Trimble Inc (TRMB) — Q3 2021 Earnings Call Transcript

Welcome everyone. Before I begin, I want to remind you that our presentation can be found on our website, and I encourage you to look over the Safe Harbor statement at the end. I will start with the key messages on Page two. In the third quarter, our team achieved remarkable results despite facing tough supply chain challenges. We exceeded our expectations, reaching record annual recurring revenue of 1.36 billion, an 8% increase year-over-year, and an 11% increase organically. We saw total revenue growth, an EBITDA margin of 25.9%, and trailing 12-month operating cash flow of $784 million. We achieved record revenue levels in many of our businesses, particularly in machine control and civil construction, with positive guidance for agriculture and Survey and Mapping. These results reflect not only the market recovery but also the effectiveness of our Connect & Scale 2025 strategy and the dedication of the Trimble team. I want to specifically acknowledge our colleagues, led by Leah Lamberton, who are helping us navigate supply chain difficulties. As a result of our collective strength, we are increasing our annual earnings guidance, even amid a tightening supply chain. The overall market remains strong, particularly in construction backlog, especially for residential and infrastructure projects, strengthening our Geospatial and buildings sectors. We are hopeful that the Infrastructure Bill will pass in the U.S., positively impacting our construction and surveying businesses starting in 2023. We have proactively enhanced our product and go-to-market capabilities in preparation for this opportunity. I'm particularly proud of Trimble's leadership in advocating for policies that support technology adoption, especially around advanced digital construction management systems that provide funding for state transportation departments to accelerate the uptake of effective digital design and construction technologies. We will keep supporting the Federal Highway Administration and State Departments of Transportation in delivering sustainable and modern projects. In Agriculture and Forestry, robust commodity prices have boosted our customers' purchasing power, keeping our backlog strong. We are monitoring inventory levels of essential agricultural products, which are healthy and provide insight into ongoing farm financial strength, countering rising input costs. We have also been promoting a legislative proposal called SB27-50 in the U.S., which offers low-cost loans to farmers for adopting precision technologies. Internationally, we see favorable conditions, including ongoing subsidies and emerging policies that promote technology use for environmental sustainability in transportation. We recorded solid growth in bookings, improved customer retention, and enhanced operating margins. In September, we announced a strategic partnership with Procter & Gamble to develop an agile procurement collaboration platform that complements our existing supply chain solutions. Our success will facilitate faster contracting and onboarding processes, enhancing business transaction efficiency and freight movement. I am also pleased to report that we became the first major technology provider to certify under Canada's ELD mandate, reflecting a positive trend in product delivery. However, the supply chain disruptions significantly impact our trucking customers' operations and may limit our ability to see execution benefits reflected in the near-term P&L. Now, let's move to Page 3 to discuss the progress of our Connect & Scale 2025 strategy as viewed through the Trimble Operating System, which integrates strategy and execution. Our strategy is an industry platform approach aimed at leveraging Trimble's strengths with our ecosystem partners to transform various sectors related to how we live, what we eat, and how we move. Following COP 26, we believe technology can positively address climate change. We recently announced a partnership with Microsoft to develop and sell our industry cloud platforms and solutions that connect people, technology, tasks, data, processes, and industry cycles. Our initial focus is to establish a Trimble Construction Cloud powered by Microsoft Azure, and we will collaborate on joint go-to-market strategies for these cloud innovations. Additionally, at our annual user conference for viewpoint construction management software, we transitioned viewpoint's branding to Trimble. At this event, we also launched Trimble Construction 1, which enhances viewpoint's existing SaaS suite with new features from across the Trimble Software portfolio. This integrated package now incorporates Trimble's estimating, detailing, and advanced project management solutions and is sold by multiple Trimble divisions. Our direction is clear: we will continue to enhance the Trimble Construction One platform for our civil and buildings customers, connecting the physical and digital aspects of construction workflows in the field and office. On the people side, we have been recognized for our strong company culture and acknowledged as a best workplace for innovators by Fast Company. In a competitive job market, aligning Trimble's mission with our innovative culture is crucial for attracting and retaining talent. Recently, we hired Jennifer Len as Chief Platform Officer and Poppy Crum as Chief Technology Officer, both of whom are exceptional talents that believe in our vision for Trimble. We continue to innovate as evidenced by the launch of our MX50 Mobile Scanner in the third quarter, a beta release of SketchUp for iPad, and enhancements to our leading high-accuracy correction services that allow for centimeter-level positioning globally. We are heavily investing in our digital transformation, which will enable us to provide increasingly connected solutions efficiently and at scale. Before I hand over to David, I want to discuss how we are navigating and leading in this volatility and opportunity-filled environment. For years, we've discussed our 3-4-3 operating model. I see Trimble leadership’s role as stewards of capital allocation for our shareholders, balancing immediate realities with future potentials. As 2021 concludes and we approach 2022, we will continue supporting our incremental investments toward digital transformation, autonomy, and infrastructure opportunities, confident that they will generate new, sustainable, and differentiated long-term growth for Trimble. We remain optimistic about the long-term secular opportunity for digital technology to enhance our customers' success, productivity, and sustainability. We are committed to managing through the near-term supply chain challenges and the initial costs of our digital transformation while holding ourselves accountable to advancing our Connect & Scale strategy. David, please provide your overview.

