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spk01: Thank you for standing by, and welcome to the Garmin Limited first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a 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. If you require additional assistance, you may press star then zero to reach an operator. I would now like to hand the call over to Terri Sec, Investor Relations. Please go ahead.
spk00: Good morning, everyone. We would like to welcome you to Garmin Limited's first quarter 2021 earnings call. Please note that the earnings press release and related slides are available at Garmin's investor relations site on the internet at www.garmin.com. An archive of the webcast and related transcript will also be available on our website. This earning 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, market shares, product introduction, 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 in actual results but 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-19 on the company's business results and outlook is the best estimate based on the information available as of today's date. Presenting on behalf of Garmin Limited this morning are Cliff Pimble, President and Chief Executive Officer, and Doug Besson, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pimble.
spk09: Thank you, Terri, and good morning, everyone. As announced earlier today, 2021 began on a strong note as momentum from 2020 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 23.3%, and operating income grew 41% to $250 million. This resulted in GAAP EPS of $1.14. Proforma 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. 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 introduced Lilly, a fashion-first smartwatch with exceptional features designed specifically for women. In the cycling market, we launched the Raleigh 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 growths in operating margins of 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. Looking next at aviation, revenue decreased 8% to $174 million, driven primarily by reduced contributions from ADS-B products that remained strong in the first quarter of 2020. Excluding the impact from ADS-B, revenue was relatively flat to last year, which is an encouraging signal that the underlying market has stabilized. Growth and operating margins were 73% and 26%, respectively. During the quarter, Autoland 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 GSC 500 and 600 autopilot certifications, which expands the addressable market for these advanced flight control systems. 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 Panoptix LiveScope sonars from new boat manufacturers and users preparing their boats for the upcoming season on the water. Looking finally at auto revenue, it increased 18% to $124 million, and 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, stay connected with other riders, 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. Doug?
spk08: Thanks, Cliff. Good morning, everyone. I begin by reviewing our first quarter financial results. We made comments on the balance sheet, cash flow statement, and taxes. We posted revenue of $1,072,000,000 for the first quarter, representing a 25% increase year-over-year. Gross margin was 59.8 percent, a 60 basis point increase. Operating expense percentage of sales was 36.5 percent, 200 basis point decrease. Operating income was $250 million, 41 percent increase. Operating margin was 23.3 percent, 260 basis point increase. Our GAAP EPS was $1.14, and performer EPS was $1.18. Next, We got our first quarter revenue by segment and geography. During the first quarter, we achieved double-digit growth in four of our five segments, led by the outdoor segment with strong growth of 46%, followed by the fitness segment with 38% growth and the marine segment with 28% growth. By geography, we achieved double-digit growth in all three segments, led by strong growth of 33% EMEA and 31% growth in APAC. America's grew 18%, which is more heavily impacted by the decline in aviation. Excluding aviation, America's growth was more in line with the other regions. Looking next, operating expenses. First quarter operating expenses increased by $62 million for 19%. Research and development increased $38 million year-over-year, primarily due to engineering personnel costs across all of our segments. Other expenses related to auto OEM programs. For advertising expenses, increased approximately $4 million due to higher spend in the outdoor and fitness segments. SG&A increased $20 million compared to prior year quarter, but decreased the percentage of sales to 14.7%, 130 basis point decrease compared to the prior year. Increase in SG&A is primarily due to increase in personnel-related expenses, information technology costs. A few highlights on the balance sheet, cash flow statement, and taxes. In the quarter with cash, marketable securities were approximately $3.2 billion. Accounts receivable decreased sequentially to $558 million following the seasonally strong fourth quarter. Inventory balance increased year-over-year to $838 million. In the first quarter of 2021, we generated free cash flow of $331 million, $147 million increase the prior quarter. In our first quarter of 2021, we put an effective tax rate of 12.2% compared to 9.3% in the prior year quarter. The increase in effective tax rate is primarily due to larger amount of reserve releases in the prior year. This concludes our phone remarks. Michelle, could you please open the line for Q&A?
spk01: 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 Eric Woodring with Morgan Stanley. Your line is open.
