AVEVA Group plc (AVEVF) CEO Craig Hayman on Q4 2020 Results - Earnings Call Transcript

AVEVA Group plc (OTCPK:AVEVF) Q4 2020 Earnings Conference Call June 9, 2020 4:30 AM ET

Company Participants

Craig Hayman - Chief Executive Officer

James Kidd - Deputy Chief Executive Officer & Chief Financial Officer

Conference Call Participants

Stacy Pollard - JPMorgan

Mohammed Moawalla - Goldman Sachs

James Goodman - Barclays

Michael Tyndall - HSBC

George Webb - Morgan Stanley

Peter McNally - Panmure Gordon

Craig Hayman

Good morning everyone and thank you for joining for us today. This is Craig Hayman, CEO of AVEVA and I'm joined by James Kidd, Deputy CEO and CFO.

Please turn to page four in the presentation. In every respect, AVEVA delivered on the vision of the Digital Twin and performed well in fiscal 2020. It was another good year with strong results and good progress against medium term targets. Revenue grew 8.8% year-to-year, adjusted EBIT grew 23.3% to £216.8 million, and delivering a margin of 26%, up from a margin of 22.9% last year.

We made good progress on the shift to subscription which delivers long-term value to customers and shareholders. Recurring revenue, which is subscription revenue, plus support and maintenance revenue, is now over 62% of all revenue. This is ahead of plan and above the medium term recurring revenue target that we established as we began the transition in October 2018.

Cloud contributed to the growth with an increase in cloud total contract value of nearly 200%. Overall, software revenue grew 11.8% and subscription software revenue grew by 45%.

With the integration of the heritage AVEVA and heritage Schneider Electric Software businesses complete and a company extremely focused on customers, we successfully navigated the impact of COVID-19 in the final quarter of the year.

Please turn to page five. COVID-19 has changed the world and we expect the market disruption caused by the global macroeconomic downturn to continue, particularly in the first six months of this financial year.

While COVID-19 has changed the world, we have changed with it. AVEVA entered the world crisis well-positioned with a strong balance sheet and ongoing cash generation. Our commitment as a leader in industrial software is to build a sustainable future for the world, while creating value for customers, employees, and shareholders.

As important are our values which we lean on in good times and in challenging times. We use our values to guide us, while delivering operational excellence, aligning our commercial model with that of our customers through a subscription transition and accelerating the digitalization of the industrial world.

Our focus on protecting lives and livelihoods means that for example over 95% of employees are now working remotely. In the past 90 days, we have accelerated our own transition to being a truly digital company. Our customers in the industrial sector face a world that is changing faster than their ability to change.

We are helping them accelerate their digital transformation and helping them free up precious operating expense, and be more certain that their capital projects will be delivered quickly and with lower risk. We have made some of our cloud solutions and online training available for no fee to customers who are themselves working remotely. In April, we delivered 18,000 online learning classes for Monitoring & Control. This is a 25x increase year-to-year.

Our commitment to give back into the communities in which we work and live has grown with the executive team and Board committing 10% of their base salaries for six months to further the AVEVA action for good initiatives around COVID-19. This is in addition to the company's existing commitment of 1% of profits before tax to the program.

This year over 1,500 employees completed one day or more of charitable work in their community supporting the U.N. sustainability goals. We are the same company as before, but now working differently and firmly focused on the future.

Here I will hand over to James Kidd for the financial review. James?

James Kidd

Thanks Craig and good morning everyone and thanks for joining us today. I'll now take you through the financial review of the FY 2020 results. So, let's start by looking at the main highlights of the year. I'm really delighted that we closed a very successful year delivering a strong financial performance which is in line with our medium term targets on revenue growth and margin and ahead on recurring revenue. And this was despite the challenging conditions we faced in the latter part of Q4.

Despite having staff having to work from home during March, thankfully there was minimal disruption to closing contracts with only a couple of deals that slipped. So, great credit must be given to our sales, services, and support teams for maintaining their focus on delivering these results.

On a statutory basis, revenue increased by 8.8% to just under £834 million, driven by strong sales execution, stable end markets in the most part of the year, and some benefit from multiyear contracts. Our organic constant currency revenue growth was 7.4% and our revenue bridge later in the presentation which walks you through the moving parts.

One of the cornerstones of our medium term guidance was to increase the level of recurring revenue through the transition to a subscription-based revenue model. We continue to make strong progress and I'm delighted that we've already exceeded our medium term guidance at 62% and I have more on that later.

The strong revenue performance flowed through to profit, driven by strong operating leverage and cost control with adjusted EBIT up 23% to £216.8 million. This also helped keep our medium term guidance for EBIT margin on track which improved to 26%, and this helped drive strong growth in adjusted EPS.

And finally, despite the challenges of COVID-19, the group is in a strong financial position and well positioned to deal with the uncertainty the pandemic has created.

From a financial perspective, we were around £250 million in available liquidity at the end of May and that will help us navigate these uncertain times. And it's from this position of financial strength that the Board is recommending a final dividend of 29p per share amounting to approximately £47 million which is flat compared to last year. This balances the performance in FY 2020 with the uncertainty of the current macro situation.

So moving on and let's start with the income statement. From a regional perspective, Asia Pacific maintained its strong first half performance, up almost 27% year-on-year with growth across all of the regions including China which delivered double-digit growth, despite the earlier impact of COVID-19. The growth in recurring revenues across all geographies was also a highlight of the year and we'll come back to that later in the presentation.

