Q1 2021 Garmin Ltd Earnings Call
Thank you for standing by and welcome to the Garmin Ltd first quarter 2021 earnings call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question answer session.
A quick question during the session you will need to press Star then one on your telephone please be advised that today's call is being recorded.
Carl I just know assistance you May press Star, then Cmos with an operator.
I'd like to hand, the call over to Teri Seck Investor Relations. Please go ahead.
Good morning, everyone I would like to welcome you to Garmin Ltd first quarter 2021 earnings call. Please note that the earnings press release and related slides are available at Garmin Investor Relations site on the Internet.
Www Dot Garmin dotcom Slashdot and archive of the webcast and related transcript will also be available on our website.
Earnings call includes projections and other forward looking statements regarding Garmin Ltd, and its business any statements regarding our future financial position revenues earnings gross margins operating margins future dividends market shares product introduction future demand for our products and plans and objectives are forward looking statements the.
The forward looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting garmin.
Formation concerning these risk factors is contained in our form 10-K filed with Securities and Exchange Commission in particular, there is significant uncertainty about the duration and impact of COVID-19 pandemic. This means that results could change at any time and any statement about the impact of COVID-19 on the company's fitness result, and outlook is the best estimate based on the information available.
As of today's day presenting on behalf of Garmin Ltd. This morning are close Pemble, President and Chief Executive Officer, and Doug <unk>, Chief Financial Officer, and Treasurer at this time I would like to turn the call over to Cliff Pemble.
Thank you Teri and good morning, everyone.
As announced earlier today 2021 began on a strong note as momentum from 2020 and continued into the new year.
Consolidated revenue came in at nearly $1 $1 billion up 25% over the prior year with strong double digit growth in four of our five business segments.
Gross margin was strong at 59, 8%.
Operating margin increased to 23 three per cent and operating income grew 41% to $250 million.
This resulted in GAAP EPS of $1 14.
Pro forma EPS was $1 18 up 30% over the prior year.
Before turning the call over to Doug I'll provide highlights by segment and a summary of what we see ahead.
Yeah.
Starting with fitness revenue increased 38% to $308 million driven by strong demand for cycling products and advanced Wearables.
Gross and operating margins were 56% and 24% respectively.
Operating income more than doubled over the prior year to $74 million.
During the quarter, we introduce Lilly fashion first smartwatch with exceptional features designed specifically for women.
And the cycling market, we launched the rally power meters, including a version for off road cycling, which is a new product category for us.
Moving to outdoor revenue increased 46% to $256 million with growth across all product categories led by strong demand for adventure watches.
The outdoor segment generated strong growth in operating margins to 67% and 36% respectively.
Operating income nearly doubled over the prior year to $93 million.
During the quarter, we launched enduro, a new adventure watch category built specifically for athletes, who demand exceptional battery life for endurance racing.
We also expanded the approach family of golf tracking devices with the launch of three new products for golfers of every skill level.
Okay.
Looking next at aviation revenue decreased 8% to $174 million.
Driven primarily by reduced contributions from a DSD products that remain strong in the first quarter of 2020.
Excluding the impact from a DSP revenue was relatively flat to last year, which is an encouraging signal that the underlying market has stabilized.
Gross and operating margins were 73% and 26% respectively.
During the quarter auto land was selected as one of seven finalists for the Robert J Collier Trophy.
The Collier Trophy is a prestigious award that recognizes significant achievements in the areas of Aeronautics and astronautics.
In addition, we recently added several aircraft models to the list of GSE 506 hundred autopilot certifications.
Which expands the addressable market for these advanced flight control systems.
Yeah.
Looking next at the Marine segment revenue increased 28% to $209 million.
Gross and operating margins were 58% and 29% respectively.
Operating income increased 53% over the prior year to $62 million.
During the quarter, we experienced strong demand for chart plotters and Panoptic slides scope sonars from new boat manufacturers and users preparing their boats for the upcoming season on the water.
Yeah.
Looking finally at the auto revenue increased 18% to $124 million.
We experienced growth in both OEM and consumer categories.
Gross margin was 39% and we recorded an operating loss of $24 million.
Driven by ongoing investments in OEM programs for next generation vehicles.
During the quarter, we entered the power sports market with a full complement of products designed to help recreational off roaders find their way to stay connected with other writers control electrical systems on the vehicle and monitor their surroundings.
In summary, Q1 was another record breaking quarter.
We're very pleased with what we've accomplished so far this year and we continue to see strong demand for our products.
Some of you are wondering how this strong performance affects our outlook for the rest of the year.
