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Trimble Navigation Limited (NASDAQ:TRMB)

Needham Annual Growth Conference

January 11, 2012 8:40 am ET


Steve Berglund – Chief Executive Officer


Good morning. We’re going to kick off the next presentation now, and we’re happy to have the management of Trimble with us. CEO Steve Berglund will be telling the story.

Steve Berglund

Good morning. Giving a brief description of some elements of Trimble here just to get us started, we are a worldwide organization. We have people in 30 countries, roughly 5,500 employees scattered across 30 countries. We have consciously over the last five years built out our international capabilities, so we have places in all the normal places. We now have approximately 400 employees in India, a few hundred in China, and with development capabilities really pretty much across the world. We may be relatively unique in being the only Silicon Valley—or one of two Silicon Valley companies that have offices, for example, in Nairobi and Kenya. We view Africa as being a legitimate long-term growth market for us because of the infrastructure requirements of the continent. Recently opened physical facilities in Brazil to take advantage of the Brazilian market, which has been a long-term market for us.

Financial performance – this reflects revenue over a long baseline. We clearly took a hit in 2009 and 2010. 2010 was a year of recovery for us. As you can see, we lost 15% of revenue in 2009, recovered most of it back in 2010, and this year, year-to-date have grown at 26% so we’re having a strong year this year and expect to take most of that momentum into next year.

So five-year growth 2003 to 2008, that did establish the baseline was 20% a year, and actually if you took the long baseline – 1999 through 2008 – it was almost 20% compound over that entire time period. So we have returned to what would appear to be the baseline that we’ve established over time.

This is non-GAAP operating earnings. Primarily non-GAAP takes out the intangible amortization, so it reflects underlying baseline cash flow; and as you can see, very much the same trend – over time profitability growing more rapidly than revenue and with a tough, tough hit in 2009, recovery in 2010 and a good year in 2011. No surprise, earnings per share – this is again non-GAAP earnings per share – follows very much the same trend.

This is a bit of an eye chart relative to the segment breakdown. We report in four segments. Engineering construction is focused on survey and construction products. It constitutes roughly 50% of the Company’s. It moves around a little bit, but at this point in time it’s 50% of the Company. That percentage has tended to drift down over time. It used to be much more dominant within the Company. As you can see, it had a strong five-year growth profile. That changed in 2009, but strong recovery in 2010 and that recovery is continuing into 2011. Margin performance – it has structured the capabilities of being a 20% or better operating margin business. We haven’t gotten fully back to that point in time but we’re taking steps to get there.

Field solutions has been maybe the most dynamic business within the Company over the last five years. It has two pieces. It has agriculture and it has geographic information systems. It constitutes roughly a quarter of the Company, strong long-term growth profile that we expect to continue into 2012, and very strong margin performance. I’ll revisit this in a bit.

One of the, I’d say, question marks associated with Trimble has been in the third segment – mobile solutions. We have not been particularly brilliant in our execution in this segment. We still believe that there is a major long-term opportunity in this segment; so as you can see, there has been nominal growth. This has been a matter of acquisition as much as anything else. We are seeing both organic and acquisition-led growth in 2011, and we have seen—let’s call it overall for the year, the margin performance won’t be all that attractive, but in the third quarter, basically a quarter ahead of our schedule, we produced an operating margin of 5.5% and we’re being comparatively visible and comparatively vocal on saying this is on an upward track at this point in time and expect to reflect that during 2012.

Advanced devices is largely a components business. Not a business that has a whole lot of strategic upside, so we don’t tend to put a lot of emphasis on that. It’s more of an historical legacy – interesting, but an historical legacy.

Overall for the Company, you can see that from 2010 to 2011, we’ve added about a point of margin expansion and are stepping our way back to a number more like 20%.

Trying to step back and talk about, okay, what is Trimble and how does Trimble create value, with an emphasis on revenue and an emphasis on, okay, how do we enhance margins? So the fundamentals of our revenue growth strategy are, first of all, market penetration. Almost none of our markets are fully penetrated at this point in time. None has reached the point of saturation, with a couple of exceptions that account for a small minority of the Company. So within market definitions we have today, we still have significant market penetration available to us.

In addition, we have a significant opportunity, whether it be in construction or agriculture or surveying or some of these other vertical markets we’re in, we have the opportunity to extend the offering that we’re providing our existing customers. So if you looked at heavy and highway, for example, you would find many of the product categories that are being sold today did not exist five years ago, and so what—the process is basically asking ourselves every day relative to existing customers, what can we invent for our customers that would provide benefit? We know their needs, we have a distribution channel, we have brand—leveraging those, and that has been a very successful element of the strategy for us.

