Q2 2021 Garmin Ltd Earnings Call
Okay.
Thank you for standing by and walk up to the Garmin Ltd second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press Star then 1 when you touched on the telephone.
As a reminder, today's conference call is being recorded.
I would now like turn the conference over to your host Teri Seck manager of Investor Relations. Please go ahead.
Good morning, everyone. We would like to welcome you to Garmin Ltd.
Quarter of 2020.1 earnings call. Please note that the earnings press release and related slides are available at Garmin Investor Relations site on the Internet at Www Dot Garmin Dot com Slashdot and archive of the webcast and related transcript will also be available on our website.
This earnings call includes projections and other forward looking statements.
<unk> regarding Garmin Ltd, and its business any statements regarding our future financial position revenues earnings gross margins operating margins future dividends market shares product introductions future demand for our products and plans and objectives are forward looking statements.
Forward looking events and circumstances discussed in this earnings call may not occur and actual.
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 form 10-Q filed with the Securities and 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, and 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 Ltd. This morning are Cliff Pemble, President and Chief Executive Officer, and Douglas <unk>, Chief Financial Officer, and Treasurer at this time I would like to turn the call over to Cliff.
Pemble thank.
Thank you Terry good morning, everyone as announced earlier today Garmin reported record revenue and operating income for the second quarter.
Consolidated revenue increased 53% over the prior year and exceeded $1.3 billion.
We experienced strong double digit growth.
In all 5 business segments profitability.
Profitability in the quarter was also strong.
Operating margin expanded to 28%.
And operating income increased 97% to $371 million.
There are 2 important things to consider when looking at our Q2 performance.
First <unk>.
Q2 of 'twenty 'twenty was negatively impacted by the onset of the COVID-19, pandemic, which reduced consumer demand and disrupted our retail partners.
As a result, a portion of the current period growth is attributable to the unusual comparable from the prior year.
Second the compound annual growth rate from 2019 to 2021 was 18% for the period.
Which is very much in line with recent trends during quarters less impacted by the dynamics of the pandemic.
We believe this indicates that the underlying market is healthy and continues to grow.
To meet the growing demand for our products I am pleased to report that later this fall we plan to open our fourth production facility in Taiwan, which will approximately double our capacity.
This is part of a multi year initiative to improve our capacity.
And prepare for opportunities that lie ahead.
Also.
So we entered a new phase of our Olathe facility expansion to convert the former warehouse building into additional office space.
Projects. Following the recent completion of other notable investments, including a new production facility for tax cycling trainers.
Our new auto OEM production facility in Europe.
The expansion of our Olathe facility to include auto OEM production.
Given our strong performance in the first half of the year, we are updating our full year guidance.
We now anticipate revenue of approximately $4.9 billion up 17% over the prior year.
With.
And digit growth expected in each of our 5 business segments.
In a moment, Doug will provide more details on our financial results and updated guidance, but first I'll provide a few brief remarks on the performance and outlook of our business segments.
Starting with fitness revenue increased.
Double the percent to $413 million with growth across all categories led by cycling products and advanced Wearables.
During the quarter, we celebrated global running day with the launch of 2 new running watches the 455 and the $409.45 LTE.
The 400.945 LTE.
LTE is noteworthy because it includes built in connectivity and Leverages a safety monitoring capability of our recent Geos acquisition.
We also launched the venue to smartwatch in 2 sizes, which will enhance the appeal of these devices across a broader range of customers.
Given the strong performance.
Of the fitness segment, we're raising our revenue growth estimate to 17% for the year.
Moving to outdoor revenue increased 57% to $323 million with growth across all categories led by adventure watches.
During the quarter, we launched our smallest I've watched.
Watch the day.
Net MK 2 S featuring multiple die modes, multi sport training and smartwatch features for everyday use gives.
Given the strong performance of the outdoor segment, we are raising our revenue growth estimate to 17% for the year.