Gross margin improvement continues to be a key objective for the services organization, which despite putting some pressure on the top line helped drive an improvement of over 200 basis points. We've also controlled our OpEx well with costs up 5.7% on a constant currency basis with the investments for growth we have made in the business being offset by the savings from the cost-synergy program. The strong top line performance and operating leverage has driven a 23.3% increase in adjusted EBIT. And on an adjusted basis the effective tax rate for the year was 18% which compared with approximately 20% last year. As we're able to benefit from the higher intellectual property incentives in the U.S. and the U.K. particularly the Patent Box in the U.K. We expect the effective rate for FY 2021 to be between 19% and 21% depending on which countries our profits land, so overall, a very strong financial performance for the year in line with our medium-term objectives.

So let's move on and let me walk you through the revenue bridge which shows the different moving parts. Starting on the left, we have last year's statutory revenue of £766.6 million. From that we add back the deferred revenue haircut of £8.7 million in the prior year, which takes us to the pro forma revenue of £775.2 million for FY 2019. We then adjust approximately 1% for the disposals of the distribution businesses in Italy, Germany and Scandinavia, so we can compare on a like-for-like basis. This gives us the organic revenue base of £769.8 million for FY 2019 from which we had organic constant currency growth of 7.4%. To complete the picture, we have the adjustments for the reduction in services, the acquisition of MaxGrip, the small deferred revenue haircut in FY 2020 and FX translation and that brings us back to the reported number of £833.8 million.

Okay. So that was the revenue bridge showing the year-on-year change. Let's now look at the breakdown of revenue. As you know, we have set recurring revenue as one of our key strategic aims as part of our medium-term plan. And we've continued to make good progress with recurring revenue for the year at 62.2% ahead of our medium-term guidance. The key driver behind the improvement has been the increase in subscription revenue which grew 43% in the year.

As we've said previously, one of the key initiatives put in place was the new sales incentive model which rewards our salespeople more for closing subscription contracts. We also launched AVEVA Flex at the start of this year, which is our subscription offering initially focused on the Monitoring & Control business unit. This has been very successful growing over 150% year-on-year. This is a combination of new business and included converting some existing customers such as Procter & Gamble and Network Rail who shifted from maintenance contracts to subscription.

We also saw strong growth in other business units for subscription. In Engineering, we saw some customers move from a one-year contract to a multiyear subscription contract. From a regional perspective, subscription grew strongly across each of the regions with Asia Pacific almost doubling compared to FY 2019 and benefiting from the large EPC renewal that we closed in the first half. We continue to see an increase in multiyear contracts in the second half. And in total we closed subscription contracts with a total contract value of approximately £350 million of which approximately 30% had a term of 12 months with 70% a mix of three and five years.

Commercially securing our customers on multiyear deals is important to both lock in reliable cash flows and provide much better visibility. As you know under IFRS 15, we have to recognize the license element upfront with around two-thirds recognized on a typical three-year contract with invoicing on an annual basis. Therefore, in the first year revenue is ahead of cash which then unwind in years two and three. This explains the increase in the contract assets which you can see on the balance sheet. So overall, the growth of 43% in subscription helped drive a 23% increase in recurring revenue.

Moving on to look at the other revenue categories. Maintenance revenue was slightly down year-on-year on an organic constant currency basis. This was as expected as we continue to see customers switch from support contracts to new subscription agreements. Perpetual licenses declined by almost 17%, which again reflects the strategy to move customers to subscription. Regionally, we saw a drop of £17 million in EMEA and £10 million in Americas.

Our services are sold alongside the software licenses to ensure efficient deployment of the software and bring value to the customer faster. Services revenue declined by 5% to £136 million, as a result of a greater focus on higher-margin services and we started to work with some of our service partners to deliver that work. The decline was all in the Americas. We're being more selective in bidding for service projects particularly in the pipeline SCADA business.

And the final point I'd make is that, overall our software revenue excluding services grew almost 12% year-on-year which shows the progress we're making on improving our revenue mix.

So let's move on and now look at the cost base. Total adjusted costs increased by 4.5% in reported terms and 3.3% in constant currency as we continue to maintain tight control over the cost base. Cost of sales decreased by 1.5% due to the focus on higher-margin services and more use of offshore service delivery centers.

Research and development costs were £120.7 million which is up just under 4% as we continue to invest in the development programs and the product integration, as well as new product launches such as the Unified Operations Centre for data centers and continued investment in cloud and AI programs.

As a reminder, the company remains very committed to R&D and enhancing our products. And we spend approximately 15% of revenue on R&D each year all of which is expensed in the year in which it's incurred.

Selling costs increased by 5.6% to £209.1 million due to investments made in the sales team both for account managers and sales specialists and also investment in marketing including customer events such as AVEVA World Summit in Singapore. Administrative costs increased by 7.1% reflecting the investment in the back office in the areas of HR, finance and IT as we exit the transitional service agreements from Schneider.

Net impairment loss on financial assets is the bad debt charge and you can see the charges increased by £1.3 million in the year. We've made an additional provision to cover the risks arising from the COVID-19 pandemic.

And finally, looking at FY '21, we've taken a prudent approach in setting the cost budget for the year to protect our margins and cash generation whilst continuing to invest for the long term in strategic areas particularly in cloud and artificial intelligence.

There will be lower cost of sales due to lower services revenue and we've taken action on our costs including a pay freeze minimizing recruitment to only critical talent and reducing our travel and event costs. The annual bonus scheme is also dependent on achieving revenue and profit targets. Overall, our cost budget is £ 50 million to £60 million lower compared to our planned pre-COVID-19. Craig will talk about this later on how we're adapting to the new world.

