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spk03: Thank you for standing by and welcome to the Garmin Limited Second Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question at that time, please press star then 1 on your touchstone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Terri Sec, Manager of Investor Relations. Please go ahead.
spk00: Good morning, everyone. We would like to welcome you to Garmin Limited's second 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 transcripts 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, 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 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 Limited this morning are Cliff Pemble, 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 Pemble.
spk05: 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 five business segments. Profitability in the quarter was also strong. Operating margin expanded to 28%. and operating income increased 97% to $371 million. There are two important things to consider when looking at our Q2 performance. First, Q2 of 2020 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'm pleased to report that later this fall, We plan to open a 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, we entered a new phase of our Olathe facility expansion to convert the former warehouse building into additional office space. These projects follow the recent completion of other notable investments including a new production facility for tax cycling trainers, our new auto OEM production facility in Europe, and the expansion of our Olathe facility to include auto OEM production. Given our strong performance in the first half of the year, we're updating our full year guidance. We now anticipate revenue of approximately $4.9 billion, up 17% over the prior year. with double-digit growth expected in each of our five 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 40% 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 two new running watches, the 455 and the 44945 LTE. The 44945 LTE is noteworthy because it includes built-in connectivity and leverages a safety monitoring capability of our recent GEOS acquisition. We also launched the Venu2 smartwatch in two 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 dive watch, the Descent MK2S, featuring multiple dive modes, multi-sport training, and smartwatch features for everyday use. Given the strong performance of the outdoor segment, we are raising our revenue growth estimate to 17% for the year. Looking next at aviation, 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 ADS-V had on 2019 performance. During the quarter, Autoland was awarded the prestigious Robert J. Collier Trophy as the year's greatest achievement in the fields of aeronautics or astronautics. Autoland is the first certified autonomous system designed to activate during an emergency to safely fly and land the aircraft without human intervention. We also announced the acquisition of Aerodata, a leading provider of performance information for commercial aircraft, serving more than 135 airlines worldwide. Aerodata 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 ADS-V mandate. We now expect full-year revenue to increase approximately 10%. Turning next to the marine segment, revenue increased 66% to $262 million, with growth across multiple categories led by chartplotters. During the quarter, we announced support for Mercury SmartCraft engines, expanding the list of engines compatible with our display systems. We also launched the MSC-10 marine satellite compass, 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 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 27%. And looking finally at auto revenue increased 74% to $148 million with growth contributions from both consumer categories and new OEM programs. During the quarter, we launched our first connected dash cam with live 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 capacity 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.
spk04: Doug? Thanks, Cliff. Good morning, everyone. I begin by reviewing our second quarter financial results. Write comments on the balance sheet, cash flow statement, taxes, or updated guidance. We proposed a revenue of $1,327,000,000 for the second quarter, representing a 53% increase year-over-year. Gross margin was 58.8%, 50 basis point decrease for the prior year quarter. Operating expense for ascended sales was 30.9%, 670 basis point decrease for the prior year quarter. Operating income was $371,000,000, a 97% increase. Operating margin was 28%, 630 basis point increase. Our gap EPS was $1.64, and our performing EPS was $1.68. Next, look at our second quarter revenue by segment and geography. We have a highly diverse business model, provide a rich set of opportunities, and reduce our reliance on single markets and product lines. Fitness, is our largest segment, contributing 31% to the sales in the second quarter, followed by outdoor at 24%. During the second quarter, we achieved double-digit growth in all of our segments, led by auto with 74% growth. By geography, America's region contributed about half our revenue, the remaining coming from EMEA and APAC. We achieved double-digit growth in all three regions, led by strong growth of 72% in APAC, followed by 53 percent in Americas and 46 percent in the MEA. Looking next at operating expenses, second quarter operating expenses increased by $83 million, or 25 percent. 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 compared to prior year quarter, but decreased the percentage of sales 12.5%, 270 basis point decrease compared to the prior year. Increase in SG&A is primarily due to increases in personnel-related expenses, information technology costs. Advertising expense increased approximately $14 million due to higher spend in the fitness and outdoor segments. A few highlights on the balance sheet, cash flow statement, and taxes. End of the quarter with cash and marketable securities, approximately $3.2 billion. Account receivable increased sequentially and year-over-year to $737 million due to strong second quarter sales. Inventory balance increased sequentially and year-over-year to $939 million, 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 a prior quarter. Our capital expenditures for the second quarter were $110 million. We expect full year 2021 free cash flow to be approximately $750 million, capital expenditures approximately $400 million to 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 gap tax rate of 6.8%, and performance tax rate of 14%. Turning next to our full-year guidance, we estimate revenue of approximately $4.9 billion, an increase of 17% for the prior year, with double-digit growth for each of our segments. We expect gross margin to be approximately 58.5%, which is lower 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%, which is higher than our previous guidance of 10.5% due to income mix by jurisdiction. This results in pro forma earnings per share of approximately $5.50. This concludes our formal remarks. Valerie, would you please open the line for Q&A?
