Trimble Inc.

Thank you for standing by and welcome to the Trimble third quarter 2023 results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Rob Painter, Chief Executive Officer, to begin the conference. Rob, over to you.

Welcome, everyone. Before I get started, our presentation is available on our website, and we ask that you refer to the safe harbor at the back. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which refer to the corresponding period of last year, unless otherwise noted. Simplification, focus, and execution are the themes of today. I'll start with a review of the third quarter, then put a trimble lens on the current market environment we see, followed by an overview of how we are taking action to maintain our strategic and financial progression. Let's begin on slide two with a review of the third quarter. The clear highlights were continued ARR growth and gross margin progression, which translated into EBITDA progression. ARR stands at a record $1.94 billion, up 25% and up 13% organically, 50% of our revenue is now recurring. Gross margin finished at a record 65%, a reflection of our connect and scale strategy translating into a more durable and attractive business model. EBITDA at 28% is also a record. The big strategic news of the quarter was the announcement of our joint venture with AGCO in our agriculture business. Slide 3 reviews our key messages to shareholders. The venture positions us to simplify, focus, and de-risk our business while de-leveraging and returning capital to shareholders. As we discussed on our announcement call, the impact on pro forma 2023 numbers moves Trimble to 72% software and 55% recurring revenue. We are proud to partner with Eric Hansodia and his team at ADCO to be a global leader in mixed fleet smart farming and autonomy solutions. We expect the transaction to close in the first half of next year, and I'd like to say that we are really pleased thus far with the internal and external reaction to our partnerships. In the quarter, we also divested our land folio business, which had approximately $10 million of revenue on a trailing 12-month basis. We have now divested 18 businesses over the last three years in pursuit of simplification and better focus to execute our strategy. Looking at the business with a global macroeconomic lens, we see increasing signs of weakness and stress across many end markets and geographies, exacerbated by interest rates, war, and geopolitical tensions. These factors contribute to our updated view on the fourth quarter, which have embedded bearish and bullish signals. On the bearish side, we see the downturn in residential construction impacting our hardware businesses in both buildings and infrastructure and geospatial. While we see strength in major projects, renewables, and onshoring of manufacturing, we aren't seeing enough earth-moving activity to overcome this dynamic, especially in Europe. In agriculture, within resources and utilities, we see emerging signs of weakness, also notably in Europe. We also expect some choppiness in the numbers as we execute our new distribution strategy in preparation for our AGCO joint venture. In transportation, I think it's safe to say that we are in a down freight market, and we've seen some trucking and technology companies either go out of business or cut back their ambitions significantly. On the bullish side, let's remember that we sell productivity, quality, safety, transparency, and environmental sustainability. This is a secular value proposition. In buildings and infrastructure, software bookings were up more than 30%, demonstrable evidence that the strategy works and that the dollar volume of construction is healthy. Our Trimble Construction One business model framework is delivering results. We are releasing a series of customer persona-based targeted offerings, and our systems enhancements are providing new levels of visibility and insight into our customers. Our machine control as a service offering also exceeded bookings expectations in the quarter. In geospatial, we continue to innovate to drive the replacement cycle, and our new business models contribute to ARR growing at a double-digit rate within the surveying and mapping business. Next week, we will hold our annual Trimble Dimensions Engineering and Construction User Conference, where thousands of industry participants will come together to learn and engage in our latest innovations. In resources and utilities, our non-ag businesses collectively grew ARR double-digits. and transportation, the shakeout industry will, in time, have the appropriate effect of restoring the balance in capacity and demand and bringing more discipline to the competitive landscape. Against this backdrop, we are taking action to protect our financial model, starting with a greater than 40 million run rate cost reduction initiative as we take action to simplify and better focus our company to operate efficiently and effectively. This is in addition to cost containment initiatives that we undertook in the third quarter. We will simplify by reorganizing our operating businesses and bringing corporate resources closer to customers. For example, we have incubated our industry cloud platform work at a corporate level the last couple of years. It's now time to embed that within the business and sharpen capital allocation. We will focus by getting the right leaders in the right seats and scaling back some of our initiatives to enable the core to better deliver short and midterm outcomes. David, over to you.