So moving on to look at our exceptional and normalized items; acquisition and integration costs were £29 million related to the integration. These costs were incurred on contractors, integration of our functions and locations and investment in new systems such as the ERP.

It also includes relatively small transaction costs from the acquisitions and disposals that we made during the year. The integration costs will continue into FY '21 as we complete the exit of the transitional service agreement from Schneider and the implementation of the new ERP system.

Restructuring costs related to the cost of severance incurred in the year arises of the integration and other income is the reimbursement of integration expenses from Schneider as part of the merger agreement which amounted to £3.8 million and £7.7 million from a gain on the disposal of the Wonderware distributors. There's a slide shortly that will give you more detail on synergies achieved and what's left to be done on the integration.

Moving on to the balance sheet and overall not much has really changed compared to last year. The acquisition of MaxGrip and Aerosol added approximately £30 million of net assets to the balance sheet and £16.8 million to goodwill.

Contract assets have increased by £42 million to £142 million, driven by revenue recognition on the multiyear contracts as I mentioned previously. Contract liabilities, which represents deferred revenue increased to £177 million due to the timing of renewals and the increase in subscription contracts. Therefore when you look at the net of these balances together for a net credit of £35 million which means that overall our invoicing is still ahead of revenue.

We closed the year with just under £150 million in net cash. None of the £100 million revolving credit facility was drawn down at the year-end. We've seen strong collections from customers since the year-end with cash at the end of May being approximately £150 million. Overall we have a strong balance sheet and with around £250 million of liquidity, we have a signed basis for proposing the final dividend.

Turning to the cash flow for the year, cash flow from operations before tax are slightly down on last year due to increased exceptional costs and the impact of multiyear contracts as I mentioned before. In the year we've paid out exceptional costs related to the integration.

And finally the working capital movements here change in contract assets with an outflow related to multiyear contracts and there's also a swing of approximately £22.4 million on contract liabilities.

So turning to the integration. The integration of the heritage AVEVA business and the heritage Schneider Electric Software business is largely complete and has been successfully delivered in line with our plans. Our integrated customer proposition is strong and is enabling AVEVA to play a key role in the digitalization of the industrial world.

We are making excellent progress in our journey towards a subscription-based business model. And as I previously mentioned, we exited the year with a run rate of cost synergies of approximately £33 million quite well ahead of the £25 million target we set at the time of the merger. These were achieved across all the functions and included rationalization of duplicated functions, the implementation of common systems, shared services for back office and real estate consolidation.

The areas remaining to complete are in real estate and IT. There are some office consolidations in Sydney, Beijing and Tokyo and the IT transitional arrangements with Schneider Electric, which are though well progressed are still to be fully exited. And they relate to the transition of the heritage SES offices onto a new AVEVA IT infrastructure and the implementation of the new ERP system. We have seen some level of disruption from COVID-19 in not being able to access some of those offices.

Overall, we feel that the merger of the two businesses delivers significant value for our customers and for our shareholders. As such, we aim to participate in the further consolidation of the industrial software industry as and when value creation opportunities arise. And to this end, we've put in place an experienced M&A team who will help progress those opportunities.

So to summarize the group has delivered a very strong set of results in FY 2020 in line with our medium-term road map. Total software revenue growth was strong and we're particularly pleased with our progress on recurring revenue, and those recurring revenues give us a resilient business model, which combined with a strong balance sheet will allow us to navigate through these uncertain times and gives us the confidence to propose a final dividend that takes into account the strong performance we saw in FY 2020.

Thank you for your attention and I'll now hand back to Craig for his review. Thank you very much.

Craig Hayman

Thank you, James. I've talked before about how the industrial sector was the first to use digital technology, but it is the very last to use it at scale. Industries like retail that are already much more digital have responded to COVID-19 by becoming even more digital. COVID-19 is changing supply chains and demand across the world more quickly than many industrial companies can themselves change. The CTOs and Chief Digital Officers that they have hired are driving digital agendas to take advantage of low-cost and high-scale technologies like cloud big data and artificial intelligence.

We are working with these companies every day to help them move more quickly and it comes down to two tactics. First, work to quickly visualize operational data across disparate heterogeneous systems, and bring people together to understand the data. This is our Unified Operations Center. Then use that data to deliver meaningful expense reductions through AI and machine learning to prevent unplanned downtime and increased business performance. The operational expense savings are then returned to the businesses and used to further accelerate the company's digital agenda. One of our customers ADNOC generates $1 billion in economic value from the Panorama Digital Command Centre.

Next, bring certainty to capital projects. The pressure on these projects is immense. So reduce risk and increase delivery and operational certainty using better design tools, better simulation and better materials management. This is what we do with Worley for example in the cloud.

Let's turn to page 18 for details on performance across each business unit and geography. AVEVA again delivered growth across all four business units in all three geographies with improved execution from both direct and indirect sales channels. The indirect sales channel is approximately one-third of total revenue. Here you see subscription transition in each geography, with recurring revenue growing 20%, 16% and 52% in the Americas, EMEA and Asia Pacific respectively.

Customer wins include P&G, Colgate-Palmolive, BP, Veolia Water and Olam. Within the business units subscription revenue grew 25% approximately in Engineering, 150% in Monitoring & Control, 250% in Asset Performance Management, and 70% in Planning & Operations. Recurring revenue is approximately 80% of total revenue for Engineering, and 45% to 50% for the other business units. AVEVA Flex gained traction with customers in a highly differentiated Asset Performance Management portfolio, which contributed to the growth.