spk03: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchstone telephone. One moment for our first question. Our first question comes from Paul Chung of J.P. Morgan. Your line is open.
spk10: Hi, thanks for taking my question in, Greg Porter. So just on the 49945 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 LTE contract, how does the margin profile there shake out? And what percent of customers are opting for the LTE function? And is the strategy to kind of expand LTE to the Phoenix and other watches and expand the subscription service. And I have a follow-up.
spk05: Yeah, good morning, Paul. I think that 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 I would say that in terms of the kind of customer that will buy this product is a customer who's that's specifically interested in the safety story that Garmin offers with the integration with our GEOS subsidiary that we recently acquired. It allows us to offer now with the connectivity an end-to-end solution for people that want real-time monitoring of their activities and also the ability to summon safety help if they need it. 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 the approach we've taken with our inReach product line in terms of safety monitoring for active lifestyles.
spk10: Okay, great. And then on aviation, you know, you're approaching 19 levels of revenue and, you know, very nice rebound in operating margins. Should we expect to see, you know, operating margins kind of hit north of 30% as we, you know, navigate through the balance of the year or are there some different dynamics of product mix going on with, you know, less ADS-B benefit. And then on aero data, you know, how much contribution should we expect there and talk about any cross-selling opportunities you see with that existing customer base. And then finally on auto land, can this be another kind of ADS-B type of opportunity? I've seen very, you know, high ASPs for this product, so let's assume not as large of an adoption there, but what is the penetration rate you think that goes and does aero fit, you know, aero data kind of fit in here in terms of improving the overall performance of this feature? Thank you.
spk05: Yeah, so in terms of operating margin, it's come up in this period because of the additional sales leverage that we have and our aviation team has, of course, worked 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 and expect 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 aerodata contribution, it's a small adder but an important one because it's It's very important performance calculations that are done for commercial flights that help airlines conserve fuel and also 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 Autoland, Autoland is delivering on three models right now, the TVMs, the SS from Cirrus, and then the M600 from Piper. Of course, in those models, it's 100%. This is not an option. The market is growing rapidly. The number of aircraft out there is growing with the delivery of those models, and they're very popular models. In terms of the aerodata part of that, they aren't closely connected to Autoland per se, but but aerodata in business aircraft would be something that's an enhancer from a safety and performance point of view.
spk10: Thank you. Very helpful.
spk03: Thank you. Our next question comes from Ben Bolin of Cleveland Research. Your line is open.
spk06: Good morning, everyone. Thanks for taking the question. Doug, could you tell us a little bit about how you would characterize the current supply situation on components. Inventory was up. It looks like a lot of it was raw materials, but how did that influence, that availability influence 2Q? How do you think about what that could do for, you know, the remainder of the fiscal year? And then I have a follow-up.
spk04: Yeah, I'll give you a little flavor on the inventory. Yeah, the reason that inventory is up year over year is due to raw material requirements. We're looking at securing our raw material requirements to make sure that we're meeting the increased demand. I'd say as it relates to the supply chain situation, that is something that we're managing very effectively on a daily basis just to make sure that we do have the appropriate components to meet that demand. As I think about the rest of the year as it relates to inventory, I think it will be increase some, even more than what we have today, probably increase more than what our sales level is going to be, and probably just a rough number, probably close to a billion dollars probably by the end of the year. That's something that the team is all focused on, making sure that we are managing the situation, like I said, on a daily basis with that.