Thank you, Robin. Let's start on slide four with a review of third quarter results. Third quarter revenue of $957 million was up 8% in total and up 2% organically. Changes in foreign exchange rates increased revenue by 1%, while acquisitions net of divestitures increased revenue by 5%. Subscription and recurring revenue continued to grow at a strong rate. As Rob mentioned a moment ago, the weakening macro environment adversely impacted customer sentiment and demand across all of our hardware and markets. Gross margin in the third quarter was a record 65% of 410 basis points year over year, driven by an increasingly favorable business mix and the ongoing net impact of pricing and reduced input cost inflation. Adjusted EBITDA and operating margins also expanded year over year due to the progression in gross margins and the benefit of cost reduction actions we took early in the quarter. Net income dollars increased by 4%, and earnings per share grew year over year to 68 cents, exceeding the high end of our prior guidance range. We are very pleased with our margin performance in the third quarter, delivering strong bottom line results even in the face of a tougher macroeconomic environment. Turning now to slide five, I'll review in more detail our third quarter revenue trends. On this and the next few pages, I will focus on organic growth rates, excluding the impacts of acquisitions, divestitures, and currency fluctuations. ARR was up 13%, driven in part by strong bookings across our construction software businesses. Our digital platform work is enabling cross-sell of bundled solutions. Our non-recurring revenue streams, including hardware and perpetual software, contracted by 8% year over year and came in below our expectations. The macro environment worsened late in the quarter across many of our hardware end markets, with weakening customer sentiment and propensity to invest. The impact was especially visible in Europe, where macro trends are the most difficult. From a geographic perspective, North American revenues were up 5%, and Europe revenues were down 1%. Moving to slide six, our cash flow from operations was $147 million, with free cash flow of $134 million, both of which are up significantly versus prior year. Our cash flow in the quarter benefited from lower purchases of inventory, lower tax payments, and higher profitability. The working capital dynamics of our business remain strong with negative net working capital. We enter the fourth quarter with $1.6 billion in backlog, inclusive of AG-committed backlog expected to shift before our AG-JV transaction closes. We project that $1.1 billion of our backlog will be recognized as revenue within the next 12 months. We ended the quarter with leverage measured as net debt to EBITDA of 2.9 times, reflecting the repayment of $115 million of net debt during the quarter and repayment of $270 million since the closing of the Transporean acquisition. Note that we are ahead of our timeline to pay down our Transporean debt, with leverage going below three times one quarter ahead of the commitment we made when the deal was announced. Finally, I'll repeat what Rob mentioned earlier. During the quarter, we reached an important milestone with half of our revenue now coming from recurring revenue streams. The formation of our ag JV will further accelerate our business in the direction of majority recurring revenue, making our business both more predictable and more resilient. Let's turn now to slide seven for additional detail on each of our reporting segments. Buildings and infrastructure revenue is up 6%. Revenue growth was strong across our software businesses in this segment. with double-digit year-over-year ARR and revenue increases at eBuilder, Viewpoint, SketchUp, and Tecla. This broad-based growth reflects the success and momentum of our connect and scale strategy, evidenced by growing bookings, especially of larger and broader bundles. Our civil construction business was down year-over-year at a high single-digit rate as the demand environment weakened among dealers and end customers. Geospatial revenue was down 2%, reflecting lower demand across many survey and markets. One bright spot for our geospatial business in the quarter was with our U.S. federal government customers, who continued to place orders well ahead of prior year levels and above our expectations earlier in the year. Resources and utilities revenue was down 4%, reflecting both declining farmer sentiment and the impact of our distribution network changes. Revenue declines were most pronounced in Europe, which makes up the largest portion of our ag hardware business. Partially offsetting the weakness in hardware demand, we experienced double-digit segment ARR growth in positioning services, forestry, and city works. Financial results in our transportation segment showed progression in a number of areas. Organic ARR was up at a mid-single-digit rate and margins expanded for the seventh quarter in a row. On the other hand, our mobility business in North America has not seen the uptick in bookings that we originally expected. With planned churn notifications in