate and our increasing participation in the Patent Box kick in as more customers migrate to E3D.

We would usually at this point be declaring an interim dividend, but just to remind you that we will be distributing £650 million cash shortly after completion of the combination with Schneider Electric Software and therefore as previously announced, we are not declaring an additional dividend in this announcement. Turning to the revenue breakdown.

AVEVA generated 17% of revenue from initial licensed fees, 40% from annual fees, 34% from rental licensed fees and the remainder from training and services. Recurring revenue which consists of annual fees and rental license fees increased 7.5% and 2% on constant currency basis.

But due to the strong growth in initial license fees, we did see a slight fall in recurring revenue as a proportion of total revenue, but still remains high at 73%. Annual fees were up 1.5% in constant currency terms, primarily reflecting new customer winds in the previous year.

Rental license fees grew 2.6% in constant currency terms, underpinned by relatively strong renewals and extensions from EPCs serving the oil and gas industry, OOs in the power sector and the European marine customer. But the real headline here is the growth in initial license fees of almost 34% reflecting new order winds for marine customers in Asia Pacific where we were very pleased to be able to capitalize on pockets [ph] of growth in a market that really more generally remains rather subdued.

Overall, reported revenue was impacted by a £4.7 million or 5.6% benefit related to foreign exchange translation. Turning now to look at the cost base.

AVEVA has a largely fixed cost base, albeit with some annual wage inflation embedded within it. During the period, overall constant currency costs increased by some 4% which was in-line with our guidance.

The cost of sales reduced by 3.7% on an adjusted constant currency basis, mainly due to the annualization of cost-saving initiatives implemented in the prior year. Adjusted operating cost increased by 5.2% although there were a number of moving parts here including within administration costs increases relating to higher national insurance cost on unvested share options due to the improvement in the share price and ships off bonus costs with the improved business performance.

On a reported currency basis, adjusted costs were adversely impacted by currency translation and exchange losses relating to non-functional currency translation. This accounted for increases of £3 million and £1.7 million respectively.

Research and development costs grew £15 million with the increase here mainly related to investment in our operations in Hyderabad India. Selling and distribution expenses include the costs of our direct sales force as well as our regionally based technical support and marketing teams and in total were £43.5 million.

The moderate decrease in overall cost on a normalized constant currency basis reflected the annualization of cost savings made in the prior year partly offset by some cost inflation. Looking at the business on a regional basis, the group saw improved performance in EMEA, strong growth in Asia Pacific and a small decline in the Americas against the very tough comparative.

I will now walk you through each of the regions in a little more detail. In EMEA, revenue grew 6% to £44.5 million.

On a constant currency basis, revenues were broadly flat on the prior year, which represents a sequential improvement after a number of periods where revenue had shown some decline. As EMEA remains our largest geographic region, this was very good to see.

Overall market conditions in EMEA were relatively stable in the first half and we saw some pockets of growth in power, oil and gas and pharmaceuticals. On a geographic basis, we saw solid growth in several of our larger markets including the UK, France, Germany and Austria.

Looking now at Asia Pacific. As James and I have already alluded to, Asia Pacific was the stand-out performer in the first half and revenue from the region grew 28% to £37.9 million with a constant currency increase of 22.7%.

This excellent performance was driven by an increase in initial licensed fees in the marine and market, but annual fees and rental fees also grew. At the sub-region level, we saw strong performances in Japan, China and South Korea.

This time last year, the standout wind for H1 was the initial license deal with southern company. So the Americas region did face a tough comparative and therefore on a year-over-year basis, revenue did reduce by £1 million to £11.5 million.

AVEVA has a lower market share in the Americas as we've said before versus EMEA in Asia Pacific and as such, our strategy has been focused on adding new customers to enhance AVEVA's recurring revenue stream and both annual fees and rental fees increased in constant currency terms in this six-month period. In this half year, we were pleased with the significant new EPC customer win and looking forward, we have a strong pipeline of business for the region for the remainder of the financial year, particularly in North America and the outlook remains encouraging.

Moving on to the balance sheet in cash flow. Net cash at September 30 was £133 million.

This represented an increase over the full year cash balance despite the payment of the full year dividend of £17.3 million and exceptional costs of £2.4 million, paid to date relating to the planned combination with the Schneider Electric Software business. Cash generated from operating activities before tax was £25 million.

