Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Good morning. This is Ann Duignan, JPMorgan's U.S. machinery analyst, and I'm very pleased this morning to have Robert Painter, the President and the CEO of Trimble, with me for you to ask questions of. Trimble, ticker TRMB, market cap $9.3 billion, the stock's trading at about 19x forward earnings for 2021. It's down about 11% year-to-date, but notably, the stock is up 40% since March 23, and it's up 16% since reporting better-than-expected Q1 earnings last week. I just want to remind you, before we get going, that you can submit questions on the Q&A, I'll keep those in front of me and we can ask them as we go forward.

And so Robert, let's begin. Let's recap last week, what happened there, Q1 non-GAAP EPS of $0.49 versus your own guidance of $0.40 to $0.45 and consensus at the low end of $0.41, those on organic growth of down 2% within your guidance range of flat to down 4%. So maybe you can walk us through what -- where the upside was? Where some of the challenges were for Q1?

Sure. Thanks, Ann, and good morning, everyone who's joined. From a -- I'll say, an outperformance perspective, a couple of places to look. First at a segment level, our Resources and Utilities business outperformed to our expectations during the quarter. We saw that -- we did see it at North America, but we actually saw it also on a global basis. Overall, there was an early planting season, which we do believe was a bit of the catalyst for the outperform. But we also had success in some of the new product introductions we've had from the agriculture team. The other pull forward is the planting season started earlier is our Correction Services business. Also a pull forward along with that as the majority of our customers are farmers within that business. At an overall company level, the -- one of the favorable drivers was the overall revenue mix, and it was more of a software-oriented revenue mix. We saw gross margins expand 110 basis points year-over-year on the back of the favorable revenue mix, plus the new product introductions on the hardware side actually also came in with higher margins. So if you translate the top line numbers down to the EPS feed, revenue mix driving gross margins was a catalyst and then the other half of the equation was in the operating expense management. In other words, expenses being lower in the quarter than we had projected. So that's the backdrop of the Q1. And you're on mute, Ann.

Thank you. And you can't unmute unless you close the Q&A button, so sorry about that. Learning as we go here. So maybe digging into the Resource and Utilities business a little bit. You were deemphasizing U.S. agriculture a little bit over the last few years. So maybe talk a little bit about what specifically did the team do that drove the beat in the quarter? And then talk a little bit about Correction Services and how important is that in agriculture? And how sustainable was first quarter that was driven by early planting? Was that just seasonally strong, not to be repeated until this time next year? Thank you.

Sure. Well, so over the last few years, we've certainly seen the U.S. ag market be more challenged than other markets. If I take a multiyear backdrop, in fact, we used to be a -- or our ag business used to be majority in North America and it's now a minority North America. Europe is actually our biggest market now when we include CIS in that definition actually as well as Russia. And so what we've seen, the dynamics, a few as follows: one, if I go actually South America, Brazil has certainly been a large amount of growth for us and for other players in the markets. So Brazil is a strong growing market for us on a multiyear basis. It can, of course, change year-to-year. But over a long baseline, it has become a much more important part of our geographic portfolio in agriculture. We saw in Europe, a dynamic you'll see there is higher rates of subsidies for farmers. And so there tends to be less variability in the -- at least in the, say, the technology-demand side of the equation because there's more certainty in the farm income. We've seen areas like Russia invested more in technology as food security became a bigger topic for them over the last 2 years, some of which was on the heels of sanctions. And so there's a little bit of the aspect of follow the money, where is -- where are the opportunities as they differentially became outside the U.S. We stood up our go-to-market efforts and then actually as well as at a product innovation level, really trying to optimize products for given markets. And these have been positive catalysts for us. On the new -- on the product side, we continue to -- we're best known for the guidance technology we have in agriculture. But we do much more. We do water management. We do -- we launched, as you know, WeedSeeker 2 to do a spot spray to reduce the use of herbicides on the farms. So there's a number of new products that -- also that have been doing well in the business that have been a catalyst, which at some level has been an offset for the negative dynamic in North America. Now it remains to be seen what happens. Now that there's been a -- the trade, let's say, agreement signed with China. The question remains what kind of teeth will be in it and what will actually happen on the purchasing side? And there, I would say, okay, let's see, to be determined. To comment on the Correction Services business, there certainly is an aspect of a seasonality to it. We allow most of our customers to turn those subscriptions off when they're not in their busy season. But we do also serve surveyors, and contractors are the customers for us. And that same business is actually what's providing lane detection capabilities in the automotive space. And so actually one of the press releases we put out just before earnings was showing how we now are covering 5 million square miles. So we've got contiguous U.S. covered, Southern Canada, most of Europe with the Correction Services. And that is something that's a value not only to our, let's say, industrial-centric customers, but it is creating business opportunities for us in the automotive space as the automotives, I'd say, move towards autonomy. And by moving towards autonomy in this case, lane detection is probably the best use case example. So that's a really big achievement for our team to have increased that coverage, and so we are optimistic that we'll see good things continue in that business.

