Trimble Inc. (TRMB) Q4 2015 Earnings Report, Transcript and Summary

Good evening. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Jim Todd, Director of Investor Relations, you may begin your conference.

Good afternoon. I’m here today with Steve Berglund, our CEO; and Rob Painter, our CFO. Before we begin, I’d like to remind you that the forward-looking statements made in today’s call and the subsequent Q&A period are subject to risks and uncertainties. Trimble’s actual results may differ materially from those currently anticipated due to a number of factors detailed in the company’s Form 10-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission. During this call, we will refer to a press release, which is available along with additional financial information on our website at www.trimble.com. The non-GAAP measures discussed in the call are reconciled to GAAP measures in the tables to our press release. Now let me turn the call over to Steve.

Good afternoon. Let me begin by introducing Rob, along with his early priorities. Rob has been with Trimble since 2006 and has held a number of both corporate and business unit roles. He began in business development which gave him an early broad view of the total company. During that time, he was heavily engaged in the work that led to our second joint venture with Caterpillar, VirtualSite Solutions. From there, he led the construction services business and then Intelligent Construction Tools, our smart tools joint venture with Hilti. Most recently, he led multiple businesses that constitute Trimble buildings. Before Trimble, he held a number of financial and consulting roles at other companies. Before that, he earned an MBA from Harvard Business School. He therefore comes into the CFO role with expert knowledge in roughly half the company represented by E&C and with a good grasp on the rest. Although there will be some learning required, he has the advantage of inheriting a deep and competent financial organization which will make the transition uneventful. The same can also be said on filling the opening that Rob’s transition leaves in the buildings group, which has been filled by reassigning individuals who have proven management track records. Rob’s short term priority list is consistent with the corporate priorities we have been discussing. First, he will lead the ongoing effort within the company to restore and extend our operating margins. This will involve both ongoing short term and long term cost rationalization, as well as ensuring consistency between our long term business and product portfolios and our financial model. Second, he will lead an intensified effort to develop Trimble’s long term secular growth story. Three months ago, we described the outlines of the scenario for 2016 which focused on the restoration of growth and improved operating margins. While acknowledging the potential dangers associated with the concerns that have grown in the last quarter around China and the general lack of strength of the worldwide economy, our belief on the 2016 scenario we described has grown stronger with more insight. The fourth quarter actually contained more of the news about baseline growth than is apparent. There are three discrete factors which influence the fourth quarter which will not be part of the year-to-year explanation during most of 2016 exchange rates, the oil price effects which will turn in the first quarter and the effects of a sale of temporarily owned dealerships to independent owners. Adjusting for these effects leaves us to regard the baseline growth to have been over 5% in the quarter. This provides reinforcement for our 2016 expectation of revenue growth in the single digits before acquisition and divestiture effects and assuming constant exchange rate. Organic agriculture revenue which has been down year-to-year for seven consecutive quarters was up slightly year-to-year in the fourth quarter even with unfavorable exchange rates. This differentiated us from the performance of the new equipment OEMs and tends to support our expectation that agricultural revenue will be closed flat for 2016 in spite of continuing pessimistic forecast for agricultural equipment sales. The somewhat disassociated performance is consistent with the historical pattern and is reinforced by signs that the technology upgrade aftermarket may be reviving expected new products and still widely demanded in some regions. The other elements of the Field Solutions segment also reflect a generally improved performance. Segment operating margins are still under pressure against historical standards because of the lower contribution from agriculture but reflect the normal seasonal patterns and did end up above 30% for the full year. In E&C, our BIM centric buildings business revenue was up strong double digits from the prior year in spite of negative foreign exchange effects. It is expected to continue at this approximate level of growth into 2016, thus continuing margin expansion. Heavy Civil was relatively flat year-over-year and up on a constant exchange rate basis. It continues to face headwinds from the regional economic effects of the oil price decline and lack of project funding in previously robust markets such as Australia, South Africa and Canada. We expect 2016 to be a somewhat muted growth year for Heavy Civil with some potential uplift from the recently passed U.S. highway bill. A major swing element in the E&C segment during 2015 was Geospatial. Although Geospatial has been a significant drag, we expect a reversal of the trend and a return to growth in the first quarter. Some of this is simply lapping the ugly first quarter last year and some represent the effects of reallocation of focus and resources away from the oil and the oil-producing regions and toward more productive industries and regions. We expect relatively robust single-digit growth from Geospatial in 2016 with an increase in contribution at the operating margin line. Overall, E&C segment operating margin performance is still below the pre-2015 historical standard but did reflect a small year-to-year improvement in the quarter despite the negative impacts of exchange rates, the short term effects of acquisitions and the Geospatial decline. We currently expect year-on-year improvement in E&C operating margins through 2016 as we climb back towards the historical standard. The Mobile Solutions segment fourth quarter’s growth rate diminished somewhat and will remain relatively low in the first quarter. However, we anticipate the segment will be the strongest performer within the company for the total of 2016. The fourth quarter was affected by the delay of transportation and logistics OEM deliverables from the fourth quarter into the first quarter as well as some rollout issues with our recently announced video and mobile gateway products. These effects will also impact the first quarter growth rate. Short term issues aside, the visible orders pipeline supports our expectation that the T&L 2016 growth rate will ramp up during the remainder of the year and demonstrate double-digit growth for the full year. A key negative issue within the Mobile Solutions segment continues to be the Field Services business in which the outlook is improving but where positive effects take time to play out because the business is sale-centered. All in, we currently expect to step up in growth for the full segment during 2016 and continued margin expansion. In the fourth quarter, we generated a non-GAAP operating margin of 16.3%, which is up year-to-year and is consistent with our efforts to return to the neighborhood of 20% during 2016. The gross margin compared