Looking next at.
<unk> revenue increased 43% to $181 million and we experienced growth in both OEM and aftermarket categories.
Revenue in the quarter was comparable to the levels achieved in the second quarter of 2019.
Which is significant considering the impact <unk> had on 2019.
Aviation once.
During the quarter auto land was awarded the prestigious Robert J Collier Trophy.
As the year's greatest achievement in the field of Aeronautics or astronautics.
Auto land is the first certified autonomous system designed to activate during an emergency to safely fly and land the aircraft without.
Per foreign intervention.
We also announced the acquisition of Arrow data, a leading provider of performance information for commercial aircraft, serving more than 135 Airlines worldwide.
Aero data broadens our presence in commercial aviation and we look forward to building on their success.
We're pleased with how the aviation segment has recovered from the impact of the pandemic and the completion of the <unk> mandate.
We now expect full year revenue to increase approximately 10%.
Yes.
Turning next to the Marine segment revenue increased 66% to 262.
$2 million with growth across multiple categories led by chart plotters.
During the quarter, we announced support for Mercury Smart craft engines, expanding list of engines compatible with our display systems.
We also launched the MSC 10, Marine satellite campus, which provides precise position and heading information.
Without the interference challenges associated with traditional magnetic compass systems.
The Marine segment is off to a great start in 2021 and.
And we expect that demand will continue to be strong throughout the remainder of the year.
With this in mind, we expect full year revenue to increase approximately <unk> 47 per cent.
And looking finally at auto revenue increased 74% to $148 million with growth contributed contributions from both consumer categories and new OEM programs.
During the quarter, we launched our first connected dash Cam with lie view monitoring and premium subscription based.
Cloud storage.
Given the strong start to the year, we now expect the auto segment to increase approximately 15%.
In summary, we're very pleased with our performance, so far which gives us confidence to raise our guidance for the year.
In addition, we are investing for the future by expanding both our production.
Cassidy and office facilities. So we are well positioned to seize opportunities that lie ahead.
That concludes my remarks next Doug will walk you through additional details on our financial results and our updated guidance Doug.
Thanks Cliff good morning, everyone.
By reviewing our second quarter financial results.
<unk> comments on the balance sheet cash flow statement taxes, our updated guidance.
Cost of revenue $1 billion $327 million per second quarter, representing 53% increase year over year.
Gross margin was 58, 8% 50 basis point decrease to the prior quarter.
Operating expense.
The percentage of sales was 39% 670 basis point decrease the prior quarter.
Operating income was $371 million and 97% increase.
Operating margin was 28% 630 basis point increase.
Our GAAP EPS was $1.64.
Our pro forma EPS was $1.68.
Yeah.
Next look at our second quarter revenue by segment and geography.
Highly diverse business model provides a rich set of opportunities and reduced our reliance on single markets and product lines.
Fitness is our largest.
<unk> segment contributing 31% the sales in the second quarter, followed by outdoor at 24%.
During the second quarter, we achieved double digit growth all of our segments led by auto was 74% growth.
By geography, the Americas region contribute about half of our revenue the remaining coming from EMEA.
Largest site in APAC.
We achieved double digit growth all 3 regions led by strong growth of 72% APAC, followed by 53% in Americas and 46% EMEA.
Looking next at operating expenses.
Second quarter operating expenses increased by $83 million.
A 25%.
Research and development increased $35 million year over year, primarily due to engineering personnel costs across all of our segments.
SG&A increased $34 million per the prior quarter, but decreased percentage of sales 12, 5%.
270 basis point.
<unk> decreased compared to the prior year.
The increase in SG&A, primarily due to increases in personnel related expenses formation technology costs.
Advertising expense increased approximately $14 million due to higher spend net of fitness and outdoor segments.
A few highlights from the balance.
Cash flow statement and taxes.
We ended the quarter with cash and marketable securities approximately $3.2 billion.