Let's cover a great customer win on page 19, Olam International. Olam are a global agricultural and food producer. They work with a network of coffee farmers in Africa and throughout the world to grow and provide food, feed and fiber into a global supply chain. They selected AVEVA's manufacturing software to increase quality, value, asset productivity and ensure the sustainability of its global industrial footprint. This solution gives visibility across disparate systems and uses analytics to improve operational efficiency a new customer. This was a great AVEVA Flex enterprise win for us in Southeast Asia.

On page 20 another customer win this time with China Merchants Industry Holding, who are using AVEVA unified engineering to digitalize the shipyard. They work across diverse marine industries and are intent on becoming a leading marine manufacturer for China. They can now use one shared dataset to produce vessels to a shared standard and go from design to delivery quickly and with certainty, state-of-the-art vessels with state-of-the-art software.

Please turn to page 21. Next is Nestlé, who needs no introduction. They've been working with AVEVA for more than 20 years and we have extended our work together to expand their use of our Monitoring & Control software to streamline processes and boost productivity. We're working across hundreds of factories that make up their global food and beverage production facilities.

On page 22, we're excited to talk about our new Unified Operations Centre which is a solution for data centers. Announced in April, it is targeted at hyperscale data center providers and connects disparate systems and centers into a single view. We built this solution in partnership with Schneider Electric, who have a very strong presence here. The go-to-market is being led by Schneider Electric, who are initially targeting this solution at their top 40 global accounts. This further extends the Unified Operations Centre already available for oil and gas, mining and smart cities into a new industry and market with a great partner.

Now please turn to page 23. Some of our operational improvements really began to take hold in the year. Here you see recurring revenue by business unit on the right. We're pleased to have achieved 62% recurring revenue overall, but there is still more ahead in our subscription journey. Services declined as we focused more on services that are attached to software and began building an ecosystem of services partners. The decline in perpetual software was more than offset by the growth in higher-value subscription revenue. Maintenance revenue grew even with the impact of subscription.

Included in subscription growth is cloud. Let's quickly take a look at the Engineering, Monitoring & Control and Asset Performance Management software, all running in the cloud with 99.995% uptime during the year. One of our new cloud customers is Veolia Water, who are using our engineering tools to help them standardize their engineering operations. Each AVEVA cloud customer uses AVEVA Connect to connect to their data and drive a digital transformation. Let's sign in from a browser and see the engineering tools at work.

Here you see the unified engineering tools running seamlessly with high performance, navigating through and working on a complex industrial facility. You're seeing not just the 3D design, but also the knowledge graph of the asset to understand, how it will operate in production and how it can be delivered on time.

Next we'll switch over to an operational view and with no-code quickly, create an operational view of an industrial facility. Again, we're not just seeing the visual design but navigating the knowledge graph of the industrial asset across a diverse heterogeneous footprint. This is why the unified operations center is so fast to deploy.

And there you have it, a real-time operational view bringing the facility to life. Now remember that next step, use that data to deliver meaningful operations, expense reductions through AI and machine learning to prevent unplanned downtime. Still in the cloud, let's look for patterns and anomalies in the operational data to predict when something is going to go wrong before it does. Here, we're looking at the issues that have been found, the projects that will be impacted and the cases or work tasks that need to be completed to manage the performance of the asset.

We are now on page 25. In September 2018, we provided a medium-term road map with overall constant currency revenue growth at or above the market, increases in recurring revenue and improvements in adjusted EBIT margin. We hit all our interim milestones this past year on those elements and overachieved on the third element recurring revenue.

This year, we continued to execute against our revenue and adjusted EBIT margin targets and intend to provide a higher recurring revenue target at the Capital Markets Day currently planned for the fall. Because of the near-term disruption due to COVID-19, it's not meaningful to provide a new recurring revenue target at this time, although we do see our investments in cloud and AVEVA Flex, delivering further increases to recurring revenue.

Page 26 gives our perspective on COVID-19. The world is changing quickly and digitalization is key to dealing with the challenges our customers face, while freeing up operational expense and delivering with certainty. Subscription provides a lot of flexibility to customers who benefit from lower upfront costs and higher value. And with the world working remotely, cloud becomes a priority. Customers who had not prioritized cloud have changed course and are shifting to the cloud.

For AVEVA, multiyear contracts provide resilient cash flows. We have not and don't intend to make staff reductions in response to the economic environment, nor do we intend to follow any staff or make use of any government support programs. But we quickly took action in March to reduce costs by £50 million to £60 million versus our original plan for fiscal year 2021. We are being prudent, while continuing to invest for the future when the world shifts from respond to recovery and then renewal.

In summary, on page 27, we performed well last year and delivered on our commitments. We're in a strong financial position with ongoing cash generation. Recurring revenue provides a level of resiliency. We will continue our shift to subscription to deliver higher levels of recurring revenue. And finally, we are being prudent while investing for the long term.

That's it. Thank you for your interest and thank you for your time. Now, let's open up the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

[Technical Difficulty]

Unidentified Analyst

…it was related to the guidance, I think you mentioned in the press release about – I think more of a one-ish weighted impact on the revenue going forward. I guess, are you able to provide any quantification around that? And number two, are you thinking about this more in terms of like a V-shape recovery? I think it would be interesting just to hear any commentary you have and what you're seeing in the end markets right now as well.

