Trimble Inc. (TRMB) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Trimble Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder today's conference is being recorded. I would now like to turn the call over to Michael Leyba, Director of Investor Relations. Sir, please begin.

Thanks Mark. Good afternoon everyone, and thanks for joining us on the call. I'm here today with Steve Berglund, our CEO; and Rob Painter, our CFO. I would like to point out that our earnings release and the slide presentation supplementing today's call are available on our website at www.trimble.com, as well as within the webcast and we will be referring to the presentation today. In addition, we will also be posting our prepared remarks on our Investor Relations website at investor.trimble.com shortly after the completion of this call. Turning to slide 2 of the presentation, I would like to remind you that the forward-looking statements made in today's call and the subsequent question-and-answer 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-K and 10-Q or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today's call are fully reconciled to GAAP measures in the tables from our press release. With that, please turn to slide 3 for an agenda of the call today. First, Steve will start with an overview of the quarter and the year. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter and the year, and our guidance, and then we will go to Q&A. I would also like to briefly mention that during the month of February, we will be attending the Goldman Sachs Technology and Internet Conference on February 12 in San Francisco, as well as the Morgan Stanley Technology Media and Telecom Conference on February 25 also in San Francisco. With that, please turn to slide 4 and I will turn the call over to Steve.

Good afternoon. . In most respects the fourth quarter and total year 2018 results represent record levels in Trimble's 40-year history and provide a strong platform for 2019 and beyond. Fourth quarter revenue grew by 13.1% and total year revenue by 18.2%. The changing company model with growing software and services was reflected in a significant gross margin improvement, which expanded 4.2 points in the quarter and 2.3 points for the year, with the gross margin of 58% for the total year. Together with tight cost control, this improvement drove a remarkable operating leverage at 56% in the quarter and a strong 36% for the total year. As a result, operating margin grew 4.6 points in the quarter and 2.8 points for the total year. On the surface, the quality of our financial model compares favorably to the levels we achieved in 2013 and 2014, before we encountered the negative impact of agricultural and energy commodity price changes. In reality, the portfolio of today represents significantly more balanced, resiliency and growth potential. In particular, we are not – we are much less reliant today on the Resources and Utilities and Geospatial segments. In 2013, the combined revenue of those two segments accounted for 53% of the company total. In 2018, it was 41%. More importantly, during the same period the two segments moved from 65% of total operating income in 2013 to 46%. The portfolio is also demonstrating rapid progress in business model conversion with over 50% of 2018 revenue coming from software and services. This change is reflected in our closing 2018 ARR balance of over $1 billion. Clearly, 2018 was a year in which the stars were well-aligned. Every vertical market generated revenue and margin growth and demonstrated strategic progression. Almost every region produced robust growth and our OEM sales added incremental growth to our core end-user markets. The year was also notable for substantial progress we made in creating that strategic and state in the Buildings & Infrastructure segment with the acquisitions of e-Builder and Viewpoint. These aggressive actions reinforce the unique position around a strong bundle of value in the construction market with an enhanced position in project management, extensive relationships with project owners, and an information backbone that enables real-time access to all the information needed to operate a construction enterprise. We received validation of the strategy in the fourth quarter through our flagship users conference, Dimensions. We had more than 4,800 participants with over 2,000 of them attending our off-site hands-on demonstration area with 60 machines from 28 OEMs. We took the opportunity to demonstrate operational examples of autonomous compactors and dozers as well as numerous examples of practical mixed reality and machine learning. There are some pictures from the conference shown on today's agenda slide as well as a hyperlink that shows the technology in use. Beyond the objective merits of the e-Builder and Viewpoint acquisitions, I'm gratified by the rapid engagement with, and intense participation in, our efforts to execute unified strategy. Together we continue to discover both strategic and budgetary synergies which create a much augmented ability to establish a unique and enhanced solution for the construction industry. As we noted last quarter, the relatively unique positive environmental alignment in 2018 began to show some cracks as the year came to a close. The fourth quarter provided some key points to watch in 2019 including the impact of trade policy on U.S. farmers, reduced or deferred demand from the U.S. government, the combined effects of Brexit, and slower Chinese growth on European exports and growth, and reduced demand from OEMs. Two additional effects impacting 2019 will be the accounting effects of our accelerating conversion to subscription models and the impact of the stronger dollar. Pending better clarity, we have adopted a generally conservative forecasting stance on these issues for 2019 with potential upside if any of these issues are resolved early. Rob will speak more specifically to each of these points. A point of differentiation between us and many companies that have reported recently is that we are not attributing a change in growth trajectory to the Chinese market. Although Chinese revenue growth was disappointing in 2018, partly as a result of the reaction to U.S. trade policy, other regions have grown much more rapidly than China in the last few years and current Chinese revenues in 2018 represent less than 3% of total revenue, with diminished potential impact on the aggregate result. Resolution on trade tensions will create a net upside for us. We remain committed to the long-term model we described last year with organic growth of 6% to 9% per year over a cycle, plus an additional 3% per year from acquisitions. Our targeted operating leverage can be expected to convert this revenue growth into increasing EBITDA margins. This view on growth is shaped by our central strategic concept of performance to potential, which focuses on the penetration of underserved markets. This moves us beyond simple considerations of GDP or industry growth and leads to the expectation of growth rates larger than standard economic or industry metrics with increased resistance to cyclical downturns. Our strategic focus remains on the end-user not on OEMs, which represented approximately 15% of 2018 revenue. Our OEM strategy is either opportunistic or an element of a more extended go-to-market strategy. We remain bullish on the building and infrastructure segment with some puts and takes regionally. We continue to see the civil engineering end-user market as a double-digit growth worldwide market supported by a generally positive economy and reinforced -- our initiatives and underpenetrated market segments and machine types. We are also marginally more optimistic than we were three months ago that the U.S. Congress could move on in infrastructure bill. The growth outlook for vertical construction also remains attractive, although we are faced with two factors more impactful to that business and other Trimble businesses; one, being unfavorable exchange rates in 2019; and the other being the multiyear revenue accounting effects as we convert more of the business to a subscription model. The Resources and Utilities segment's short-term outlook will be determined to some extent by the duration of the U.S. Chinese trade dispute. U.S. farmers are demonstrating nervousness about the effects of lower Chinese demand for agricultural products and are showing some hesitancy about investing in their operations without more clarity. Longer term, we are confident about the agricultural market potential, driven by worldwide demographics, the potential of variable rate technology and the convergence of hardware and software and to complete workflow solutions. The Transportation segment's short-term outlook is positive, driven in part by the second phase of the ELD mandate. We anticipate longer-term growth as we address the industry's remaining challenges including the improvement of transparency between the shipper and fleet operators. We also have additional growth potential available through worldwide expansion. The Geospatial segment may have more moderate growth prospects than the other segments but, nonetheless, it has meaningful three-year growth potential, driven by the technology replacement cycle, the creation of new classes of product through innovation, alternative business models featuring hardware-as-a-service, and the inclusion of Trimble technology in autonomy solutions. Our view on the regions also remains generally positive. We view our U.S. markets positively through 2019 with the qualification relative to the trade induced ambiguity in agriculture. Europe, although still producing double-digit organic growth is accumulating more questions and our outlook has become somewhat more conservative. Russia remains a country with significant potential, but brings with it some volatility and challenges. Brazil is a significant and attractive market for us currently driven by agriculture, but with new potential in the transportation enabled by our Veltec acquisition, although too soon to tell the Brazilian regime change has potentially improved three-year prospects for construction. India had a very strong 2018, and we expect the country to be a significant contributor to results in the next three years. Africa is a small contributor at this point and is inherently a complex market but with meaningful three-year potential. China is a significant three-year question pending improved clarification of trade policy and rules of engagement. In summary, we are coming out of the most successful Trimble year ever with excellent strategic positioning significant market momentum and an organization focused on performing to our potential. Let me turn the call over to Rob.