So Robert, would you expect the performance, the Q1 performance, to be sustained through the rest of the year? I believe we had organic growth in Resources and Utilities up 7% and very solid margins. Is that sustainable? Or should we anticipate that there's a bit of seasonality there?

We definitely anticipate some seasonality, and so Q1 has always -- historically, has always been our biggest quarter, which makes sense given the concentration, Northern Hemisphere, and where planting season -- or when planting season happens. So that's definitely, and then we've seen as we've grown our Brazil business over the years, now we start to see a third quarter that also starts to look bigger than it used to historically as we have a couple of planting seasons in Brazil. So we definitely expect that to have been the best quarter we have this year. And in fact, from a second quarter perspective, a couple other comments we made on the call is that we expect revenue in all of our reporting segments to be down in the second quarter, so including Resources and Utilities, and that would reflect a bit of the forward buy that we believe we saw from the early planting season as well as just the general dynamics of the economy right now. So that -- and then from a margin perspective, we've historically, seen the pattern of Q1 being the highest op margins, which again correlates to the planting season and the additional revenue and leverage one would achieve on that. We were a couple of hundred bps higher this year, I'd say, than normal. We would normally see maybe 300 bps decline in op margins, Q1 to Q2 sequentially, and that would be a minimum baseline, but likely, actually a bit more as we come into Q2. And maybe last comment on that, Ann, is within the 4 reporting segments, while we said we expected all of them to be down on a relative basis, Resources and Utilities to be the least down of the 4, and just to bookend it, Geospatial expected to be the most down.

Great. Thanks, Robert. And then if we look at the other end of the scale, I would say that the operating margin in Transportation came in a bit weaker than we were anticipating. Maybe you could update us on what happened there? And what's your outlook for the Transportation business for the remainder of the year? Obviously, you're not giving guidance, but from a margin perspective?

Sure. So we would expect a tough couple of quarters ahead of us in the Transportation business. We thought that coming into the year that the first half of the year would be more challenged from a margin perspective. We made an acquisition, it's a dilutive acquisition, but we believe a very important strategic acquisition of a business at the beginning of the year that takes us to the shipper side of the equation. So we want to connect and transform the Transportation supply chain. Our strength is -- sort of strength is with the carriers, and we believe to drive the transformation, we need the, I'll say, the relationships and the critical mass on the shipper side of the equation. So we made that acquisition not as dilutive, that means that we're spending more than we have revenue coming in. And if you kind of just look at the math on the decrementals, given the drop in the revenue that we saw in particular -- that we saw in the segment in the quarter, that was -- that had that sort of double extra, if I could call it that, negative impact at the bottom line. From a -- if I call it a macro perspective, this is what we can control and what we can't control. From what we can control, I have talked on previous calls about the work we've been doing on the ELD or Electronic Logging Device mandate to get the product to where our customers expect it to be, and I'm pleased with the progress the team made in the quarter. So we're definitely making good progress on that front. And we saw the churn at the end of the quarter markedly less than at the very beginning of the year. Again, I call that in our control and I think we're headed in the right path, but we'll see the -- we're seeing the impact of that to some extent. And then at the macro level, actually, I follow your research and the transportation market is in a tough spot in North America at the moment. So we see Class 8 new units are down on what the sharpest drops we've seen in history or certain history since when the data has been collected. We see spot market rates have dropped as well as inventories. And so we saw -- in the first quarter, we saw some aspects were strong, such as, let's not be surprised, let's say, food, retail, some of the e-commerce and then capital goods, let's say, stopped. There weren't cars moving or anything related to the energy market significantly slowed down. So we see a tough macroeconomic backdrop that we think will challenge margins and growth the next couple of quarters, and remain convicted that we've got the right strategy and we're going to continue to invest in this business because we see -- that we see a bright future for what we're doing. So I don't want to stop the progress and the development and the innovation, and the team are really driving more of the connectivity we have not only within carriers, but now that we have the shipper side of the equation. And we did see over 12,000 new trucks get added to the Kuebix, which is the business we acquired to that platform, which is really leveraging the strength we have with the carriers, now wanting to join the shipper networks. That's one of the proof points we'll be looking at to see if our base of over 1 million carrier assets will -- and how many of those will migrate into the Kuebix platform. So I wouldn't expect it by -- the last thing, I guess, I'll say on that is I wouldn't expect it to be as low as Q1 on an ongoing basis and this hardly represents the ambition level that we have for the business.