Craig Hayman

Thanks for the questions. This is Craig. Can you guys hear me okay?

Unidentified Analyst

I hear you fine.

Craig Hayman

Yeah. Great. Yeah, I think – I'm sorry, I think I only caught the second half of the question. So with respect to the economy look it is dramatic swings in the last 60 days. Although in the last 30 days, it's certainly been more positive. So one of the indicators we look at is the manufacturing index that above 50 is growth below 50 is not. We saw that drop dramatically two months ago to 35 in some countries around the world, some of the major economies. But in the last 30 days the May numbers have all sort of either – they've not gotten worse in fact gone substantially better still below 50, but its gotten better.

So that's a bit of a positive sign. I think the other element is that our markets are really not focused on discretionary spend. Our markets are focused on energy, power fuels, chemicals used in clothing for example, food, beverage, pharmaceuticals, and we see growth in those sectors. We – in the final months of the year, we still saw good deal flow. But without any doubt, it was harder. People working remotely, it's – not getting on planes it is harder to do that, but we still see a good trajectory of deals.

I think James highlighted some of the pressure we see perpetual software and typical capital expense is harder to sell. Our subscription software is normally operational expenses is a lot easier. James, anything you want to add?

James Kidd

Can you hear me, okay?

Craig Hayman

Yeah.

James Kidd

Yeah. No, just really following up from Craig. I think perpetuals we are seeing more pressure, but subscription is growing – continues to grow well. So – and obviously, with the services our service people can't get on site here to visit customers et cetera. So that's causing some impact on our services revenue as well.

Unidentified Analyst

Okay. James just one follow-up question too. And thank you for providing a little bit data on the TCP data around the subscription deals and the split in terms of 12 months and multiyear deals. Can you give us a sense of how that compares to last year as well? Because I think, we can back into the pull forward obviously from the data point you gave us for this fiscal year. But, can you give us a comparison for the prior year?

James Kidd

I can't give you the specifics, but it's certainly – it'd be slightly up year-on-year in terms of the mix in terms of the slightly more multiyear deals in FY 2020 compared to FY 2019.

Unidentified Analyst

Okay. Thank you.

Craig Hayman

Operator, I think we are ready for the next question.

Operator

Yes. The next question is from Stacy Pollard. Please ask your question.

Stacy Pollard

Hi. Thank you very much. A few questions from me. On the £50 million to £60 million in cost savings what portion would you say is permanent and carries into 2021 versus maybe the shorter-term savings from the lower T&E or events going virtual et cetera? So really that's part of the question. And then, where do you see most of the margin gains coming from in the future years as you head towards that 30%? So maybe how much is mix shift? Are there further synergies and then other areas, and maybe if I can do a follow-up.

Craig Hayman

Stacy, I'll start. James, I'm sure will add something here. In terms of the cost savings for the obvious point that is we're not traveling. And so we are – I assume very little limited travel – physical travel around the world with our team. So that's one example of cost savings. I think we all look every day at the newspapers to understand when air travel will return to normal. It's certainly not now, but perhaps it's – so at some point, we will return to high levels of travel. I will say that, as we're in this respond phase sort of looking towards recovery, we're thinking about what does this mean to the future of work of how we work.

Our 150 scrum teams are now working remotely. And while that was challenging to set up, they're actually driving with a lot of productivity now in fact to increased productivity now. So I think those – you'll end up with – some level of that cost savings will be sustainable longer term. And our focus will be of course to invest those savings for growth.

In terms of the mix shift, I think you -- Stacy you understand our model, subscription is still growing quite well. And every time we -- £1 of subscription revenue, over above £1 of perpetual software creates more free cash flow and drives margin improvement after about three years. And so we're -- we see still a long -- a large amount of benefit in the out years as to -- through increasing the subscription mix. James?

James Kidd

Yeah. So just on the £50 million to £60 million Stacy, it relates to recruitment freeze and pay freeze. And it's great that it's coming down on travel and events and such like. I would estimate maybe £10 million to £15 million and that would be sort of permanent. That's just an estimate. But I think in that sort of ballpark.

And then in terms of the margin gains, certainly the mix shift is an important part. Also subscription as a build obviously delivers higher margins, so that will come through. And obviously our focus on services, as we drive higher-margin services and even more services through partners, that will also help improve our margins.

And also just this broader theme of operational improvement that we're still driving, there's still benefits to come through from pricing, from improving our channel performance and also the benefits from expanding our relationship with Schneider. So, those are the things that will contribute to that margin trajectory.

Stacy Pollard

Okay. And then, just the follow-up -- sorry two, would be how do you see your cloud business developing? Is that something that could double again? And maybe a quick comment on, what products people are more interested in, in the cloud? So is it more Engineering or APM or Monitoring & Control?

And then sorry last question really, now that your Schneider integration is largely complete any thoughts, on M&A?

Craig Hayman

Well, you really packed questions in.

Stacy Pollard

Yeah couple of questions. They are just three questions.

Craig Hayman

That will be three questions all good.

Stacy Pollard

Sorry.

Craig Hayman

So, first on, cloud. Yeah we have been investing in cloud for some time now, at least 18 months building up a DevOps team, ensuring that we have single sign-on, ability to provide high levels of uptime. In fact we published the uptime of all of our services publicly. The cloud contracts, the customers sign or a click and sign are on our website for people to quickly, easily get going with cloud.

So we feel like we've done a lot of the heavy lifting, to bring up more and more cloud solutions, through the same AVEVA Connect system. We're going to continue that investment. And we are going to listen very deeply to the sales desk, who are off selling on what customers want.

