Q1 2022 Garmin Ltd Earnings Call
Good day, and thank you for standing by and welcome to the Garmin Ltd first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
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Now I'd like to hand, the conference over to your first speaker today to Teri Seck director of Investor Relations. Please go ahead.
Good morning.
Welcome you to Garmin Limited's first quarter 2022 earnings call. Please note that the earnings press release and related slides are available at Carlin's Investor Relations site on the Internet at Www Dot Garmin Dotcom 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.
Regarding Garmin limited and its business any statements regarding our future financial position revenues earnings gross margins operating margins future dividends or share repurchases 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.
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 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.
<unk> 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 <unk>, Chief Financial Officer, and Treasurer at this time I would like to turn the call over to Cliff pemble. Thank.
Thank you Terry and good morning, everyone.
As reported earlier today consolidated revenue increased 9% to one $1 $7 billion, representing a new first quarter record.
Four business segments reported revenue growth in the quarter, three of which delivered double digit growth.
We generated $229 million of operating income down 8% from the prior year.
Operating margin was 19, 5%.
And was negatively impacted by gross margin performance, which declined due to historically high freight costs combined with the strengthening of the U S dollar.
In addition, operating expenses increased for a variety of reasons, including.
Higher associate head count increased compensation cost.
And the increase of certain operational expenses as business activities continue to normalize.
We performed very well during the quarter, despite a combination of old and new headwinds.
Why chain constraints persists, which limited the orders we could sell.
Russia's invasion of Ukraine created an unthinkable humanitarian crisis and further complicated the global economic outlook.
Despite these challenges demand for our products remains strong.
And we are optimistic about the future.
Our board of Directors recently approved a $300 million share repurchase plan.
Which is in addition to the proposed $2 92 per share dividend that.
That will be considered by shareholders at the upcoming annual meeting.
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 decreased 28% to $221 million.
Gross and operating margins were 48% and zero percent respectively.
All product categories declined, but the normalization of demand Precycling products was the main contributor.
While revenue from fitness Wearables declined on a combined basis wearable device revenue across all segments of Garmin experienced robust growth.
We expected the first half of the year to be challenging for the fitness segment as we compare against the outstanding performance of the prior year.
While the decline was greater than expected. We believe these trends will moderate in the back half of the year as we move past the pandemic swings of 2021.
And benefit from new product introductions.
Yes.
Yeah.
Moving to the outdoor segment revenue increased 50% to $385 million.
With growth in multiple categories led by strong demand for adventure watches.
Gross and operating margins were 64% and 39% respectively.
Resulting in operating income of $149 million.
During the quarter, we announced sweeping updates to our adventure watch lineup, including our flagship Phoenix Seven series, featuring a distinctive new design with a touch screen display.
And the interesting two series available in two sizes, including versions that can operate indefinitely using our exclusive solar power technology.
We also announced the all new ethics with the bright emel that touch screen display and class leading battery life up to 16 days.
We believe that strong demand for these new products as well as other categories in the segment will be a growth driver for the remainder of the year.
Looking next at the aviation segment revenue increased 1% to $175 million with growth driven by OEM product categories.
Supply constraints impacted sales of aftermarket products, but the situation improved throughout the quarter.
Gross and operating margins were 73% and 23% respectively.
Resulting in operating income of $40 million.
Aircraft Oems are reporting robust orders from both new and existing customers.
Aftermarket demand is also strong as customers invest in new cockpit systems.
We believe these are positive indicators of growth for the remainder of the year.
Yeah.
The Marine segment delivered another quarter of impressive results with revenue, increasing 21% to $254 million.
We experienced broad based growth across multiple product categories led by chart plotters.
Gross and operating margins were 51% and 23% respectively.
Resulting in operating income of $59 million.
Lifestyle has proven to be a halo technology for Garmin.
And the new lifestyle, plus sonar system raises the bar with higher resolution images and improved target separation.
We continue to see strong demand for our marine products and lifestyle plus built on this momentum.
We believe this is a positive indicator of growth for the remainder of the year.
Yes.
Moving finally to the auto segment revenue increased 11% to $138 million with growth from both OEM and consumer categories.
Gross margin was 38% and we recorded an operating loss of $20 million driven by investments in auto OEM programs.
And consumer auto we continue to diversify our product offerings with the launch of the instinct to diesel addition, smartwatch for truck drivers.