Great. Thank you. And then let's talk about April, what you experienced in April across the different businesses, let's open it up. What are you beginning to see? What changes are you seeing in construction and also in geospatial? And maybe we'll come up through all 4 businesses. But how did April look, and how does it look now that we are May 12?

Yes. So I'll start by giving you Q1 context on that. So we talked about on the call that we saw January and February up 8%. And so that we started out, at the beginning of the first couple of months of the year, quite strong. I would say that on an absolute basis. And then, March, we said was down 15%. And then you can split March even, really, into the first half of March, second half of March depending on where we were around the world. But that 15% drop, we would have been, of course, more in the back half of March to net to 15% and become a strength of the January, February when we were able to hit the mid of the, really, right at the mid of the guide that we had put forward. The experience at the end of March, I would say, has largely played through into April. So April has been a difficult month, as you can imagine, as so many economies have been shut down, obviously, on the heels of the public health crisis. Now what we've seen in the ARR-centric businesses, which now represent 1/3 of Trimble, is we did say on the call that we expect that to be up in the second quarter in the low single digits, nevertheless, to be up. And so there's certainly resilience to the business model there. The -- what we see in the hardware businesses, and I'd actually say the same thing in the perpetual software businesses is the new bookings have taken a significant drop at the end of March and then through April. So it's hard to say that April actually showed big rays of light. There are certainly some of the businesses that did better than we expect in April, and then there's others that did, I'd say, equally as poor as we expected April to be. And we really feel like if we look at the second quarter, this is what -- one of the many reasons why we didn't want to guide for the second quarter is we think June is -- will be the kind of the make or break and really tell us the path of where things are going. We're starting to see economies open up. We've certainly seen some of the China business come back. So even though China is less than 2% of our revenue, we have seen business coming back there. We've seen business starting to come back in the Nordics. And so we track it market by market. So there's some optimism in the second half of May that we would start to see the businesses come back online. And then really June will be the kind of more important month -- most important month of the quarter.

Yes, Robert, if you were to rank order -- where you're sitting right now, if you were to rank order the 4 segments, how would you rank order them in terms of the ones you would expect to come back first and the ones you'd expect to lag?