So one, I'll give you one example. One pattern is we've talked before in our engineering tools. We use -- we have a database called Dabacon which is a network hierarchical database. We run that in the cloud.

And it's very efficient versus some of our competitors. They rely on -- have to -- you have to license a third-party, relational database which is expensive to run in the cloud. So we see customers switching very easily to do an engineering work around the world, using a Cloud Dabacon System that we're providing to them, through their engineering tools. It's one example.

APM, also a lot of great growth APM in the cloud, the more access you have in data, the more data APM has access to, the better the machine learning, the better the artificial intelligence. And then finally, really we're just seeing it come online is around remote workers.

Sort of remote workers in the field, where you're doing dispatch of tasks and things like this. You'll see -- hear from more about that from -- in the coming year. And M&A, I'll hand to James.

James Kidd

Yeah. Thanks, Stacy. Yeah. We continue to work on a pipeline of opportunities and progress those. I would say that operationally it's a bit more difficult obviously just given remote working such like. But we continue to with opportunities. And it is a mixture of smaller things and some bigger things. But having got through the bulk of the integration, we can now focus on, another opportunity.

Stacy Pollard

That's perfect. Thank you.

James Kidd

Okay, the next question.

Operator

Thank you. The next one is from Mohammed Moawalla. Please ask your question.

Mohammed Moawalla

Hi guys. Thank you very much. Good morning guys. A couple for me, first, just as we think about, when sort of some of your end-markets like oil and gas have gone into downturns. What is different this time, versus previously?

I know that historically you were linked to CapEx. Now you're more into OpEx. But, in terms of the solution and product sets what are the kind of products you have in the kind of low ASP, quick ROI kind of quick sales cycle categories? And how significant are these for you to kind of help continue to drive growth for yourself, even though your customers still have to kind of cut costs?

And then related to that, appetite for sort of native cloud products, is this causing a shift we've seen as a result of the kind of COVID crisis more broadly, adoption of kind of public cloud and need cloud applications when you step up? In your end markets are you kind of seeing that?

And then secondly, just coming back on services. Obviously, you talked about the mix shift James. But where are you in terms of engaging with your system integrators, particularly as you kind of try to kind of extend growth? Is this becoming a meaningful channel alongside Schneider for you, or is there more work to do there? Thank you.

Craig Hayman

Thanks, Mo. I'll start and I'll hand to James. In reverse sort of mode the -- in terms of the native cloud activity, our customers who were perhaps not -- everyone is on a different adoption curve with cloud. As you can imagine, in the last 90 days customers who had previously told us, sometimes even just a few weeks before and said don't ever talk to us about cloud again, said "hey, what's that cloud solution you have again and we're very eager to trial or begin using our software running in the cloud." And that is in oil and gas and in other industries too. And really a dramatic shift as the world is going through, it forces you to prioritize and cloud lets you get going very, very rapidly. I mean, you've seen this in other sectors too.

In terms of quick wins in oil and gas and low selling prices, our Unified Operations Centre is really fastly deployed. We've talked about how the $1 billion ADNOC provides. But that began as a Unified Operations Centre, an eight-week project with ADNOC to stand up that beautiful 50-meter display. The view onto their -- all their operating companies.

So we are really deploying a lot of those. In fact, we're in the middle of the handover for one of those for another oil and gas major that really -- they tried it with another vendor. It was too difficult. It didn't do what they need. It didn't provide the contacts. It was more sort of a screen scrape view, didn't understand the knowledge behind the data that was being presented. So Unified Operations Centre is really good.

The other is around the supply chain optimization. Look, in oil and gas, you've got energy and you've got fuel. And energy is relatively stable, but fuel is really dramatically shifting as we all don't fly. And then you got overproduction. So it's a classic supply chain problem. So our customers who typically didn't run that sort of value chain optimization more than a few times a year, are forced to run that -- rerun that value chain optimization, sometimes multiple times every 30 days.

And again that's our software. That will all run from the cloud. That's our Spiral Suite. It's inside Planning & Operations. And again, there's good growth in there. Relatively, the question we always get is why you price so low based on the value it's delivering to the customer? Another good question. James, on services?

James Kidd

Yes. On services, we are starting to build out this SI channel. We've done a few projects in the year where we sold the licenses directly to the customer and the customer engaged one of the big consulting firms to do the implementation and that worked really well.

We're continuing to train up some of the SI people and get them enabled and there's a specific work stream driving that. So, there's certainly more work to do, but we have made good progress and really want to build on that this year and into next year.

Mohammed Moawalla

Great. Thanks very much.

Operator

Thank you.

Craig Hayman

Can we have another question, operator?

Operator

Yes. The next question is from James Goodman. Please ask your question.

James Goodman

Good morning, Craig and James. Thanks for taking my questions. Firstly, just on the multiyear subscription deals. Those have been a big feature over the last couple of years. And, clearly, there's this complicating factor just around IFRS 15 recognition and the upfront element of those. But the question is to what extent are we now into sort of a renewal site around your larger customers there, or are there still large customers to convert in the coming period? And how do you see the opportunity to sign multiyear deals in the current environment?

The second question is a follow-up on M&A. You made some interesting comments there actually in the pre-prepared remarks around putting an M&A team in place. But we've also seen Schneider do a big deal since we last spoke in a related space. So the question is how do you draw the line between, I guess, yourselves and Schneider there? And is there any discussion of potentially looking at closer alignment or combination of any of the Schneider assets with the AVEVA assets?