Thanks, Steve. In my commentary, I will review the results for both the fourth quarter and the total year of 2018 before closing with guidance. Starting on slide 5, fourth quarter total revenue was $793 million on a non-GAAP basis, up 13% year-over-year and at the lower end of our guidance range. Breaking that down, currency translation subtracted 1% and acquisitions net of divestitures added 10%. Organic growth was 4%. ARR or annualized recurring revenue grew to $1.05 billion in the quarter, up 36% year-over-year. Gross margin in the fourth quarter was 59.5%, up 420 basis points year-over-year reflecting favorable pricing dynamics as well as favorable product mix, which was driven both organically and inorganically. Gross margin was clearly a standout dynamic in the quarter. For the year, we delivered a 230 basis points year-over-year improvement in gross margins. The adjusted EBITDA margin which includes income from joint ventures and equity investments was 23.6% in the fourth quarter, up 430 basis points year-over-year. Operating income dollars increased 43% to $172 million with operating margins increasing 460 basis points to 21.7%. Our non-GAAP tax rate declined from 23% to 19% year-over-year driven by U.S. tax reform. Net income was up 31% and non-GAAP earnings per share in the fourth quarter were $0.48, up $0.11 or 30% year-over-year. Commensurate with our low capital intensity and attractive cash generation profile of the business deferred revenue was up 40% year-over-year and net working capital inclusive of deferred revenue was approximately 3% on a trailing 12-month basis. Cash flow from operations was $102 million, down 5% year-over-year, which was driven by the timing of a $30 million cash interest payment. Otherwise, cash flow from operations would have been up year-over-year. We closed the quarter at a gross debt level of over $1.9 billion, a net debt of just under $1.8 billion representing about 2.5 times net debt to adjusted EBITDA on a trailing 12-month basis, which is more than three quarters ahead of our original deleveraging plan. If a full 12 months of EBITDA from e-Builder and Viewpoint were incorporated, that metric will be lower still. Our balance sheet remains demonstrably strong and provides us with flexibility to simultaneously consider a range of capital allocation actions. We expect to continue to delever and pursue modest year buybacks while having dry powder deployable for attractive acquisition opportunities. During the fourth quarter, we also completed the acquisition of Veltec and we repurchased 1.1 million Trimble shares. Next, put the fourth quarter into context of the overall year as the performance in any singular quarterly is incomplete by definition. Turning to slide 6 when looking at the total year for additional perspective, we view 2018 as a very strong year. Revenue grew 18% overall and 9% organically. Gross margins expanded 230 basis points to 58%. With approximately 36% operating leverage for the year, operating margins expanded 280 basis points to 20.6%. EBITDA margins expanded 240 basis points to 22.6%. And EPS grew $0.49 or 34% to $1.94 exceeding the guidance ranges that were previously provided at our Analyst Day and during our third quarter earnings call. Lastly, our 2018 cash flow from operations was up 13% on a year-over-year basis and near $500 million, driven by the growth in net income and deferred revenue, partially offset by increased working capital. Turning to page 7, the eight listed metrics are financially representative of our identity as a technology company. From revenue mix, growth, contracted backlog and our low capital intensity, our metrics demonstrate the strength of the Trimble financial model. Turning now to slide 8, let's go to the revenue details at the reporting segment level, which is presented on a year-over-year basis. Buildings and Infrastructure delivered 7% organic growth with double-digit growth in the building construction business and the civil construction business down slightly. Our BIM-centric building construction businesses continued growth across the portfolio and across all major regions. In civil construction, the discrete negative impact was from U.S. government sales, which we expect to continue into the first part of 2019. The underlying end-user field sales growth remains strong in the business, reflecting the strength of our distribution network and new product introductions. Geospatial delivered 3% organic revenue growth with end-user demand exceeding this number and OEM-centric business is slightly down. Resources and Utilities was flat on an organic basis. Our OEM base -- business was up based on new OEM partners. Variable rate technology was also up. The end-user business was down and is a story of geography. North and South America were both up, both benefiting from go-to market actions, whereas, Asia Pacific was down driven by the drought in Australia. Our Europe business had a tough comp as well as some discrete issues in Ukraine. Put into context to of the year, the business had a solid year of growth. Finally, the Transportation business produced 4% organic growth with growth in subscription revenues above this level offset by lower a new unit hardware demand that drove the comparable number in the fourth quarter of 2017. Moving next to slide 9, let's give an update on our Viewpoint and e-Builder acquisitions. Steve covered the strategic rationale in his commentary in how these capabilities are enabling us to strengthen our reach to contractors and owners as we link the construction -- constructible model to the project delivery. Both businesses have outperformed expectations since acquisition including strong bookings growth in 2018 that provides us a high degree of visibility into 2019 financials. In the e-Builder business, we moved Trimble's program management solutions under the e-Builder management team to rationalize our product and go-to-market strategies. In the case of Viewpoint, the transition from license to subscription is ahead of plan. The customer-driven strategy of selling an integrated office team and field offering, which is packaged as a Viewpoint 1 is demonstrating that general contractors -- the general