Accounts receivable increased sequentially and year over year to $737 million is strong second quarter sales.
Inventory balance increased sequentially and year over year to 139 million.
Non sheets, primarily due to raw material requirements.
During the second quarter of 2021, we generated free cash flow of $120 million, a $22 million decrease with the prior quarter.
Capital expenditures were second quarter from $110 million.
We expect full year 2021 free cash flow.
<unk> to be approximately $750 million capital expenditures of approximately $400 million, who invest in expansion projects that cliff previously mentioned.
During the second quarter of 2021 reported effective tax rate of 14, 8% compared to the prior year quarter GAAP tax rate of 6.8% pro forma tax.
<unk> rate of 14%.
Turning next to our full year guidance.
We estimate revenue of approximately $4.9 billion, an increase of 17% over the prior year with double digit growth each of our segments.
We expect gross margin to be approximately 58, 5% which is lower.
Sure than our previous guidance of 59, 2% due to higher supply chain costs.
We expect an operating margin of approximately 23, 8%.
Also we expect pro forma effective tax rate of 11, 5% is higher than our previous guidance of 10, 5% due to income mix by jurisdiction.
This results in pro.
Earnings per share approximately $5.50.
Concludes our formal remarks Valerie can you. Please open the line for Q&A.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then 1 on your Touchstone telephone.
Our first question.
Our first question comes.
No formal channel of Jpmorgan. Your line is open.
Hi, Thanks for taking my question and great quarter. So just on the Florida 945, LTE can you give some insights on how that product is doing.
What percent of customers are repeat versus new and then on the monthly.
From policy E contract, how does the margin profile of their shake out.
And you know what.
What percent of customers are opting for the LTE function and is the strategy to kind of expand.
LTE to the Phoenix, another watches and expand this subscription service.
Follow up.
Yeah. Good morning, Paul I think it's early days for the 945 LTE. So.
Really not a lot to say yet about.
The results there and we don't provide results by product category anyway, but but I would say that in terms of the.
The kind of customer that will buy this.
<unk> is a customer that.
Specifically interested in the safety story that Garmin offers with with the integration.
With our Geos.
Subsidiary that we recently acquired and allows us to offer now with the connectivity and end to end solution for people that want real time monitoring of their act.
This price.
And also the ability to.
<unk> safety help that they need it. So so that's the kind of customer that would take that product and again, it's early days.
And I really can't speak to the roadmap right now, but it's.
Something that is compatible with.
Activity, which we've taken with our in reach product line in terms of safety monitoring.
For active lifestyles.
Okay, Great and then on aviation Youre approaching 19 levels of revenue and a very nice rebound in operating margins should we expect to see.
The property margins kind of ignored.
With 30% as we navigate through the balance of the year or are there some.
Different dynamics of product mix going on with less a DSP benefit.
And then on Aero data, how much contribution should we expect there and talk about any.
Cross selling opportunities.
With that existing customer base and then <unk>.
Finally on auto land can this be another ESP type opportunity seem Barry hi.
Hi, Asp's for this product so it's not as large of an adoption there but.
What is the penetration rate.
You think that goes in this area.
<unk>.
Aero data.
Sitting here in terms of improving the overall performance of this future. Thank you.
Yeah, so in terms of operating margin.
It's come up.
In this period because of the additional sales leverage that we have in our aviation team has it.
Of course work very hard on managing expenses during a pretty difficult challenge that we face but that said.
We don't forecast really the operating margin that we have for the future other than to say, we strive to be unexpected to be very profitable it will depend.
On the investments that we make in the programs and the new products that we're doing in aviation.
In terms of Aero data.
Contribution, it's a small adder, but an important 1 because it's it's.
Very important performance calculations that are done for commercial flight that help airline.
Airlines conserve fuel and also per.
Provide safety escape procedures for engine out during takeoff and so that's a critical function that's required in commercial aviation and it's something that we think we can expand to business aviation as well.