International markets – to repeat the obvious, many of the emerging markets represent perhaps the—provide a relatively large opportunity, in some cases even from a dollar standpoint represent large opportunity, so we are very well represented in the classic BRIC countries, as well as building presence in emerging countries like Vietnam, all of which are going to develop a great deal of infrastructure. We can play into this infrastructure development that they’re undertaking.

And then finally, we have identified a number of what we’d call emerging markets, emerging product categories where we believe that we can walk into some of these industries that are underserved by technology and provide them with a technological replacement to traditional methods of doing things.

As far as margin expansion, we do it through value-add. Over the last five years or so since 2006, we have added 3.4 gross margin points to the Company; so if you track the Company over time, what you see is a gradual drift up of gross margin over that time, and that represents the value-add we’re bringing to the marketplace which comes from a switch from more horizontally-oriented product categories to emphasis on vertical markets where we believe we can define a value equation specific to a market and create defensible barriers to entry and to create a value proposition that’s tied to that individual market. A general move from sensors to solutions, and that includes a great deal more software content; but as a result of this effort, we are seeing our overall gross margin increase as a company, and I think that reflects the growing value-add we’re bringing to our customer sets.

Now down below represents maybe crudely the evolution of Trimble over the last 12, 13 years. Current management generation started in 1999, and in 1999 Trimble was very much of a GPS company. We have progressively redefined ourselves, started talking about a more generic positioning company than productivity, and today I would say our real task is to walk into applications, whether it be in construction, whether it be in agriculture, whether it be in forestry, and look at the work process and ask ourselves the question, how can we use technology to fundamentally change the traditional method of working? So the integrated work process for a mobile or field worker really is at the center of what we do, but along the way is by this redefinition, we’ve expanded the size of our addressable market by probably 10 times over that time, so creating more space to occupy.

This is reflected in the technology. At one time, we were known as being a GPS company. Our technology base has diversified significantly since that time, become much broader. We see our realms technology being in positioning, whether it be GPS or whether it be optical or whether it be inertial, or whether it’s utilizing new techniques, using visualization, using images to determine spatial relationship. To communications, most of what we do is moving data within a construction site, say from point to point there or between a remote site and a back office somewhere. And in information, we have become very much more of a software company over time. Down at the bottom, you can see that 64% of our technical workforce is actually devoted to software, not hardware, which is very much of a different picture than it would have been 10 years ago, so we are, I guess, statistically more of a software company that we are anything. But the emphasis is putting together a bundle then – is hardware, software, and potentially services together in a way that creates value for the customer.

In reality as we approach some of these applications, again, they tend to be or almost exclusively are mobile or field-type applications; but what we’re attempting to do is pull together a number of elements. That makes us comparatively unique as a company. In pretty much everything we do, there is a geospatial content. It may be, okay, XY – where is my asset, where is my person; to in a room like this, where is a point in space to millimeter level accuracy? But there is typically geospatial content. There are few in this world that can do as well as we can do in terms of establishing spatial context; but then increasingly there’s a whole realm of mobility solutions. Where is my asset, what is the status of my asset? All of those sorts of questions need to be answered.

Then we have moved aggressively into—once you have dispatched the mobile worker, once you establish a utility worker to a location to do a task, when they get there, what is it they are supposed to do? And okay, that may sound trivial, but in reality it’s a very difficult problem. And then we have developed an entire set of tools to apply in each of these areas. So what we are—again, focus is on the remote worker, the field worker, the mobile worker; and in terms of the work process, in terms of how we can make that more efficient. We have tended to use the term ‘the connected site’ to describe the overall concept, whether it’s the connected construction site, the connected farm, or the connected mobile enterprise, working to bring solutions to all aspects of this.

A key element of our growth strategy for the future is to carve out new verticals. If you take a snapshot of the Company today, in terms of current revenue anchors resident in the existing segments, it’s a pretty familiar list – survey; heavy highway; new emerging category called BIM – Building Information Modeling, which I’ll come back to in a moment; building construction – one of the historical parts of Trimble; agriculture, GIS, data collection, transportation logistics, and the advanced devices – the component side of the business. These account for 85% or better of the revenue, but in addition there is a—and let me just point out that in 1999, the construction categories there – heavy and highway and BIM – were zero. Agriculture was less than $10 million, so Trimble has always been about establishing a position in marketplace and growing it. And that’s what we’re working to do with the businesses on the right, whether it be utilities or whether it be railroads or whether it be forestry, is to establish a position in these markets.