favorable to last year’s and expenses were down year-to-year. Before the effect of acquisitions that were not in last year’s fourth quarter results, total quarterly expenses were down almost $13 million year-to-year and that dropped by 1.3 percentage points of revenue. Expenses associated with new acquisitions added almost $9 million [ph] of expenses and increased the percentage of our expenses-to-revenue to the as reported 40.6%. All of the expense reductions were in marketing, selling and G&A costs. As reported, R&D costs were 14.8% of revenue, which is higher than our historical run rate at 13% to 14%. While we anticipate working R&D spending down into our traditional range during 2016, we have a number of significant new product and technology programs underway and will run somewhat hotter in the early part of 2016. As we have discussed in previous quarters, we continue to work on a number of programs to improve our cost-effectiveness. The first is the reduction of the number of business lines. This portfolio adjustment will reduce 2016 revenue by approximately 1% which should improve the operating margin by the better part of a point. We are incrementally narrowing the strategic focus of the company to the core franchises of Construction, Geospatial, Agriculture and Transpiration and Logistics and a handful of emerging businesses that have significant three-year potential - rail, electrical and water utilities, forestry and field services. The second initiative is the consolidation and leaning out of the organizational infrastructure that has grown up through our acquisitions. One significant element of this will involve the elimination of unnecessary legal entities acquired through acquisition with their corresponding costs. A third initiative is to consolidate organizations and operations into more cost-effective configurations where possible. Some of this effort is already complete and some is ongoing. This has involved consolidating a number of selling and manufacturing organizations to gain better cost leverage. A fourth initiative is the ongoing consolidation of product platforms and the reduction of redundant R&D activity. This is particularly important because we have been an active acquirer of technology and have accumulated a range of diverse product platforms. This effort to achieve convergence has been underway for a few years and is now achieving critical mass. Another area of sharpened focus is on getting the balance of hardware and software development right. We are a solutions company and our value is created through a bundle of hardware, software and services for the user. We are re-sharpening our focus and ensuring that our hardware development is creating unique value and in some cases, we are outsourcing hardware elements to better focus on the solution, reduce development cost and improve time-to-market. The regional picture looks much like it did three months ago with perhaps more of an upside bias. The U.S. continues to provide growth opportunities that is not particularly robust. Brazil, Russia and South Africa, previously areas of significant growth potential, are in sharp decline. Canada and Australia continue to trend down. China is currently suffering from deferred decision-making as a result of both market volatility and government indecision but is still regarded as a source of growth over the next several years. Although Europe remains volatile, we saw growth as measured in local currency in 2015, continue to see strong growth in some national markets and generally see an upward bias in the region. We have made a number of small acquisitions over the last six months that extend growth platforms. The entire price tag for these six acquisitions is slightly more than $100 million. Five of the six are software businesses and the sixth provides a bundle of software and hardware. Spatial Dimension was acquired in August and extends our role beyond our existing geospatial product offerings in the land management market segment. It will operate within E&C. Vianova was announced in September and is a BIM provider focused on tools for civil engineering design and project management and infrastructure lifecycle management. It will operate within E&C. PocketMobile was acquired in October and is an enterprise mobility platform provider and offers a mobile front end that agnostically integrates with enterprise back ends. It will operate within Mobile Solutions. AGRI-TREND was acquired in November and is an important element in our Connected Farm strategy. It actualizes the concept of the trusted advisor to the farmer and provides us with access to a network of 110 experts who support the advisors to farmers. It will operate within Field Solutions. Telog was acquired in November and provides the water industry with wireless remote monitoring, analytics and data acquisition systems. It will operate within Field Solutions. Sefaira was acquired this month and it provides performance-based design for architecture and HVAC planning. It enables designers to understand performance implications of design choices in real-time and evaluate different design scenarios to better understand tradeoffs. It will operate within E&C. Beyond the ongoing initiatives focused on rationalization, there are a number of other strategic actions aimed at improving our market penetration. One of the most important is the general emphasis on mapping the right go-to-market strategy onto the individual markets. This is particularly important as we add more software and service content to the product mix. Our basic distribution backbone for Heavy Civil, Agriculture and Geospatial will continue to be a third party channel, augmented by a direct sales and professional services capability focused on large key accounts and major projects. For the buildings businesses, it will be mixed with a higher component of direct distribution. Transportation and Logistics will continue to have a direct sales emphasis as will most of the emerging market initiatives. Although a first inference would be that this will involve a doubling up on the cost side, we believe the implications on operating margins are net-net positive. For Heavy Civil SITECH channel is maturing and proving to be a needle mover for the industry in terms of bringing new technology to the market and a major competitive differentiator. In the buildings construction market, we are growing the BuildingPoint channel and emulating many of the characteristics that have proved successful for the SITECH channel. For Agriculture, we recently formally announced the new Vantage third party distribution channel which is similar to both the SITECH and BuildingPoint models built on the existing dealer channel but with an upgraded set of expectations for the dealers selected, particularly as it relates to software and support capabilities. In parallel, we have built out a meaningful account and project sales capability over the last 18 months to focus on specific opportunities or meeting enterprise level needs. Our success with the Beijing new airport is representative of what we are attempting to achieve. Before turning the call over to Rob, my summary consists of three points. First, we are operating in a continuing tough environment in which the markets are generally not giving us any favors. Second, we are emphasizing the fundamentals of controlling to our model, short term and long term. Third, we continue to hold strategically advantageous positions in markets that give us substantial headroom and substantial penetration possibilities. We are therefore balancing short term progression with long term strategic goals. Rob?

