Trimble Inc. (TRMB) Earnings Call Transcript & Summary

Perfect. Well, welcome, everybody. We're pleased here today to have Trimble and Rob Painter, CEO, with us. I'm Meta Marshall. I cover the communication -- or the networking space here at Morgan Stanley. We have a brief disclosure. If you have any question on disclosures, check out morganstanley.com/researchdisclosures or talk to your sales reps.

I was going to save it until the end, but just given the news, just any Russia-Ukraine impact that you wanted to call out as a part of the business, maybe to just kind of level set?

Yes. So just to frame it up, 2% of Trimble revenue is in Russia, Ukraine and Belarus. We stopped selling into Russia and Belarus last week. We've got about 100 people in the -- in between Russia and Ukraine, and that is actually my first consideration, is taking care of the people in both of those markets. So that sizes the business for us.

Got it. Okay. That's helpful. And then maybe just bringing us or level-setting kind of Trimble, I think a lot of investors, just given our conversations on the technology side, are fairly new to Trimble. And we do a lot of kind of level-setting calls. So maybe just start off with a brief overview of the different end markets you serve and how you're able to deliver growth within what would typically be more cyclical areas of the market.

Sure. So I know some of you know us very well and some of you are new faces, would know us less well. We're fundamentally in the business of digitizing some of the largest industries on the planet, namely markets like construction, agriculture and transportation. The underlying technology, the underlying tech stack is really a function of positioning meets precise modeling, meets analytics, driving a value proposition that's better, faster, safer, cheaper. So that's what we're delivering. We happen to deliver them to a set of end markets, and that's how we really think about the go to market at Trimble. Trimble was founded 43 years ago by Charlie Trimble. Fast forward, I'm the third CEO in 43 years. A dramatic change in the landscape and the makeup of the business over that time. We're 55% software and services today, 45% hardware. We exited last year at $1.41 billion in ARR, growing double digit. So this isn't just talk about a model transformation. This isn't just talk about connecting the physical and digital world. We actually do that, connecting our hardware and software, connecting with work in the field and work in the office in pursuit of a mission of transformation.

Got it. I mean since you took over as CEO, you put together a new strategy coined Connect & Scale 2025. Just what was the impetus for that strategy? And what does it entail?

Yes, I'd say over the last -- context-wise, over the last 15 or so years, I think we've built -- put together some of the most compelling capabilities across the end markets that we serve. You fast forward to a couple years ago, and we had been somewhat naturally already on this glide path. This just is an opportunity to accelerate it, which is connecting the assets we have together better. And this is fundamentally customer-driven. Our customers are asking us to help them move from task productivity to system productivity. Our customers have been asking us to make ourselves easier to do business with, which looks like more bundling of the offerings that we have, more single points of contact. I call it less -- more features, fewer products. So simplifying ourselves as we go to market, simplifying the products. And we're seeing the fruits of that. Actually, I look at the bookings. I look at the ARR. We listen to what our customers are telling us, and it gives us conviction that we're heading in the right direction. So that's what the connection looks like. So connect, connect the data, connect the users, connect the stakeholders across these industry life cycles that we serve. I believe we do that, and I believe you're looking at having every share of Trimble you own as a call option on a data company. We manage hundreds of billions of dollars of construction volume in our systems with tens of millions of users. Almost a couple of hundred million acres of farmland use our technology. Millions of assets on the highway use Trimble technology. What is possible as those get better connected, that's the impetus of -- the thesis behind the Connect & Scale is fundamentally about making ourselves easier to do business with so that we can efficiently and effectively grow this business over a long baseline.

Got it. I mean a lot of investors that we talk to look at Trimble through an ESG lens. To us, it seems obvious with all of the efficiencies that you were just talking about bringing to the market. Just what have you seen in terms of the investor base or conversations with investors around the ESG thesis? And what do you think kind of helps frame that story in that way?