spk06: 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 talk us through where you think you are right now on utilization of the existing footprint and the timing for when the fourth facility will be online or ready to go? Just approximate timing for that would be helpful. Thank you.
spk05: Yeah, Ben, I think in terms of utilization of our existing footprint, specifically talking about our consumer manufacturing, I would say we're almost at 100% capacity. I mean, we've been bursting at the seams, especially keeping up with this market growth and demand. So it's a very important step for us. And in terms of timing of the new facility, we're targeting a fall opening to start to produce products there, and that will help alleviate our overall capacity constraints. Thank you. Thanks, Ben.
spk03: Thank you.
spk07: Our next question comes from Jeffrey Rand of Deutsche Bank. Your line is open. Hi. Thanks, and congrats on a strong quarter. Your consumer auto business appeared to bounce back nicely in the quarter. Can you talk about what is driving this? Is it newer, older products, and how do you think about this business going forward?
spk05: We saw, Jeffrey, growth in all of the categories in our consumer auto business. We've been talking for a while about the growth opportunity and the strength in specialty products. Of course, they did very well, and the traditional P&Ds also bounced back. Some of that is simply the pent-up demand as people traveled less last year and, of course, had less demand for those products. But in general, all of the categories did well.
spk07: 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 of the second half of last year?
spk05: Yeah, I think there's really a few things to consider in our guide. First of all, last year, you know, the first half was very challenging because of the pandemic. And we believe that a portion of the impact in the first half was really shifted to the second half. So our second half benefited from what we weren't 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 opened their doors. So that is a factor 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. And finally, potential uncertainties around supply chain that still exist. So that's what went into the guide. And yes, it is at a lower rate than what we experienced in the first half, but we believe that much of that is explained by the factors I just mentioned.
spk07: Great. Thank you.
spk05: Thank you.
spk03: Thank you. Our next question comes from Will Power of Baird. Your line is open.
spk09: Okay, great. Thanks for taking the question. Yeah, I guess echo my congratulations on the strong quarter. I guess I'd love any color that you're able to provide broadly, probably across categories on what the channel inventory situation looks like. It seems like strong in demand. Do you feel like channel inventories in balance where you want it. So maybe just kind of sell-in versus sell-through, any broader color there and how that may or may not be impacting the forward outlook.
spk05: Yeah, thanks, Will. I think in terms of channel inventory, it's better than it has been in the past, but still, depending on product and segment, there's areas of lean inventory that we continue to scramble to fill You know, we're air 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 registrations in Garmin Connect. The sell-through has been in line with the deliveries we're making. So the inventory situation, a little bit better, but still not where we need to be.
spk09: Okay, and then just wanted to ask on, you know, the M&A outlook from here. I mean, obviously you continue to generate, you know, strong cash flow. Just any color on, you know, areas of interest and kind of what valuation parameters look like. I mean, how much of a barrier is that here given some of the, you know, broader demand trends for some of the areas you might be targeting? Okay.
spk05: I think M&A is something we're continually looking at. We are usually looking at a few different opportunities at any one given time. I really don't ever share what specifically we're interested in, but I would say anything that complements our segments in terms of technology or adjacent products are things that are interesting to us. Evaluations are kind of a challenge and very nuanced right now. There's There's obviously a lot of exuberance in the market and expectations. So we certainly don't want to and aren't interested in those things that are simply out of line, and so we typically don't engage on those.
spk03: Okay. Thank you.
spk05: Thank you.
spk03: Our next question comes from Nick Todoro of Longbow Research. Your line is open. Okay.
spk02: Hi, yeah, good morning, everyone, and thanks for the questions. Doug, 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 changed? 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 from OEMs or what's driving that?