And actually just a clarification, because I think I missed some comments, thirdly, on China. I think you said it's still growing double-digit, despite the weakness that you flagged early there. Are we getting close to business as usual in China? Did you make some commentary around the recovery you've seen there? Thank you.

James Kidd

Craig, I'll start.

Craig Hayman

James Kidd, over to you.

James Kidd

Yes, sure. Yes. Yes. So we're not quite in the renewal cycle. We really have -- this year we're in FY 2021 and then FY 2022 will be the ones that the deals will start reviewing then. We have a couple of big deals in the pipeline for the second half of this year, which are two of our larger customers. And -- but all our major sort of EPC customers are now on a multi-year contract. So it's now the smaller ones where they're going to commit. And we're still seeing good examples of those sort of deals in the pipeline so we're not seeing any dramatic change there as yet. So there's still more to do and we do expect multi-years to continue to be a feature of this year.

Craig Hayman

And on the M&A. So look we -- there's a chart in the backup that we've -- it's the chart hasn't changed. I mean it's a different chart. It just hasn't changed from every one of our sessions with investors of the areas that we have on focus on inorganic activity. If you look at Schneider Electric just announced and I believe one of them is now closed ProLeiT, which is a hardware-software solution for brewing and other industries. And also RIB Software, which is sort of more architectural engineering and construction software in the CapEx cycle.

When you look at those acquisitions and you consider what they do and look at the -- our focus that chart in the deck you realize that they are an adjacency to us than one that is -- that we have not selected. We certainly spend time thinking about those companies and many others on how they fit within our strategy, but we -- they were sort of adjacencies to our strategy.

Now we are eager as Schneider completes these two acquisitions to build a go-to-market relationship with RIB and ProLeiT as they have with all of Schneider Electric. We have a good go-to-market relationship with Schneider Electric and we intend to carry it -- on doing so.

Finally, on China, look, China suddenly has -- everyone's looking very closely at China as to, you know, its own recovery. The signs are good in terms of just energy consumption, in terms of manufacturing output, the signs of good. Our employees in China were some of the very first to learn the best practices around the lockdown. They then share those best practices with also across the rest of the world. And they're also now defining the new best practices on how to get back to work.

They -- China is one of the very few offices where around the world where we have people physically in the office working to as they enter to the sort of renewal of phase.

James Goodman

Helpful.

Craig Hayman

Next questions, please.

Operator

Yes, the next question is from Michael Burriest [ph]. Please ask your question.

Q – Unidentified Analyst

Yes, thank you. Good morning. Couple from me. I think in reiterating your mid-term goals, understandably the cost synergy thing to be running a bit ahead of track, which is good. Are you comfortable saying the credit as a 30% to the margin exiting Fiscal 2022 is still the ambition today? And then on free cash flow changes, obviously, you know an impact from subscription. What would you expect for free cash flow in 2021? Are we still seeing, sort of, a drag effect before we get into the sort of the renewal cycle? Thanks.

Craig Hayman

Thanks, Michael. On the medium-term guidance around the margins of driving towards 30%. Yes, we still have that -- size to get to 30%. We have multiple ways to get there as we -- when we laid that out in October 2018. We had sort of, operational improvement. We had mix. We had a several other levers inside the business, we'd also risk mitigated, and that allowed us to get there through multiple ways.

And still -- we're still on track. There's no doubt that COVID is, you know, a substantial challenge. But you'll see the action that we've taken around cost -- your cost reductions versus what we have planned for this year. We -- our hands are firmly on the wheel of this business and we're very rapidly making decisions and choices and actioning to align -- to maintain the alignment around our strategy, around our medium-term guidance. James? James, go ahead.

James Kidd

Yeah. Just on the free cash flow point, Michael. So as we come right into the renewal cycle in FY 2022. We should see our cash conversion improve in FY 2021. We saw in the second half of FY 2020 cash conversion at 92%, which was a step-up through from the first half. So, yeah, we should expect free cash flow or cash conversion to improve a bit compared to FY 2020 and FY 2021.

Q – Unidentified Analyst

So 2022 -- it does get more meaningful step-up.

James Kidd

Yes. Yeah.

Q – Unidentified Analyst

And finally just on the cloud TCV. Did you actually give an absolute value for that along with the 200% growth rate?

Craig Hayman

Roughly…

James Kidd

Sorry. Go ahead.

Craig Hayman

Yeah, TCV – prior TCV is roughly 5% of our total TCV.

Q – Unidentified Analyst

Okay. Thank you.

Craig Hayman

Next question, please.

Operator

Yes, the next question is from Michael Tyndall. Please ask your question.

Michael Tyndall

Yes, hi, there. Thanks for taking my question. So just a couple really. In terms of the margin progress, if I'm not wrong back in April, you suggested that it might actually be a bit slower in 2021. And maybe I'm reading too much into today's statement, but it feels like you've actually dropped that, is that because things have perhaps improved or you've been more aggressive on costs, such that you will continue to see progress in 2021.

And then, just on the multi years, is probably more my understanding than anything else? In terms of recognizing the licenses up front, if it's the same for the profit, so are we seeing a profit boost to the same degree as we're seeing in the revenue side, because we are recognizing that profit as and when those contracts are signed? Thanks.