Thank you, Rob. Let's start on Slide 5 with a review of third quarter results. Third quarter revenue was $9101 million, up 14% on a year-over-year basis. Currency translation added 1% and divestitures subtracted 2% for a total organic revenue increase of 15%. Gross margin in the third quarter was 58.7%, down 10 basis points year-over-year, reflecting several factors including higher product and freight costs in our supply chain, offset by increased pricing and lower discounting. Adjusted EBITDA margin was 25.9%, down 90 basis points year-over-year, driven by higher operating expenses and investments in the business. Operating margin was 23.8%, down 40 basis points year-over-year, but still up over 300 basis points versus the pre-COVID third quarter of 2019. Operating expenses last year were unusually low in a number of areas, including compensation expense. Net income dollars increased by 10% and earnings per share increased by $0.06 to $0.66 per share. Our third quarter cash flow from operations was $166 million and free cash flow was $156 million. Cash flow was down modestly year-over-year in the quarter as we are purchasing inventory in response to strong demand and supply chain shortages. Operating cash flow is up 23% on a year-to-date basis, with a conversion ratio to net income above 1.1 times. Our net debt declined by $88 million in the quarter, and our net debt-to-adjusted EBITDA ratio fell to 0.9 times. During the third quarter we repurchased $100 million of common stock. At the end of the quarter, we had the entire $1.25 billion available in our revolving credit facility and approximately $513 million in cash. Our balance sheet is strong and we are well-positioned to invest in our business, both organically and through acquisitions that will accelerate the implementation of our strategy. Turning now to Slide 6, I will review in more detail our third quarter revenue trends. As mentioned earlier, our ARR was up 8% in aggregate and was up 11% organically on a year-over-year basis. The 11% rate excludes the impact of foreign exchange and our recent divestitures of IRON Solutions, Manhattan Real Estate Solutions, and Construction Logistics. All three of these divested businesses had a recurring revenue component, but were in areas outside of our strategic roadmap. Our non-recurring revenue streams grew with hardware up 18% year-over-year and perpetual software growing 19%. Our hardware growth was driven by strong performance in civil construction, Geospatial, and Agriculture. Our hardware growth contributed to perpetual software growth, as some of our hardware offerings are bundled with perpetual software. From a geographic perspective, North American revenues were up 11%, European revenues were up 18%, Asia-Pacific was up 5% year-over-year, and the rest of the world was up 33%, driven principally by strong demand from the agriculture sector in Brazil. Next on Slide 7, we highlight some of the key metrics we follow, and I'll start with ARR. While total Company ARR grew 11% organically on a year-over-year basis, ARR excluding transportation grew at a mid-teens rate in the quarter. Networking capital, inclusive of deferred revenue, continued to be negative, representing approximately -2% of revenue on a trailing 12-month basis. Notwithstanding an acceleration in purchases of component inventory during Q3. Research and development on a trailing 12-month basis was 15% of revenue, and our deferred revenue grew 17% year-over-year. Our backlog at the end of the third quarter was $1.6 billion, up from $1.5 billion a quarter earlier, and up over 30% year-over-year. While growth on our backlog is an indicator of momentum in the business, it is also reflective of the shortages and extended delivery times that we are experiencing for many key components in our hardware products. Of our $1.6 billion in backlog, just under $340 million relates to our hardware offerings, up from about $100 million in hardware backlog a year ago, and $38 million higher than the end of Q2. We expect supply chain constraints for many key components to extend well into 2022. Let's turn now to Slide 8 for additional detail on each of the reporting segments. Buildings and Infrastructure revenue was up 12% on an organic basis. Revenue growth was strong in both our building and civil Construction businesses and organic ARR was up in the high teens in the quarter. Geospatial revenue was up 23% on an organic basis, driven principally by strong performance in our core branded survey equipment. Margins were up 60 basis points due to both revenue growth and operating cost control. Resources and utilities revenue was up 23% on an organic basis. We experienced double-digit growth in each of our precision agriculture and positioning services offerings. Margins in resources and utilities contracted 330 basis points and were hardest hit by product cost inflation in the quarter. Financial results in transportation showed progression in a number of areas. Revenue was up 3% on an organic basis year-over-year, but grew less than we expected due to supply