spk04: Yeah, I just want to give you flavor for the overall OpEx for the full year as percentage of sales than kind of sequential what's going on there. So on a full year basis of percentage of sales, we expect operating expenses to be up about 60 basis points year-over-year. Looking at each one of the categories, advertising, our goal is to keep that to relatively flat percentage of sales on a full year basis. Now, it will increase on absolute dollars, you know, as co-op, increased sales, and 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, and they're just increased headcount to support, you know, our product roadmap. We're talking about, you know, investing in AutoAM, et cetera. Then on SG&A, a little flavor there, 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 sales also driving that to volume, some of the areas such as IT costs, as well as product support and different operations. You know, as it relates to R&D on a sequential basis, the situation there is that it's lower in the second quarter due to reimbursement of some change order requests from OEM partners. The situation is whenever an OEM partner gives a change of request, we get reimbursed for that, and that is shown as a reduction in R&D. So there may be a little bit bumpy between the quarters there from that standpoint.
spk02: Okay. Got it. Very helpful. Thanks. And Cliff, if I look at the aviation guidance, it implies meaningfully lower sequentially second-hand revenue. What would be driving aviation sales to go down from here? And also, as we speak of aviation, how should investors think about normalized operating margins in aviation once that business kind of goes back to normal?
spk05: I think in terms of second half, Nick, you know, again, we try to analyze all the factors that we can in coming up with that and And 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 is related to the timing of deliveries of certain products to customers. So that's one thing. We benefited some in the first half because of some accelerated delivery. So that's part of it. In terms of the normalized growth rates, I mean, you know, 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 for developing countries. And frankly, 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 these growth trajectories. So we probably only look at that from a passing interest point of view, 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.
spk02: Got it. Thank you, guys. Good luck.
spk05: Thank you.
spk03: Thank you. Our next question comes from Ivan Feinsteth of Tigris Financial. Your line is open.
spk01: Thank you for taking my question, and congratulations on another incredible quarter.
spk05: Thanks, Ivan.
spk01: On your increased guidance, you increased the guidance for marine tremendously from 15% to 27%. What is driving that growth?
spk05: Well, the marine market continues to be very strong. There's a lot of interest in boating. Our boating OEMs, the people that 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 also see a lot of interest in people upgrading their existing boats. So the momentum is there, and we're simply working very hard to satisfy the needs of the market.
spk01: And you're seeing equal demand from OEMs and, let's say, aftermarket products as well, which has been doing better?
spk05: I would say just generally they're both very strong. It 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 they're definitely accelerating. We're seeing that in our OEM product sales. Meanwhile, retail, there's still a lot of interest from our retail partners and a lot of promotions planned for the products in the future.
spk01: You see a lot of people, they buy in used boats and then just upgrading all of the marine equipment?
spk05: Yeah, when they can find the used boat, the market is so incredibly tight, no one is letting go of their boats.
spk01: Then also with your incredible innovation on the aviation side for autonomous control like Autoland and Smartglide, are you seeing incorporating that in OEM automotive autonomous capability and working with not only the OEM manufacturers but some of the OEM autonomous computer manufacturers, let's say like NVIDIA and Qualcomm and then Waymo and GM Cruise?
spk05: I would say that the autonomous technologies between aviation and auto are very different, so there's little overlap in terms of what we're doing in those areas. So really nothing to comment there.
spk01: But what about your camera capabilities? You have some AI capabilities in your OEM cameras.
spk05: Yeah, I mean, from a sensor fusion point of view and sensor technology, those are building blocks for sure of things that can be applied. But for the most part, auto OEMs have their strategies and their partners that they're using to work on the autonomous kind of features that they want. And so we're a part of their overall plan, but not necessarily the ones that are doing their technologies.
spk01: And then one last area, in corporate wellness, you had made some comments on opportunities there. What kind of opportunities do you see growing the, let's say, corporate wellness integration into your Garmin Connect app and things like that?