Thank you, Steve. Good afternoon, everyone. Let me first say that I’m excited to be Trimble’s new CFO. I remain as enthusiastic today about Trimble’s prospects as I was 10 years ago when I joined the company. I look forward to meeting many of you on the call today in the coming weeks and months. Before getting to the numbers, please note that unless otherwise indicated, the operating results I will discuss today will be on a non-GAAP basis. The reconciliation from GAAP to non-GAAP numbers is in our earnings press release, along with the financial data by segment. Unless otherwise indicated, growth rates are meant to be year-over-year growth rates. Now let’s turn to the fourth quarter full year results. Overall, our results came in ahead of our expectations. Q4 total revenue was $560 million, down 1% year-over-year. Currency translation subtracted approximately 3% year-over-year and the net effect of acquisitions and divestitures added approximately 1% year-over-year. Turning to our revenue by segment, Engineering and Construction segment revenue of $319 million was down 3%. Currency translation subtracted approximately 4% and the net effect of acquisitions and divestitures reduced revenue approximately 1% year-over-year. Within E&C, the revenue performance was mixed. Trimble Buildings grew double digits organically. Heavy Civil revenue was relatively flat, impacted negatively by FX and positively by acquisitions. Geospatial revenue was down double digits but improved from recent quarters and continues to be impacted by the combination of FX and continued weakness in regions with significant oil and gas exposure. We expect Geospatial to begin growing in the first quarter and grow through the rest of the year. In the Field Solutions segment, revenue of $79 million was down 2%. Currency translation subtracted approximately 3% and acquisitions had an approximate 2% positive impact. Within Field Solutions, despite negative FX effects, agriculture was up slightly, offset by GIS. Mobile Solutions segment revenue of $132 million was up 7%. Currency translation subtracted approximately 3% and acquisitions had an approximate 3% positive impact. Within the segment, the Transportation and Logistics business was up high single digits, somewhat lower than the recent performance due to product rollout delays and the impact of OEM-related revenue moving from the fourth quarter into 2016. These new products are now commercially available. The rest of the segment was up slightly year-over-year. Advanced Devices segment revenue of $29 million was down 5% due primarily to weaker OEM sales. As we have previously discussed, Advanced Devices revenue can be lumpy due to the timing of sales to a range of OEMs. By geography, our revenue split was as follows. 54% from North America, 25% from Europe, 14% from Asia Pacific and 7% from Rest of World. North America was flat year-over-year, an improvement from last quarter. Within North America, revenue in the U.S. was up with a double-digit decline in Canada. By segment, Field Solutions revenue was up single digits and Mobile Solutions grew as well. North America continued to experience oil and gas related weakness and the U.S. and Canada impacting E&C. We expect E&C to demonstrate growth in North America in 2016 as we lap the oil and gas related effects. Europe continues to be a positive story with revenue up 3% year-over-year. Excluding the currency translation effects, revenue was up in the low double digits. Geographic performance is characterized by relatively broad-based strength in the U.K., France and Nordic regions and included signs of renewed growth in countries like Italy and Spain. After the excluding the effect of FX and the divestiture, Germany was up single digits organically and showed improvement. We experience continued weakness in Russia. Asia Pacific revenue was down 4% year-over-year as reported. Currency translation subtracted approximately 2% year-over-year. China was flat in the quarter, Japan experience strong growth and Australia remained weak. Rest of World was down 8% year-over-year. Currency translation subtracted approximately 5%. Brazil was weak, offset by growth in the Middle East. Turning to the rest of the P&L, our gross margin, operating income and EPS for Q4 came in ahead of our expectations. With respect to gross margins, Q4 non-GAAP gross margins increased to 56.9% compared to 56.0% in the fourth quarter of 2014, largely due to favorable revenue mix shifts. With respect to operating income, Q4 non-GAAP operating income was $91.1 million or 16.3% of revenue as compared to 14.9% of revenue in the prior year. The total company operating income percentage