contractors value having mobility and project delivery capabilities bundled with their construction management system. Further, we announced the transfer of the MEP business from Viewpoint into the larger Trimble MEP business to help us drive a unified workflow between the job costing, system resident in an ERP solution with the estimating and constructible design capabilities of the Trimble MEP software. Looking at our combined capabilities, we are driving customer success by integrating workflows and we have made tactical progress to motivate joint selling efforts across the businesses. Next, slide 10, for an overview of the geographic revenue mix. Between the relative strength of the U.S. economy and the North American centricity of recent acquisitions, we again see the portfolio mix tilting towards North America in the quarter. The trailing 12-month performance reflects the strength we've also seen out of Europe. In Asia-Pacific, Steve commented earlier on China and I commented on the impact of drought in Australia. India outperformed both in the quarter and for the year. And Rest of World, Brazil was the standout performer. Let's turn to slide 11 and look at our trailing 12-month revenue mix by type. We grew to a level of 52% or $1.6 billion of software services and recurring revenue and 48% hardware. This is a significant milestone for Trimble as this is the first year we have crossed the 50% threshold. Within the software revenue elements recurring revenue which is mainly comprised of subscription revenue and support and maintenance agreements stands at $935 million, or 30% of total revenue. Software and services which is mainly comprised of perpetual and term licenses as well as professional services represents $680 million of revenue. Each software-oriented revenue type grew double-digit with hardware growing high-single-digit reflecting strength across the entire business in addition to acquisitions. Moving on to slide 12, let's go through the operating income details at a reporting segment level. Operating income growth drivers were similar across each of the reporting segments with gross margins expanded based on product mix and pricing. When combined with operating expense management this enabled us to significantly expand our operating margins in every reporting segment and over 460 basis points at the company level as compared to the fourth quarter of last year. I will now close with guidance, which excludes the impact of any future acquisitions or divestitures. Overall, we believe the company is positioned for solid growth in 2019 following a very strong 2018, with a continued shift towards software and subscription revenues and margin expansion ahead of the target model we set out at Investor Day. The margin expansion we are seeing reflects the resiliency of our model and the actions we have taken over the last few years to balance our market exposure, exit non-core activities, shift our business toward software and to control our operating expenses. Turning to page 13, for the first quarter, we expect non-GAAP revenue of $795 million to $820 million, an EPS of $0.44 to $0.48 per share. The first quarter revenue range assumes total company growth of 7% to 10% with organic growth in the 3% to 5% range plus a 6% to 7% from acquisitions less 2% from FX due to the strengthening of the U.S. dollar. The earnings per share range also incorporates an updated 20% non-GAAP tax rate reflecting our expectation on geographic profitability mix. To bridge this revenue range against our long-term model as Steve discussed. Our strategic focus as a company is centered around end users, where we believe the growth drivers are secular in nature. Throughout 2018, the growth of our end-user businesses fit the target model and we expect this demand pattern to continue into 2019. In the first quarter, three discrete elements moderating total company revenue growth expectations include: one government orders and our OEM-centric businesses; two agricultural weakness in some markets which we largely attribute to trade and tariff consideration; and three the acceleration toward subscription revenue, primarily in our construction business and secondarily in our Transportation business. In fact, our SketchUp business is officially launched their subscription model today. This revenue conversion is definitively the right thing to do for the business and we believe will further fuel our ARR growth. With the first quarter as context, our current full year view of 2019 total company growth is estimated at 6% to 10% with organic growth in the 4% to 7% range, plus 3% to 4% growth from recent acquisitions less 1% from FX impact. Please note that in the second half of 2019 that Viewpoint flips to the organic category and positively moves the needle on a total company organic growth. With the incremental uncertainty, as we mentioned, our view is that the prudent course of action is to remain cautious here at the beginning of the year and continually assess patterns as we progress through the year. We expect gross margins overall to be slightly up on a year-over-year basis and we expect to manage operating expenses to deliver 25% to 30% operating leverage. We expect a strong year from a cash flow perspective with cash flow from operations above non-GAAP net income and reduce working capital. We currently anticipate about half of our cash flow will be directed towards debt paydown, which will keep us well ahead of our deleveraging plan. On that basis, we expect interest expense to decrease as we progress through the year, with overall interest expense in the range of $80 million. Equity income is expected to grow to approximately $35 million. Under those assumptions and using a 20% non-GAAP tax rate for the year, we expect EPS growth in the high single digits for the full year, delivering single-digit growth in the first half of the year and double-digit growth in the back half of the year. Where if not for the subscription conversion, operating leverage and EPS growth would be higher. Let me close, as Steve began, 2018 represented a record year of performance for Trimble and provided a strong platform for 2019 and beyond. Let's now take your questions.

