Q3 2020 Garmin Ltd Earnings Call
[music], ladies and gentlemen, thank you for standing by.
And welcome to the Garmin Limited third quarter 2020 earnings Conference call.
This time, all participants are not listen only mode.
After the speaker's presentation, there will be a question and answer session.
Good question during the session you'll need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference your speaker today Harry.
He's sick with Investor Relations. Please go ahead ma'am.
Morning, we would like to welcome you to Garmin Limited third quarter 2020 earnings call. Please note that the earnings press release and related slides are available at garment Investor Relations site on the Internet at Www Dot Garmin dotcom stocks and archive of the webcast related transcript will also be available on our website. This earnings call includes projections and other.
Forward looking statements regarding Garmin limited and its business any statements regarding our future financial position revenues earnings gross margins operating margin future dividends market shares product introductions future demand for our products and plans and objectives are forward looking statements. The forward looking events and circumstances discussed in this earnings call may not occur.
Her and actual results could differ materially as a result of risk factors affecting garmin information concerning these risk factors is contained in our form 10-K, and third quarter 2020 form 10-Q filed with the Securities Exchange Commission in particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results.
Could change at any time any statement about the impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date.
Presenting on behalf of Garmin limited. This morning are Cliff Pemble, President and Chief Executive Officer, and Doug Batson's, Chief Financial Officer, and Treasurer at this time I would like to turn the call over to Cook Pemble.
Thank you Terry and good morning, everyone.
Earlier today Garmin reported record third quarter operating results.
Consolidated revenue exceeded $1.1 billion as strong demand for active lifestyle products fueled growth of 19% over the prior year.
Gross margin was 60.2%.
Operating income increased 21% year over year to $317 million and operating margin expanded to 28.6%.
This resulted in GAAP EPS of $1.63 and pro forma EPS of $1.58 for the quarter up 24% over the prior year.
We are pleased with our performance so far in 2020.
Especially considering the unprecedented challenges caused by the COVID-19 pandemic.
Trends in the business are stabilizing which gives us confidence to provide fiscal 2020 guidance, which I will cover shortly.
First I'd like to offer a few remarks on the performance of each of our business segments.
Yes.
Starting with marine revenue increased 54% as we experienced growth in multiple product categories led by strong demand for chart plotters.
Gross and operating margins were 61% and three.
31% respectively.
Belting and operating income growth of over 150%.
There are two key factors driving these results.
First the market is expanding as new customers embrace boating and fishing.
Second our strong lineup of products and game changing technologies are driving market share gains.
We continue to be recognized for innovation and achievements in the marine industry.
For the sixth consecutive year, the National Marine a lot Electronics Association name Garmin manufacturer of the year.
And we received four product of Excellence awards.
We were also recognized as one of the top 10, most innovative marine companies by soundings trade only.
B to B news and information provider for the recreational boating industry.
Looking forward, we anticipate that interesting boating and fishing will remain strong.
We plan to capitalize on these trends by offering a compelling lineup of products with innovative features and disruptive technologies.
Turning next to the fitness segment segment revenue increased 35% driven by strong demand for advanced Wearables and cycling products.
Gross and operating margins were 54% and 27%, respectively, resulting in operating income growth of 75% over the prior year.
The pandemic continues to highlight the importance of living a healthy life and our fitness segment benefited from this trend.
During the quarter, we launched the new forerunner 745, expanding the features offered in our mid tier multisport product range.
We also launched clipboard an.
An asset facilitates team training and performance monitoring using garmin devices.
In the advanced wellness category, we launched the venue Sq.
And entry level smartwatch that combines daily where style with industry, leading activity tracking and health monitoring features.
Looking forward, we expect the broader trend in fitness and wellness to continue.
I plan to leverage our recent acquisition of proceed to offer products with unique health wellness and fitness features.
In addition, we intend to capitalize on the indoor cycling opportunity with our tax product line.
[noise] [noise] turning next to the outdoor segment revenue increased 30% with strength in all major categories led by strong demand for adventure watches.
Gross and operating margins were 67% at 44% respectively.
Resulting in 40% operating income growth.
The segment benefited from increased consumer interest in outdoor activities.