was positively impacted by organic operating performance in the quarter. We saw improvements in the performance of acquisitions and placed greater than 12 months, offset by an impact from recent acquisitions. Operating expenses were down on a year-over-year basis, even after the impact of increased expenses from recent acquisitions. This reflects the impact of recent restructuring actions that have reduced organic headcount on a year-over-year basis. The non-GAAP tax rate was 24% against a non-GAAP tax rate of 5% in the prior year, which reflected a true-up for the reinstatement of the R&D tax credit. In 2015, we transitioned to a new methodology on the non-GAAP tax rate which eliminates large quarterly variations on the tax rate. Q4 ‘15 non-GAAP net income of $67.3 million was down 12% as compared to Q4 ‘14. Diluted non-GAAP earnings per share were $0.27. Net income and EPS were down year-over-year but would have been up without the tax rate delta. Let me now provide a brief summary of the 2015 full year results. Total revenue was $2.3 billion, down 4% as reported, compared to 2014. Currency translation effects subtracted approximately 4% year-over-year and the net effect of acquisitions and divestitures added approximately 2% year-over-year. Engineering and Construction revenue was $1.3 billion, down 5%. Currency translation subtracted approximately 5% and the net effect of acquisitions and divestitures added approximately 2%. Field Solutions revenue was $355 million, down 16%. Currency translation subtracted approximately 4% and acquisitions added approximately 2%. Mobile Solutions revenue was $520 million, up 7%. Currency translation subtracted approximately 3% and acquisitions added 2%. Advanced Devices revenue was $132 million, down 5%. From a revenue mix standpoint, we are continuing to see an evolution toward software services and recurring revenues across the company. For 2015, the combination of software services and recurring revenue represents approximately 47% of total company revenue, up from approximately 40% in 2014. Recurring revenue, which is a subset of that, in 2015, represented approximately 26% of total company revenue, up from approximately 23% in 2014. By geography for the year, 55% of our revenue came from North America, 24% from Europe, 14% from Asia Pacific and 7% from Rest of World. Non-GAAP gross margins were 56.8% for the year, slightly down from 57.5% in 2014. Non-GAAP operating income was $390 million or 17% of revenue as compared to 20% of revenue in 2014. 2015 non-GAAP net income of $292 million translated to non-GAAP earnings per share of $1.13. Our full year operating cash flow was $355 million. Turning to the balance sheet, deferred revenue increased to $264 million, up 11% year-over-year. The increase in deferred revenue primarily reflects changes in revenue mix and current large contracts. Debt decreased by $27 million sequentially, ending at $730 million. Our leverage ratio, defined as gross debt to trailing 12 months EBITDA, ended at 1.7, well within our targeted range. In August of 2015, we announced a $400 million share repurchase authorization and said that we intended to spend at least $150 million of debt authorization before year end. We executed on that plan through a combination of open market purchases and the accelerated share repurchase program that we announced in September. The ASR came to a close in Q4 as planned and during 2015, we repurchased a total of 11.2 million shares of our common stock or $234 million. Our capital allocation priorities remain consistent. Our first priority is our long term investment in the business organically and through acquisition. With solid operating cash flows and the current acquisition pipeline, we expect to continue to be opportunistic relative to the stock buyback. Our current stock repurchase program has a remaining authorization of approximately $250 million. I will now turn to our guidance for Q1 2016. We expect first quarter revenue to be between $565 million and $595 million and non-GAAP earnings per share of $0.25 to $0.30. First quarter guidance assumes current FX rates and an approximately 1% negative impact to year-over-year revenue due to currency translation. Non-GAAP guidance excludes the amortization of intangibles of $40 million related to previous acquisitions, estimated acquisition cost of $3 million, the anticipated impact of stock-based compensation of $15 million and approximately $3 million in anticipated restructuring charges. First quarter non-GAAP earnings per share guidance assumes approximately $254 million shares outstanding and a 24% non-GAAP tax rate. With that, we will now take your questions.