Craig Hayman

Thanks, Michael. Yeah, I'll take this. So my margin progress is consistent really what we said at the April Trading Update is that we expect a modest improvement in the margin percentage and FY 2021. And, you know, through the actions we've taken on the – on the costs here compared to original plan, we've taken £50 million, £60 million of costs out through the hiring freeze, no pay increases, reducing discretionary spend, as we said, and so, you know, really consistent with what we said back in April.

And on the multi-years, the license element we take up front, and there are costs associated with that license revenue such as sales commission, and maybe third-party costs. But yes, in essence, a large proportion of withdraw profit

Michael Tyndall

Perfect. And one maybe quick follow up. I think last year you mentioned Schneider to and through revenues were about 10% of your total. Do you have an update for that number?

Craig Hayman

It's still roughly around 10%. Some of the go-to-market has changed a bit in the year, so it's not quite as visible as it once was because Schneider and I buy through some of our third-party distributors, although we're still involved in helping with that sale but the revenue we do a third-party distributor around through our books directly, and then we get commissions from the distributor. But yes, in essence, it's all around 10%.

Michael Tyndall

Perfect. Thanks very much.

Operator

Thank you. [Operator Instructions] And the next question is from George Webb, please ask your question.

George Webb

Good morning, Craig and James, and one question more in the medium term. When you look across the business today, there are several parts that could be positively impacted. But if you had to pick a single product area where you see the greatest scope for behavioral changes from COVID-19, driving acceleration in demand, would that be APM, some of the Wonderware and Monitoring & Control or would that be some other area? Thank you.

James Kidd

Well, that's a short good question, George. The – look, we – you – I think we you and everyone understands our business, the mix in our business between oil and gas, Greenfield CapEx oil and gas and then also the work we've been doing investing in other sectors such as food and bev, life sciences, et cetera.

We see in for example like in Monitoring & Control for example, food and bev, life sciences and infrastructure all grew much, much more quickly in the year than oil and gas. Now oil and gas also grew but there was much stronger growth in those other industries.

So we have a little bit of positive reinforcement that our work to expand products like Unified Operations Centre into other sectors is actually quite a good strategy. So we're intent on doing that. I think you've heard that from us today.

Look, the – just to rewind all the way back, Greenfield CapEx is perhaps the area that is – as it relates to oil and gas is perhaps the area that is the most that comes under pressure, when oil majors are announcing expense cuts. The other side of that coin is those oil majors all believe that digitalization is how they get to maintain and protect their own profitability.

So digitalization becomes more front of mind with those majors, notwithstanding the headwinds of pressures around it. So look we're comfortable with the mix of the business we have. We think three major geographies, four business lines, a series of industries, we have a level of multiple different revenue types. We have a level of diversification across our business that we think bides us well from a company of our size.

Craig Hayman

Thanks, George.

Operator

Thank you. Yes we have one more and that is from Peter McNally. Please ask your question.

Peter McNally

Hi. I think you guys have touched on this a bit but just to hear your thoughts. Would you say there's been less of a benefit from the multi-year contracts in the second half of the year? I'm just looking at the contract assets versus the first half?

James Kidd

Hi, Peter. Yes, that's probably, right. I mean, overall, the contract assets have gone up £42 million in the full year and in the first half it was up £27 million, wasn't it? So, yes.

Craig Hayman

Yes, it was about £25 million versus £15 million or so…

James Kidd

Yes, that's right. Yes. So, slightly less benefit in the second half. That's right.

Peter McNally

Okay. And just another point was you mentioned that across all three regions that our customers are on maintenance contracts that shifted to the annual subscription. Without giving too much away, I guess, could we get a feel for how much more they're paying on average? And can you just remind us what they're getting for paying that higher amount? And I don't know if you can talk about, this compression maintenance growth to about 4%, what would have been without that? Thanks.

Craig Hayman

James?

James Kidd

Okay. Yes. Sure. Yes. So when we get these opportunities in the pipeline, we are seeing the sales guys, were expecting an upwards of 20% to 25% to convert maintenance contract on subscription. So that's sort of the guidance it goes. And typically, we're achieving that. Not always, but recently are pretty disciplined around that because, yes, it's an important thing to draw us.

Craig Hayman

And, look, I would just add here, Peter, on subscription like -- the difference between buying an album that you love versus subscribing to Apple Music or Spotify, you get a lot more choice and flexibility on the subscription model. So customers they -- it's called Flex, they can buy a subscription, the Flex subscription. They can pick and choose what products they have within that subscription, sort of, envelope and they pay for it based on their consumption, versus a perpetual model where you're paying upfront for the entire life of the product.

In this current climate anything that's saving cost, anything that provides better flexibility that delivers values more quickly is far more interesting to customers than sort of a five-year business cases, for example.

Peter McNally

Thanks very much.

Craig Hayman

Yes. Thanks.

Peter McNally

Thank you.

Craig Hayman

Operator, I think we have to close it there, is that right?

Operator

Yes. Thank you. That was our last question. And I would now like to hand the call back over to Mr. Craig Hayman, the CEO, for closing remarks.

A - Craig Hayman

Well, look, thank you everybody for joining. Thank you for your interest. Our strategy is unchanged, albeit, we are the same company now working differently and as the world has turned again, we think that, for example, in retail, there's been a dramatic shift to -- even more dramatic shift through online purchasing in the last 90 days, which shows the shift of digitalization, even industries that you thought were penetrated with digital can go so much further with digital.

In our industries, we're still underpenetrated with digital technology, digital transformation, and we're still seeing a good demand from our customers, albeit under very difficult macroeconomic conditions. So, thank you for your focus. We appreciate it and we look forward to talking with you soon.