In the OEM category, we made significant progress preparing for the launch of the next generation B M. W Computing module platform.
BMW approved our new Poland factory, giving it a rare green rating for mass production readiness.
We anticipate delivering production parts to BMW, starting in the second quarter.
Before I turn the call over to Doug It's important to remember that our diversified business model offers many different paths to achieve our consolidated growth goals.
We remain focused on creating highly differentiated products in all segments that excite our customers and lead to success.
Regarding our outlook for the rest of the year I mentioned, several new and existing headwinds we face.
And we cannot predict the impact that these might have on the business.
Also the first quarter represents the lowest seasonal quarter of our financial year and much of the year remains ahead of us.
With these things in mind, we are maintaining our 2022 guidance issued in February .
Which called for consolidated revenue of $5 $5 billion and EPS of $5.90 a share.
So that concludes my remarks next Doug will walk you through additional details on our financial results Doug. Thanks Cliff Good morning, everyone.
I begin by reviewing our first quarter financial results and provide comments on the balance sheet cash flow statement and taxes.
Posted revenue of $1 billion $173 million in the first quarter, representing 9% increase year over year gross margin was 56, 5% 330 basis point decrease in the prior quarter.
Increase was primarily due to higher freight costs and favorable impact foreign exchange rates.
Operating expense percentage of sales was 37%.
A 50 basis point increase.
Operating income was $229 million, 8% decrease.
<unk> margin was 19, 5% three basis point decrease our GAAP EPS was $1 nine former EPS was $1 11.
Next look at our first quarter revenue by segment and geography.
The first quarter, we achieved double digit growth in three of our five segments.
Led by the outdoor segment robust growth of 50% followed.
Followed by the Marine segment, 21% growth in the auto segment, the 11% growth.
By geography, 21% growth in APAC, 13% growth in Americas was partially offset by a 1% decline in EMEA.
This negatively impacted by foreign exchange rates during the quarter.
Looking next at operating expenses first quarter operating expense increased by $42 million or 11%.
Research and development increased $20 million year over year, primarily due to engineering personnel costs.
Advertising expense increased approximately $3 million higher spend in the outdoor and marine segments.
SG&A increased $19 million compared to the prior year quarter, primarily due to increases in personnel related expenses information technology costs.
A few highlights on the balance sheet cash flow statement and taxes.
Ended the quarter with cash Mark with Securities approximately 3 billion accounts receivable decreased sequentially to $600 million from the seasonally strong fourth quarter and grew year over year relatively in line with our sales growth.
Inventory balance increased year over year to $1 $3 billion, we execute our strategy increased days supply to support our increasingly diversified product lines to optimize the mix of ocean versus air freight shipments did carry sufficient levels of raw materials safety stock to mitigate increasingly types.
In the first quarter of 2020 to generate free cash flow of $126 million $206 million decrease in the prior quarter, primarily due to increased working capital needs and higher capital expenditures.
Also reported effective tax rate of 10, 3% compared to 12, 2% in the prior year quarter. The decrease effective tax rate is primarily due to an increase in U S tax deductions and credits.
This concludes formal rocks to Lou could you. Please open the line for Q&A.
Thank you.
As a reminder to ask a question you would need to press star one on your telephone.
So which are your question. Please press the pound key please standby, while we compile the Q&A roster.
I show our first question comes from the line of Paul Cheng from J.
J P. Morgan. Please go ahead Sir.
Hi, Thanks for taking my question so.
First off you had a very nice head start in <unk>.
Outdoor.
The strength of our Phoenix and other product releases.
Any update to kind of the.
The year and how we think about that.
Should we expect kind of more product releases throughout the year and then.
Can you help us on the kind of seasonal outlook for outdoor our all scale.
Yeah.
Yes, good morning, Paul.
I think in terms of the update to the year you know we basically.
Are still seeing things the way that we've laid them out and it's very early in the year to.
It really make any conclusions based on the start that we've had but we do have a strong product lineup right now and we have more new products coming throughout the year and all of our segments and so a lot of our momentum and growth is driven around new innovation and new products.
Gotcha and then similar question in fitness you know the pace of decline was a bit more.
Than expected how do we think about the balance of the year as well.
And what drove the minimal operating profit in the quarter.
Is that mostly component costs related and.
How does that rebound throughout the year.
Yes, so in fitness was weaker than we expected for sure and the cycling category is the biggest.
A contributor to that we are comping against really strong results from last year. So so theres lots of moving pieces lots of dimensions to this.