Yes. So before I was CEO, I was CFO. Before I was CFO, I grew up through Trimble over the last 16 years and have run a number of businesses, primarily in construction. When I became CFO in 2016, the question I always got is, are you an industrial or are you a tech company? My answer, of course, is yes, to that bias, of course, towards technology. And I think over the last years, call it a space, albeit maybe a narrow space, around industrial tech has emerged that makes us a little bit easier to put into context. We've seen the shareholder base move more tech-centric over the last few years. Now enter ESG. And I say especially with the European investor lens on, I can look at our top 10, top 20 shareholder base and see quite a change in the shift of that investor base. Okay. So here's the good news about Trimble is that this isn't like lipstick on a pig, like we actually do fundamentally good things in the world and in the market. So take a market like agriculture. We optimize yield, in other words, increase the yield of crop because we're putting the seed in the right place. We can minimize the use of herbicide, minimize the use of pesticide through variable rate applications. So we know the digital map prescription for the farm. This is the weak part of the soil, that's the strong part of the soil on the farm. You don't need to blanket-apply. You can precision-apply. We can control the individual nozzles on those implements behind the tractors. In construction, it looks like less rework, less waste. What you design and what you engineer is what you build. Do it right the first time and you drive a fundamental positive increase in sustainability. Transportation, as you optimize routes and optimize networks, less diesel being used. So there's fundamentally positive sustainability benefits. We've gotten better at telling our story. I think we can still be better at telling our story and certainly done a lot more around the reporting side around ESG.

Got it. Another attractive element about Trimble is that you've proven to investors the ability to show significant operating leverage. Just back from your CFO seat almost, how are you balancing where to deliver efficiencies while not sacrificing growth?

So won't be a surprise that I'm a believer in the and. I can't imagine you ever have somebody up here who sees it one way or the other. I think there's a balance to be had. Over a long baseline, we've been a mid- to high-single organic growth -- -digit growth company over a long baseline, about 25% operating leverage over that time frame. So that's always, I'd say, been pretty central to the -- to how we manage the business and think about it. Now we have a 3-4-3 operating model. We think simultaneously about 3 months, 4 quarters, 3 years. So you have to be able to hold a short- and a long-term mentality in mind. And it's that mentality that would -- for us, that would, let's say, take about a model conversion. You don't have $1.41 billion in ARR by saying it. You actually have to work to get it, and we've had to work to convert perpetual software businesses, for example, to this model. There, you don't want to use operating leverage as your primary metric because then you would not do the right thing over the long-term health of the business. So the metrics change over time, especially as you go through these conversions. Now we fast forward as we get more and more of the business to a ratable level, we naturally then think about margin expansion through that. And I would expect that the operating leverage potential in the business is greater than the historic baseline. Look at how much more software we have in the business today, look at the nature of the cumulative subscriber base, it should naturally intrinsically be able to produce margin expansion over time. And so that is how we think about it.

Makes sense. Maybe turning back to just the hardware piece of the business, just given everything going on with supply chain for right now. In Q4, your team noted the decision to take on incremental margin headwinds to just kind of support the demand from customers. Do you think that, that willingness to get customers where they needed to go as quickly as possible and as economically as possible will help kind of award you incremental share?

I do. I mean I think the overwhelmingly important metric as we move forward as a company is customer lifetime value. And so with a customer lifetime value lens, I mean, we think about our strategy is really that of an industry platform strategy, industry cloud strategy, the connection of the hardware and the -- it's not an or, like we think about both of these things. I think that naturally progresses the business and the business model forward. So the growth -- or I should say the -- when I think -- then think about more temporal aspects of what we're seeing with supply chain is we see ourselves more supply-constrained than demand-constrained at the environment. Okay. Proof point, we exited the year at $1.8 billion in backlog, about $400 million of that, rounding up $400 million, is hardware backlog. That's about 4x the level of what we'd normally -- would normally see at any point in time. So there's -- I can see the evidence that we've got a -- it's a supply constraint more than a demand constraint. Part of what we've seen on the challenge of that where we guided to pinch gross margins in the first half of the year and that we think will inflect better in the second half is because we did price-protect the backlog that's in the system. So we made a conscious choice that, that was the right thing to do for the customers in the market. We look at -- from the data we can see around market share, we think we're gaining market share in the businesses. And so think about now the platform and customer lifetime value and that ability to connect hardware, software, office, field. It's in our interest to continue to sell into that environment. And in a way, I guess, I would think of it as a first-world problem. I mean one of the reasons that supply chain has been harder is that we've seen such extraordinary demand in the hardware and more than I'm seeing in competitive hardware growth from others out in the market. So for instance, our hardware business in civil construction and agriculture was up over 30% each in the fourth quarter on a year-over-year basis. That's pretty good. And that's naturally, in a market that's already constrained on supply, going to make it that much harder.