Yes. It's a good question. It's a difficult one because there are so many potential puts and takes inside of that and so maybe I can sort of blur some commentary on that one. I mean certainly, in the very short term, the agriculture business, the Resources and Utilities has shown the performance in Q1, and as I said, to be the one we expect to do the, I'll say, the best in the second quarter. As you know, the agriculture markets arguably have been challenged here for a couple of years anyway. So whenever I've been in a conversation around are we at a cyclical peak of construction or other markets, I'd say, well, we can have that conversation but if we're saying -- if we're implying we've been in a cyclical high in agriculture, I would reject that as a trend of where we've been. So -- and maybe it's not the most virtuous way to be the -- an outperform is coming from a lower baseline. So there is -- a floor may be the wrong -- may be not the exact word I'm looking for, but something in the neighborhood of a floor in agriculture that, at least, to treat here in the near term has us putting that -- would have me putting that higher on the list. And that correlation with our Correction Services is certainly an important one. Actually, our Utilities business, which is -- we never talk about the Utilities business within Resources and Utilities. We see Utilities and local governments having a differential ability to spend in this environment, maybe even more so the Utilities. And so I think, overall, that segment, I would look to see resiliency in that. If there's a downside, I would look to -- look at in that in the -- particularly in the agricultural world, we're certainly paying attention to what actually happened -- actually happens with trade with China as well as what happens on the ethanol price side and what is that -- how does that impact play out into the commodity prices on the cane -- sugarcane and on the corn -- well, maybe corn more specifically. And then from -- if we take the walk from there, I would next look positively to our construction business and this certainly has puts and takes to it. But our construction business is now, majority, a software business. What we're doing are mission-critical applications and so we're confident that we wouldn't see -- that's a meaningful churn. But to the extent we would see churn in a business, it's really more nature of if customers were going out of business. Of course, that would be bad for us, it'd be bad for the whole economy. But from a competitive standpoint, we feel confident about the franchise, the business model has helps to it. And I will say there is clearly still a meaningful amount of hardware when we look at our civil construction business. And I think Infrastructure is going to be one of the interesting -- maybe the interesting thing to watch here. Clearly, an infrastructure bill would be a catalyst, and that's stating the obvious. We saw HS2 was approved to move forward. The Chinese have talked about really a pretty extraordinary amount of infrastructure. And then, I would say, at the moment, depending on which day or which article you read, you can have a case for optimism in the U.S. or a case for gridlock and not being able to see our way through it. So I'd be, net, optimistic. If there was ever a time to do something more meaningful at infrastructure, now would feel like that moment. But obviously, we don't have any funding passed. We also need to look closely at the state tax revenue base. So clearly, tax coffers are being depleted. Highway Trust Fund and gas taxes are down markedly. And so we'll need to understand what does that mean. At the current time, we actually still see the backlog that construction companies had. It's the backlog they had coming into the year. We see companies start to think about what does 2021 hold in store for them in terms of backlog, and that's where clarity on state tax revenue. I think infrastructure will be something we pay a lot of attention to, to understand the barometer of where sentiment goes. If I take the walk next, then, to Transportation, I do, as -- just then as you asked and as I mentioned, I do think we've got a couple of challenging quarters ahead of us on the macro side. And then from there, I think that -- I would like to think that -- we would like to think that there's really more upside from there once we hit the bottom that can now work getting back into growth, and we think we've got a differential value proposition. We just see transportation as a market where we could see some competitive shakeout with balance sheets that can't survive the economics of the moment. And so from a competitive standpoint, actually, of all the markets, I could see that one having the most shakeout given how much capital seems to have come into that market in the last few years. And then if I look at the Geospatial side, well, I'm very positive about the new products that have come out in the business and resilient margins the operators hold up in the segment in the first quarter. If I look at the demand side of the equation, we'd certainly be looking at the aspect of the business that's exposed -- has exposure to oil and gas. And I think that would be a fair -- probably a reasonable, a fair, if not obvious, assumption to expect some ongoing challenges in the oil market. And when we look at a market like oil and gas, you could look at new wellhead development and that I would expect to be well down. Now pipeline work, much of that is in progress work and so we would expect to continue. New pipeline development could be another topic. But we also have a business that's measuring the storage tanks, both for capacity as well as for safety. So you pivot to find where the business is even within a sub-segment of a market like oil and gas. So hopefully, that gives you a little bit of a walk through, obviously, of where you'd like to...

Yes. I do think it's interesting on the agricultural side that it's more -- we were closer to trough coming into this, and so there isn't as much downside risk versus in construction, we came into this crisis more or less at the peak. So -- and Transportation also may be beginning to suffer. But ag, the good news is things were bad already, so they're probably not getting too much worse. So I think that is interesting. I want to move on because I still have a lot of questions. One of the big questions that I get, obviously, when I'm talking to investors is they want to know what's different this cycle? How is Trimble different? How do you assure us that you're not the same old cyclical company you were in prior downturns? So maybe you can just address that right up front.