chain challenges, both in our operations and our customers' businesses. Margins expanded 410 basis points year-over-year. Turning now to Page 9 for our updated outlook for the full year. We are raising our expectation for full-year revenue with a new range of $3.59 billion to $3.64 billion, representing growth for the full year in the mid-teens and single-digit year-over-year growth in the fourth quarter. End market demand is even stronger than we thought it would be a quarter ago, but supply chain constraints will likely cause our backlog to remain at or above the increased levels from the end of Q3. Our growth at the company level is trending as we anticipated, driven by strong bookings and subscription transitions. And we expect organic revenue growth of greater than 10% in the fourth quarter and a strong entry point going into 2022. Gross margins in the fourth quarter are likely to be about flat sequentially with the third quarter. An increasing mix of software will have a favorable impact on sequential gross margin trends. But this benefit will be offset by an anticipated decline in hardware margins. In aggregate, we now expect that the net impact of accelerating hardware cost inflation and our recent price increases will be modestly negative to hardware margins in Q4. Building off our strong third quarter results, our outlook for operating margins continues to improve, and we now expect operating margins for the full year 2021 will be above 2020. Operating margins in the fourth quarter of this year will likely be lower than the fourth quarter of 2020, driven both by higher hardware component costs year-on-year, and by higher operating expense as OpEx was unusually low in 2020, and we're now ramping up investments against our strategy. Our outlook for full-year earnings per share has increased to $2.61 to $2.69, representing growth of approximately 17 to 21% year-over-year. We continue to expect operating cash flow greater than 1.1 times net income and free cash flow greater than 1 times net income, reflecting the strong cash-generated aspects of our business model. I'd like to comment briefly on the outlook and fourth quarter for our transportation segment. As Rob mentioned earlier, the leading indicators for this business are strong with growing bookings of recurring solutions, sequentially improving customer retention in our mobility business, an increasing sign that our connected transportation strategy is resonating with customers. Nevertheless, factors related to the global supply chain and the extraordinary pressure on the transportation industry will negatively impact our business momentum in the short run. Our OEM business will be constrained by customer manufacturing challenges. And the aftermarket business will be slowed by the fact that trucking companies are reluctant to take assets off the road for technology upgrades at a time of high transportation prices and extraordinary asset utilization. We believe that these constraints will be resolved over time and we remain confident in the turnaround of this business. But the pace of improvement of revenue, ARR, and profitability will be lower than we had earlier projected. With regard to 2022, we don't plan to give detailed guidance until our year-end earnings release, but we can characterize some of the drivers that we see now and their expected impact on revenue, ARR, and margins. Demand across our end markets remains strong and we believe that strength will sustain at least through the end of 2022. Our customers' need for digital solutions to optimize their workflows has never been stronger and these customers have the money and the desire to invest. We expect organic ARR growth to accelerate in 2022, building off the momentum we have now and aided by continued model transitions and the growing sale of connected recurring solutions. The supply chain environment remains our biggest challenge and that challenge is predicted to be with us for several more quarters. From a cost perspective, we anticipate that inflation in our hardware businesses will be sustained through the first quarters of 2022, driven both by higher component costs and higher cost of getting products shipped to our manufacturers and distribution centers. It is the goal of our pricing strategy to offset the impact of inflation on our hardware gross margins, and that pricing strategy continues to evolve. Rob referenced in his remarks the investments we are making against our digital transformation. We anticipate that as we get through this investment cycle in 2022 and as our software businesses continue their transition to recurring revenue models, our operating leverage will be lower in 2022 than we expect over the longer term. The investments we're making in our digital transformation are at the core of unlocking the potential of our platform strategy. And we expect to end 2022 with business processes and systems that will accelerate our ability to transform the way we go to market and the way our customers do their work. With that, I will turn it over to the Operator for Q&A.