[Operator Instructions] And our first question comes from the line of Gal Munda of Berenberg Capital Markets. Your line is now open.

Hi, everyone. Thanks for taking my question. The first one I have is just in terms of the business model transition. Rob, you mentioned that it's definitely having an impact on organic growth for next year. Can you give us – have you thought about maybe trying to quantify how much of that would be the impact on organic growth when you kind of look at the guidance for the year? And then as a follow up, I just have one question on the incremental income margin.

Sure. Hi, Gal. I'd call it a plus or minus range. If we look at about, call it, $30 million of revenue converting to subscription and I call it an incremental $30 million of revenue converting to subscription in 2019. At a total company growth or an organic growth view that has 1 point impact on the top line. Of course, that $30 million also goes directly to the bottom line. And so what you would see from an operating leverage perspective is, call it, 5 to 8 points of a drag on operating leverage and therefore, an impact on EPS as well.

That’s really helpful. Thank you. And then, the second thing is, you've basically highlighted the fact that the first quarter when software and services have overtaken the hardware portion of the business. You obviously have a plan to reach kind of 55% by FY 2021. If the current environment continues, is it fair to say that that percentage could potentially be higher? And where I'm getting at with the question is, what is your exposure -- rather the revenue exposure, what is your exposure to margin in terms of the software versus the hardware business, if you have thought about that way, which means that if hardware doesn't grow as fast, how much will be your margin can you expand effectively?

So as we look at the model forward, I think, yes, if you would take the pattern of today and if we assume that that would hold, I would, by, let's say, the laws of math expect the software to be higher than 55% at that point. And aside from that, I think, we're already probably on track to be a bit ahead of that. It would be a modest difference, not a fundamental difference, given the underlying size of the dollar revenue base. From a margin perspective and what would happen with margins on -- I'd say hardware versus software growth in the next years, it actually doesn't make a very big difference to the margins. So the hardware business as an aggregate have a solid level of profitability today. So there's not let's say a distinct shift that would happen if the revenue mix were to change.

Okay. Thank you. Great help.

And our next question comes from the line of Ann Duignan of JPMorgan. Your line is now open.

Yes, hi. Maybe you could give us a little bit more color on the government slowdown in orders? I think you mentioned that in both the Buildings and Infrastructure or the civil side, but also on the Geospatial side. So if you could just provide more color that will be great?