spk07: Hey, good morning, everyone. Thank you for taking the call. My first question is just on the component side. I'd 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 are component shortages specifically on the auto side impacting you or your partner's ability to meet demand? And then I have a follow-up.
spk09: Okay. Yeah, I think as you have read, the situation is very widespread, so there's a lot of impact, and some of these major fabs that have had some issues recently certainly impact a broad range of components. So there isn't any given set of components or any one component that I could highlight. It is 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 in 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 we've been doing everything we can to keep our customers' lines going.
spk07: Okay. That's super helpful. And for my follow-up, 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 component safety stock. But is there a level of cash where 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? Yeah, thank you.
spk09: Yeah, so we don't have a specific number that we target for cash. As you can see, our business is growing at a very nice rate. So as the business grows and gets more complex, of course, we feel like cash is a good thing. Our priorities on cash have remained what they've been for a long time. We want to be a reliable payer of an attractive dividend for our investors. We're focused also on acquisitions, 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.
spk07: Super helpful. And maybe if I could just sneak in one more. Just curious on your view how you think about kind of normalizing EBIT margins for outdoor and fitness segments as we kind of come out of COVID, demand somewhat normalizes, the retail environment somewhat normalizes, how we should think about that. And that's my last one. Thanks, guys.
spk09: Yeah, I think we don't target a specific number around our operating costs. margin for these segments. These are segments that have a lot of specialty products in them, and so consequently, we aim to have higher levels of operating margin in those segments to fund our investments. But in general, we don't necessarily target a number. With the sales increases we've been seeing, of course, we get some leverage out of that, so we're very pleased with our performance.
spk01: Our next question comes from Nick Tortor with Longbow Research. Your line is open.
spk04: Yes, thanks, Anne. Good morning, everyone. Cliff, I think you're congrats on doing a great job on the inventory and not being impacted on the component side. I guess related to that, I just wonder if you're seeing any impact from trade costs because I know trade costs from particularly from Asia to Europe and North America are up substantially. Your results does not suggest so, but I wonder if you're seeing any headwind from higher logistics costs.
spk09: Yeah, I think freight is definitely higher, and it's not a new situation. Actually, we've been experiencing higher freight costs over the past year. A lot of freight providers dialed back on their capacity early in the COVID crisis, and that created some constraints even a year ago. So it's not a new thing. Sea freight has got some additional delays. We're actually using a higher mix of air freight right now to keep our product flowing, and we're focused on product availability.
spk04: Okay, got it. Question on fitness. Your gross margin was exceptionally strong at 56% relative to the last couple of years. I think mix is helping you there with cycling being strong right now, but I just wonder if there's anything else that pushes your fitness growth margin higher relative to the last two years.
spk09: Yeah, I think definitely product mix in general, we would say, is helping us in fitness. And on the cost side, we've seen some benefit in terms of our overall cost structure on the product. So in general, we've had very good performance on the margin side in fitness.
spk04: Okay. And last question for Doug. Very strong first quarter free cash flow numbers. I think record for the company, $300 million. How do you feel, Doug, about that relative to your full-year free cash flow target? Is it still 725? And CapEx was kind of low relative to your full-year guide of $350 million last quarter. Is that unchanged?
spk08: Yeah. So first, regarding free cash flow at this point in time, we're maintaining our overall guidance. So that's a number that we feel confident with at this point in time. We'll actually update that as we progress through the year. Regarding CAPEX, yes, we still feel confident of the amount that we basically gave our guidance for CAPEX. We will be ramping up some of those investments that Cliff really 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. We expect, you know, increased spend, you know, in Q2 and the 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 for workspace. So those expenses will be ramping up in Q2 and the rest of the year.
spk04: Got it. Very helpful. Thanks, guys. Good luck.
spk08: Thank you, Nick.
spk01: Our next question comes from Paul Chung with JPMorgan. Your line is open.
spk12: Hi, thanks for taking my question. So just on aviation, you know, a nice recovery in 1Q, which is, you know, now exceeding kind of 1Q19 revenue levels, but, you know, operating margins are rebounding, but, you know, they still are below the 1Q19 levels despite kind of higher revenues. Any comments on the dynamics there?