Could you provide more details about the outlook for 2022 and what you anticipate across the different segments? You mentioned in your opening comments that you expect developments regarding the infrastructure bill. If that does not materialize, would it affect your outlook for 2022 in the buildings and Geospatial sectors? Additionally, in Agriculture, we're seeing a decline in farmer sentiment due to rising input costs, not only in the U.S. but also in Brazil. Could you discuss some of the advantages and challenges you foresee as you look towards 2022 and the end-markets? Thank you.

Hi, and thanks for the questions. This is Rob. I'll provide an overview of the end markets, highlighting both the positives and potential challenges we are monitoring. Factors we are cautious about include supply chain inflation and labor availability, which are interconnected. In Geospatial and Construction, we observe strength in residential and infrastructure projects. On the commercial front, sub-markets like data centers and hospitals are performing well. We believe that residential work will likely stimulate light industrial work related to the infrastructure bill; however, if it doesn't pass, we anticipate no significant impacts in 2022, with any benefits from the bill coming in 2023. There is a sentiment factor that is difficult to measure, yet we remain optimistic. A couple of weeks ago, I was in Washington to discuss this further. Regarding construction and labor as potential vulnerabilities, technology offers advantages by improving the performance of less experienced operators. Our Geospatial market's robotic total station can streamline tasks, allowing one person to handle what previously required multiple operators. In Agriculture, commodity prices are encouraging. Early harvest data indicates a lower yield, which should support commodity prices when compared against ending stock levels. Input inflation is indeed dampening farmer optimism. However, when considering technology, solutions like spot spray technology can minimize herbicide usage, which is significant, while variable rate applications can reduce other input needs and contribute to environmental sustainability. Geographically, subsidy policies are generally more stable and higher outside the U.S., which helps stabilize the overall market. We are closely monitoring all these factors, knowing they will eventually exert an influence. In transportation, we note an increase in spot pricing, reflected in our own transportation rates, as David mentioned, though a challenge remains in driver availability and truck supply from OEMs, making it difficult for carriers to expand capacity. From a technology perspective, the average driver uses about 7 hours of their clock daily. Our strategy aims to enhance the connected supply chain through dynamic scheduling with shippers and receivers to better utilize driver hours. We also offer improved routing and navigation solutions for efficient trip management while striving to provide more accurate load information for our customers. There are always challenges and opportunities, and we believe technology plays a vital role in nearly any market condition.

Hi, this is actually Devin on for Jason, potentially taking my questions. First one I have on construction. Just wondering if you could provide an update on I guess, e-Builder and viewpoint. I know that you guys re-branded, but any color on ARR growth and growth drivers there would be helpful.