Yes. No. I mean just how do you think about the puts and takes of kind of supply chain and its impact for the remainder of the year? You mentioned, I mean, price-protected backlog, but just in terms of what you're seeing in supply chain and when you expect kind of some impact of loosening there.

I see it more as a 2023 loosening. Where I think we would expect things to look a little better in 2022 is it seems to be a little more predictable at the moment. So predictable doesn't mean good. It could be predictably bad. But we see a little more predictability. We were seeing, last year, more decommits out of nowhere. Those are very disruptive decommits. So now if we know that -- if it's predictably bad, then we can make the choice to respin a board, for example, and we have done that in a number of cases. We'll certainly watch things like freight. With oil going up, you would expect freight to something to pay attention to on either side of the equation, on inbound or outbound.

Okay. Got it. I guess the greater point is that supply chain is obviously a limitation right now, but you're helping customers be more efficient with their resources. And so how has that impacted the demand in your machine guidance business? Obviously, machinery OEMs are seeing tightness. So does that increase the demand to customers to retrofit existing equipment? Or just how are you seeing buying cycles somewhat correlated to new machinery sales?

Well, our fundamental wiring and premise is to serve mixed fleets in the aftermarket. That is how we are architected. So our technology is on thousands of different machine platforms with well over 100 OEMs that we work with across Trimble. So in that respect, I would say, new machine sales from OEMs are, of course, a positive for us because we can still put technology on after the machine has been built. Very few actually have the factory -- fully factory-fit technology. So that is, I'd say, a selling opportunity for us. And I would say primarily, we're selling fully into the aftermarket. And I referenced that growth in the fourth quarter and the businesses and gives us conviction that we're in a really solid place in those markets.

Got it. Commodity prices have obviously been obviously impactful to the business, particularly on the ag side of the business. We're now kind of going in -- we were off from peaks. We're kind of getting back towards peaks. What would you say as farmer confidence continues to grow? Or what are the next waves of technology adoption and precision ag investors -- that investors should be mindful of?

Well, on the commodity price side, certainly corn, soy, now wheat. We've seen the increase in wheat since the Russian invasion of Ukraine. So the net impact of that is that we think of the P&L for a farmer, your revenue minus your input cost. Input costs are also quite a lot, actually, substantially for farmers to equals profit. To give you a North American example, last year was an extraordinary year for farm income in the U.S. This year is expected to be well above the 10-year baseline. So farm income is strong. Farm income strong equals more purchasing power. And whether that purchasing power is going towards technology or equipment, we still see relatively aged equipment from the OEMs, some -- or taking OEM data on that. So there's a, I'd say, a multiyear buying cycle around that. Now if we were to find ourselves flipped into an environment where productivity is challenged -- or sorry, where income is challenged or labor is short, and we're still seeing that, productivity matters more than ever. And that has actually been the secular of Trimble over the long baseline as we've been a secular with a cyclical undertone. I think those who think industrial first before technology tend to see the world through a cycle first. And we see it through a secular first, and that's proved out for us over time that we've sold into multiple different environments.

Got it. Maybe turning to the Building and Infrastructure segment. Are the dynamics the same in the construction machine guidance? Or does a more complete end-to-end portfolio also factor into competitiveness?