the quarter, Our transportation segment ARR momentum will moderate going into next year. Transporium top-line trends remain below our expectations when we bought the business, driven almost entirely by a contraction in overall industry shipment volumes and a depressed spot market. Importantly, we have maintained our customers and our market share, and with our transaction-based recurring model, we are positioned to recover with an improvement in the overall European goods economy when the inevitable upswing takes place. The Transporium team has managed costs well in this tough environment, and our operating margins since the deal closed remain in line with our original expectations. Moving to slide eight, I will now discuss our guidance for the fourth quarter and the full year. Our third quarter results reflect a weakening demand environment. We expect this weakness to extend through the fourth quarter and into next year. We now project fourth quarter revenue between $890 and $930 million. Our fourth quarter outlook reflects 13% growth in ARR offset by a decline in our hardware and perpetual software at a low to mid single digit rate. This yields a full year revenue outlook of 3.76 to 3.80 billion. A significant majority of the reduction in revenue outlook is in our hardware businesses with the biggest impact in civil construction hardware. For perspective, it is helpful to look back to the pre-COVID period to determine the underlying long-term trends of our hardware businesses. All three of our core hardware businesses, geospatial, agriculture, and civil construction, have grown at a compound rate of mid-single digit or better since 2019, and our fourth quarter guidance reflects a continuation of this long-term trend. We project that the combined impact of higher gross margins and lower operating expense versus our prior outlook will offset much of the impact of our lower revenue forecast, resulting in an EPS range for the fourth quarter of $0.55 to $0.63. Our updated full-year guidance for EPS is $2.58 to $2.66. Fourth quarter operating margins are projected to be in the range of 24.5% to 25%, a meaningful improvement from year-ago levels, but sequentially down from the third quarter, driven primarily by mix. Within the overall outlook for the fourth quarter, we anticipate the following segment trends. Buildings and infrastructure will remain our strongest segment, with organic revenue in the quarter accelerating from third quarter levels to the mid to high single digits. Even in the current macro environment, we see strong demand for our software offerings, while our hardware businesses are expected to be down at a mid-single digit rate. Geospatial segment revenues are expected to be down at a low to mid-single-digit rate in the fourth quarter. Gradual improvement across some areas of our core field survey business will be offset by lower sales in the fourth quarter to the U.S. federal government. Geospatial margins in the fourth quarter will come down sequentially from third-quarter levels due to a less favorable business mix. Resources and utilities revenue are expected to be flat to down at a low single-digit rate. This fourth quarter outlook reflects both the adverse overall demand environment and the impact of our ongoing aftermarket dealer network transition. ARR growth in the segment will remain at a strong double-digit level. Transportation segment revenues will be flat or down modestly as the impact of higher customer churn in our North American mobility business offsets the growth across the rest of our transportation This outlook assumes no meaningful improvement in Transporean's core European transportation market in the fourth quarter. From a cash flow perspective, we expect full-year 2023 free cash flow in the range of $530 million to $555 million. Excluding the impact of full-year transaction-related and restructuring-related cash outflows of approximately $100 million, this outlook represents free cash flow of approximately one times net income. With our strong year-to-date cash flow performance and with contractual certainty on the upcoming close of our AGJD transaction, we plan to reinitiate share repurchases in the fourth quarter. Consistent with past practice, we plan to issue guidance for 2024 at our fourth quarter earnings release in February. At this point, our outlook for next year can be characterized threefold. First, we expect that organic revenue growth trends will be better than those we posed this year. as our hardware businesses stabilize following the declines of 2023, and as recurring revenue sources make up a growing proportion of our total revenue base. Second, we believe ARR will continue to grow at a double-digit rate. Even in the context of a tough macro environment, our bookings and net retention performance continue to support this outlook. Third, with the cost reduction actions we are taking, we expect to hold or improve EBITDA margins, even with the impact of the close of our AGCO deal. This outlook leaves us on track to achieve the EBITDA margin goals we put forward in our investor day last year. Rob, I'll turn it back over to you.