Of course. So yes, let's look at the data and let's compare it to the financial crisis. And this has been quite instructive for us in our own scenario planning as you can imagine. We've run every scenario you can imagine of what will happen in the economy. So let's look at the facts. In 2008, Trimble had 11% software, 89% hardware. So 11% overall software services recurring today on a TTM basis, that's at 57%. So 11% became 57%. If we look at the recurring revenue for Trimble, we use to have 10% -- in 2008, we had 10% recurring revenue. So that ARR, annualized recurring revenue I talked about, today, we sit at 35% recurring with over $1.1 billion of ARR on the books that was -- that's been -- was growing still coming into the first quarter and we expect to grow into the second quarter. So fundamentally different to have that level of visibility. If we look at the reporting segments, we used have 47% of our revenue come from our Geospatial division and I just mentioned that as the one that we would expect to have the lowest growth through this period. That's now 19% of Trimble revenue. The biggest growth we've had would be in the Buildings and Infrastructure space. So it was 21% -- 21% of revenue in 2008 is now almost 40% of revenue on a TTM basis. And then, actually, even with the end markets, so if I take a market like agriculture, as we were talking about earlier, we used to be almost 60% North America revenue; and today, that's below 40% of the revenue, closer to 1/3 of the revenue. So more attractive end market diversification, more attractive geographic diversification and maybe #1 on the list would be that certainly the business model transformation of the company over the last years. And I think that sum of those create a resilience, it certainly creates a different Trimble as it relates to working through economic cycles. There are cycles and there are cycles, what we're in is a whole different game with the pandemic. And we believe we've got the resilience to come through it. Just maybe to connect the dots on the liquidity side. We don't expect to have any debt due until 2022. So we were able to negotiate to push out maturities. So we sit with a staggered, say, level of debt maturities that put us in a good -- the balance sheet is in a good position. Our access to revolver and credit is in a strong position. And so one of the mantras we had as we came into this thing, and I sincerely believe this, is position ourselves to come out of this on a stronger relative footing than we entered this, and it's one of the reasons we're continuing to invest in R&D and innovation in the business. We haven't stopped. We look to do things like push harder towards converting models to subscription. I think now more than ever is the time to do it, and we have the balance sheet to help us make that happen.

Great. And I want to talk a little bit about the longer term. On the fourth quarter conference call, you introduced Connect & Scale for 2025. Can you talk about your longer-term vision and what it is you want to -- where you want to take this business from where it is today? Maybe a number of different brands, a number of different end markets or customers that you serve. What is your vision for the business as we look out to 2025?