In reaches an important technology that provides critical emergency and communication services in places where cellphone simply don't work.
We recently added and reach to our popular Montana series.
And we announced that Enbridge has facilitated over 5000 SLS incident since its launch in 2011.
This is a significant milestone reflecting the important role in reached technology can play in changing outcomes.
Looking forward, we expect the broader trends in outdoor to continue.
We plan to leverage this opportunity by offering unique products that maximize the enjoyment of outdoor activity and adventure.
Turning next to the auto segment revenue decreased 6% as the decline in consumer PND was partially offset by growth in specialty categories and revenue from new OEM programs.
Gross and operating margins were 45% and 3% respectively.
The auto segment continues to transform as we launch new specialty products like the Garmin catalyst an industry first real time coaching tool designed to optimize track racing performance.
New OEM projects are also making contributions and will further diversify the revenue mix in the segment.
During the quarter, we began production shipments of the energy you 2020 computing module, marking the beginning of our relationship with BMW automobiles as a tier one supplier.
In addition, we began shipments of the complete infotainment solution for the time learn veto then.
Looking forward, we will continue to pursue growth opportunities and specialty product categories.
In addition, we will be making major investments to complete OEM projects, we have one in recent years.
And we will continue to pursue new opportunities as a tier one supplier of innovative electronic solutions for a broad range of vehicles.
[noise] looking finally at the aviation segment revenue decreased 19% due to lower revenue from OEM product categories, and the expected decline of the DSV market.
Gross and operating margins were 71% and 19% respectively.
Well the OEM market has experienced some headwinds we see positive signs in the smaller aircraft segment, especially in owner flown aircraft.
In addition, when adjusting for the impact of 80, USBI, we see encouraging signs in the retrofit market as aircraft owners take advantage of the latest cockpit technologies.
During the quarter auto land achieved Epay certification on the serious vision Jack.
Which is the first jet aircraft to incorporate auto and technology.
This latest certification brings the auto land equipped aircraft to three models, including the previously certified hyper M 600, and the dot her TBM 940.
Atlanta is receiving notable recognition as an important new safety technology for general aviation.
In Aviation week network recently selected auto land as the Grand Laureate winter for its achievement in the category of business aviation.
Looking forward, we believe that the general aviation market will stabilize as impacts from the pandemic the associated economic fallout and the HDFC mandate again to fade.
We will continue to invest in compelling new products and technology in anticipation of the next chapter of growth for the general aviation market.
Yes.
In summary, I'm very proud of what Garmin associates have accomplished so far in 2020, while facing circumstances that no one could have anticipated just one year ago.
Considering our growing confidence in business trends, we're issuing full year 2020 guidance. We now project revenue of approximately $4 billion as growth in marine fitness and outdoor more than offset the expected declines in aviation and auto.
We anticipate gross margin of approximately 59% and operating margin of approximately 24%.
Having a pro forma effective tax rate of 10% pro forma earnings per share are expected to be approximately $4.
70 cents.
Looking at full year 2020 revenue guidance by segment, we expect the marine segment to grow 25% the fitness segment to grow 20% and the outdoor segment to grow 15%.
We expect the aviation segment to declined 17% and the auto segment to decline 20%.
So that concludes my remarks. This morning next Doug will discuss additional details on our financials Doug.
It's Claire good morning, everyone, let's begin by reviewing our third quarter financial results <unk> comments on the balance sheet cash flow statement and taxes.
We posted record revenue of a $1.1 billion for third quarter, representing 19% growth year over year gross.
Gross margin was 60.2% to 50 basis point decrease in the prior year operating expenses percentage of sales, 31.6% 110 basis point decrease from the prior year.
Operating income was $317 million, 21% increase year over year.
Operating margin was 28.6% 60 basis point increase from the prior year.
Our GAAP EPS was one dollar and 63 cents pro forma EPS was $1.58 cents to 24% increase in the prior year.
Next we look at our third quarter revenue by segment.
She had revenue of over $1.1 billion, but three of our five segments posting growth of 30% or more.
Led by the Marine segment and robust revenue growth of 54%.
By geography, we achieved 19% growth in Americas, EMEA and APAC.