spk05: Well, we continue to press on those opportunities. I think what's interesting about corporate wellness and some of those program wellness opportunities that are out there is each one is different. It requires some level of customization, especially on the part of partners. The benefit that we have in our offering is that we have a broad product line that can be applied to almost any kind of opportunity, and we've served opportunities anywhere from the very highest end Phoenix on down to the entry-level VivoFit. So we continue to work on those, and we continue to look for more opportunities in that space.
spk01: Thank you, and congratulations again.
spk05: Thanks, Ivan.
spk03: Thank you. Again, if you'd like to ask a question, please press 5 and 1. Our next question comes from Derek Satterberg of Collier Securities. The line is open.
spk08: 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 and operating margins, sort of that trajectory as you transition to the OEM side. And some of those investments you're making there conclude maybe over the short or medium term. And then I have a follow-up.
spk04: Sure. As it relates to overall auto, yeah, you're seeing that those gross margins are decreasing, you know, as our auto OEM business is becoming a bigger piece of auto. And also, more specifically within auto OEM, you're seeing that gross margin come down on a year-over-year basis also. since some of our new programs, primarily, you know, BMW, Vito, hardware-related, you know, have a lower gross margin overall. So it's really just going to be a function, you know, as it relates to the gross margin in there, you know, as those newer pieces of our business become a larger piece of that and actually, you know, kind of play into a segment type of a mix in there from a standpoint of what's one of those gross margins on an overall basis. As it relates to, you know, the operating... margins there. So, yeah, you know, the consumer auto business is doing well. And from that point, we are in the investment stage relating to auto EM. So with that, you know, we have a high R&D standpoint. So we'll probably be in that for, you know, a couple years here until we get into a production standpoint.
spk08: Got it. And then just curious quickly on Prime Day, wondering how that was relative to prior years. And, you know, if that had any impact on your guidance for the rest of the year. And then just a quick one on that as well. How does Prime Day typically impact gross margin for you guys? Thanks.
spk04: Yeah. So with that, you know, the Prime Day year over year, there was a shift, you know, from the standpoint. So last year, you know, that was, you know, in the third quarter, this year in the second quarter. So, you know, that did impact, you know, as Cliff talked about, the comparable that we do have. As it relates to the gross margins, yeah, there are, you know, that's a more promotional business for us from that standpoint. But, you know, kind of from an overall four-year standpoint, you know, probably didn't impact it a whole lot.
spk08: Great. Thanks.
spk03: Thank you. Our next question comes from Eric Woodring of Morgan Stanley. Your line is open.
spk11: Hey, good morning, guys. Congrats on the quarter. Just want to start, so obviously you're seeing a stronger 2021. Your new guidance range implies some of the upside in 2Q 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 three months that gives you confidence in your new guidance targets? And then just are you embedding any impact from component constraints into that forecast? And then I have a follow-up. Thanks.
spk05: Yeah, Eric, when we create our guidance at the beginning of the year, as I mentioned, there's a lot of art that goes into it because we're a business that is not driven by a backlog book. It's consumer demand, and a lot of times 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 beginning of the year. By the time we reach this point in the year, of course, we've had much more time to evaluate the 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, and 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 this And then as we look to the second half now, we have more clarity of what's transpiring for the end of the year.
spk11: Okay, that's helpful. Thank you. And then, you know, if we touch on margins, you know, makeshift autos would be a headwind to gross margins, but I believe your guidance also assumes some incremental pressures in the second half unrelated to mix. is, you know, 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 component costs and how that impacts your gross market, kind of all of that together into one thing.
spk05: Yeah, I think it's really very simple. I mean, we take all of those things into account. We look at 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.
spk11: And maybe if I just clarify that, are you saying you expect more component cost pressure in the second half, or is it more related to logistics? Just wanted to make sure I understand that.
spk05: Generally, I would say our supply chain costs in the second half will will increase more than what we have seen so far this year, and that's been built into the guide that we've provided.
spk11: Okay, super. Thank you so much, guys. Congrats again. Thank you.
spk03: Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Terri Seck for any closing remarks.
spk00: Thank you so much for your time, and have a great day. Bye.
spk03: Ladies and gentlemen, this best concludes today's conference. Thank you all for participating. Have a great day. You may all just be nice.
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