[Operator Instructions] Your first question comes from the line of Paul Coster from JP Morgan. Your line is open.

Thanks very much for taking my question, and welcome to the call, Rob. A couple of quick questions. One is, Steve, you talked about I think rationalizing the portfolio. I understand what was in it but what is actually being shed and what are the implications of shedding those products or services?

Yes, so I think that I’m a little reluctant to kind of be fully explicit here just because some of this is underway and will be affecting individuals. But I think if you compared the list of businesses I named today versus the list from a year ago, you’re going to find some things that were there a year ago that are missing in today’s list, such as mining, oil and gas, environmental, public safety. So I would say is they are not large businesses. They were consuming mind share and they were consuming some level of resources. And I think the determination was that we simply could not get the sufficient scale to really have them be significant factors within the next two or three years. Many of them are attractive businesses but just not appropriate at this point in time. And then again, in terms of the financial impacts, will be relatively minor, talked in the script in terms of a kind of 1% of revenue sort of effect. But enough was being invested in them that we can probably beneficially impact operating margins on a run rate basis by about a point a year. So that would -

Okay. And my follow-up question, as you talked a little bit about rebalancing your investments between hardware and software, I think I took it that it’s still a bundled offering. But nonetheless, I think in interpreted it to mean that more is going into software and some of the hardware development will be outsourced. Can you elaborate?

Yes, I think that is generally the right perspective to take. I think there are some elements of hardware that will be commoditized. I think there will be, particularly with some of the changes in regulation, kind of draw new players with significant scale into some elements of the hardware. So I think that it will have a tendency to commoditize some of - let’s call it more telematics oriented hardware and is simply not going to be attractive to be a hardware provider there. I think our core strength is seeing the big picture. And I think that we would see ourselves fundamentally as an integrator and that we should be appropriately selective in terms of which realms of hardware we should participate in, just making sure that we’re picking hardware niches where we can create a unique value proposition.

Okay, thank you very much.

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Good afternoon, it’s Bryan Jaffe [ph] on behalf of Jerry. Can you talk about what drove the strength in Field Solutions performance this quarter in light of the continued decline in underlying demand? The results were much better than we would have expected just looking at what some of the agriculture OEMs have been reporting.

Yes. So again, I think that what the fourth quarter and what we’re expecting in 2016, I think, is consistent with our multiple year theme which is, okay, we are exposed to but we are not simply victims of the OEM equipment cycle is that we are selling technology which provides cost benefits and improved yields. It provides benefits as opposed to simply providing capacity. So I think that there has always been what’s called a bifurcation between the equipment market and what we’re doing. Yes, so it’s always easier to sell a piece of technology onto new piece of equipment. So a strong equipment market is good news for us. But I think that the market for the last two years really has been so bad, it’s frozen a lot of decision making among farmers. Now, I don’t want to be too aggressive too early in terms of what I say. But I think in the fourth quarter, what we saw was, first of all, a revival or what may be a revival in the aftermarket for what’s called technology upgrades onto existing equipments. So again, we’re not totally dependent on new equipment sales. We can sell into the existing install base. There are still regions that are really quite lively at this point in time. Europe and parts of Asia being examples where the doom and gloom that’s happened in the North America isn’t quite as pervasive there. And then I would say is new products or new product categories coming into play kind of create new market opportunities for us. So again, I think that the fourth quarter provided some evidence, maybe not conclusive evidence but some evidence that what we’ve been saying about 2016 is founded on a fairly rationale argument.

Great. And can you provide us with an update on how the Manhattan Software business is currently performing?

It is still a drag on the company. But fourth quarter 2015 was better than the fourth quarter 2014. So we are showing progression and we expect that during the course of 2016 that we will continue to show progression. So I think the fundamentals are still, from an operating standpoint, are still there. We’re still able to go out and attract new business. But what we’ve got here is a kind of an accounting challenge in terms of being able to move revenue from deferred revenue into revenues at being at the key. But Manhattan is still kind of consistent with the strategic intentions that we had at the time of the acquisition.

Great. Thank you.

Thank you.

Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.

Hey, guys. Let me echo my congratulations as well. I just wanted to start out, can you talk a little bit about the Heavy and highway funding bill and maybe what we can expect for that in terms of your business for 2016? And perhaps a little bit of color in terms of the timing that could impact the business as well.

Yes. So I think that, first of all, the highway bill I think for the industry provides a lot of certainty. It did not necessarily provide kind of new levels of spending, but it does provide certainty. And I think that we’re already seeing signs that contractors were engaged in highway constructor or supporting highway construction are more open to making longer term investments because they see the certainty of money flow as contrasted to prior to the passage. It was hand to mouth, month to month sort of thing and therefore, made it difficult to make long term commitments. So I think as the year goes on, what we’re going to find is that contractors beginning to gear up to take advantage of the more certain flow. And again, it’s a difficult business, it’s competitive. Margins are thin. Return on assets are difficult. And so the only way to really influence those in a big way is through technology. So I think that not visible on fourth quarter, certainly probably not going to be visible in the first quarter, maybe evens second quarter. But as we get into the latter part of 2016, we expect to see some lift in the U.S. spending in construction which will beneficially impact us. I want to be a little shy about identifying the actual impact quantitatively at this point in time until we see a little bit more.

Got it. And then just in terms of the macroenvironment, how comfortable are you in terms of making investments and does it feel like there’s much of a recessionary risk that’s sort of baked into your expectations?