It did represent a slight decrease from the prior year which as we called out at the time benefited from a larger-than-usual cash inflow from trade debtors in that period. We're going to H2 this year with a slightly higher level of trade receivables than last year after a strong September, but cash flow in H2 will be further affected by the payment of the exceptional deal costs and of course, we do expect to distribute the 100 million of surface cash in Q4.

And finally, a look at exceptional costs, the only significant item here was the cost associated with the planned combination with Schneider Electric Software. This amounted to some 20 million and this represents most of the deal cost we will incur.

Most of the cash payments for these will happen in the second half of the financial year. In conclusion, I've been very pleased with AVEVA's performance in the half.

The business has shown good growth in revenue on a constant currency basis and our continued focus on cost and discipline saw this seed through to substantial increase in profitability. And now, back over to James for the strategic review.

Thank you, David. I'd like to start by providing an update on our end markets.

Although we haven't seen yet a broad-based recovery, development have been incrementally favorable in the first half. First of all, oil and gas which came from 40% to 45% of revenue and is our large end market, we've seen the oil price to be a bit more stable during a period of great volatility, but we are seeing customers become more accustomed to the new normal.

We're also seeing increased CapEx spend and project awards start to come back in 2017, albeit from a little base in the previous year. The mix of offshore versus onshore is being somewhat surprising with a greater waiting to offshore than expected with several large greenfield offshore projects sanctioned in 2017 including E&I £7 billion LNG project, VP's Mad Dog Phase 2 and ExxonMobil's Liza project.

Onshore projects have shown strong growth with projects awards surpassing 2015 levels. Overall, oil and gas CapEx in 2017 is ahead of 2016 and 2015 and therefore, the environment does seem to be more stable.

In marine, which is our next most important market in which [indiscernible] 20% of revenue, we have seen some encouraging pockets of growth. These have been quite specific, for example, some customers wanting to invest in technology to increase their competitiveness in the marketplace and we are seeing growth in particular, specialist areas such as cruise ships.

Since it's a bit early to call the recovery in the sector, but trends are looking better. In power, we continue to see CapEx investment in conventional power projects which represents a good longer term sustainable business for us.

In other markets, we continue to see opportunities for growth, both through underlying CapEx growth and through adoption of technology. Moving on -- and I just wanted to highlight some of the key deals that we closed in the first half.

As we've said, the biggest improvement we saw was in Marine where we won a broad base of new business in Japan, Korea and China. And as I mentioned before, this win is related to the strength of our products and customers prepared to invest our technology to drive efficiency.

In Japan, the situation is interesting with one of the features being the replacement of in-house systems which often go beyond 3D cards. In the boom times in the past, many shipyards were prepared to invest in their own systems, but as the market turn, they realize they had to be more competitive and could not afford to invest in R&D at the same level as an independent software vendor can.

And the opportunity is not just 3D card, it can also go into other applications like materials management. Though we expect that we can continue to drive some level of growth through the displacement of home-grown systems and we're not necessarily dependent on the underlying growth in shipbuilding.

Elsewhere in the U.S., we won significant new EPC customer and also saw some additional license sales to our major U.S. industrial in the power space that we closed in the previous year.

And pleasingly, we also saw some major renewals with more increases in demand for licenses including one global EPC where they purchased significant top off of tokens. Returning to our strategic progress.

As most of you will know, AVEVA's strategy is to increase revenue by growing the addressable market for its products as a concept of the digital asset is more widely adopted to sell a wider range of products and to grow in industry verticals and geographies with the group's market shares underway. During the first half, we made progress against the strategy and significantly advanced our long term execution plan combination with the Schneider Electric Software business.

More about that shortly, but first let's look at some of the performance highlights. The migration to E3D continued at pace with growth in revenue of some 50%.

E3D now came to around 16% of group revenue and we expect if projectivity continues to pick up, we will see faster adoption of E3D on new projects with many customers having entitlement to E3D within their agreements. Sales in more than 3D also grew with a strong performance in schematics and Enterprise Resource Management or ERM.

ERM is our materials management solution which require back in 2010 and we've adopted the solution to the plant market and we're seeing a lot of interest from EPC, who wish to swap out legacy or home grown systems to improve efficiency and take out cost. We did see slower growth in information management in the first half.