And then finally on auto land.
Auto land is delivering on 3 model.
<unk> now the tbms, the SaaS from Cirrus and then the.
The 600 from paper and of course in those models. It's 100%. There. This is not an option so.
The market is growing rapidly the number of aircraft out there is growing.
With the.
So I agree with those models and they're very popular models in terms of the Aero data part of that they arent closely connected to auto land per se, but that aero data in business aircraft would be.
Something thats, an enhancer from a safety and performance point of view.
Thank you very helpful.
Thank you. Our next question comes from Ben Bollin, Cleveland Research. Your line is open.
Good morning, Brian Thanks for taking the question.
Scott could you tell us a little bit about.
How you would characterize the current supply situation on components inventory job it looks like a.
A lot of it with raw materials, but.
How did that influence that availability influence <unk>, how do you think about what that could do for the remainder of the fiscal year and then I have a follow up yes.
I'll give you a little flavor on the.
Inventory, yes, the reason that inventory is up year over year is due to.
Raw material requirements, we're looking at making securing our raw material requirements to make sure that we're meeting the increased demand.
Say as it relates to the supply chain situation that is something that we're managing very effectively on.
On a daily basis, just to making sure that we do.
We have the appropriate to components to meet that demand as I think about the rest of the year as it relates to inventory.
Think it will.
Increased some even more than what we have today, probably a probably increase more than what our sales level is going to be and probably just a rough number.
Probably close to $1 billion, probably by the end of the year. That's something that we are the team is all focused on making sure that we are managing the situation and like I said on a daily basis with that.
Okay.
And then the other item with this.
Facility expansion as you bring on a.
Fourth Taiwan facility and the potential to double your production.
Could you just talk us through where you think you are right now on utilization of the existing footprint.
The timing for.
The facility will be online or ready to go just approximate timing for that would be helpful.
Helpful. Thank you.
Yes, Ben I think in terms of utilization of our existing footprint, specifically talking about our <unk>.
Consumer manufacturing I would say, we're almost at 100% capacity.
We've been bursting at the seams, especially keeping up with this.
As market growth and demand. So so it's a very important step for us and in terms of timing of the new facility. We are targeting a fall opening to start to.
Produced products, there and that will help.
Alleviate our overall.
<unk> constraints.
Okay.
Thank you.
Thanks Ben.
Thank you. Our next question comes from Jeffrey Rand of Deutsche Bank. Your line is open.
Hi, Thanks, and congrats on a strong quarter consumer auto business appeared to bounce back nicely in the quarter can you talk about what is driving this is a newer older products and how do you think about this business going.
Okay.
We saw Jeffrey growth in all of the categories in our consumer auto business, we've been talking for a while about the.
The growth opportunity and the strength in specialty products. So of course day, they did very well in the traditional Pnd's also bounced back some of that is simply the pent up.
Forward and as people travel less last year and of course had less demand for those products, but in general all of the categories did well.
Great and based on your revised outlook it looks like year over year revenue growth is going to decelerate in the second half of the year are you seeing any signs of slowing demand or is this just kind of being driven by.
The hard comps second half of last year.
Yes, I think theres really.
A few things to consider in our guide.
First of all last year.
The first half was very challenging because of the pandemic and we believe that <unk>.
<unk> of the impact in the first half.
<unk> was really shifted to the second half so our second half benefited from what we werent able to do in the first half due to the pandemic and I mentioned those factors earlier that there was a pullback by consumers initially and then retail partners were disrupted many of them not even open their doors.
So that is a factor.
<unk> as we look at our guide and then we also look at our.
Product release timing of this year versus last year, that's a factor in our outlook.
Finally.
Potential uncertainties around supply chain, that's still exists. So so that's what went into the guide and yes. It is at a lower rate.
And what.
Then what we experienced in the first half, but we believe that much of that is explained by the factors I just mentioned.
Great. Thank you.