I suppose the somewhat fastidious would be that we’ve been looking at recession for outside the U.S. for much of the last year or two and nothing has really changed all that much. So I think that Australia is really into probably its third year of what we would consider to be a recession. And Russia certainly is probably getting into its third year of what we would consider recession. So we’ve been dealing with difficult circumstances for some period of time. And I think the two new pieces of data really in the last three months are China, but our fundamental view on China really hasn’t changed which is there’s volatility and there’s a major difficulty in getting people to make decisions on projects at this point in time partly because they’re looking at the volatility in the financial markets and waiting to see what happens out of that. And then secondly, without getting to geopolitical here, the relative emphasis on kind of decision making in the Chinese governments, the emphasis on anti-corruption really I think has slowed down decision making in the government as well as the uncertainty of feeding into the government. So China at the moment is a difficult market. But whether it be six months or nine months or 12 months when this starts to pass and whether it is a 3%, 5% or 7% growth country, it is still a significant market for us. And I think represents in the kind of over the next three years, still a significant growth opportunity for us. Now, the other piece of news at least from our perspective is Europe which in our view is actually getting more hopeful as opposed to less hopeful in terms of individual countries like U.K. U.K. and France showed very strong growth for us. Germany with some transactional confusion in the middle but was actually quite good. But we’re starting to see signs of life in places like Italy and Spain which have really been dormant really since 2008. So I think Europe is a question mark, it’s under a lot of pressure. But I think the macros in Europe to us are looking actually better than they have for some period of time. Otherwise, I think the environment is largely unchanged for us and something that we’ve been baking into our estimates now for a number of quarters.

Great. Thank you.

Your next question comes from the line of James Faucette from Morgan Stanley. Your line is open.

Thanks very much. I just want to ask a couple of follow-up questions on the international. It seems like you mentioned that Australia and some of those markets have been trending now for quite a while. Brazil and Russia seem just little bit deteriorating quite quickly. Are these markets that’ similar to maybe what we’re seeing in ag that if things stabilize long enough that the ROI argument for your products and services can help them start to rebound? Or are those markets so deteriorated that we probably are going to help for meaningful economic improvement to come through before we can star to see any pickup in business in those markets. That’s my first question. My second question is you touched about operating margin expansion in 2016, have you or could you give us some targets for where you think you can to and under what conditions? Thanks.

Okay. Yes. So I think in terms of kind of the ROI argument around the world, I think actually I like that question because I think it does, it’s relevant for us, maybe not in the same way everywhere in the world. But for example, in Brazil, which right now seems to be kind of in free fall. But I was in Brazil a few months ago and I think there is implicit opportunity for a company like Trimble because if you look at what’s happening in construction, the first year contractors that the large and not large by a little bit, but larger by orders of magnitude have been pretty much shoved aside because of the corruption scandals. And there is a second tier of smaller, younger, more energetic contractors that are attempting to fill the space. And those set of players are very, very focused on technology. So I think there is an inherent opportunity there when things do get a little clearer, a little bit more stabilized albeit at a lower level. The other consideration is that with the shocks that producers and Brazil have received among others, what’s called the mega farms in Brazil, they have an absolutely urgent need to reduce their cost structure to really be transformative in terms of their cost. And they’re looking for technology to be the transforming element on their cost structure. So I think in the middle of this adversity in Brazil, there is a real opportunity for a company like Trimble. Australia which is already an awfully well-developed market has always been an early adapter of technology. I think the similarity up there might be a bit different which is I think there we got to be looking for signs of economic recovery really to see anything developed. And Russia, again, I think there is a geopolitical element there as well but I would turn that kind of in the same case as Brazil. If they’re going to stay competitive on the world stage and many ways, they’re going to have to adapt technology aggressively to keep the edge. So I think the scenario varies around the world, but in the midst of this adversity, there are opportunities for Trimble to operate in these countries effectively. Second one. Operating margin expansion. So I think really, we’ve been talking for a couple of quarters about operating margins which have been probably on a 12-month rolling basis, hovering somewhere around 17% or so, we do view ourselves fundamentally as a 20% or better non-GAAP operating margin company. And with the gross margins that we have up in the neighborhood of 56%, 57% structurally, we should be a 20% plus company. The impact of ag falling as a percentage of sale as well as agricultural operating margins falling kind of from the 40s to the 30s has taken a whack out of us here in the last 12 to 18 months. But I think that our objective for 2016 is to demonstrate as we go through the year that we are a 20-plus percent operating margin company and really provide evidence of that. So I mean the factors that enable us to do that are, yes, some straight up cost reduction we have taken and are continuing to take steps there. Some of it is this pruning of what’s called marginal product lines, marginal businesses that will have a little bit of domino effect but will have a disproportionate effect on operating margins. And then finally, it’s kind of a recovery of some of these businesses and I would point specifically at Manhattan Software which has the ability to kind of recover the better part of a point there. So I think that as these things roll out during 2016, we should provide the evidence that we’re a 20% operating margin company or having a neighborhood of a 20% operating margin company and enable a conversation in terms of how we move beyond that.

Your next question comes from the line of Richard Eastman from Robert W. Baird. Your line is open.