We believe there are two very important factors to consider.
First much of the year remains ahead of us.
Q1 is typically the lowest seasonal quarter of our financial year.
It's difficult to predict what the remainder of the year will look like based on one period, especially considering the pandemic driven dynamics of the past year.
Second the electronics industry is experiencing high demand for and short supply of certain electrical components.
So far the impact on us has been minimal due to our inventory strategy and vertically integrated business model.
However, the situation is very dynamic complex and long term in nature, and thus difficult to predict how it will evolve.
With these things in mind, we're maintaining the guidance issued on February 17th 2021.
So that concludes my remarks next Doug will walk you through additional details on our financial results.
Thanks Cliff good morning, everyone.
Jim by reviewing our first quarter financial results with comments on the balance sheet cash flow statement and taxes.
We posted revenue of $1.072 billion from the first quarter, representing 25 per cent increase year over year.
Gross margin was 59, 8%, a 60 basis point increase.
<unk> expense as a percentage of sales was 36, 5% 200 basis point decrease.
Operating income was $250 million, 41% increase.
Operating margin was 23, 3% 260 basis point increase our GAAP EPS was $1.14.
EPS was $1.18.
Next to our first quarter revenue by segment and geography.
First quarter, we achieved double digit growth in four of our price segments led by the outdoor segment with strong growth of 46 per cent.
Although by the fitness segment with 38% growth in the marine segment with 28% growth.
By geography, we achieved double digit growth all three segments led by strong growth of 33% EMEA, 31% growth in APAC.
Americas grew 18% more heavily impacted by decline in aviation.
Excluding aviation America's growth was more in line with the other regions.
We'll go next operating expenses first quarter operating expenses increased by $62 million from 90%.
Research and development increased $38 million year over year, primarily due to engineering personnel costs across all of our segments and other expenses related to auto OEM programs.
<unk> expense increased approximately $4 million due to higher spend in the outdoor and fitness segments.
Yesterday increased $20 million per the prior quarter, a decrease percentage of sales to 14, 7% from.
30 basis point decrease or the prior year.
Christian SG&A, primarily due to increases in personnel related expenses information technology costs.
A few highlights from the balance sheet cash flow statement and taxes.
With cash and marketable securities of approximately $3 2 billion accounts receivable decreased sequentially to five or $50 million from a seasonally strong fourth quarter.
Inventory balance increased year over year to $838 million in the first quarter 2021 generate free cash flow of $331 million $147 million increase the prior quarter.
First quarter 2021 put in effective tax rate of 12, 2% compared to nine 3% in the prior year quarter, increasing the effective tax rate is primarily due to larger amount of reserve releases from the prior year. This concludes our formal remarks share can you. Please open the line for Q&A.
As a reminder to ask a question. Please press Star then one.
If your question has been answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Erik Woodring with Morgan Stanley. Your line is open.
Hey, good morning, everyone. Thank you for taking the call.
My first question is just on the component side.
Just like to dig in there a little bit more to understand you know what are the components that are potentially most impacting garmin as a whole and then kind of secondary to that how where component shortages specifically on the auto side impacting you or your partners ability to meet demand.
And then I have a follow up.
Okay, Yes.
Yes, I think as you have read the situation is very widespread so there's there's a lot of impact in some of these major fabs that it had some issues recently certainly impact a broad range of components. So there isn't there isn't any given set of components or any one component that I could highlight it as a.
Just a general pressure across the industry in terms of specifically for auto we've been very careful with.
Our inventory and supply chain management, and auto and as you know, we've often talked about our strategy of using inventory as a business tool and so that's helped US we've not had any major issues with supplying our customers and I really can't speak to our competitors, but but we've been doing everything we can.
To keep our customers' lines going.
That's super helpful. And then for my follow up now for the first time in company history, you have over $3 billion of net cash I know you historically run with a buffer to protect yourselves in times of financial hardship like the pandemic or to maintain your components safety stock, but is there a level of cash.
Where you know you guys say to yourselves, we need to start putting more of this to work via X y or Z and if there is you know what would be the priorities in terms of reinvesting that cash.
Thank you.
Yeah. So we don't have a specific number that we target for cash as you can see our businesses growing.
At a a very nice rate so as the business grows and gets more complex of course, we feel.
Like like cash is a good thing.
Our priority is on cash and have remained what they've been for a long time, we want to be a reliable payer of a attractive dividends for our investors.
Where we're focused also on acquisitions is reinvesting in the business that way and then finally.
Investing in the business and increasing our production capacity for example, our facilities our people all of these things are priorities for the way we use our cash.