These products do have a longer sales cycle and we did see some deals flip into the second half. The full year is definitely more promising with some important deals in the pipeline.

Our integration engineering and design suite of tools is definitely attracting a lot of interest from Owner Operators as part of their strategy to manage our engineering data, which is helping drive growth particularly in the schematics products. We also made good progress in other areas with the strong performance in China and delivering growth in adjacent markets with some important new wins.

We continue to develop our Cloud and SAS offering and there's a lot of interest from customers around providing solutions as a managed service or on a hosted basis. And now I'd like to take a moment to talk about our annual AVEVA World Summit Conference, which is our annual thought leadership event, which brings together executives from our industries and from many of our customers.

Last month, we hosted a summit in Cambridge to mark 50 years since the company was founded. A theme of “Digitalization: Getting it Right” and we had some 350 business executives from 33 countries attending where we had streams for plant, marine and digital.

We did diverse range of customers from different industries presenting, including Boehringer Ingelheim, BAE Systems, Kawasaki Heavy Industries, Southern Company and WorleyParsons. The prevailing topic of discussion of event to the journey towards digitalization and companies sharing their experiences so far.

What really struck me was that participants felt that they were in the early stage of that journey, but the potential benefits of implementing it through digital twin strategy using AVEVA technology can significantly deliver many advantages around efficiency, cost reduction and safety. This illustrates the huge potential market opportunity that move towards the adoption of the digital twin offers -- a momentum appears to be building.

A true digital twin is a virtual representation of a physical asset that contains both the structure and the behavior of the asset in real life. And of course, the combination with the Schneider Electric Software business greatly advances our capabilities by adding the behavioral data from their portfolio software to the structural data that comes from our engineering and 3D design capabilities, resulting in a unique unrivaled offering.

But before I talk a bit more about the combination, let's turn to the outlook. As I've outlined, I'm pleased with the first half results together with the strong sales execution.

We're seeing signs of stabilization in our oil and gas end market and some pockets of growth in marine. As such, the Board remains confident in the full year expectations and looking to longer term, we believe that AVEVA has both the market opportunity and the right strategy to deliver substantial growth.

The combination with the Schneider Electric Software business is expected to enhance these growth prospects by enabling an end to end engineering and industrial software platform to provide a digital twin to accompany the whole life cycle of physical assets in capital intensive industries. Let me now provide you an update on this transaction.

As most of you know on September 5 this year, AVEVA and Schneider Electric announced an agreement to combine AVEVA over the Schneider Electric Software business to create a global leader in engineering an industrial software. Our shareholders overwhelmingly approved the proposal of the general meeting held on September 29.

We have submitted regulatory filings to various authorities and new concerns have been raised to date and part of that includes the specifies [ph] filing in the U.S. Preparation is on track with the transaction expected to complete at or around the end of 2017.

After completion of the combination, £550 million of cash contributed by Schneider Electric and £100 million of the excess cash on AVEVA's balance sheet will be distributed to existing AVEVA shareholders, resulting in a payment of approximately £10.14 per share. I'd also like to just give you an update on the financial performance of the Schneider Electric Software business which we published this morning.

This is a same perimeter as was included in the perspectives that was published back in September and I'm pleased to say that like AVEVA, the business has delivered a solid performance with growth in revenue and adjusted EBITA. Overall revenue is up 4% to $288.5 million in the first half and there are two main factors driving this.

First of all, approximately half of the growth came from the implementation of the commercial agreements with the wider Schneider Electric Group that were referenced in the respective. It's important to note this is a one-time effect that will pretty largely be factored in by January 1, 2018.

The remaining growth came from underlying trading with an increase in HMI/SCADA license volume in Asia Pacific and Europe and an increase in supporting maintenance revenue, offset by a revenue decline in North America due to the leveling out of the tailwind pipeline business which is exposed to the midstream oil and gas business. Overall, these factors helped drive an increase an adjusted EBITA of 3.3% to $43.6 million.

So that concludes our presentation and thank you for listening. We no will be pleased to take any questions, so I now hand back to the operator for the Q&A.

Thank you.

Good morning, gentlemen. Well done on a decent performance.

I'd like to inquire a bit more about the end market if I can. You talk about stabilization in here.

Obviously the period you're referring to, the oil price, they really started mostly at the end of that. So where do you think we are in terms of sort of broader customer sentiment willingness of owner operators to start investing and flow-through without the EPCs and then onto you.