Thank you.
Thank you. Our next question comes from will power of Baird. Your line is open.
Okay, great. Thanks for taking the <unk>.
Question, I guess echo my congratulations on the strong quarter.
I guess I'd love any color that you're able to provide a broadly probably across categories. On you know what the channel inventory situation looks like it seems like strong.
And demand.
Do you feel like channel inventories and balanced way.
Where you want it so maybe just you know kind of sell in versus sell through and any broader color there and how that may may or may not be a bad thing the forward outlook.
Yeah. Thanks, Thanks, well I.
I think in terms of channel inventory it is better than it has been.
In the past, but that still depending on product and.
Segment, there's there's areas of <unk>.
Clean inventory that we continue to scramble to fill.
There are shipping a lot of our products right now in order to keep up with that and the sell through that we see especially on those products that.
We have the ability to observe through registration.
<unk> and Garmin connect the sell through has been in.
In line with with.
The deliveries were making so.
The inventory situation, a little bit better, but still not where we need to be.
Okay and then just.
I wanted to ask on the M&A outlook from here I mean, obviously you continue to continue to generate.
You know strong cash flow I, just any any color on areas of interest and kind of what valuation parameters look like and how much of a barrier is that.
Here, given some of the broader demand trends from some of the areas you might be targeting.
Yeah, I think M&A is something where we're continue.
When you only looking at we are usually looking at a few different opportunities at any 1 given time.
You know I really don't ever share, what specifically were interested in but I would say anything that that complements our segments in terms of technology or.
Adjacent products is our.
Are things that are interesting to us valuations are.
Kind of a challenge very nuanced right now there's there's obviously a lot of exuberance in the market and expectations.
So we we certainly.
<unk>.
Don't want to end arent interested in those things.
Things that are simply out of line and so we we typically don't engage on those.
Okay. Thank you.
Gil.
Our next question comes from Nick Todorov of Longbow Research. Your line is open.
Hi, Yes, good morning, everyone and thanks for.
All my questions.
If I look at the guidance you took gross margin down because of the component cost, but you took operating margin guide up I wonder is that driven by leverage or has your opex plans for the year change I ask because it looks like your R&D and specifically OEM auto or R&D came down.
Meaningfully sequentially.
Is that reflecting receiving credits for a volume so or what's driving that yeah. I just wanted to give you a flavor for the overall opex for the full year as a percentage of sales than kind of sequential what's going on there. So.
On a full year basis, a percentage of sales we expect.
<unk> operating expenses to be up about 60 basis points year over year looking at each 1 of the categories.
Advertising I mean, our goal is to keep that relatively flat as a percentage of sales on a full year basis will increase on absolute dollars co op increased sales and <unk>.
Media spend as it relates to R&D, we do expect that to be up about 50 basis points year over year percentage of sales in.
And they are just increased.
Head count to support our product roadmap, we're talking about investing in auto OEM et cetera, then on SG&A.
A little flavor there a percentage of sales on a full year basis, we expect that to be slightly up maybe about 10 basis points and that's really due to increased <unk>.
Sales also driving that volume some of the areas such as COO.
Costs.
As well as product support different operations.
As it relates to R&D on a sequential basis. The situation. There is that is lower in the second quarter due to reimbursement of some change order requests from our OEM partners. The situations whenever OEM partner gives a changeover requests we get reimbursed for that and that is shown as a reduction.
<unk> and R&D, so there may be a little bit bumpy between between the quarters there from that standpoint.
Okay got it very helpful. Thanks, and Cliff if I look at the aviation guidance and implies meaningfully lower sequential second half revenue what would be driving aviation sales to go down from.
Here and also related as we speak.
<unk>, how should investors think about normalized operating margins at aviation once that business kind of goes back to normal.
I think in terms of second half again, we.
We try to analyze all the factors.
That we can and coming up with that and and there is there's quite a bit of art and a little bit of science that goes into it but some of our outlook for the second half.