Super Helpful. And then maybe if I could just sneak in one more just just curious on your view, how you think about kind of normalized EBIT margins for outdoor and fitness segments as we kind of come out come out of COVID-19 demand somewhat normalizes, the retail environment somewhat normalizes and how we should think about that and that's my last one.
Thanks, guys.
Yes, I think we don't target a specific number around our operating margin for these segments. These are segments that have a lot of specialty products in them and so consequently, we are we aim to have higher levels of operating margin in those segments to fund our investments.
But in general we don't necessarily target.
Number with sales the sales increases we've been seeing of course, we get some leverage out of that so we're very pleased with our performance.
Our next question comes from Nick Todorov with Longbow Research. Your line is open.
Yes, thanks, and good morning, everyone.
Cliff I think you your congrats on doing a great job on the inventory and not being impacted on the component side.
Guess related to that Ah I, just wonder if you're seeing any impact from freight costs, because I know credit costs from particularly from Asia to Europe, and North America are up substantially.
<unk> does not suggest so but I wonder if you're seeing any headwind from from higher logistics costs.
Yeah, I think freight is definitely higher and it's it's not a new situation actually we have been experiencing higher freight costs.
Over the past year, a lot of our freight providers dialed back on their capacity early in the COVID-19 crisis and that created some constraints, even a year ago. So so it's not a new thing.
Afraid is has got some additional delays.
We're actually using a higher mix of of air freight right now to keep our products flowing and we're focused on product availability.
Okay got it.
<unk>.
Question on fitness your gross margin was exceptionally strong at 56% relative to last couple of years I think mix is helping you there would cycling being strong right now, but I just wonder is there anything else that that pushes Europe. Another growth margins are higher relative to lots of yours.
Yes, I think definitely product mix in general we would say is it's helping us in and fitness.
And on the cost side, we've seen some benefit in terms of our overall cost structure on the products. So so in general we've had very good performance on the margin side in fitness.
Okay and last question corporate Clifton corporate Doug a very strong first quarter free cash flow numbers I think are a record for the company of $300 million. How do you feel Doug about that relative to your full year free cash flow target is it still several hundred and 25 in <unk> and Capex, what was kind of low relative to your full year guide of 300.
50 million last quarter is that unchanged.
Yeah. So first regarding our free cash flow at this point in time, we're maintaining our overall guidance. So that's the number that we feel comfortable at this point in time.
Actually no update that progress through the year regarding our Capex, yes, I, we still feel confident that the amount that we basically gave our guidance for capex.
We'll be ramping up some of those investments are currently talked about and we talked about.
During our previous call here in the latter part of the year relating to our consumer manufacturing facilities in Taiwan.
<unk> increased spend.
Q2, and rest of the back half as well as.
We're renovating our facilities here in Olathe of actually taking some of our previous facilities that were for distribution manufacturing and renovate those from workspace. So those expenses will be ramping up in Q2 and rest of the year.
Got it very helpful. Thanks, guys. Good luck.
Thank you Nick.
Our next question comes from Paul Chung with Jpmorgan. Your line is open.
Hi, Thanks for taking my question. So just on aviation you know a nice recovery in once you, which is you know now exceeding kind of once you 19.
Revenue levels, but operating margins are rebounding, but you know they still are below the 1019 levels. Despite kind of higher revenues any comments on the dynamics there.
Yeah, I think the operating margin in aviation, Paul It's really a function of the lower sales, we're continuing to invest in new program development and technology. So we we do have a higher level of R&D spend it at this moment.
But in general I think that's really the driver and as we see the market recover we.
We should begin to get some leverage out of that again.
And then as we kind of move through the year in aviation you know given solid solid one two against pretty.
Pretty tough comp, but you have much easier comps ahead for for Q2 and beyond is that 5% target a bit too conservative I assume you know some visibility in this segment and slightly higher than your other ones.
Yes, I think as we mentioned, we're we're not adjusting our numbers right now it's certainly true that as we go forward. There is there is some interesting comparable and our business compared to last year aviation was hit harder and longer last year.
Then other segments, but we're starting to see some positive signs and as we get a clearer picture. After the end of Q2, we'll be able to provide more information.
Thanks, and then Doug another follow up on free cash flow you know nice harvesting of accounts receivable and a nice profit upside should we expect you know a or to be more of a source of funds. This year and how do we think about.
Working cap investments throughout the year. Thank you yeah. So our numbers did come in favorable as it relates to <unk> there. So.
More favorable so.
They get some more a little bit of a headwind against that rest of the year.
<unk> is that our customers are really demanding our product as a result of that base.