Hi Ann. So we've seen it in a couple of areas and as you said in geospatial and civil construction. The dynamic has more or less been as follows; we've had some orders that have pushed out, and then we've had some orders that just didn't come. Of course it doesn't help that government was shut down, but this was actually prior to that. One of the dynamics we've seen and I think, I probably underestimated it was -- actually the lack of appointments we have in some of the government positions. And so as those positions have been slow to get appointed, what we often have is the new person comes in and wants to review programs and that slowed the machinery down, so to speak. So it's not at all about competitive issues at all. It's really just to say that the straight demand from the government business.

And is it any department in particular? Or any appointments we're waiting for? Or the department just been mean and we’re just waiting for projects to get back on the table?

It's really not any department in particular. I'd say it's a little bit across-the-board. We have both business in the civil side of the government as well as some of -- to the Department of Defense and some of the military branches, a little bit more on the DoD side than in the civilian space. We've -- I'd say generally yes, we think by the second half of the year we'll be where we need to be. Of course, it's the third quarter. Our third quarter is the big quarter for government sales as you get closer to the end of the budgetary year. It's the end of the government's fiscal year. And so that's kind of the -- from an annual perspective that's the make or break quarter. And we -- at this point we would be positive on that business in the second half of the year.

Okay. And if I could I'd like to ask a follow up on the transportation side. You've been reading a lot how competitive the industry there is for Telematics and for -- just offering the fleet beyond Telematics and beyond the ELDs. As we transition away from ELDs what's your view of how competitive that industry is and how competitive might get going forward? And what are the ramifications for your business either at the margin side or the revenue side?

Yes, it's a good question Ann. There's no doubt that the ELD mandate which is really a compliance activity brought a lot of competition into the market, particularly, at the low end of the market if it's just to check the box compliance activity or for the very small fleets. As we look at -- if you can contrast that to the Trimble business, there's no doubt we also had some benefit from the ELD business, but we're fundamentally about providing an enterprise solution. And so as we think about the space as it is today, there's a lot more trucking companies that now have adopted technology as a result of the mandate. What we believe is starting to happen and will continue to happen is that a number of trucking companies are going to have buyers' remorse from the solutions that they bought that have no ability to have an upgrade path to an enterprise solution and get beyond the check the box compliance activity. So, in that respect, we would be -- we actually see that as a favorable that so much more of the market has adopted some technology that actually won't be able to meet the needs such that as we can. From the enterprise side of the space of trucking -- of the trucking market, I would agree that that also is -- has become more competitive. And then in that space when we look at what's uniquely different about Trimble and this is a very -- this is North American context as we're the only company that can bring together both the enterprise, back office, with the mobility solutions and the field with the mapping technologies as well as actually now shipper visibility. So, our ability to connect ecosystem we think is unique and differentiable in the North American context. And then the last thing, I guess, I would add is with the acquisition of Veltec that gets us an extension into Brazil which is the largest market south of the U.S. and we also have business today in India as well as in Western Europe.

Okay, I'll leave it there and get back in queue. I appreciate the color, helpful.

Thanks Ann.

And our next question comes from the line of Richard Eastman from Baird. Your line is now open.

Yes, good afternoon. Steve, can we just -- would it be possible or Rob just to maybe parse out if you think about where the revenue guide was for the fourth quarter. It seems like from plan, we're really talking about the B&I civil business and then also the Resource & Utility Ag business. Could you just kind of parse out, I mean, $10 million of plan in those two pieces of the business? Or can you get us focused there a little bit as to how those businesses and then the cadence through the quarter? It sounds like the civil side being government-oriented, you probably have a good sense of that as early as October, but I'm curious about the cadence through the quarter in those two pieces of the business that maybe were off the plan.

Sure. So, yes, relative to the -- I'd say the original guide or original thoughts we had for the quarter, it was concentrated in the Resources & Utilities and the Buildings & Infrastructure market. In aggregate, the government and the OEM sales were lower in those -- within the collective businesses. Actually I guess geospatial would have been lower as well in the OEM business, so geospatial a bit lower in the OEM revenue. The civil construction was in the government revenue primarily, because when we look at the underlying field sales growth which is the vast majority of the business, our field sales were up double-digit organically in the quarter, so exceeded actually the expectations we had over the field business, which is the end-user business. And in the Resources and Utilities business, predominantly on the agriculture hardware side, I mentioned, Europe, where we didn't run a promotion program that we had the prior year and we saw our delta revenue to that. And then we also saw stocking orders that were lower in the Asia-Pacific region both of which we've seen now reversed as we've come into Q1.

Okay. And against the 4% to 7% core for the year, maybe expectation, how do the four segments kind of lineup here? It sounds like towards the higher end would be trans and maybe the vertical construction? Could you just kind of put those on a relative basis here to the 4% to 7%?