spk09: I think the operating margin in aviation, Paul, is really a function of the lower sales. We're continuing to invest in new program development and technology, so we do have a higher level of R&D spend at this moment. But in general, I think that's really the driver, and as we see the market recover, we should begin to get some leverage out of that again.
spk12: Gotcha. And then as we kind of move through the year in aviation, you know, given solid solid 1Q against a pretty tough comp, but you have much easier comps ahead for 2Q and beyond. Is that 5% target a bit too conservative? I assume some visibility in this segment is slightly higher than your other ones.
spk09: Yeah, I think, as we mentioned, we're not adjusting our numbers right now. It's certainly true that as we go forward, there's some interesting comparables in our business compared to last year. Aviation was hit harder and longer last year than 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.
spk12: Thanks. And then, Doug, another follow-up on free cash flow, you know, nice harvesting of accounts receivable and nice profit upside. Should we expect, you know, AR to be more of a source of funds this year, and how do we think about working cap investments throughout the year. Thank you.
spk08: Yeah. So, yeah, our numbers did come in favorable as it relates to AR there. So, you know, it's more favorable. So we may get some more, a little bit of a headwind against that rest of the year. You know, the situation is that our customers are really demanding our product. And as a result of that, you know, they basically have certain credit limits. So in certain cases, they may be you know, paying prior to some of their credit terms to stay on those credit limits. But that's a good thing, you know, as the community to see the demand that we're actually funding that. As well as to other working capital, yeah, probably, you know, looking at inventory, that's an item that we'll probably make some additional investments in and see that increase the rest of the year also.
spk12: Thanks, guys.
spk09: Yep, thank you.
spk01: Our next question comes from Will Power with Baird. Your line is open.
spk03: Oh, great. Yeah, a couple 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 supply chain component questions out there. And then I've got an additional question.
spk09: Yeah, I'd really say a couple of things, Will, on that. We believe the channel inventory is very clean right now. There's a lot of demand out there for products, and definitely the supply chain considerations in meeting that demand are more complex when there's increased demand. So that's why we believe that, in general, we see strong demand for the products going forward.
spk03: Okay. All right, Cliff. I also want to ask you, I guess as you look at auto, kind of a two-part question, you noted that the consumer auto piece grew, and so we'd love more color there on key drivers. But also just from a broader perspective, I'd love to get your thoughts 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 near and longer term?
spk09: Yeah, so we were pleased to see the consumer auto segment grow. The drivers behind that really are the specialty products that we've been investing in over the years, things like truck and RV and 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 our solution with tread and the power switch and also the cameras is a fantastic way for us to enter that market with a really strong offering.
spk03: Any sense for how broad that portfolio could be over time? I mean, is this kind of the starting point or are these kind of the key categories?
spk09: Yeah, 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 approach and our strategy in building the business, which is to find great niche categories that we can innovate in and take a strong market share and be able to build the business that way.
spk03: Okay. Thank you.
spk01: Our next question comes from Ivan Fainza with Tigers Financial. Your line is open.
spk06: Thank you. Thank you for taking my question, and congratulations on another great quarter and a great start to the year and making it to Mars. 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 power switch industry?
spk09: Yeah, I think there's a good level of interest on the OEM side in the products that we're offering. Already, Articat has 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.
spk06: And how was the initial reaction or what was your thoughts on the initial reaction to things like the tread and the communicator?
spk09: I felt 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 these are definitely right up. their interest alley, if you will, and it leverages all of the strengths that we have across Garmin, including the mapping, the communication, and the rugged designs.
spk06: Were there any other areas that surprised you in the quarter?
spk09: Well, I think we've kind of highlighted most of those. You know, we continue to be really excited about the growth in marine. There's a lot of demand out there for marine products, and we expect that will continue. Fitness has been fantastic, of course, with cycling and advanced wearables. Lily was a great new product for us as well. And, 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 manufacturers and shops installing equipment are all making positive remarks.
spk06: What kind of attendance are you seeing at the trade shows as we kind of go to this reopening and getting over the pandemic?
spk09: Well, it's early days, and actually we just completed the Sun and Fun show in Florida, which was canceled last year, reopened this year. But attendance was actually, I would say, reasonably strong given the conditions. It was probably what I heard, maybe 70%, 80% of what it's been in normal years. But what we saw out of that was buyers that were very interested and very serious about equipping their aircraft and interested in what we had to offer.