Looking at our year to date revenue, our first three quarters of 2020, Arkansas.
Consolidated revenues up 7% over the prior year, but three or five segments posting double digit growth led by the fitness segment, a 25% growth part of closely and Marine segment were 24% growth.
Looking next operating expenses, our third quarter operating expenses increased by $45 million or 15%.
Research and development increased $26 million year over year, primarily due to investments in engineering resources.
Our advertising expense increased by approximately $1 million due to higher spend or outdoor segment.
Additionally, increased $17 million current and prior year quarter, primarily due to increases permission technology costs personnel related expenses.
The highlights on the balance sheet cash flow statement and taxes.
We ended the quarter with cash Markel securities approximately $2.7 billion and no debt.
Thats receivable increased sequentially to $658 million.
Chris year over year in line with third quarter sales inventory balance increased on both a sequential every basis pair for the seasonally strong fourth quarter sport, our increasingly diversified product lines.
Our third quarter 2020, we generate free cash flow $236 million $78 million increase the prior quarter for full year 2020 expect free cash flow to be approximately $750 million approximately $175 million of capital expenditures.
Also during the quarter, we paid dividends of $170 million.
Third quarter 2020 reported effective tax rate of 6.9% purchased effective tax rate of 11.6% in the prior quarter. The decrease is primarily due to electric property migration transaction.
We expect our full year 2020 pro forma effective tax rate to be approximately 10%.
That concludes our formal remarks, well could you. Please open the line for today.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby will be compiled the candy roster.
Our first question comes from Paul Chung with JP Morgan. Your line is now open.
Hi, guys. Thanks for taking my questions and congrats on the quarter.
Suits. So just thought fitness on tax you've had this asset for no more than a year now can you give us a sense of how much you know incremental growth you have driven by leveraging your distribution network and then assume the pandemic has accelerated sales in that business. If you could confirm any sense.
For the outperformance there and then I have a follow up.
Yeah, Paul I think tax has been a wonderful acquisition for us I'm definitely leveraging the Garmin network is helping us tax did not have a strong presence in the north American markets that we're in we're able to expand that now and of course Asia and that is another opportunity. They were mostly strong in Europe before we bought them.
Okay. Thanks for that and then on first be you know how do we size up. This business you guys seem to margins are quite high given the license model is it is it a meaningful contributor or is it kind of more of the added feature you you'll roll across more.
If you're smart watches.
Well, it's a contributor and as you say, it's a high margins because its licensing business, but.
For us we look at it added as a an important a technology provider for our products.
And being able to to support the existing wellness and fitness features as well as developing new advanced metrics that we can have in our smartwatch and cycling products.
Okay, and then and then lastly, it's not very common for you to have you know kind of uniform year on year growth across all the regions, but you know any trends across the regions that stand out during the quarter or what you're seeing early in Q4. Thank you.
Yeah, I wouldn't I'd make a couple of notes there I think that it is kind of interesting to see 19% across the board in the Americas that growth would have done even stronger if you adjust for the impact of of the DSP surge last year or so so Americas is even stronger than what we're showing there in terms of the.
Other consumer products.
And in Asia, I would say that they have been slower to come back from the COVID-19 impact, but we do see signs of stabilization and each country is different but we do see positive signs in some of the major countries as they emerge out of out.
How does crisis mode.
Thank you. Thank you.
Thank you. Our next question comes from Charlie Anderson with Calia Securities.
The line is now open.
Yeah. Thanks for taking my questions and congrats on a really strong quarter. It was great to hear cliff that there is some stabilizing trends in aviation So I wonder.
If you could maybe expand on that a little bit I know you serve many portions of that markets.
Sales of size and platforms and also sort of curious working within the various categories in aviation.
Where do you see stabilization versus whats still.
You know impacted.
In a large way by the pandemic I've got a follow up.
Well as I mentioned in the remarks, the OEM categories, reflecting owner flown aircraft are are doing reasonably well in this environment and we've seen encouraging signs there.
They're on the retrofit side of things as I mentioned, if we.
Eliminate the impact from 80 as fee, we see positive signs in retrofit, particularly driven around new display systems and Autopilots systems for.