But the cycling side of things is really the one that's the biggest impact, but if you look at it from a different angle. The the operating profit was mostly affected by.
FX and freight costs, if those things would have been under under normal circumstances, we would have been pretty much in the range of where our gross margin and operating margin profiles are for the segment.
Got you and then lastly, Doug on free cash flow kind of any update.
On.
Fuel guide.
And the share buyback messaging, that's new we havent seen no buybacks in four years.
Last four years, how should we think about kind of the pace there.
Attention for more kind of material buybacks, given 3 billion net cash thanks.
Yes, yes regarding free cash flow, yes, it's still <unk>.
Early in the year, but a couple of things we need to consider one of which you know is our working capital needs.
Did have some of those working capital needs here in Q1, where we saw inventory increased more than the previous year and you also need to factor in last year, we had a large amount of inventory increases in the back of the year. So hopefully won't have as much of a increase in the inventory I'll say year over year that we did last year.
In there, but working our free cash flow and other things our capex is pretty consistent year over year for the full year.
Also at the operating side of things, but we'll be giving more guidance on that.
In Q2 as it relates to the share buyback, it's something that we evaluate with the board and we felt that was something that was appropriate at this point in time regarding the.
Amount that we're going to be doing it was really depending upon market conditions business conditions a point in time.
The amount that we you buyback during the period.
Thank you.
Thank you.
Thank you.
Next question comes from the line of will power from Baird. Please go ahead.
Oh, great. Thanks for taking the question, maybe just to follow up first on fitness I think.
And you all knew that there were some particularly tough cycling comps.
Year over year, but it sounds like there were some year over year weakness in the other fitness categories too and I guess I guess I'm wondering if there are any areas you'd call out there any key drivers of that maybe any comments on changes in the competitive climate I'm, just trying to understand the broader fitness picture.
Yes.
Yes, good morning.
I think that as we mentioned all categories.
This segment were weaker year over year, we're comparing against a really monster quarter from the last year.
So that's one dimension.
And then you can't discount the.
The impact of our overall wearable product lineup across the company and particularly the the release of the new adventure Wearables on the outdoor side, which which probably impacted things as well. So as I mentioned, we experienced robust growth across all wearables that garmin. So we feel like the market is robust.
And our positioning in the market is also very robust.
Okay that makes sense.
It'd be great to get a little color as to what you're seeing kind of real time across Europe . As you talk to your retail partners have you seen any change in kind of purchasing trends appetite from that just as you think about the.
The impacts of the Russia, Ukraine conflict and.
Inflationary pressures kind of across the continent, particularly in eastern Europe .
Yeah, as you exit Q1 and now into Q2.
Anything you'd call out there with respect to demand trends.
Yes, I think Europe is.
More notably weak as you can see in our geographical.
<unk> I think really two aspects to that one is is the Ukraine situation, we definitely did see.
And noticeable impact in product registrations as that conflict broke out and was weaker for the initial periods and has only recently started to show some signs of its kind of popping back as people, maybe normalize or get used to the.
The risk environment that they're in there, but the other factor for Europeans is the high inflation, it's really not just European but it's global but they particularly are are impacted by much higher fuel prices.
And our concern and worry over the economy. So I think those factors impacted us in Europe , but we saw much stronger growth in Americas and APAC.
Yeah, Okay, I guess, maybe just that.
Last question you maintained guidance for the year, maybe just any other color as to your confidence there I mean, it sounds like it's really built on the diversity of the business and.
And I recognize we're still early in the year, but as you think about the various uncertainties.
They're still out there whether its supply chain.
Sure.
You know inflation.
You know it et cetera, maybe just any other color as to what gives you confidence in maintaining that outlook at this point.
Yes, as you said.
Maintaining what we said in February .
It is early in the year and this this is our lowest seasonal quarter. So so we'd like to see how the year is evolving before we.
Make any material changes to our outlook I would say that that in general we see positive indicators as I said in my remarks across many of our segments.
And at the same time, the uncertainties have increased and the complexities have increased so we recognize that as well.
The diversity of our business is very high.
Demand in several of our segments is strong and so that's what we based our confidence on as we go forward.
Okay, great. Thank you. Thank you.
Thank you. Our next question comes from the line of Nick Todorov from Longbow. Please go ahead.
Yes, thanks, and good morning, everyone.
Doug.
First question on.