As related to the timing of deliveries of certain products to customers. So that's 1 thing we benefited some in the first half because of some access.
Accelerated delivery so that's part of it in terms of.
Normalized growth rates.
<unk>.
There's a lot of studies and a lot of people that put effort into.
Long term projections for the aviation market and they typically grow.
At or above GDP levels.
Sure.
For developing countries and frankly those.
Those studies are so long term, it's very difficult to know how real they are based on everything that can happen as we know pandemics can change the whole course of of these growth trajectory. So so we probably only look at that from a passing interest point of view.
You and we generally say that we.
We want our aviation segment to continue to grow both in terms of market share and penetration on platforms.
And with market growth.
Got it thanks, guys. Good luck.
Thank you.
Thank you. Our next question comes from the island.
That's a big risk financial your line is open.
Thank you for taking my question and congratulations on another incredible quarter.
Thanks Ivan.
Hey on your increased guidance you increased the guidance from marine tremendously from 15% to 27% what is driving net growth.
Well Jim.
The marine market continues to be very strong theres a lot of interest in boating are boding Oems with people to build the boats are backlogged now many into 2022 and some are even saying that's closing as well.
So there's just a lot of interest in boating, our retail partners.
<unk> also see a lot of interest in people upgrading their existing boats. So the momentum is there and.
We are simply working very hard to satisfy the needs of the market.
And youre seeing equal demand from Oems in let's say aftermarket products as well, which has been doing better.
I would say just generally they are both very strong.
Tends to go up and down the Oems have taken some time to spin up their production.
Because of course, it's very complex and a lot of materials involved in what they do but there are.
They are definitely accelerating and we're seeing that in our.
OEM product sales and.
Meanwhile, retail theres still a lot of interest from our retail partners and a lot of promotions planned for the products in the future.
And you can see why people would say buying used boats and then just upgrading all of the marine equipment, yes.
When they can find the use both the market is so incredibly tight.
As letting go of their boats.
And then also.
And your incredible innovation on the aviation side.
Autonomous control.
To land and smart glut are you.
Seeing incorporating that in an OEM automotive autonomous capability and working with some of them not only the OEM manufacturers, but some of the OEM autonomous.
So with theater manufacturers looks very like.
Nvidia and Quill Com, and then weigh Moe and GM cruise.
I will say that the autonomous technologies between aviation and auto are very different. So there is little overlap in terms of what we're doing in those in those areas.
Yeah.
So so really nothing to comment there.
But what about your camera capabilities and you have some AI capabilities in your OEM cameras.
Yeah, I mean from a sensor fusion point of view and sensor technology. Those those are building blocks for sure are things that can be applied but for.
Part of auto Oems have their strategies and their their partners that they are using to.
To work on the autonomous features that they want and so.
We're a part of their overall plan, but not necessarily the ones that are doing their technology.
And then 1 last area in corporate wellness you had made some comments on opportunities there what kind of opportunities you see growing the let's say corporate wellness.
Integration into your Garmin connect App and things like that.
Well, we continue to press on those opportunities I think what's interesting.
About corporate wellness and and some of those program wellness opportunities that are out there as each 1 is different it rich.
Acquires some level of customized customization, especially on the part of partners the benefit that we have in our.
Offering is that we have.
<unk> product line.
It can be applied to almost any kind of opportunity and we've we've served opportunities anywhere from the very highest in Phoenix on down to the.
Entry level vivo so weak.
We continue to work on those and we continue to look for more opportunities in that space.
Thank you and congratulations again.
Thanks, Kevin.
Thank you.
To ask a question. Please press Star then 1 our next question comes from Derrick Satterberg colleague Securities. Your line is open.
Hey, guys. Thanks for taking my questions, Doug I want to start with automotive margins.
I'm curious, how we should think about gross margins in.