Existing aircraft on the market. So I think the technologies are super the safety technologies that come in the retrofit market with our auto pilot system in our display systems is something that people recognize is great value.
And we see a lot of strength there.
Okay, Great and then for my follow up I'm curious on automotive we're going to now go through this transition where are we essentially becomes a larger portion of the revenue. Another BMW garden I Wonder if you could speak to the margin profile of that segment from a go forward basis looks like you.
We're not going to make much money in that segment this year, but I'm sort of curious is that.
Layers and how that impacts margins going forward. Thanks.
Yes, definitely the margin on the OEM categories is lower than the than than trends on the consumer spot side, especially as we are.
See the consumer side transition to more specialty products, which are also higher mark.
Margins. So we'll see that that mix of revenues impact be OEM segment, and as I mentioned in my remarks, we're still investing heavily to bring these programs to market.
We brought the BMW the first BMW program.
Fruition, which were a build to print supplier a second source basically for for that module, which is designed by another party on the other program that we've won we were the lead design.
Partner with BMW on that and others are built to print for us and so consequently, we're investing heavily in bringing that technology to market.
Okay, great. Thank you so much thanks Charlie.
Thank you and our next question comes from will power with Baird.
Your line is now open.
Oh, great. Thanks, Yeah, I guess, a couple of questions, maybe just to kind of follow up on the previous auto question just trying to.
I was just wondering if you could help us think about the cadence of additional OEM projects behind BMW.
And what that could mean in terms of turning the quarter on.
Getting that to break even or maybe positive growth and what's kind of the outlook or timing of.
That transition and improving the growth outlook there.
We do have additional.
Projects that are underway, which which we can't really talk about the specifics. The one that's the major one of course is is the BMW project that we announced about a year ago in terms of revenue performance in this environment as we bring new projects on line definitely we've said before that that 2020 and.
Into 2021 is going to be an inflection point for revenue growth as these new programs start to contribute.
Okay, maybe just to switch gears to outdoors continues to be strong performance any further color there as to the key drivers I suspect the Phoenix line continues to be you know.
Probably that the lead driver there, but any color on other key contributors there in the quarter.
Yeah, I would say that to Phoenix and instincts are both very strong product lines for us we launched new versions of those products with solar charging technology, which is a unique differentiator for garmin.
And are those products.
We're we're very popular in the quarter as we sold into the channel and they're starting to sell through.
Now, but we do see strength across other categories basically everything that involves adventure.
The outdoor activity, especially golf golf is very strong as well.
And we felt very good about the performance of our categories in the quarter.
Okay actually maybe if I could sneak in one for Doug just on thinking about taxes and the potential change in administrations.
Next week at any early thoughts as to how.
Yes, a potential change could impact you know tax strategy and how you look at.
Given your plans on that front.
Yeah, you know, we do not provide any.
Fixture or any additional guidance beside the current year for any effective tax rate. So there is a lot of.
Moving parts that go into that tax rate, obviously statutory rates the income by jurisdiction reduction such so kind of wait to see how it all plays out.
Okay. Thank you.
Yeah. Thank you will [laughter]. Thank you. Our next question comes from Ben Bollin with Cleveland Research. Your line is now open.
Good morning, Cliff, Doug Terry Thanks for taking the question.
Clip could you talk a little bit about what you're seeing from a product availability perspective across categories seems like some may have been short in the quarter could you talk to maybe fitness marine or outdoor if you're seeing any tightness in delivering product and then if you're seeing any raw material.
No shortages associated with those builds and then I have a follow up.
Yeah.
Yes, so product availability has been fairly tight the demand has been strong and we did make adjustments coming out of.
The significant drop in activity associated with Q2, when all of the Lockdown Lockdowns took place and since that time, we've been working hard to ramp back up to the levels needed to fill demand I think we're doing okay, but but the the backlogs are very strong for us right now.
So we're working hard to fill those in terms of raw materials, we've mostly been okay. I would say there is a few shortages here and there and especially as our forecasts a change to the upside we have to deal with with that situation within lead times from our suppliers that we've had very good cooperation.
And we've been able to mostly get.