Hi, thanks for the question. So the combined ARR growth between the two businesses was set up plus 17% year-over-year. So another great quarter of execution between the two businesses. As you noted with the rebranding, we are especially optimistic around the Trimble Construction One offering. We converted over 1,000 customers to the Trimble Construction One offering. Sold dozens of new logos onto the offering in the quarter and that bookings creates ARR later down the road but the value proposition and the awareness from the customers is quite encouraging. And we've seen that in the bookings for some time now, which now plays through the ARR expansion.

That's helpful. I have one more question about construction. It’s encouraging to see the connected construction platform, but I want to know if you're primarily replacing legacy systems that follow outdated processes, or are you noticing significant interest from contractors and owners seeking a more connected solution?

There are both. It's a good question. From an overall market perspective, really the secular opportunity in construction technology, by the way, I would see this in our other end markets as well, is that these markets are large, they're global, they're underserved, and they are underpenetrated by technology. So the move to digitization provides a value proposition that delivers productivity, quality, safety, efficiency, transparency, and environmental sustainability. So there's a positive catalyst for technology to be adopted. At some level, yes, that is replacing paper-based systems that exist or let’s say just the mental-based systems that exist. We are seeing demonstrable interest from customers in the connected solutions that we offer and I've had a chance to talk to a number of customers personally, some that are showing us how they're already taking our technology and connecting the various solutions to improve their workflow. One of the things they do is connect a Trimble workflow by accommodating an environment. We can connect in an open and really agnostic way to the other technology that our customers use. Customers operate in a fragmented construction industry, and therefore, the technology tends to be a bit fragmented as well. Our ability to connect Trimble and non-Trimble solutions is very top-of-mind for customers. Of course, COVID has also been a catalyst from a digitization perspective. So much of what we do can uniquely connect the work in the office and the field that connects the hardware and the software and ultimately that physical and digital.

Great, that’s good to hear. Thank you.

Hi, thank you. Rob, I appreciate your response. I would like to follow up on a couple of points you mentioned. Regarding the future of digitalization in construction, I see a significant opportunity. Do you believe there is an acceleration happening, or is there a tipping point we will reach in the next two to three years where being digital becomes essential? I'm curious about how quickly this market is evolving. Also, do you think it's consolidating around two or three platforms, with yours being one of them? Is that an overly ambitious statement? Or is it still a mixture of various assets? I'd like to hear your thoughts on the competitive platform dynamics as well. Thank you.

Hi Rob, thanks for the question. From the perspective of both a tipping point and acceleration, the numbers indicate a rapid adoption of technology. If we were to secure an infrastructure bill, which we are discussing in a U.S. context, we observe a global recovery in construction across several markets. HS2 is a significant project in the U.K., along with major initiatives in Paris and substantial developments in Saudi Arabia and Australia. The fundamentals in the macro environment are conducive to accelerating this trend. The shift towards digitization, prompted by COVID, has certainly sped things up. Many customers have found it necessary to be cloud connected as they were not frequently going into offices. This shift has driven more bookings for our cloud offerings. Regarding the tipping point, that’s a challenging question. One potential catalyst for reaching a tipping point could be increased momentum from owners and possibly regulatory influences. This is partly why we acquired e-Builder, as owners have the most to lose when projects are delayed or exceed budgets, and we assist them in managing their capital programs. From a policy and regulatory standpoint, we believe there are significant opportunities, such as the U.S. infrastructure bill, which represents a chance to enhance the competitiveness of U.S. infrastructure. We can deliver that infrastructure at a cost reduction of 20-30% by leveraging technology. If more awareness is raised, I firmly believe that policy measures could effectively drive this movement. There is a key factor that could lead to an acceleration at that tipping point. On the platform side, it seems logical to expect a consolidation around a few key platforms. The industry is quite fragmented and we are not the only technology platform available. Interoperability among these platforms is essential, and it significantly influences the development of our technology, which is a core belief we hold. You're welcome.