Well, the end-to-end absolutely factors into competitiveness. And I just -- sorry, when you're going back to back in meetings all day, you can't remember if you just said something or not. So everything blurs together. I only answered half of your question in agriculture. So -- and -- in agriculture, our primary business historically has been the guidance and automation steering in agriculture. But the next frontier is -- that's a tractor or a combine, when I say that. Think about a tractor, there's something behind a tractor. It's called an implement. And a farmer has, on average, about 6 to 7 different implements. They spray, they spread, they seed. We see variable rate. That's really the next frontier of adoption. We have technology and variable rate. But think of -- there, I think about controlling the individual nozzle on that -- where it's spray, spread, seed. And take -- we make -- we have the digital model, remember that farm prescription, digital prescription. We take it to the field, and we can take it to the tractor, but it's taking that model all the way down to the individual nozzle, that's where we see the growth from a product perspective. Geographically, we've seen our business outside the U.S. grow well ahead of the U.S. growth rate for the last few years. Think Europe, think Australia, think Brazil when I say that. So that's the agriculture business. Now to your question on construction.

We've all done the same thing over the past couple of days. I appreciate it.

I'm like halfway through a sentence, I'm like I have no idea if I just said that or not. So -- and the construction market, historically, we've been very strong on selling point solutions, the connected solutions, more bundled offerings, and we do have now bundled offerings. We have an offering called Trimble Construction One that, in this case, is targeted at general contractor as the persona, where you can buy multiple products in the form of a collection, like that's the Connect & Scale in action because we're connecting the capabilities, we're eliminating friction out of the system, we're giving the customer a better value proposition. We're giving the customer what they're asking us to give them. And we're seeing cross-sell, upsell opportunities within the installed base. We're stronger and better together. We're more differentiated when we bring the capabilities of Trimble together as opposed to selling as many Trimbles. We have a different competitive set than when we sell more as One Trimble. Selling as One Trimble, I would submit that there's no company that has the breadth of capabilities that we do. It's a very different mindset.

Got it. I mean -- and is that -- just to help explain, is that hardware and software together? Is that bundling different products? Just what does that mean kind of bringing it -- bringing the solution set together or a bundled solution?

So it can mean the software bundled together. It can mean software and hardware. We can do both. It's a little bit like a Rubik's cube of capabilities to bring together. So our Trimble Construction One offering, that brings together ERP capabilities. We call that office with field mobility tools with project management, because ultimately, a project management system needs to feed into a job cost system. So that's the ERP. So we sell that as a bundle. Now we have expanded that bundle with Trimble Construction One, which is -- that's primarily for general contractors with the mechanical, electrical, plumbing software, estimating software, design engineering software. That is a better value proposition now that we can take to a new persona and we're seeing that drive revenue forward. What you'll see from us in our construction or civil construction business, which is more guidance on construction equipment, so think autonomy on a motor grader, dozer, excavator. As we're taking that and actually going ratable on some of our hardware businesses -- this is very early days on the hardware, whereas it's not early days on the software, so early days on the hardware with these business models. And once you do that, you have an easier and, I'd say, more compelling ability to bundle the hardware and software, that field and the office software together. And that, I think, provides a basis and a catalyst upon which to grow.

Got it. The promise of a U.S. infrastructure bill and now that infrastructure bill being signed has been exciting for investors, given some of the solutions you have here. Just how do you think about kind of time lines between when you could start to see impact to your demand? That would be helpful.

Okay. Putting aside that we're in this continuing resolution funding thing, which is not especially helpful to, okay, predictability, let me just assume that we'll fund the bill that we have, if I can say that, hey, we would expect to start to see a more meaningful upside in 2023. Now before you build or construct something, you need to survey it, that's our Geospatial business. So we think we could see some positive upside to that later this year. And then we move into next year, and it's a multiyear funding bill. In addition, the bill has some promotion of digital technologies. So our team was successful in helping to lobby and advocate for policies that will promote the use of digital, such that we actually spend this money efficiently and productively, how about that, as a good thing, as taxpayers in the room. We can get more out of the money we spend by deploying the technology. We did an -- sorry, an acquisition recently of a company called AgileAssets. And we think a lot about the state departments of transportation with the infrastructure bill because it's a mix of funding between the feds and the states here.in the U.S., so it's important to have strong connections and capabilities at a state level. Our survey business is in over 45 of the state -- of the 50 state DOTs. Now you get a sense of why we're bringing in more of the capabilities of Trimble into this segment to help go after that infrastructure bill opportunity. I gave you a DOT example, but the infrastructure bill is also targeted towards ports, mass transit, rail, airport, did I say airports, as another -- as other markets.