Is there yet a sign of an oil and gas led recovery in that space, or are we still waiting to see that come through?

I think we're seeing pockets of growth and some of the projects I referenced in the presentation are fairly substantial offshore greenfield projects sanctioned this year. I think generally, the sentiment of that customers is improving and we certainly had a lot of our recent AVEVA world summit in Cambridge.

I think overall, the environment does seem a little bit better, but I don't think we're calling a complete recovery yet. But technology is a key enabler for our EPC customers and for our Owner Operator customers on the journey towards visualization.

So I think despite the conditions in the end market, we can still buck some of those trends through greater adoption of our technology.

Thanks. And then just a brief follow-up on the technology; are you at the stage yet where you think E3D is becoming the default choice for customers and you're seeing less and less of PDMS?

Can you give percentages in that? But I was thinking more from a sales perspective.

Is it E3D first now for everyone?

Certainly. At the start of this year, we got a big push from the sales force to lead with E3D.

Obviously we got the higher price point, but also we have a tax benefit and that it qualifies for patent box. So there's a double benefit there.

So we are seeing increased take up I think is project activity increases, we will see faster adoption of E3D. Despite the product being absolutely compatible with PDMS, customers are generally reluctant to change mid projects.

So as new projects start, we'll see greater take over E3D.

Okay. Thank you very much.

Great, thank you and good job on the quarter and the half year. Just my first question was James, your reference to your lower kind of [ph] scope in Japan to replace in-house spending.

If you think that there's a progressive recovery in the oil and gas market and you're seeing pockets of that today, how much scope is there in terms of replacing legacy or in-house more broadly in the oil and gas market amongst your customers and also from a competitive standpoint, do you see scope for E3D to sort of displace some of these competitive deployments particularly as CapEx spending comes back. So it's now my first question and I have a follow up.

Yes. I think in the oil and gas space, the area where we see the biggest opportunity for replacement for home-grown systems at around materials management and our new ERM offering is getting a lot of interest from customers.

We've got a partnership with one of the major EPCs which has been going on for probably over a year now. We're getting a lot of interest from the other EPCs around adopting that technology, which is replacing in-house systems where it has been developed over many years, but approximately, the interoperability and compatibility with new operating system into our applications is becoming more and more difficult and customers are seeing the new benefit of having this leading edge technology that we've got with ERM.

So I think that's probably one of the biggest opportunities. I think on E3D, it's 25% more efficient than PDMS and PDMS is really one of the most efficient tools in the markets, so I think as project activity really picks up, I think we'll see much faster adoption of E3D from customers and prospects.

Okay. My second question was just obviously we've got the Schneider Software deals at the close end of this year or early next year.

And then obviously, you're running into your all-important Q4. So can you just give us a sense of how you think you can manage the two concurrently without impacting the year-end push and then also any updates on perhaps where the pipeline is, how kind of sale cycles are versus say, a year ago.

So are you essentially entering this period with a stronger better pipeline and do you think that closed rates are getting any better to sort of manage potentially the risk around also the closure of the deal impacting your business?

Just taking the first part of your question and the business have been very focused in the first half and you can see that and the results are strong topline performance. Bear in mind that we've had discussions with Schneider starting back in mid-June and obviously it's been announced now in September.

This is not a new thing. I'm pretty confident that we're not going to see disruption in our Q4.

Our sales force are very focused on hitting their targets for this year and given the good performance in the first half, they're in a very good position to hit [indiscernible] targets and deliver against what's expected. I'm not concerned or I'm not front -- let me hand over to David on the second part.

I think in terms of pipeline now, what can we say? I think we're pretty happy with the way the pipeline looks for the second half.

It certainly supports our view that there are some opportunities for organic growth. I think specifically, we've already called out in the presentation that North America was perhaps slightly down for the first half, but we're happy with the pipeline for the full year and similarly for information management as well, again, perhaps not the best performance in the first half, but again, that's an area where sale cycles can be a bit longer, but we're pretty happy with the strength of the pipeline.

That's great. Thank you very much.

Thank you. Good morning.

Obviously these couple of months since with the deal with Schneider announced, is there anything more you can tell us today about the synergies either how quickly they'll be realized, how much it will cost to get them or at least give us an indication of when you will be able to talk about that.

Hi, Michael. It's James.