Sure. So I'll emphasize more the Connect side of the Connect & Scale 2025. First was when we talk about 2025, I wanted us to be less constrained to the short term. I also wanted us to be able to -- as we talk to, as we start to put more meat on the structure of the vision, to be able to play this eventually through to the financial model to share with the investment community as I think it could be hard to do in a 1-year or 3-year context, particularly when you have business model conversions going on. So one of the questions I was asked most after the last Investor Day we did in 2018 was wanting to see what's the other side of this look like as you make it through the conversions? And I think it's hard to do that if you don't have the right time frame. So I think 2025 feels like the right time frame to be able to see more of the other side of business model conversions. But the Connect is -- so that's the reason for the 2025. And then the Connect part of the equation, we've always -- our mission at Trimble is to transform the way the world works. And our vision is to deliver products and services and connect the physical and the digital worlds. So this connection, the connection of the physical, the digital, that's the hardware and the software. That's the office and the field. We believe the hardware actually is essential to much of the strategy we have at Trimble. It's one of the things that makes us so unique is this ability to have connectivity from the office to the field in that physical, in that digital. So we want to connect the industry life cycles we serve. So we talk about Connected Construction, a Connected Farm, connected utilities, we talk about connected supply chain. So really connecting data, connecting workflows, connecting stakeholders is really a central part of the strategy we have here in the next years. Part of that, as you move towards the connectivity, you naturally move, in our view, towards transforming the business models. So I talk a lot about subscription business models, I talk about bundling of the technology we have. So we bundle multiple software packages together out. We bundle the software and the hardware, which remove friction from the buying process when you transact with Trimble. And so the business model conversions driving the connectivity and interoperability. And we also believe there's a really interesting data strategy that we have the opportunity to execute upon. And so to execute upon a data strategy, we need to unlock the data from that on-prem computer or from that infield machine to bring that data back into the cloud. We believe that the business model conversion to subscription is a catalyst to change the nature of the model, to change where the data actually is stored and managed. Obviously, it's the customer's data, so I mean all this with permission from the customers to utilize the data. And so we actually think there are some really interesting things there for us in the kind of whole data AI side, and that's one of the areas where we're continuing to differentially invest our R&D at the moment and our cloud tools and then building a data and AI, have our areas where we're quite committed to continuing to invest. So the Connect side is a very important part of the equation. And I'll just briefly say on the Scale side of Connect & Scale 2025, the Scale causes us to rethink some of the underlying plumbing of the business. So that looks like looking at the systems and the processes, things that can allow customers to do more self-provisioning makes it easier to actually transact with us. That's where we'll differentially spend on the CapEx in the business, and we've been doing that, but we'll continue to do that as to get the plumbing right such that we can scale and scale profitably and generate that operating leverage. So we need to -- I mean we see -- I mean hey, we're in the business of digitally transforming the companies and the industries that we serve. In fairness, we've got our own digital transformation that we need to continue to go on. So those are the main building blocks of Connect & Scale 2025.

Maybe for somebody who's not as familiar with Trimble, maybe you could give an example of connectivity in construction or in agriculture, just something visual that we could look to?

So I'll give an agriculture example. If you -- most people, again, would know us for our guidance technology, but we also have farm software. So think about an operating system for the farm. That farm that needs to be able to manage the materials, the inputs and manage the implements. That's what's standing behind the tractor, the sprays, the spread, the seeds. And so the management of that we do with Trimble software. And then we talked about the Correction Services, so you can get that 1-, 2-centimeter accuracy, which is ubiquitous and fast convergence level, so that the farmer can optimize the yield and reduce the overlap and therefore reduce input costs. Today, generally, you're buying those from 3 separate transactions from us at Trimble and we see the opportunity to buy it in 1 transaction. That's removing friction and simplifying how we do business with our customers. In the construction...

I think we're probably going to get cut off any moment, but keep going while...

Okay. So in the construction world, so it's -- what we're doing with our Viewpoint business, which is the ERP system for the construction company and connecting that with the field workflow data. So we see what's happening with machines. We see what's happening with the workers in the field and that's really profoundly helpful to how you manage that overall cost and schedule. So the connectivity, the data and the workflows. I'm trying to wrap that up.

Very good. I think we're almost out of time. But if we've got 30 seconds left, so you've been CEO for 6 months. What's the biggest thing you've learned in your 6 months?

Well, so I was CFO for a few years before this, so I already had confidence in the secular attractiveness of the business and the uniqueness of our strategy and the quality of the people. What I see different being in the CEO role, certainly, I see more of the importance of the communication and the tone from the top, both the verbal and nonverbal communication within the organization. And I'd say the other one I see is around managing priorities and being really clear of what the critical view are and whether that's a real or perceived aspect is, but being willing to let more things go and stay focused on the critical things that matter in the context of Connect & Scale 2025 and really just staying laser-focused on that and letting more probably things around the periphery go, which is maybe not always natural for me.

Yes. I can appreciate the difference in the job requirements. It is quite different. Well, we still are live, so we'll keep going. We saw in Europe recently one of our electrical equipment companies that manufactures components for nonresidential buildings, Schneider. They acquired a BIM company called RIB and they own more than 40% of AVEVA. Do you see that as a threat or a validation that this is an industry that people are really going to invest in and they share your vision for the digitization and just changing the way the business is done in the construction industry?

I'd say probably a neutral to a positive. Positive in the sense of a rising tide if there's more and more, I'll say, resonance...

The session is over. End of broadcast.