Basically we have certain credit limit so in certain cases, they may be.
Paying prior to some of their credit terms to standard whose credit limits, but that's a good thing.
Can you get to see the demand that we're actually.
Funding that as well as two other working capital.
Billy you know looking at inventory, that's an item that will probably make some additional investments and then see that increase.
For the year also.
Thanks, guys.
Jim Thank you.
Our next question comes from will power with Baird. Your line is open.
Oh, great Yeah, a couple of questions maybe just a quick follow up in case I missed it on the supply chain commentary any update you can provide just on current channel inventory across key product categories, just trying to understand the ability to meet near term demand given some of the <unk>.
<unk> channel component questions out there and then I've got one additional question.
Yeah, I'd really say a couple of things will on that but we believe the channel inventory is is a very I mean right now there's a lot of demand out there for products and definitely the the supply chain considerations in meeting that demand are more complex when there's increased demand so.
So that's why we believe that that are in general we see strong demand from the products going forward.
Okay.
Alright, well from there I also wanted to ask you I guess as you look at auto kind of a two part question.
And you noted that the consumer auto piece grew.
Grew and so would love more color there on key drivers, but also just from a.
Broader perspective, I'd love to get your thoughts on the on the power sport opportunity I know you've rolled out a couple of initial products, but how are you thinking about the opportunity there you know near and longer term.
Yeah. So we were pleased to see the consumer auto segment growth.
The drivers behind that really are the specialty products that we've been investing in over the years on things like truck and RV and in cameras in terms of power sports. That's a perfect complement to what we're doing in the consumer auto business. The power sports market as you know has been.
Growing a lot, especially in the pandemic environment and so there's a lot of interest in products that can help people enjoy that sport and enjoy their vehicles and so are our solution with tread and in the power switch and also the cameras is a fantastic way for us to enter that market with a really strong offering.
I mean any sense for how broad that portfolio could be over time I mean are these supposed to kind of a starting point or are.
Or are these kind of a key categories.
Yes, I think that it remains to be seen I would say that there's a lot of opportunity in the power sports market.
And a lot of products that we can do and so this really is our our approach and our strategy in building the business, which is defined great niche categories that we can innovate in and and.
Take a strong market share and be able to build the business that way.
Okay. Thank you.
Okay.
Our next question comes from Ivan <unk> with Tigress financial your line is open.
Thank you. Thank you for taking my question and congratulations on another great quarter.
Late start to the year and making it tomorrow.
Thank you.
So in the power sports area.
Are you going to do you think envision yourself starting to work with some of the OEM manufacturers, especially for things like the the power switch.
Yes, I think there's a good level of interest and on.
On the OEM side and the products that we're offering already Arctic cat is has announced.
Announced our product on some of their vehicles and we're talking to others as well, but we do feel like we have a compelling offering that is of interest to the market.
And how was the initial reaction or were you what was your.
So that's on the initial reaction to things like the trade and the communicator.
I felt it was it was good it was encouraging clearly users in that market are watching for the kinds of products that will help them enjoy the sport and so are these these are definitely right up.
Their interest Ali if you will and it leverages all of the strength that we have across garmin, including the mapping the communication.
And the rugged designs.
Were there any other areas that surprised you in the quarter.
Well I I I think we've kind of highlighted most of those you know.
We continue to be really excited about the growth in and marine Theres a lot of demand out there from marine products and we expect that will continue.
Fitness has been fantastic of course, with the cycling and advanced Wearables Lilly was a great new product for us as well.
And Ah you know aviation, we're excited to kind of see things stabilize and we're getting a lot of positive feedback as trade shows and and manufacturers and shops are installing equipment are all making positive remarks.
What kind of attendance or you're seeing at the trade shows as like we kind of go to this reopening and getting nowhere the pandemic.
Well, it's early days and actually we just completed the southern Sun show in Florida, which was.
Canceled last year, we opened this year, but.
But attendance was was actually I would say reasonably strong given given the conditions. It was probably what I heard from 87% to 80% of that was spent in normal years what.
What we saw there that was buyers.
We're very interested and very serious about equipping their aircraft in and interested in what we had to offer.
And congratulations again.
Thanks Scott.
And next question comes from Ben Bollin with Cleveland Research. Your line is open.
Good morning Cliffs', Dr. Terry Thank you for taking the question two.
Two items the first.
Interesting.
How we should think about the investments being made in the auto OEM ramp as you build out facilities and head count.
Any way to think about.
The linearity investment expansion and when that starts to normalize based on.
What your current visibility is and then I have a follow up.