Everything that we need we rely on our safety stock of course in our business. So so we do have inventories are things that we can continue to build products and our vertical integration model is something that allows us to be flexible and what we build and when.
Okay.
And then the other question is as it relates to your partners.
Seemed like early on with coal did a lot of the retailers did the same thing they drew down working capital and inventory.
And now they are trying to replenish going into the holidays.
Do you have any thoughts on where Phil.
Finished goods inventory is with partners and now how you think that could be playing into your overall visibility as you look forward. Thanks.
Many partners are experiencing the same things that we are so the increased demand and even though they're they're taking more products. They also are selling out very quickly as well. So we believe that the channel inventory on a most of the consumer categories is is.
Not not high in fact, it's very lean and in a lot of cases, we find customers looking for our product. So again, we're working hard with our partners to fill the demand an end to end.
Help customers find what they want.
Thank you.
Thank you. Our next question comes from Nick <unk> with Longbow Research. Your line is now open.
Thanks, Good morning, everyone I just wanted to take a look at the implied fourth quarter guidance.
I think the implication is for sales to be up sequentially, but it took a look at the implied EPS for the fourth quarter that down more than 15% quarter over quarter.
I like to publicly you have a sequential decline and fitness margins in the fourth quarter due to promotions, which is okay, but I guess the the sequential decline it seems a little bit I know, you've just said, it's a little bit more than.
Than usual I guess can you talk about any additional puts and takes.
I think Q4 is different than Q3 as we look at the promotions that are going to go on over the holiday season.
As as well as the product mix and the segment mix. So so theres a lot of different factors that go into play there will also be doing more advertising.
Sequentially. So these are all factors that come into play there with our guidance.
Okay, and then on the Aviation segment I think you spoke about signs of stabilization, which is encouraging at the same time I didn't if I look at the guidance for 17% decline for the year I think that implies an acceleration in year over year declines were the comp on harmony radio perspective.
Was it is easier from last year I, just wonder if there is anything particularly better effects that the December quarter, yes.
Yeah that has a very simple explanation Q4 of 2019 was a huge quarter with a DSP and the surgeon equipage that was going on and so that's a a headwind that we'll quickly fade as we move past Q4.
Okay last question for me.
I just want to make sure the major investments that you talked about you know yeah. There's nothing new incremental there is just that you guys are acute have to keep up with the ramp up I don't know if <unk> is there any way you can size up the how much of a net investments you guys are putting into those programs.
Yeah. So yeah, you basically.
Cliff mentioned, we are continuing to invest in our OEM business is primarily.
The R&D investments you know as we get closer to production also into Capex.
Have increased year over year Capex related to manufacturing facility, we have in Europe there.
Okay, and just a quick follow up on tax I think you I believe you guys were expecting new capacity to come online here in the second half of this year I just wonder if you can give us an update on that if it's ready to go and you.
You guys are going to be able to supply product into the December quarter.
Yeah, the need to tax facility is operating we're starting to do some production functions there as well as distribution of the products out of that facility and now in Q4, we should be ramping up fill.
Physical production lines on the various products to be able to manufacture them and the new facility. So we're very pleased with that and we believe that's going to be a big incremental adder to filling the tax backlog that we have.
Got it thanks, good luck guys. Thank.
Thank you.
Thank you.
Our next question comes from Ivan Science after the Tigris Financial Partners. Your line is now open thank.
Thank you. Thanks for taking my question and congratulations on another great quarter. Thanks.
Thanks, guys and congratulations on this cadence of new products.
You've been able to continue during this difficult time some out on in April on your Q1 call. You had said that you were seeing strong demand for marine.
And no better way to social distance and be in the middle of a lake on a boat. It seems you have brought out a lot of new products that provide ancillary.
You know.
Participation to marine including fishing and diving.
Did you have these products like already in the pipeline or were you able to kind of pivot toward meeting that demand and that ability to do that has driven.
Given your great success. So you're adaptability you did you have these new products planned for.
Or did you kind of.
Develop them as you saw this need growing earlier this year.
Yeah, I think really we focus on long term roadmaps and the products that we introduced yesterday for instance, in the marine market where products that we've been planning.