Hi, good afternoon. I wanted to maybe start out with some of the supply chain issues. Can you talk a little bit about maybe what the increases in lead times look like for your customers and have you seen any potential losses given the extended backlog and potentially delivery times?

Hey, Jonathan, it's David. The lead times vary a lot by product, but historically, our lead times have been very short, measured in a few days. There are many times that, so weeks and in some cases, many weeks or a few months, and that's the math of the backlog that you're seeing. As far as the competitive dynamics, in a very few isolated cases, we can identify where we've lost business to a competitor that can supply more quickly. Typically they are competing at the lower end of the market and in some cases those customers have come back. But I think our competitors are experiencing at least similar pressure. We don't believe that this has had an adverse impact on our share trends. In fact, in our hardware businesses where we can see numbers published by our peers or competitors, there is evidence in many of those segments that we are gaining share. We also haven't seen a meaningful amount of orders being canceled because lead times are extended. So it's something we're watchful for. We're lucky, as Rob said in his comments, that we have a really capable operations team that has done a remarkable job getting supply in this very difficult environment.

Excellent. And then just as a follow-up, just given the strength in your Ag business, I'm wondering, are you seeing a change in the types of products that you're selling into that market, especially relative to historically when it was sort of focused on guidance systems? Are you seeing sort of that broader digital transformation happening in this segment as well? Thank you.

Hey Jonathan. It's Rob. The product mix is relatively stable right now. We're doing a better job of integrating the software, hardware, and correction services into our offerings. There's more bundling at the point of sale, making it easier to do business with us. We have gained some new OEM customers, and we've observed strength in certain geographic areas. Brazil and Russia, for instance, were particularly strong for us this quarter. So, there are specific regions where we are able to increase our market penetration. However, there hasn't been a noticeable shift in the overall mix of our portfolio at this time.

Hi, good afternoon and good evening. Rob, could you elaborate on the growth in recurring bookings that you mentioned in your prepared remarks regarding transportation? It seems like there's a notably positive sentiment in this area for the first time in a while. Can you clarify which aspects of the business are contributing to this recurring growth and how the churn rates look for the legacy business as we navigate through the challenges? Thank you.

Sure. Hi, Jerry, thanks for the question. Within the transportation business, historically talked about three legs of the stool of the technology stack. The first being that we provide mapping, routing, navigation engines. Second, that we provide the back office technology for trucking companies. And third, that we provide the field mobility tools for companies. In terms of the bookings growth, the carrier side of the business, where we see the bookings growth, is in a couple of places. First, in that ERP systems, we call it a Transportation Management System, and we're moving that business to a recurring model. We have seen evidence that we're increasing the size of the addressable market, which means we're reaching some customers that we hadn't previously reached. That's translating into 20% plus bookings growth on a year-over-year basis in that part of the business. What we're seeing as well on the mobility side, which is really more of the EOD part of the business, we have seen some life there, both through two things. One, increasing penetration in existing customers as some of our existing customers, actually many of them are adding capacity given the market. They would like to add more capacity in many cases but aren't able to get the vehicles or the drivers to do it. That's one area of growth. The others are we do see some logos coming back to us, which has been a really good sign for us. Still a long way to go, but I'm liking what I'm seeing from the team, and the pace of the team, and the trajectory. The Canadian ELD certification was a nice proof point that we're not just talking about these things, that we are actually delivering. That mapping, routing, navigation business has had many, many years of double-digit recurring revenue growth, which means bookings continue to grow strong and they continue to do a great job in quarter-in and -out. You asked Jerry about the churn rate as well.

I'm optimistic about the team's performance and their progress. The Canadian ELD certification is evidence that we are not just making promises, but we are following through. Our mapping, routing, and navigation business has consistently experienced robust double-digit recurring revenue growth, indicating that bookings are strong and the team is performing well consistently. You also inquired about the churn rate.

On the churn rate side, I'd characterize it in net retention, and net retention was above 100% in the quarter, which is obviously a great sign for us.