spk06: Thank you, and congratulations again.
spk09: Thanks, Ivan.
spk01: Our next question comes from Ben Boland with Cleveland Research. Your line is open.
spk10: Good morning, Cliff, Dr. Terry. Thank you for taking the question. Two questions. The first, I'm interested in how we should think about the investments being made in the auto OEM ramp as you build out facilities and headcount. Any way to think about the linearity of investment expansion and when that starts to normalize based on what your current visibility is? And then I have a follow-up.
spk08: Yeah, sure. Relating to the investment in OEM, give you kind of perspective for 2021 as it relates to the R&D. We would expect to see a similar level of the R&D spend in the remaining quarters of 2021 as we saw in 2001, you know, as we continue to ramp up for new programs there. As it relates to the CapEx side of things, you know, the CapEx for the new facility in Europe related to OEM. That's factored into our CapEx budget that we gave you previously. But also, I should say, the majority of that CapEx, the number in there, is relating to the consumer manufacturing piece in Taiwan, as well as the renovation here. And then as it relates to the OEM piece, it's primarily relating to increasing our production lines, get ready for production in the near future.
spk10: 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, what are your bigger picture thoughts about how categories or the business as a whole maybe impacted as you start to see more reopening? Any of the puts and takes about, you know, point of sale, trajectory, category expansion, just some of the secular drivers and where you think that goes into the future?
spk09: Well, it's early days, so probably difficult to quantify. We do believe that the kind of lifestyle changes that we've seen as part of the pandemic have are durable because people have made significant investments in themselves, their health, 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.
spk10: Thanks, everyone. Good luck for the rest of the year. Thank you.
spk01: Our next question comes from Jeffrey Rand with Deutsche Bank. Your line is open.
spk02: Hi, thanks for taking my call. Can you talk through some of the puts and takes for operating expenses as we move past the pandemic?
spk13: I would expect there to be some lower costs related to employee safety, but also probably some increased traveling costs. So just some details on how you are thinking about that.
spk08: Yeah, there are some. Especially when you look at the Q2 over Q2 comparison, you know, last year at this time we did cut back on travel, trade shows, those type of things in there. So I would say, you know, looking at Q2, there will be, you know, some increase that we'll spend, you know, this year versus last year there. But, you know, that's not really the big drivers, you know, of our CapEx. The big drivers, you know, really are, you know, the R&D and such in there that we have. going forward.
spk02: 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 boating was a good socially distant activity during the pandemic?
spk09: Yeah, 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 2022 now, so there's still significant pent-up demand for boating products and people who want to be out on the water, and we believe that will continue to drive growth in our marine segment. Great. Thank you. Thank you.
spk01: Again, to ask a question, please press star then 1. Our next question comes from Derek Soderberg with Collier Securities. Your line is open.
spk11: Hi, guys. Thanks for taking my questions. Cliff, I want to start with you. I'm wondering if you can provide an update on the ADS-B opportunity in Europe. I think it's progressing a bit slower than the U.S., but that mandate was pushed out, I think, almost a year ago. What are you seeing in that market today? Are projects starting to accelerate or still sort of being pushed out? Any thoughts on the ADS-B in Europe and sort of what you're seeing there would be great.
spk09: Yeah, 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 they're 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% of what the total global market is.
spk11: Great. And then as my follow-up, I guess I'm curious as to the employment environment and, you know, I guess your ability to track new talent. It sounds like labor costs might be going up. Is there anything going out there in the labor market that has changed more recently or anything you're seeing that's maybe a concern in the labor market? Thanks.
spk09: Yeah, I think that labor is an interesting topic. I think 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 looking to create new things and new products. So we're operating in a tight environment. 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 16,000 employees around the world now. And our culture is very unique, and the kind of products and markets that we serve are also very unique. They're products and markets of passion where people can actually create things that interest 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.
spk11: Great. Thanks, guys.
spk09: Thank you.
spk01: If there are no further questions, I'd like to turn the call back over to Terri Seck for any closing remarks.
spk00: Thanks, everyone, for your time today. Doug and I are available for callbacks, and we hope you have a great day. Bye.
spk01: Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.
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