You know throughout the Ur cobot cycle since before it was a unknown thing.
We didnt waiver from the investment we were making in our product Roadmaps I think that's the key thing and we were able to maintain our product release schedules even in the face of significant challenges that we've had like every company with a working from home and and distancing in the workplace I'm Super proud of what our team has accomplished I'm actually.
They sometimes at what they've been able to do and I think our products are a testament to their determination to be successful in the face of this pandemic.
Absolutely and then the pandemic you know this whole stay at home at home play at home and gaming has been a huge thing since the pandemic and then you brilliantly come out with an E sports watch so I like the way that you are taking advantage on for adapting to the environment.
You mentioned the indoor cycling what is your plan there to expand your presence in the Super Hot Indoor cycling and endorphin this market.
Well, our a response from the customers on tax has been very strong.
We have a lot of backlog for those products and we're working hard to fill those especially as we look towards the winter season as people are going to.
To be anymore. So the tax facilities, a new production facility is a big part of our plan.
To take advantage of that and expanding our distribution, especially in the Americas and Asia for those products.
Then what other areas you see more specialty auto products like the catalyst what other types of products, you have kind of different coming out.
Well, we have other categories in the works I can't share details on those that we have a creative team that are active participants in lifestyles and so I anticipate we're going to see more new categories in the future and auto targeting the specialty categories.
All right. Thank you very much and congratulations again.
Yes Ivan.
Thank you. Our next question comes from Eric wondering with Morgan Stanley. Your line is now open.
Hey, good morning, guys. Congrats on the a fantastic results I just want to get your kind of high level thoughts here on just how do you think about your end markets now from the perspective of are we seeing Tam expansion are we seeing a pull forward of demand you know from potentially 22.
Anyone into you know the summer months and just based on your answer there and kind of what gives you the confidence in your answer.
Well I think each market probably has a different story as we mentioned in marine we're seeing what you would probably call Tam expansion as new customers come into the market.
In in fitness and outdoor it's it's a strong demand for people that want to be healthier and to engage in fitness and outdoor activities.
So again those those could possibly be described as Tam expansion. There's also market share gains that are factors in those things as well we don't see anything that's happening right. Now is pull forward into 2021. The demand is strong throughout the back end of this year and we anticipate through the discussions with our partners there too.
Turning 21.
We'll also have similar trends based on the behavior of people during the pandemic.
Awesome. Thank you for that color and then I guess, how many or how should we think about the strength in the consumer the fitness and outdoor segments and in terms of you know or U.S.P. versus unit, driven or or maybe asked a different way did you. Maybe can you comment on the mix shift that you're seeing either.
To no higher priced devices versus lower priced devices.
Yeah, I think that there's a combination of things going on there. There's there's definitely ASP increases as we launch new products like the Phoenix Solar line in the instinct solar line, but there's also a unit growth as well.
As we look at our advanced wellness products in fitness for example, so it's a combination of things and the customer base that we're targeting I think are those that appreciate.
The value and the capability of the products that we offer.
Okay. That's super helpful. And then just one if I could just squeeze it in here I realize your marine business has been remarkably steady basically throughout all four seasons I looked I count one down quarter in the last 30 quarters, but can you just help us kind of understand from a high level, how do the drivers of the marine business chain.
Change during for example, the winter months versus the summer months if at all.
Yeah Marine is this just a historically very seasonal so in normal times, we would expect that the market would slow down in Q3 late Q3, especially in into Q4, and then ramp up again.
When the new year arrives this is anything but an ordinary year and so we thought boating activity continuing to take place throughout Q3 and demand for our products is very strong not just in the selling sense, but also in the sell through sense at our retailers.
Retailers. So so it's an extraordinary year as people take advantage of time on the water and as we look at Q4, the the retailer enthusiasm around marine products and the plans that they have for promotions are very strong and so we should also see I'm a very strong Q4 for marine Unlike we've seen in past years as.
Well.
That's great. Thanks for the color Congrats again guys alright.
All right. Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Teri Seck for closing remarks.
Thank you all for joining us today, Doug and I are available for call back and have a wonderful day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Ooh.
[laughter].
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