It's really nice to hear about the inflection there and in buildings and infrastructure, I know you have really good visibility on the prospective pipeline and bookings. Can you talk about if you've seen an acceleration in those lead indicators that you track for e-Builder and viewpoint, given the labor shortages, et cetera. Could we actually see ARR accelerate further from the strong rate that we're running at in 3Q?

We believe we can increase our growth across the Company. The most significant factor contributing to that growth is something we can reasonably anticipate. As we look at our future bookings growth, we consider what is securely in place and what we aim to achieve. When evaluating our goals, we assess our pipeline and the qualified leads available. We continue to refine that approach. Additionally, another factor that will boost our growth next year is our structures business, which includes the steel concrete sector. We stopped selling perpetual licenses in the summer but ended up selling more than we expected this year. Now that we've moved on from perpetual licenses, this will mathematically support our annual recurring revenue bookings and drive growth in that segment as we look ahead to next year.

Thanks, Rob.

Hi, thanks for taking my questions. Actually, I have two, if you'll allow it. First, just the Geospatial segment has been growing really strongly. I'm just wondering if you could help us just get a feel for those trends through next year, how sustainable is this rate of growth?

Hi, this is Rob. Thanks for the question. A big thank you to the Geospatial team. The latest product launched in the third quarter was the MX50 Mobile Mapping System, which follows a series of innovations over recent quarters, including the X7 Laser Scanner and our receiver. There's a significant backlog associated with this business. Looking ahead to 2022, we believe we have some momentum and can continue to grow. However, the remarkable growth we experienced in 2021 is unlikely to continue at that pace. We had anticipated this a few years ago, considering it our most mature business, yet it has turned out to be one of the fastest-growing sectors within Trimble year-over-year. There's been outstanding innovation, and our go-to-market team has excelled in global channel management. I expect growth to normalize closer to the company average of 6 to 9 percent organically as we move into next year, and I would consider that a baseline.

That's very helpful. Thank you. And then the other question I had, you mentioned the COP 26 conference, the discussions around there, and with all the severe weather events this year and how this impacted your customers. I'm wondering if you could maybe discuss some of your broader revenue opportunities with respect to climate change adaptation. Specifically, thinking about some of your agricultural construction infrastructure customers. And maybe outweigh broadly speaking how that revenue opportunity could ramp.

Thank you for the question. I am excited and inspired by Trimble's potential to positively influence climate change. Our products and technology have long contributed to environmental sustainability as a byproduct of the productivity and efficiency our customers achieve. I see an opportunity for this focus to become more prominent. We've noticed an increase in reporting from our customers, whether they realize it now or not, and we are preparing to engage more in that space. For instance, in Agriculture, we operate a small business that runs a carbon marketplace, and we receive inquiries from customers seeking assistance in certifying the offsets they purchase. While we often highlight our Agriculture business, we also have a strong forestry business, which is crucial to this discussion. As large companies commit to sustainability and buy offsets, they seek quality options. The inquiries we're receiving strengthen our conviction about guiding our product development to make a positive impact. In the construction sector, particularly within our structures business, we recently announced our capability to design with sustainability in mind by understanding the carbon load during the design phase. For years, we've offered a pre-design product to help assess a building's energy consumption profile. As building users face regulatory demands to consider carbon, the models we provide can greatly enhance the design and maintenance of projects with sustainability in focus. We are committing resources towards this area, and I see intriguing commercial opportunities ahead.

That's really helpful, and thanks for all the effort in that category for sure. Thank you.

Thank you.

Hi, good evening, guys.

Hi.

I want to return to Trimble Construction. Can you provide more context on its place in the previous portfolio? My first question is about how much overlap it has with your current product offerings, and could you also discuss your initial sales, specifically whether they are coming more from conversions or new customers? Additionally, does this new platform create opportunities to expand?