Got it. You're bringing it all full circle here, helping to -- you're like applying fertilizer in a direct manner to proceed with your making the tax dollars more efficient. So bringing it all together here. I want to make sure not to miss the transportation segment. There's obviously discussion of new competition in the market but you've made it clear that you're razor-focused on growth and necessary improvements being made to kind of return that business to growth. And what are some of the changes that you're making and encouraging signs of improvement there?

Well, on the encouraging sign of improvement is we see the net retention in the business at 100%. We see the bookings growing. We see the bookings overall in the segment have shifted, particularly in the -- we have an ERP business in transportation, and that's moved from entirely perpetual business to where now 80% of the bookings in that business are subscription bookings. So before you have ARR, you got to have a booking. That bleeds eventually into the ARR, so I like what I see on the bookings front. I like what I see on the execution front, the unforced error we made in the telematics side of what we do in transportation was on the U.S. electronic logging device mandate rollout. Totally on us. That has nothing to do with the competitive environment. It's like the strength we had was that incumbent position, and we turned that into a weakness as it turned out to be a very difficult lift to get to -- the customers to where they needed to be. Canada is going with ELD as well. We're the first major technology provider certified in Canada. So I see the execution on the dev side, development side of the business. I see them -- I see the trends heading the right way in the bookings of the business. It's a carrier market right now. And transportation carriers are making money. Now they're so dang busy at the moment that, that is, I think, slowing down a little bit from some technology adoption, but they have -- they are making money, which puts them in a position to be buyers. So I answered more on the indication of where we see that, but those are the things we need to see as we progress the margins forward in the business. Supply chain hit us -- I mean it hit the whole business and hit -- this one had the least room, so to speak, to absorb supply chain dynamics, but that will be temporal. So we got to stay focused, keep our eye on the prize. And I like where the business is heading.

Okay. So I want to see if there are any questions from the audience.

When we think about the end markets that you serve, 5 years from now, where will we be surprised that Trimble has grown so much more in one area than in the others, do you think?

Well, the common thread of the businesses is large global markets underserved and underpenetrated. That's the secular attractiveness of the market. If I look at the end markets we serve, I'd say the construction market would be the one where I'm the most optimistic about the growth potential in that. It's such a large global market. We think about things like an infrastructure bill as catalyst to spend. We see a rising tide where a number of the technology companies out there are continuing to grow, and maybe it's because I also grew up in our construction business, maybe I have a little bias. But that one, I would -- if I'm answering your question, that's where I would see the strongest competitive position we have, the biggest moats.

And then maybe to end with, M&A has always been a part of the story for Trimble. Perhaps across the software universe, we're seeing more attractive valuations this year, and clearly, that's been an area of investment for you guys. Just how do you see M&A as a continuing portion of the strategy? And do you think we're kind of in an environment where we could see that pace pick up as valuations become more reasonable?

So I mean for sure, M&A has been part of our playbook over time. We've acquired over 100 businesses over the last 15 years. I think we've been a good steward of capital in that regard, or we acquire not for the sake of acquiring but actually pursue the strategies, and that's how we built up these capabilities that now this inflection point in the company is to connect those better together. So there's no reason for me to see a fundamental alteration in how we think about acquisitions as part of our capital allocation. We always think about one vector is around geography and the other vector is around capability, which takes us down that path. If you could all help the private markets get the memo on valuations, that might help a little bit because they haven't quite -- maybe they're a quarter behind receiving the memo that I think is in the mail. But I'd say it's not quite there yet. We've delevered quite a lot actually over the last 3 years. We're over 3.5x net debt to EBITDA, and that's well below 1, actually it's at less than half a turn, I think, today where we sit. So we have the balance sheet to deploy. We've got, we think, the position in the market to want to go play ball and pursue from a position of strength.

Perfect. Well, Rob, thank you so much for being here today and sharing the Trimble story.

Thank you.