Now, this isn’t starting from scratch, so for example railroads, there may be at the moment between 5 and 10 Trimble divisions selling solutions to railroads. We’re simply focusing them and working to come up with an integrated view on railroads and an integrated set of capabilities for railroads so that we can more effectively market those directly to the railroads around the world and be less piecemeal about it. So this element of emerging verticals, I think is going to be a growing part of the Trimble story, and what we’re aiming to do is replicate the success in agriculture, replicate the success we’ve had in construction over the next 10 years with some of these new categories.

Talking to, let’s call it a few of these businesses to give you a little bit more insight, is starting with construction – our view on construction is that it’s an information problem, and the information problem, if you talk to a contractor or you talk to an owner or you talk to a developer in terms of what are the frustrations today with the construction process, it’s really about issues surrounding rework, and a lot of the rework is poor information. Information tends to get siloed; it tends to be inefficiently transmitted from one process to another. So what we’re doing as a company is looking at construction as an integrated process, starting with kind of the preplanning aspects and all the way through to construction and operation. We have a solution for every element of this. On the preplanning, we have tools—software algorithms that define optimal routing for a road or a railway or a pipeline, through to we can do the surveying. We have—we interface with the design packages. We have estimating solutions. We have—when it comes time to do the site prep, we have two joint ventures with Caterpillar and can basically sell machine control solutions onto construction equipment all the way through to the build, which has been a major point of investment for us in the last year, the construction and building using developing tools for the construction and the building all the way through into maintenance.

Now talking about machine control – just to make sure everybody has the right idea in their heads. Machine control – you’ve got a bulldozer. You put a GPS receiver on either end of that bulldozer blade with centimeter-level accuracy. You know where that bulldozer blade is to centimeter-level accuracy in three dimensions. You put the plan for the site on-board the bulldozer. That blade is now intelligent, it knows where it’s supposed to be and can automatically adjust to where it’s supposed to be. It knows where it is X-Y so it can adjust the Z appropriately. What this does is it improves machine productivity potentially by 30%; but more importantly to the owner, it’s probably that 23-year-old operating the equipment who probably was out drinking all night long who may be well hung over and is creating a surface where you’re going to pour concrete, the contractor is sitting there afraid that concrete gets poured and two weeks later it’s been found to be at the wrong grade, wrong elevation, and somebody’s out there chiseling it out. Okay, with the system we provide, you’ve got verification that blade has been in all the right places. The surface is where it is so you can safely lay down the concrete. Rework is probably the great dirty secret of construction, just how big it is and how much it takes out of profitability of the construction industry. That is the essence of machine control, whether it be an excavator, whether it be a bulldozer, whether it be a grader, is essentially controlling the machines appropriately.

Now in terms of where this market stands at this point, this has a North American focus. North America, Australia and the Nordic countries are the most advanced, so this is one of the most developed markets in the world. Other parts of Europe, certainly Latin America and Asia are much less developed, but during 2011 we did a survey. The relative conclusions were that by category, by machine category, graders were not yet saturated, not yet fully penetrated, moderately penetrated. Dozers were low, and excavator penetration was almost non-existent. Looking worldwide, excavators are the great opportunity here. Excavators – there are a lot more of them and outside of the U.S. they are used differently and much more aggressively. So by machine category, the graders are the only—which is the smallest number category here, are the most penetrated, but still in the U.S. – arguably the most developed market in the world – it’s still not penetrated.

Then by nature of the contractors, so very large contractors - the Bechtels, the Skanskas, the Kiewits of the world – yeah, they’ve all got machine control and they’re all using it, and they may not have every machine yet fitted out but as an institution, they understand the merits of machine control and they’re using it. But of all contractors with more than 100 employees, so from kind of smallish to huge, less than 65% have adopted machine control. I think this is a very dynamic picture. I think it’s changing very quickly, but still even at the relatively larger contractors there is room to be found in terms of further penetration.

Those with less than 100 employees, still not penetrated all that well, and what this means is that there’s fundamentally a distribution—the challenge as much as anything else is distribution channel. Factory install is increasing but this is still very much of an after-market sort of sale, and for large parts of the market 10 years from now it will still probably be an after-market sale. But what Trimble has done in concert with Caterpillar from the—as far the 2008 agreement, Trimble is establishing a brand-new distribution channel called SITECH in concert with the Caterpillar dealer principles, in effect the Cat dealer principles. Not the Cat dealerships, but the people who own the Cat dealerships are buying into Trimble distribution through a number of different templates, and ultimately there will be one channel worldwide with more than 100 outlets focused on bringing technology to the construction market. Co-branded SITECH, it will be a Trimble distribution channel but with the ability to project worldwide, so we are already seeing the benefits – it’s not yet fully built out. We are already seeing the benefits of this, and it will give us, I’ll just call it credible worldwide coverage in a way that we’ve never had before.