Chad, so this is Rob, I'll take the question. Where to start? Our Trimble Construction 1 offering, essentially right now can take what we do at Viewpoint. I mean, years ago, we moved from selling, I'll call it an ERP on an office-based solution to moving to selling a combined team and field solutions, think project management and field mobility tools. We called it Viewpoint 1 and categorized it as an office team field offering. It moved from a point solution to a bundled viewpoint solution and that next step is Trimble Construction 1, what the first release of it brings in many aspects of our MEP business. So it's mechanical, electrical, plumbing business, enabling detailers and estimator workflows into the product offering. We have a basis from there where we can continue to expand across other architectural and engineering workflows and products that we have. By and large, it's taking what we do already and having a better packaging around that. We're making it easier for our customers to consume the technology. From a technology perspective, it's better integration, tighter integration between the solutions. Our customers have been asking for this. We're really excited to start delivering upon it. I would say it's just the start. It's version 1 of Trimble Construction 1. There are many other capabilities we believe we can bring into that both from a civil perspective and a vertical construction perspective. The nature of the conversions we have thus far are predominantly with existing customers and moving them over, but we did get a few dozen new logos during the quarter on Trimble Construction 1. It's a persona-based growth platform. We think about personas in architectural engineering work persona, contractor persona, and owner persona. We will be able to get more specific and targeted to delivering Trimble Construction 1 to those individual personas. I would really say this is the start of much more to come and the more that we connect the data, the users, and the workflow across this data, the more opportunities open up for richer data and AI developments. The more we can connect what we've got for our customers, the more that will create solutions down the road.

Thank you for your response. For my second question, I'd like to focus on your hardware business. Can you explain how the price and cost have progressed throughout Q1, Q2, and Q3? I recall you mentioned that Q4 is expected to show negative figures. Additionally, what are your projections for this year? Also, I believe a segment of your business operates under longer-term contracts. When do those contracts come up for renewal?

Hey, Chad, let me give you some perspective on this. When we mentioned last time, in this very uncertain world, we estimated that for the full year 2021, we'd have inflation in aggregate of about 6% of our $600 million in COGS, so that's $36 million. We're definitely running north of that. We're probably about $10 million more in product and freight inflation than we anticipated. We've adopted our pricing strategy all year in response to our best guess of where things are. You're right; there’s latency in when you can make a decision and implement the strategy, and it really differs by business and customer. In some cases, we can implement a price increase by smarter and less discounting. In some cases, there's a surcharge that's possible, and in some cases, you have to wait for a list price. Our pricing momentum has kept up with the inflation outlook we started with, but we're running behind because inflation is higher than we believe. Your understanding is correct. We're behind inflation now even though pretty much the full impact of our price increase came through in Q4. It will be modestly negative, not hugely, just modestly negative. Going forward, it's a tough world to guess cost inflation. We think it won't get better soon. We're optimistic it won't get a lot worse. We have some more work to do on the pricing front, but I would say in aggregate it is still our view that over time we can offset the inflation costs impact with pricing. It's just going to take us into next year to do that.

Thank you.

Hi. Good afternoon. This is Kristen on for Colin, thank you for taking the question. Just to follow up on some of the commentary around the Connect and Scale investments for this year. Could you confirm, did you say that you thought you would be back on model with respect to incremental margins in 2023, or did I hear that correctly?

Hey Rob, It's David. So I think I'd characterize our comments is sort of a broad outlook to 2022. It's a little early to talk about 2023. But just to add a little more color, we are in an investment mode in the areas Rob talked about in digital transformation, in autonomy, and in our major accounts. Go-to-market activities, which are all critical to take advantage of the strategic opportunity we have. Those are likely to result in OpEx growth next year ahead of revenue growth. I think we'll have, if you look back to the 2018 Investor Conference and the objective stated was operating leverage in the 25% to 30% range. I think we'll be in that range, but in 2022 at the lower end. It's logical to expect that we will have some positive benefit beginning in 2023, but I’ll be cautious about making a firm prediction now.

Sure, sure. Maybe the follow-on that is, if there was some news in the quarter around where you do have some autonomy exposure. Customers are planning to ramp some of the technology they leveraged from you. How should we think about when that does happen? If it happens, when is that more step-function or is that more linear with, I guess the volumes around that?

I’d say it’s more linear with volumes.

Thanks, everybody.