Gross margin for fitness, how should we think about the trajectory throughout the year, obviously FX headwind if anything is probably going to increase in Q sequentially and the logistics piece is probably not changing much or any kind of color on trajectory of fitness gross margin through the rest of the year.
Yeah.
<unk> gross margin for finished yet to the big drivers there, obviously, our freight and.
FX and actually FX is a bigger impact on the fitness business, just given our EMEA side of the business in there. So it relates to the year. It's still early in the year here, but we have to manage through those headwinds and we will have to see how those mitigate hopefully.
We're doing things hopefully you know helped mitigate some of the freight.
As mentioned on inventory.
Trying to optimize our ocean versus air to mitigate some of the increases there, but FX, that's something and we've seen more of a shrink thing a dollar there increases will have to see how that all plays out for.
For the rest of the year.
Okay and then.
Cliff I think you mentioned in your remarks that you're starting to see some improvement in aviation in the aftermarket business as it relates to component supply do you have any visibility into further easing into the rest of the year.
Do you expect.
Maybe a return to some normal environment through the second half or that's too early to call.
Yes, I think one of the things we mentioned actually last time is that we expected the first half of the year.
To be more challenging for the aviation aftermarket because of the supply chain constraints, we were experiencing.
We've started to see that improve especially as we rolled into the month of March and onward.
But we do expect still to be able to see more improvement as we get into the back half because we are taking actions.
Two to dual source some parts as well as we're getting more supply from our existing suppliers.
Okay.
And last question for me, there's been some signs of moderation of retail boating demand and I know you're exposed morando aftermarket side, but I'm. Just wondering if are you seeing any any spillover effect any signs of moderation on the on the aftermarket side of our marine.
Yes, I think really really nothing to speak of.
We still see very strong demand for our most popular products and especially driven by the.
The technology developments that we've made in the area of lifestyle in our in our display systems are all very good and sought after I would say in terms of retail boating or I would say the OEM side is what we would call that but in general we still hear at our OEM partners say that they are sitting on.
Years of backlogs in their business and working very hard to deliver the boats that have been ordered so we still see a strong demand cycle moving forward from the OEM side of the business.
Got it thanks good luck. Thank you.
Thank you.
Our next question comes from the line of Jeffrey Rand from Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question how are the current inventory levels and your channel for your cycling business and how do you think about end customer demand for cycling products through the rest of the year.
I think in terms of inventory it various by product line, but the one that we've been talking about most is the indoor trainer.
Inventory retailers do you have.
A lot of inventory in the indoor training category.
And they are selling through that of course, and we also have inventory that we have in our warehouses that would go into the channel as soon as it kind of clears up that but thats a situation thats going to be around for a while we don't expect it to to improve quickly. So we're just going to have to be patient and work through that.
In terms of other categories, it really depends by by geography by retailer by by product line, but in general we think channel inventory levels are reasonable and we don't see any concern there.
Great. Thank you and then operating margins in your auto OEM business were relatively flat sequentially. How do you think about operating margins for this business over the next few quarters as projects ramp up further.
Yes, I think.
In terms of what will happen going forward as our deliveries increase we will we will be able to experience scale in that business. So it should.
Improve our overall operating margin performance, although we're not expecting that to swing to a positive number in the near term.
But as we start to deliver new products to BMW and as are our production scale increases it should generally improve.
Great. Thank you.
Are you.
Thank you I show. Our next question comes from the line of Ben Bolan from Cleveland Research. Please go ahead.
Good morning, everyone. Thanks for taking the question.
Yes, good morning.
A couple of questions. The first is.
But could you talk a little bit about how you think of fitness and outdoor wearables and.
And how much of that business, you think is completely new buyers versus how much might be refresh.
The existing buyers and then I had a.
Follow up.
Yes, Thanks, I think in terms of the customer profile of our Wearables it really depends by by product line and by segment, but.
At the highest level if you look across all our Wearables we are.
Mostly selling to brand new customers to Garmin, who are registering a new device for the first time in creating our garmin connect account, but we also have of course, a sizeable amount of business that we do with people who love to stay current on the latest products that we release.
And so.
So we see that side of the business as well, but right now it's still more than.
It's still the majority of people that are new to our wearables.
Okay.
The other different question can you remind us.
The revenue recognition methodology with BMW.
How it may change as you go into the broader platform outside of China.
Any thoughts on.
Content opportunity.