The technology is here. The market is not yet fully penetrated. The emphasis for the next few years to get it more fully penetrated will be on distribution.

Another category which has been featured by Trimble in the last six to nine months is the category of Building Information Modeling – BIM, and here the quick picture is in a building like this, there are any number of interacting elements. There is structural steel, there is plumbing, there is electrical, there is the HVAC, and it’s a free-for-all. First trade in usually wins – they do it the way they want to. Forget what the drawing says – they do it the way they want to, and everybody else is sitting there working around whoever was there before. It’s not the way it needs to be. BIM basically takes all those elements – mechanical, HVAC, plumbing, steel – and puts them in a three-dimensional model. To be more precise, a parametrically-correct 3D model that has all the elements in it, so if one element changes—if I change the ductwork from 12 inches to 18 inches, I instantly know whether I’m interfering with a sprinkler run 50 feet down the hall or something like that. It is in that sense self-correcting. So we’ve been investing in this capability, the three-dimensional model capability, but our point of emphasis is on BIM to field, taking this capability to the field. So we have little strategic interest in the architectural or even the engineering elements of this but really want to bring the technology to the contractor in a productive fashion.

Now we have a joint venture with Hilti, the tools manufacturer of out Lichtenstein, which the point of that joint venture is to create intelligent tools. So rough concept is out of this three-dimensional database, you’re talking to the tool and so I’ve got a drill, I need to drill a hole – light magically appears saying, drill here, sort of thing. But essentially, to transform the way buildings are constructed by bringing technology into them. The rework argument here is as strong as it is on dirt-moving, maybe even more so. Contractors spend an inordinate amount of time fixing screw-ups, and this enables them to eliminate large parts of this.

We made this acquisition, Tekla, during 2011; but just to show you how this fits into this concept of BIM-to-field, on the front end we build scanners and we can walk into a building, an existing building that’s going to go through renovation. We can do accurate scans of everything, feed that into this three-dimensional database, and then at the back end coming out of that three-dimensional database we can create a whole set of tools, intelligent tools that will access that database. But our relative point of focus here, our relative point of hopefully differentiation here, is this BIM-to-field. We will have the database, we will have the capability, but our real point of emphasis is to make this useful in the field to the contractor.

Agriculture – so we got our start in agriculture through guidance, putting a GPS received on the roof of a tractor, guiding that tractor up and down the rows to 4-inch accuracy. And the benefit we’ve produced by doing that is when we’re pulling a sprayer of either fertilizer or insecticide or something else, there’s a big tendency to over-spray. You go up one row and you come back, and just to make sure you’ve covered the field you tend to over-spray. It’s wasteful of fertilizer, for example, and it adds to environmental load and actually detracts from yield. With GPS control actually steering the tractor, you can get it spot-on every time and eliminate the over-spray. That was the way we got started; that’s the value proposition we brought initially.

With the GPS receiver on the roof of the tractor and with the computer on-board, there are a number of other applications that become very cost-effective to add in the realm of prescription farming. We’ve been building out our portfolio here to include things like flow controls – being able to turn off individual valves of that sprayer and be very precise, but getting closer and closer to prescribing a solution square yard by square yard in the field, ultimately getting closer and closer to worrying about the individual plant – spraying the plant, not the field; watering the plant, not the field. But building out a set of capability in agriculture.

Just touching on a number of the key points in agriculture – first of all, we are expecting double-digit growth in 2012. It has been a strong grower. We expect this to continue for the foreseeable future. We expect it to be a strong double-digit growth provider to the Company. We have been comparatively—we’re not immune to cycles, but we are resistant to cycles, so we have grown kind of independently of what farm income is doing.

Prices in this realm have been relatively, if not very stable since 2004. Now, it’s a traditional technology story – more functionality for the dollar, but prices have been stable since 2004. We have had a high share in this business. It has not really wavered. It’s been sustainable and we don’t expect any significant changes in that. Competitive intensity, competitive makeup of the market really hasn’t changed in six, seven years. If anything, the number of competitors has declined slightly.

We have a scalable cost structure. The gross margins in this business are not all that different than the rest of Trimble, but it generates strong operating margin because we can scale the cost elements under gross margin. So we’re not a captive of gross margin here – this is a very scalable business.