Yes, sure. So, from record, there's the 4% to 7% that we've talked about for the year. I could also probably index that against what we've talked about it at Investor Day for the reporting segments. Now if we take the transportation business and the Buildings and Infrastructure those two would be, I'd say, right in line with what we talked about it at Investor Day with B&I at an 8% to 10%, expectation transportation at 7% to 9%. Geospatial has dialed down a bit and that's from the OEM parts of the Geospatial business. And then the Resources and Utilities business that's also dialed down and we've tempered expectation a bit here, especially relative to the tariffs and trade. And I mean, as Steve mentioned, certainly that if these things get resolved, that's a net positive for us.

Okay. And then just probably last question from me. For Steve, I'm just curious, we narrowed down the list of many small wounds or negatives out there to kind of just list the 4. And I think can you just kind of look at this list of 4, the trade policy, the reduced demand by U.S. government, Brexit and the OEMs reduced demand? And just kind of give order of magnitude as to the impact on the business if one or all of these start to clear?

Well, okay. Probably, I think top of mind would be the trade as it's, I guess, indirectly affecting U.S. farmers. I think the demand from China is very much reduced maybe putting it mildly, it has introduced major ambiguity into the U.S. farm environment. And there are -- and the farmers are actually facing windows where they have to make decisions in terms of what to plant this season. So I think that probably in terms of effect in 2019, maybe the indirect effects of trade on U.S. farmers maybe is top of mind. Now at the same time as in the Chinese market, it's clear kind of U.S. actions or the interchange between the U.S. and China is giving relative license for, let's call it, renewed economic nationalism in China. So I think there's a secondary impact here, which again we're not putting kind of top of mind here. But I would say U.S. agriculture is maybe the most direct and obvious effect on us. I think – okay. Brexit and kind of the second and third order effects Europe is kind of in the category of who knows – first off, who knows what's really going to happen and then who knows what the effects of whatever that maybe. I mean, there's certainly an impact on the U.K. and there would be knock on effects in Europe. And I think our view is that, it can be pretty significant and it all remains to be seen. So I think that is more in the still a – to be kind of to be determined, unknowable but I think we share that ambiguity with a lot of other companies as well. I think the reduced deferred demand from the U.S. government, I think is a short-term issue. I'm not sure that has even full year effects on 2019. It may be kind of a first half versus second half effect. But I think that is maybe more of a short-term kind of tactical. And the reduced demand from the OEMs, I think maybe reflects again just caution and a drawback from some collection of uncertainties as it related to the latter part of 2018 and 2019. But I would say, yes, substantially the impact of trade on U.S. agriculture and the possibilities of Brexit fallout or probably the two that really matter to us. The others tend to be not really nearly so strategic or necessarily structural as those two. Q – Richard Eastman: Very good. Thank you.

Thank you [Operator Instructions] Our next question comes from the line of Jonathan Ho of William Blair. Your line is now open.

Hi. Good afternoon. I just wanted to see, if you could give us a little bit more color on the impact from China? And to what degree there are offsets for the U.S. demand? Do you have products that are subject to tariffs? Just wanted to get a little bit more of a sense of what's driving that?

Yeah. So first of all, just to clarify, we're not pointing necessarily at tariff effects as the primary kind of issue in China. I think it's the relative license that's maybe growing around the world for kind of a higher degree of economic nationalism kind of enabled by talk of tariffs and protection of industries. So I think there's always been implicit in China a level of economic nationalism, our preference for national champions and such. So I think there is – okay. It's more of that element in terms of kind of a bias shown in the Japanese – sorry Chinese market than necessarily a direct effect of kind of tariff outcomes. I think also that clearly the Chinese market has slowed with kind of primary effects and secondary effects so some of the demand in China has just slowed because the market has slowed. But I think there's also if you will a more defined more apparent bias towards, let's call it national champions of one sort or another, even if they've got an inferior product. So I think again, we've been dealing in this environment for some period of time. It's intensified clearly in the last 12 to 18 months, but I think that's the issue in China more so than just straight calculation of tariff effects or anything like that.

Got it. And Rob, how should we be thinking about maybe ARR growth for 2019?

Yes. So we had the 36% growth year-over-year in 2018. Of course, some of that was aided by the acquisitions we grew in the teens and mid-teens in 2018. As we look into 2019 I expect that pattern as well to be somewhere in the low-teens growth in ARR which is obviously a significant element for us now.

Thank you.

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

Yes. Good afternoon and good evening. I wonder if we could start in Resources and Utilities where you -- Steve you had mentioned farmers feeling the impact of the tariff situation. Sorry, are you saying that in the first quarter we're going to see OEM production cuts? Or are you seeing meaningful year-over-year declines in North America aftermarket inflations? Can you just flesh that out for us, and we're talking about a number of headwinds yet pretty reasonable organic growth in the first quarter, so I just wanted to make sure I understand as your messaging if there's risk to the downside? Or is your point organic growth would have been better without the headwinds that spoke about it at length over the course of this call?