Yes, in terms of synergies, we're not in a position to provide any update in terms of quantification. We're still going through the process to complete the deal and the various anti-trust rules mean that at this stage, we can only do some high level planning, so we're not in a position to be providing any update and we expect to be able to do that once the deal completes and during the first part of 2018.

Okay. And then just on the cash flow, David.

Deferred income was down year-on-year and I appreciate currencies moving around, but you seem to imply most of the exceptionals or hit the cash flow in the second half and it's just cash, it's a little bit weak to me given the overall performance. Can you talk about that?

Yes, I can. First thing, on the first half, if you compare this first half to the first half last year, as I said, last year's first half did benefit from coming into the year with the high level of receivables.

We did call it out last year that we did sort of get a bit of a benefit from that in the first half last year. Not terribly unexpected, the cash from operating activities this year was a bit lower, but I think as we head into the second half, we've got a good level of trade receivables for us to collect, but obviously we have got the outflows from the exceptional cost that we expect to make in the second half.

I think overall for the year, I think the cash flow, I think we're pretty comfortable with where that's going to be and how that will compare to previous years.

Okay, thank you.

Hi. Thank you.

Just looking at the pipeline, can you give us a little more color on the pipeline for initial licenses -- maybe some by vertical and geography? And do you feel that the 6% constant currency and/or perhaps a mid-single digit number in revenue growth is sustainable in the mid-term?

And the second question would just be about the tax rate, 23%. Is that for the full year as well and going forward as well?

How long does that benefit carry through?

I'll take those, Stacy. In pipeline as we said, I think we're pretty comfortable with the way the pipeline looks for the second half and can't really keep you and we typically wouldn't give more detail in terms of verticals or end market.

But we talked a bit about some of the geographic markets in some of the products. I would say pretty comfortable with where that's looking.

In terms of growth, we said at the start of the year that we thought that with facing more stable markets, we thought there was opportunity for us to generate some organic growth, low single digit levels and I think we've had a good start to that with the first half and I think we stick by that guidance for this year. In terms of tax rate, good question, actually.

Half of your tax rates, a bit unusual and it's driven by the accounting standard. What happens in the first half is typically because the profit is proportionally less of the total, we end up with more of the profit done overseas and typically, those are therefore at higher tax rates.

The tax rate of the half year is probably a little bit higher as a result of that. I think previously, we said that we expect to benefit as 1) the UK rate comes down and; 2) as we get more participation from Patent Box and that's obviously driven by more adoption of E3D.

So I think the outlook for the tax rate is still that we would expect to be able to see some reduction for the full year over what we had for the full year last year.

The rate is closer to 20%?

More. Last year, I said we were 22.1%.

I think somewhere between 21% and 22%, I would have said for this year is [indiscernible].

For the full year? Okay.

For the full year. Yes.

So slightly lower. Okay, thanks.

But I think the opportunity then would continue for further years as E3D adoption continues.

Great. Thanks so much for taking my question.

I just want to come back to Michael's question on the synergies. I appreciate there's not much you can say in terms of hard quantification, but just conceptually, can you give us an indication of how much of your anticipated synergies need to come from harmonizing the Schneider technology on to your Dabacon database and conceptually, I think you took two or three years to complete that transition with Tribon.

Is that the type of time frame we can think about this time around? Thanks.

Hi, Charlie. In terms of the technology, there are still a lot of work ahead of us in terms of looking ahead as portfolios will integrate.

But given the nature of most of the Schneider products, it's unlikely that they will migrate onto Dabacon platform that we have. Some may well over time, but the majority won't.

So I don't see that as a major feature of the integration. I think in terms of broad time scales, I think from day one, there will be opportunity to cross-sell respected portfolios into customers where the relationship is stronger on either side and there will be some things that we can do on the technology to ensure that the seamless integration between some of the products will be joined up from the start.

And then in the medium term, there may be better things we can do around tighter integration. But from the start, we expect to be able to have some cross-selling opportunities.

Great. Thank you.

I'd like to thank you all for joining the call this morning. As we say, we're pleased with the first half performance underlying growth of 6%.

Sharp books on our execution during the six months and improvement in our end markets which is encouraging. Remain confident at living full year expectations and are obviously very excited about the pending deal with Schneider Electrics Software.

With that, I'll bid you a good morning and speak to you all soon.