Yes, good afternoon Steve and welcome Robert. Quick question, maybe first on the T&L business, Steve. You had kind of noted the high single digit growth here in the fourth quarter and that that would continue into the first but then accelerate to double digit for the full year. You noted some product delays, is that at all associated with PACCAR? Or is there any PACCAR noise in there that maybe short-term is slowing that business down but then gains traction?

Yes. I referred to two considerations. One was OEM which could be read as code for PACCAR just as they move from fourth quarter out. So not very far out, but far enough out to kind of disrupt the fourth and first quarter. And then there were simply in terms of a couple of announced products that we announced in the fourth quarter, we didn’t get to rollout particularly advanced in the fourth quarter so those have fallen into 2016 and just kind of moved things out a couple of months. And so kind of both fourth quarter and first quarter affected by both those.

Yes, okay. And then just on the ag business, again, we’re still kind of speaking to - you spoke to maybe a flat, flattish year for 2016 was still a good prospect. And I’m a little bit curious, the OEM side, the unit build number did deteriorate when you listened to the year or some of the other big players there. .and they’re probably talking about down 22% as much as 30% on the heavy side. And so my question is around, do you have more confidence in the aftermarket side of the business that it’s offering to offset the bigger OE declines? Is there anything tangible there that you could note?

Yes. I mean I think that just looking at the fourth quarters for example which we surprised ourselves to the upside in the fourth quarter. So they moved to the upside or beyond the upside of the guidance was in agriculture and that was largely an aftermarket phenomenon. So what we actually saw in the fourth quarter - and again, I don’t want to be too aggressive here in terms of the vocabulary I’m sing, but certainly we are seeing signs that sure look like there is a technology upgrade cycle in the aftermarket taking place. And that promotions that we ran which really have not been effective for a year and a half were effective in the fourth quarter and we’re expecting those to be effective in the first quarter as well. So I think the aftermarket is looking more lively than it has been. We’ve got singles from the OEMs in the first quarter but we’ve discounted those so we are being, let’s call it, sober relative to our expectations of what we can expect from the OEMs. But it’s really the aftermarket. It’s really the fact that some of these new product categories that we’ve already released that we anticipate releasing during the course of the year that are getting some traction. And then again, back to some geographies are very widely in agriculture are not being hit by it. They’re still on the upswing in spite of commodity prices. So those three things integrated made me to believe that we can put differentiated performance to the OEMS during 2016.

Okay. And then aftermarket sales, do they slant towards some of the precision ag products versus machine guidance? I mean are you seeing some uptake in that channel that you established? The vantage?

Yes, yes. I mean I think it’s smaller number of growing at a reasonably strong rate so it’s not moving the needle for us as a company at this point in time. But I think that the answer would be yes, but I think guidance kind of there have been generations of guidance and so a farmer with an old tractor with old guidance on it, there is the ability to go out and basically sell an upgraded feature set and sell it on to a five year old tractor. It is possible to do that and that seems to be happening maybe at a higher extent that we’ve seen for some period of time.

Very good. Thank you very much.

Thank you.

Your next question comes from the line of David Riles [ph] from Webquest Security [ph]. Your line is open.

Good afternoon. Thank you for taking my call. I just had a couple of questions if we can talk a little bit about the restructuring, the actions or the benefits that you saw in the fourth quarter if you can parse it out a little bit from the actions you’ve taken and then the incremental $3 million in restructuring or that we expect in 2016, is that incremental in terms of the benefits we should expect in 2017 or later 2016? And then the second question is the global vantage distribution network. If you can just help me understand a little bit better in terms of in comparison complements this high tech distribution network.

Yes. Let me do those in reverse order.

Sure.

And maybe Rob can pick up some of the load here on the restructuring. As far as vantage is concerned, it’s the idea here and we put out a press release fairy recently and talked in terms of kind of expectations of the number of those. And it was over 100 vantage dealers is what we’re targeting. And I think it’s very much the same theme as those that we’ve already played out particularly with these high techs is that third party channel is still a very effective channel for accessing the market is if a farmer or a contractor has a problem at 3 o’clock in the afternoon relative to PC equipment, there’s no alternative really to having a local dealer that will come out and replace or fix the problem there locally. So we still have a very strong orientation towards third party distribution for some of these markets. But the traditional distribution which has been hardware-centric has been challenged by new generations of software kind of the expectation of being able to integrate hardware and software. So in effect, it’s what we’re selecting out of a number of hundreds of dealers in agriculture at this point in time but selecting a subset of those that are willing to invest and kind of step up to being able to kind of provide the integrated kind of higher brain functions sorts of capabilities that kind of more consultative approach to the farmer requires in terms of kind of more information based. So that’s what we’re intending to do. I think that if you look at the marketplace, nobody has perfected or nobody has come close to perfecting the right distribution channel to accomplish that. And I think that we have the expectations that maybe we can lead the way in terms of kind of getting, for the relatively small medium size farmers, a third party channel. And then for the large corporate farmers that’s got a more direct sort of approach augmented by the five dealer channel. So that’s what we’re attempting to do. I don’t if I was necessarily on point to your question, but that was an attempt anyway.