Well, I guess, by definition -- this is Rob. I guess, by definition, the organic growth would have been better were it not for the headwinds we saw. As we look into Q1 I mean, into 2019 we read the same stuff as you do about OEM expectations on new machine units which you of course have to parse into what's in the dealer inventory versus what's retail demand. The majority of our business of course is aftermarket business and not OEM-centric although of course that is still important to us in the agriculture business. We also look at the business that's outside of North America. Years ago, we used to be the majority in North American business in agriculture. And today, that's I think less than 30% of revenue is coming from North America in agriculture. So the factors all add up. So for instance, if you look at the pressure on U.S. farmers related to tariffs and the Chinese demand on soy. Of course, the Chinese are now buying that soy from Brazil. And so right our mantra then is to go get the business in Brazil and that is one of the reasons we've seen that Brazil business growing nicely here for the last few years. Actually we see -- we've talked about -- we sometimes might see in North America, but actually we need to isolate that to U.S. because we've seen the business in Canada performing well. The other element as we come in and think about ag here at the beginning of the year and for the total year is we look at our new product introduction cycles that we expect to come out throughout the year. We look at our own go-to-market initiatives that we would view ourselves is having control of more enterprise selling, more bundling of our hardware and software, additional OEM relationships and always looking to improve the distribution partners that we have. And so we take those factors together and that gets to our point of view on agriculture and why we do things that there's good business to be had there.

And Rob, just a clarification, are you expecting your aftermarket inflations in the U.S. to be down year-over-year in the first quarter? Or are you just talking about a slowdown in the pace of growth?

I'd say it's more kind of flat, which would be a slowdown in the pace of growth.

Okay. And e-Builder bookings growth really accelerated to what looks like about 50% growth in the fourth quarter, if I am understanding the disclosures right. I'm wondering if you can expand on what's driving the momentum and how sustainable is that through the early part of 2019, as the comps seem to suggest?

Well, I can say without reservation that business is an excellent business run by an excellent set of operators. I mean, we're very pleased with the performance of the business thus far under Trimble. I think we believe that e-Builder, let's say from a product perspective has a unique solution. It's meeting an unmet need in the market without a great deal of competition. The team has I'd say a very well oiled machine relative to the go-to market. Actually they execute the sales and marketing aspect of the engine, and so we're bullish on the business. And we feel bullish on the continued growth in bookings as well as profitability of the business. And we're bullish on the intersection points between e-Builder and the rest of Trimble construction both vertical and horizontal construction. We made our first integration for our customer between e-Builder and Viewpoint between the program management system and the project management system that the general contractor is using. And so we believe there's many more things to come along that line. And then also I would add that in -- let's see -- and noting the performance of that team in our business we moved a couple of product lines that we had I'd say in Trimble over to the e-Builder management team to run. And we're optimistic that that business will flourish under their leadership.

I appreciate the discussion. Thank you.

Okay.

And our next question comes from the line of Colin Rusch of Oppenheimer. Your line is now open.

Thanks so much. Can you talk a little bit about the paydown on the debt versus buying back stock? How do you guys think about that? And what should we expect in the first half this year?

Yeah. Hi, Colin. So for the year, we expect to pay down approximately $75 million a quarter of the debt, so call that $150 million for the first half of the year. If we look back the stock buyback, we did in Q4 the $40 million and I'll call that a plus or minus as a baseline expectation here in the first half of the year. That assumes if there was acquisitions, that they will be tuck-in in nature. If there was anything of more material size, we'd immediately revert back to the focus on the deleveraging. But there's nothing to let's say report on that side.

Okay. And then, obviously, there's an awful lot of variables to track with the business given the diversity of end markets. I mean, as you think about the second half growth and earnings power, what are the -- a couple of key levers that you guys are really concerned about right now as you think could break either way that we should be tracking?

Well, if there was something to be concerned about I would highlight, Steve's commentary and the thing that gives us some degree of caution or the things that we're paying attention to would be the geopolitical topics around trade or things like Brexit or general macros and how that impacts OEM businesses and new unit sales to a degree that that impacts Trimble. But from a positive standpoint, a lot of the things that encourage folks to think about is with the over $1 billion of ARR coming in to the year that is a very meaningful amount of revenue that we have line of sight to. And that ARR grows throughout the year as we grow the cumulative subscriber bases in our businesses. A couple of other details I would add as we think about from, so I'll call it a positive sense as we move into the second half of the year. Truth is as we get a little bit more of a favorable comp in the second half of the year than we would have in the first half of the year at least on an organic basis. The other thing -- another thing to look at is that our software -- as we get more software-centric we see Q4 as the I'd say the biggest quarter in many of the software businesses and as that -- and with that expectation that that plays through this year because it has -- it basically continues what we've been doing so if that continues to play through that gives us conviction that we've got a handle on the business in the second half of the year. And then I would layer in the so-called usual activities of new product introductions that we anticipate in a variety of businesses and that would add up to the conviction we have for the business as we move throughout the year.

Thanks so much.

And our next question comes from the line of Rich Valera of Needham & Company. Your line is now open.

Thank you. Rob could you bridge between the -- your prior organic growth guidance for the year which I think was 6% to 9% and the 4% to 7% now, does that reduction -- is any of that from subscription transition or is that all from kind of four main factors you discussed previously?