So as it relates to the revenue recognition standpoint, probably shouldnt be that much different than we have at this point in time.
And the different models that come out from that standpoint from a revenue recognition standpoint.
Any thoughts on content going forward as you get into more of these models does that change the amount of dollar content per vehicle or is it similar with what you saw it in China.
Yes, I think actually.
Ben that the content.
<unk> per vehicle on the newer platforms that we're delivering is much higher per vehicle than what we're seeing on the current.
Products delivered out of China, as well as out of the U S factory here.
And in some cases once we get to full production mode with BMW they've adopted it across all of their platforms some vehicles.
Could have.
Three or more of these modules within the vehicle so it will dramatically increase.
Per vehicle based on what we are delivering over the long term to BMW.
That's great. Thank you have a great day. Thank you.
Thank you I show. Our next question comes from the line of Elizabeth Grenfell from Bank of America. Please go ahead.
Hi, good morning.
You think about the cycling business and the normalization that we're seeing when do you expect it to.
We have normalized and at what level do you consider normal.
Yes, I think thats a very good question.
During the first half of 2021.
We saw elevated demands for all cycling products, including the <unk> trainers, where every factory and speaking broadly beyond just Garmin every factory in every manufacturer of those devices were delivering all but they could make to the market because of the demand. So the first half was.
Very robust because of that.
Really strong pandemic driven demand.
And then that tailed off significantly in the second half. So we were expecting to see that those comps will improve starting in the second half and will probably take throughout the remainder of the year to really normalize in terms of the levels. We're seeing generally we continue to see that that the.
The levels were settling out for cycling products are in line with reasonable growth of the overall market over the past two years or three years. So so what that means is the CAGR is.
Probably somewhere in the 5% to 10% range of the overall market and it's settling in at some reasonable growth level over 2019 or even early 2020.
Type numbers.
Great. Thank you very much.
Thank you.
Thank you <unk>.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
I show. Our next question comes from the line of Erik Woodring from Morgan Stanley . Please go ahead.
Awesome. Thank you guys for taking my question maybe.
Maybe just a few from me starting with one clarification question Cliff you know you mentioned earlier about channel inventory levels being reasonable with was that just a fitness comment or was that a total company comment I would say I would say total across all of our.
Product lines that are popular in retail.
And then you know.
In your in the.
The prepared remarks in the presentation deck, you made similar comments in outdoor aviation and marine calling out positive indicators anyway that you can just maybe for each of those markets.
Just a bit on what those positive indicators are.
Well I think.
We just look at those one by one I would say an outdoor you know our new product releases in the adventure watches are we continue to work to fill all of the demand that we're seeing.
For those and in addition, there is some golf products that that we have.
Struggled to match the demand popularity of some of the products that we have there. So that's that's the outdoor side of things on the marine side of things are new and optics lives go plus system is extremely popular and so we're working to fulfill a lot of back orders on that product, which also drives display system.
<unk>.
So theres kind of a broad based demand.
Our marine segment because of that.
And then finally in aviation I think our biggest opportunity right now is the aftermarket side of things we've been constrained because of the supply chain situation and as I mentioned, we're starting to see that get.
Get better incrementally, but it will take some time to really fully recovered, but the backlogs that we have there are things that we need to deliver as strong.
Okay Super helpful. And then and then one last question for me on outdoor you know how much of the outperformance so to speak and <unk> was a result of sales being pushed from <unk> into one Q and then kind of second to that were you able to fill the channel with all of your with all the new products that.
You were that you launched in outdoor or is there still more to come you would say.
I think most most certainly you know we tried to time the launch of the new products optimally and we felt like it was not the best time to launch an in late Q4. So there's there's probably some impact that shifted demand because people were waiting for our new products for sure.
It's hard to speculate.
On how much of that there was and would.
Would you would you say your second part again, yeah. Just curious if you were able to get enough supply to fill the channel to your ideal levels.
For those new products launching outdoor if there is still more of that to come in the future you'd say.
And I think for our initial plan, we definitely we're able to fill the channel and what we found is that the.
The Reorders have have continued to be strong and so we're still chasing.
Initial demand for that product line that we're working to fill.
Great. Thank you so much.
Thank you I'm showing no further questions in the queue at this time I would like to turn the call back over to Teri Seck director of Investor Relations for closing remarks.
Okay, everyone. Thanks, so much for your time, Doug and I are available for callbacks and have a great day.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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