After-market distribution is the key to success today. We expect it to be the key to success going forward. The percentage of units being factory-installed is still less than 20%, and we don’t see that changing any time soon, so this is still very much of an after-market story.

The high end of guidance markets, the products that actually take control of the steering and the throttle of the tractor, they are maturing; but they’re still a long way from mature. No individual geographic market at this high end has more than 60% penetration, so the most penetrated market we have is roughly a 60% penetration and there are significant segments around the world that still remain underserved or totally underserved at this point in time.

The new product categories, such as flow control and software, are growing more rapidly than the base guidance products, so they are becoming a larger percentage of the mix and we expect that to continue. It’s a typical technology adoption curve which is in our realm is not instantaneous. It takes some time, and as farmers figure out the economics of this, they are taking on the new products.

There are a number of new niches that are becoming available to us, things like sugar cane and fixed crops – read, for example, wine growing, that we haven’t necessarily served in the past that are becoming available as we develop applications for them. We did sign a new alliance agreement with CNH in 2011 that defines the relationship for the foreseeable future. It’s based on product differentiation, so there is a strong technology development part of this. This is about innovation, this is about technology development; and among other things, the agreement gives us increased access to other OEMs as well beyond CNH.

And then emerging markets – so I would say South America, which includes Brazil but Brazil is a reasonably advanced market, Russia, India and China have significant penetration potential. Came across a case last week in China where they’re using the technology on a grand scale in Mongolia growing potatoes to feed McDonald’s in China. So this is still a very vibrant business for us. It has been in relative terms the most successful business in Trimble for a number of years, and we don’t see that changing any time soon.

As far as mobile solutions, the third segment, the idea here is not to provide dot-on-a-map functionality but really to become relevant for the enterprise, so really connecting the remote operations, the site operations back to the enterprise, backing into the enterprise. So we’re verticalizing this market, so as opposed to—we are going to start to avoid—it’s a little hard-wired, but we’re going to start to avoid using words like Mobile Resource Management – MRM – and start to talk more about the verticals. So you saw transportation and logistics on the list – that is a defined vertical in this space; but again, the point is to bring a lot more functionality than simply dot-on-a-map functionality to the user, integrate into the enterprise.

And what do I mean by that? Well, there is a lot of functionality that can be added beyond simply a dot on a map, saying okay, this is where my vehicle is, sort of thing. There is a whole set of driver behaviors that can be monitored. There is a lot of information about the asset itself in terms of, okay, maintenance information. There is fuel management that can be done much more precisely, and we have seen large-scale users save literally millions of dollars simply by being able to judge performance of the fleet versus fuel consumption and modify the policy relative to the fleet to minimize fuel. Safety is a big issue, and there are any number of things we can do to improve and enhance driver safety. Compliance – always a big issue and a growing issue in terms of long-haul trucking, if nothing else, is getting a major load of new compliance, and they have to figure out ways to demonstrate the compliance. And then carbon is always with us.

Let me just summarize where we stand as a company. So 2011 – in October of 2010, we indicated that we thought during 2011 that we would be in the neighborhood of 20% revenue growth. We’re going to be well above that number. Operating leverage in terms of our ability to convert that revenue increase into profitability, we identified 25%. We expect that is still relevant.

Looking forward to 2012, although not going to be overly specific today, is with the economy as it is today, taking a snapshot of the economy worldwide as it is today, we believe that we can produce a very credible double-digit growth story for next year with no change in the economy, and recognizing that we have not yet demonstrated the full potential out of the mobile solutions segment, and on top of that commercial and residential construction is still dead and is basically a dead weight to us at this point time, awaiting recovery. So that would be only be upside if that starts to come back. But mobile solutions, on the profitability side, we’re expecting that to be a major swinger in 2012. We’ve been below profile on that. We expect 2012 to be a year of credibility.

Five-year growth potential – 15 to 17% is generally what we say is the longer term growth scenario. The bulk of that being organic with perhaps a couple points of that 15 to 17% being acquisitions, but the themes are very much still the same. We still believe that structurally we’re a 20% non-GAAP operating margin company. We’re getting close to that. We have touched that point in the past pre-meltdown. We believe we can get back to it, and it’s increasing value we’re producing plus the mobile solutions from a portfolio standpoint. If they begin to produce, we’ll get there quite soon. And acquisitions have always been a part of Trimble to fill in technology and market gaps, and we would expect that to continue.

So that is everything I have to say this morning. We finished more or less on time, so thank you for being here.

Question and Answer Session

[no Q&A at this presentation]

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