Yeah sure relating to the investment in Oems give you kind of perspective for two.
2021, as it relates to the R&D, we would expect to see a similar level of R&D spend in the remaining quarters of 2021 as we saw in 2000 and in Q1 as we continue to ramp up for our new programs there as it relates to the cash.
Opex side of things.
Capex for the new facility.
Europe related OEM, that's factored into our Capex budget that we gave you previously but also I should say the majority of that Capex number and there is relating to the consumer manufacturing piece in Taiwan as well from renovation here and then as it relates to the OEM piece, it's primarily relating to.
Two increasing our production lines get ready for production in the near future.
Okay.
And then cliff more of a I guess, a big picture question, but when you step back and look at.
How garmin has.
Benefited throughout COVID-19.
What are your bigger picture thoughts about how categories or the business as a whole may be impacted as you start to see more reopening any of the puts and takes about point of sale trajectory category expansion just some of the secular drivers and where do you think that goes into the future.
Well, it's early days, so probably difficult to quantify we do believe that the.
It kind of lifestyle changes that we've seen as part of the pandemic.
Our durable because people have made significant investments in themselves or help their ability to be outdoors and to have recreation and so that's what we continue to hear from.
Our partners and what we continue to see in the industry.
Thanks, everyone. Good luck for the rest of the year.
Do you.
Our next question comes from Jeffrey Rand with Deutsche Bank. Your line is open.
Hi, Thanks for taking my call can you talk through some of the puts and takes your operating expenses as we move past the pandemic I would expect there to be some lower costs related to employee safety, but also probably some increased traveling cost I guess some detail details on how you how you were thinking about that.
Yeah there are.
Some cases, especially when you look at the <unk>.
Q2 over Q2 comparison.
Last year at this time, we did cut back on travel trade shows those type of things in there. So I would say looking at.
Q2, there'll be some increase that we'll spend this year versus last year, there, but that's not really the big drivers of our Capex big drivers really are.
The R&D section there that we have going forward.
Great and then your marine business continues to do very well how do you think about trends in the business longer term and is there any concerns of a pull in of future purchases as boarding was a good socially just can activity during the pandemic.
Yes, I think certainly that's a possibility, but as I mentioned earlier, we believe that this trend is pretty durable our boat building partners. Many of them are booked out through the remainder of the year and some are even talking about 2022 now.
So there's still significant pent up demand for boating products.
People, who want to be out on the water and we believe that we will continue to drive growth in our marine segment.
Great. Thank you thank.
Thank you.
Again to ask a question. Please press Star then one our next question comes from Derek Soderberg, Let's call. Your Securities. Your line is open.
Hi, guys. Thanks for taking my questions Cliff I wanted to start with you I'm wondering if you can provide an update on the <unk>.
Opportunity in Europe, I think it's progressing a bit slower than the U S.
That mandate was.
Pushed out I think almost a year ago, what are you seeing in that market today, our projects starting to accelerate are still sort of being pushed out any thoughts on the S. B.
In Europe, and sort of what Youre seeing there would be great.
Yes, I think the European mandate has been pushed out probably more than once and so.
That probably wasn't a surprise we are starting to see customers.
Get more interested in that I think they realize that it won't keep pushing out forever and so theyre looking for a solution and I think we're well positioned for that I would say that Europe is probably the next biggest opportunity obviously compared to the north American opportunity, although much smaller because the market there is generally 25% to 30%.
The total global market is.
Great and then as my follow up I guess I'm curious as to the employment environment and you know I got to your ability to attract new talent sounds like labor cost might be going up is there anything going out there in the labor market that has changed more recently or anything youre seeing thats, maybe a concern in the labor market.
Thanks.
Yes, I think that labors, an interesting topic.
For a long time engineering talent has been in strong demand and I think it's only gotten stronger in the pandemic as many companies are are looking to create new things and new products.
So we're operating in a tight environment, that's that's not generally new but it does seem to be.
Increasing in this environment for sure.
We're focusing on having a great work culture I think we've got fantastic employees at Garmin, we're really proud of all of them over 16000 employees around the world now and our culture is very unique in the kind of products and markets that we serve are also very unique their products and markets a passion where people can actually.
Create things that interests them and not just work on something that someone else tells them to do.
So we have some advantages, but obviously, it's still a tight market and we're doing the best we can.
Great. Thanks, guys.
Thank you.
There are no further questions I'd like to turn the call back over to Teri Seck for any closing remarks.
Thanks, everyone for your time today, and Doug and I are available for callbacks and we hope you have a great day.
Yeah.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.
Okay.
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