Yes. I will add context, the 6% to 9% we talked about over the economic cycle. And we've always had a point of view that in any given year it could be higher or -- slightly higher or slightly lower but I do appreciate that you heard as 2019 6% to 9%, but what we talked about last quarter, 6 -- reaffirming 6% to 9% over cycle and Steve reaffirmed that at the beginning of the commentary. So, the better bridge I think I can make is okay if it's 6% to 9% over a cycle why would we have a view that would be slightly dialed down on that for 2019 as a year. And the first one I will talk about would be the government sales and the OEM revenue streams. So, I'll focus on two, is if I can take that as one category. The line of sight we have in those two revenue streams, we expect that to be lighter this year overall than it was last year and I could look at the second half of last year as -- call it the baseline view of that and playing that forward into 2019 over a total year basis. We take about -- I'll call it about one point of growth. And then the other one I'd say to focus on would be -- I think it's what you're getting at would be the subscription revenue transition. And using the SketchUp business which did officially launch the subscription model today that transition goes as we expect it to go that -- if we see that conversion of revenue, which of course, would be call it a third less than what we might normally see, then that's going to have a natural headwind to the revenue growth. But of course, for everyone doing the math on the model it's definitively a good thing if not a great thing for the underlying health of Trimble as we grow that ARR revenue stream.

That's perfect. Thank you. And then I just wanted to clarify. I think what you said, when you're talking about your growth of ARR in response to a prior question was that last year the organic growth rate was mid-teens. Is that the correct number to think of for the organic ARR growth last year?

Yes correct.

Got it. And just one final one, if I could gross margin as you know was exceptionally strong in the fourth quarter. How should we think of 2019 as a whole relative to the – for gross margin relative to that fourth quarter level?

Yeah, it's a good question. So on – in the fourth quarter, we think on an ongoing basis we're going to see what we saw in Q4 2018 which is that the strongest performing gross margin quarter in a given year which is a function of the amount of software that we see selling in a quarter. So, basically in other words, it's a product mix topic relative to end of year sales – end of the year revenue dynamics and the software businesses is that we have that we'll just essentially by the math and the mix will pop gross margins by I'll call it 100 to 200 basis points in Q4. So which is a way of saying then that taking Q4 as the baseline is not assuming – is not the baseline to take for us for the total year of 2018. Now for the total year, 2018 we ended at 58% gross margin. And we would see just a really would plan for just a slight increase to that as we come into 2019 as a total year. Now how the revenue mix plays out through the year of course could take that higher, if it was more software-centric than we expected or lower if the hardware business is stronger than we expected.

That's perfect. Thanks for taking my question, Rob. Appreciate it.

No problem.

And our next question comes from the line of Rob Wertheimer of Melius Research. Your line is now open.

Hi. So just two points of clarification, if I may. Is there a incremental slowdown from the actual government slowdown? Or is that not a material factor? And then in resources maybe 3Q is abnormally stronger or is quite strong anyway. Was this really all – if I understand it right a majority led aftermarket slowdown in North America? Or were the tariffs continue to be an issue? Or was it really more balanced than that?

Well, let me start with the first question on that – I think you said Rob that the government shut down and to what extent.

Yes, the actual shutdown is that incremental yes.

I think slight. It's certainly a delay. I wouldn't say that, because of government shutdown that the orders went away, but it's actually one area where we think that played out – it plays out in agriculture market as – when the USDA was shut down. That's that much less time that the USDA was – USDA spent with farmers and we're getting close to planting season here before too long, but not overall really not material in and of itself. Can you repeat the second one? I didn't hear the beginning of the question.

Yes. I'm sorry it's just on resources. 3Q was pretty good to be fair and then slowdown. The tariffs were in place in 3Q and we didn't see the farmers sort of panicking. And so I'm just really curious as to whether that was really a North American slowdown? Or there's a little bit of everywhere? Or really what led such an abrupt slowdown from 3Q to 4Q?

Yes. So the two biggest areas for us were in Europe and in Asia Pacific. In Asia Pacific two aspects, one is the drought in Australia, which that – as I understand it, there's drought conditions are – I don’t know if I could say over, but they are relieving in Australia. And we see some of the demand coming back. The second in the Asia-Pacific region was stocking orders from our dealers that didn't come at the end of 2000 -- that didn't come in Q4 like they have in prior years. And we saw some of the partners taking actions to manage inventories down at the end of the year. And we saw those orders come back immediately in January. So that was one aspect that would connect the dots between the Q3 and the Q4 pattern. In Europe, two things that we saw, I guess you could call them discrete. One would be, we normally run a promotion in Q4 in Europe that we didn't run this year in Q4. We started running it here at the beginning of Q1 and it had the impact that we would have otherwise expected on the business. And so there's a delta of revenue there. And then the second one is, there's been some issues in Ukraine around VAT that we're holding up business there, between Russia, Ukraine and the CIS countries, that's become a bigger market for us. So those would be the factors, I would call out in Resources and Utilities that change the slope of that curve from Q3 into Q4.

Great, thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Michael Leyba for closing remarks.

Thank you everyone for joining us and we look forward to speaking to you again next quarter.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.