Operating margins sort of that trajectory as you transition to the all the OEM side and some of those investments youre, making there conclude maybe over the short or medium term none of a follow up.
Sure as it relates to overall auto yes, youre seeing that those gross margins are.
Decreasing as our auto OEM business, becoming a bigger piece of auto and also more specifically within auto OEM Youre seeing that gross margin come down on a year over year basis also since some of our new programs, primarily BMW Vito hardware related and I have a lower gross margin overall.
So it's really just going to be a function as it relates to the gross margin in there as those.
Newer piece of our business become a larger piece of that and actually kind of play into.
Segment type of a mix in there from a standpoint of what 1 of those gross margin on overall basis as it relates to.
The operating.
Margins there so yes, the consumer auto business doing well from standpoint, we are in the investment stage relating to auto OEM. So with that we have the high R&D.
Standpoints, so we'll probably be in that for couple of years.
Ears here until we get into a production standpoint.
Got it and then just curious quickly on Prime day wondering how that was relative to prior years and if that had any impact on your guidance for the rest of the year and then just.
Quick 1 on that as well how does.
Prime day typically impact gross margin for you guys.
Thanks.
Yes, so with that the prime day year over year, there was a shift from the standpoint, so last year.
That was.
In the third quarter this year.
Quarter, so that did impact us.
Cliff talked about a comparable debt would you have as it relates to the gross margins you have there are more promotional business force, Matt standpoint, but from an overall.
For the full year standpoint, probably didn't impacted a whole lot.
Great. Thanks.
Thank.
Our next question comes from Erik Woodring with Morgan Stanley. Your line is open.
Hey, good morning, guys. Congrats on the quarter just wanted to start so.
Obviously, you're seeing a stronger 2021, your new guidance range implies some of the upside in <unk> can also continue into the second half and so can you just maybe help us understand.
What has changed from your perspective over the last 3 months that gives you confidence in your new guidance targets and then just are you embedding any component constraint any impact from component constraints into that forecast and then I have a follow up thanks.
Yeah, Eric when we create our guidance at the beginning of the year.
Understand as I mentioned Theres, a lot of art that goes into it because we're a business that is not driven by.
Our backlog book.
Consumer demand and a lot of times, we don't we don't even see a forecast from our customers and we have to kind of project what they want so we take that into account at the.
The beginning of the year by the time, we reach this point in the year of course, we have had.
Much more time to evaluate that.
Dynamics of the market and what's happening and also we start to see a picture of what will take place in the back half with promotions.
So it gives us a better sense of how the year might finish in that.
That's why we've been able to update our guidance. This time, because we saw strong trends in the first half ahead of our expectations and then as we look to the second half now we have more clarity of what's transpiring for the end of the year.
Okay. That's helpful. Thank you and then.
If we if we touch on margins.
Mixed shift to autos would be a headwind to gross margins, but I believe your guidance also assume some incremental pressures in the second half unrelated to mixed and so is maybe maybe where are you seeing those pressures maybe can you talk about what you're embedding in terms of cost pressures.
From the new manufacturing facility and then maybe also a component costs and how that impacts your gross margin kind of all of that together into 1.
I think it's really very simple I mean, we take all of those things into account.
We look at it.
The general trends of margins based on promotions we.
Look at what we're seeing in terms of component trends.
And other supply chain.
Pressures so all of that has been factored into our outlook and we do that every year.
And then maybe if I just clarify that.
Are you, saying you expect a more component cost pressure in the second half.
It related to logistics I'm, just trying to make sure I understand that.
Generally I would say our supply chain cost in the second half will will increase more than what we have seen so far this year and thats been built into the guide that we've provided.
Okay Super. Thank you so much guys congrats again.
Thank you.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to Teri Seck for any closing remarks.
Thank you so much for your time and have a great day.
Yeah.
Ladies and gentlemen, this does conclude today's conference. Thank you all for participating have a great day, you may all of.
Disconnect.
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