No, that’s helpful. Thank you.

Yes. With respect to the restructuring. So we had last year taken approximately $30 million of cost out of the company, $15 million we did in Q1 last and then additional $15 million in Q2 last year. So the Q4 performance against that was in line versus the restructuring that we had put in place in 2015. You also asked about the $3 million that we guided on for the quarter and that is not new incremental expense.

Okay. And then as a follow-up, should we expect any additional in the back half of 2016?

Restructuring?

Yes, that will drive incremental savings in 2017.

Yes, yes. So I mean I think that it’s always been part of the culture and I think given an ability to kind of naturally rely on revenue growth as much as we did, I think that there is a view that we will be perpetually restructuring. So some of these things are relatively long-term. So reducing the number of legal entities but dramatically lots of complications of doing that, that will be a multiyear effort. So I think the culture and the mentality is, yes, continue restructuring and not necessarily in big public press release mode, but basically continually working to leverage our cost base and get what must be organizational productivity improvements.

Will either one of you be able to provide as you go along as you did I think of the first half where you’re able to see upside in the number, provide some sort of guidance whether there’s upside or whether something is incremental as just opposed to part of the ongoing 200 basis point improvement?

I think basically what I would prefer to do is talk about revenue in relationship to cost. So if revenues go up, okay, costs are likely to go up. But to talk about the relationship as opposed to talking about them as two independent elements. So I think that our fundamental vocabulary I think will be around operating margins and that’s the forcing function more so than talking about kind of discrete cost reductions or cost movements, but I would like to keep the vocabulary centered around operating margins and kind of explain the variables associated with them.

Okay, great. Thank you very much.

Your next question comes from the line of Brett Wong from Piper Jaffray. Your line is open.

Great. Thanks for sitting me the last minute here guys. I just wanted to dig in the ag new products a little bit more. Steve, if you could just provide a little more color, detail around what products you’re seeing that are receiving good demand? And then the expectations of growth or contribution from the new ag acquisitions which you guys did in the fourth quarter.

Yes. So I think the - I don’t want to pre-announce any products that have not been announced. But kind of pointing at just one product and then one product category where we’re ultimately had kind of a business. But one product category where they were released during 2015 that are providing some additional sales momentum were kind of new displays, what the farmers are actually looking at in the cab with the tractor and, okay, information is central, information is king. They’re king or queen these days. And so I think the display is actually a central part of the tractor. And we came out with new displays that have attracted some new revenue. And I think that even though we’ve been talking about it, it’s still a relatively new category. The startup and the learning process have been a bit longer than we expected, but I will say a new product category that has the ability to add a step function of revenue. Maybe not a large step function in the beginning but a substantial step function in the longer term would be irrigation, the ability to control individual nozzle heads on an irrigation boom for example. And that has again turned out to be a slower development or longer development cycle in terms of testing one unit for a farmer that may need 30 systems. And so we may spend one season actually testing one or two systems on that farm with the expectation that we may get another 30 next season. And so I think that that things like that have the potential for moving the needle in their own right. Now, the AGRI-TREND acquisition we made in the fourth quarter is significant because we’ve been talking about the information-centric farm and the fact that farming will go through a transformation in the next 5 to 10 years that will be the use of information to make decisions on the farm. Some of it real time, for example, how much fertilizer should I drop on the next section of field based on a set of analytics. And part of it is, okay, what should I plant and what’s my strategy for maintaining the field while its growing? But ultimately the farmer where it’s kind of a bit category to extent for the first category, the farmer’s looking to an advisor of some sort and they take different forms around the country and around the world. And AGRI-TREND really gets us into that ecosystem and have a scale that we did not have before in terms of it’s the experts supporting those advisors is what they do. And so I think that again, financial results here in the next 12 months are not going to be huge from AGRI-TREND but it really positions us well to play a leading role in kind of this information transformation. So I would expect second and third year results from that to be potential needle mover for agriculture.

Great. Thanks. And then maybe I can just say one last one in here. You’ve talked about this increased focused on software going forward which is consistent what you talked about in the past. And we’ve watched software service sales growing consistently. And I know that it’s not always easy or consistent to see that growing on a quarterly basis. But can you just talk to what is driving that consistent growth? Is it the BIM offering? Is it T&L, both or something else?

Yes. Actually, I think it’s in some ways at different levels of intensity across the company. It’s really impacting most of the businesses within the company. And I think that some of this is conscious thought on our part. Some of it is just the demands of the market pulling us along with it. So I think that particularly if we declare ourselves to be on a transformative sort of mission, transform construction, take out 25% to 30% of project cost in construction by transforming the way work is done on the construction site, a similar sort of ambition in agriculture and in reality a similar sort of vision in transportational logistics, maybe with a little bit more help from the regulatory environment and transportational logistics. But really, for example, in construction, they get 25% to 30% reductions and project cost, it’s more than just a series of point solutions. It’s really a holistic approach. And therefore what you need is the integrated software to pull it all together. So that is kind of what’s driving the overall things for the company.