Garmin Ltd.

Good day, ladies and gentlemen, and welcome to the Garmin Limited fourth quarter 2018 earnings conference call. At this time, our participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require further assistance during the conference, please press the star and the zero on your touch-tone telephone. I would now like to introduce our host for today's conference, Ms. Terri Seck, Manager of Investor Relations. May we begin?

Good morning. We would like to welcome you to Garmin Limited's fourth quarter 2018 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. As a reminder, we adopted the new U.S. GAAP revenue standard in the first quarter of 2018. The prior periods presented here have been restated to reflect adoption of this standard. 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 and operating margins, and 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 filed with Securities and Exchange Commission. 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.

Thank you, Terri, and good morning, everyone. As announced earlier today, we finished 2018 strong, with revenue for the quarter increasing 4% over the prior year to $932 million. Aviation, marine, outdoor, and fitness collectively increased 13% over the prior year. Gross margin improved to 58.9%, driven by both product and segment mix. Operating margin improved to 23.9%, and operating income increased 21% over the prior year. These results generated GAAP EPS of $1 and pro forma EPS of $1.02 in the quarter, an increase of 26%. Looking briefly at full year performance, 2018 was our third consecutive year of revenue and operating income growth. We launched many innovative products, some of which have become halo products in their respective markets. I will highlight accomplishments in each of our business segments in a moment, but looking back at 2018, I'm very pleased with everything we accomplished. For the year, revenue increased 7% to over $3.3 billion. Combined revenue from aviation, marine, outdoor, and fitness increased 16%. Gross margin improved to 59.1%. Operating margin improved to 23.3%. And operating income increased 14%. This resulted in GAAP EPS of $3.66 and pro forma EPS of $3.69, an increase of 22% over the prior year. The growth in EPS and cash generation gives us confidence in proposing an 8% increase in the quarterly dividend. We shift nearly 15 million units during the year, bringing our total to over 205 million since inception, which includes over 1 million certified aviation products. Doug will discuss our financial results in greater detail in a few minutes. But first, I would like to highlight some achievements from the past year and outlook in each of our five business segments. Starting with aviation, revenue increased 20% driven by growth in both aftermarket and OEM product categories. ADS-B continues to be a driver of solid performance in the aftermarket. while new platforms and favorable market conditions led to growth in the OEM category. Gross and operating margins were 75% and 34%, respectively, and operating income increased 33% over the prior year. During the year, Tactical Air selected us to equip their fleet of F-5 fighter aircraft, which is the second program win for our tandem integrated flight deck. Also during the year, we were recognized by Airbus Helicopters and Embraer as Outstanding Supplier of the Year. And most recently, Garmin was ranked number one in avionics product support by Professional Pilot Magazine and by Aviation International News for the 15th consecutive year. The recognition we are receiving is significant because the aviation industry demands strong performance from those that participate in the market. I congratulate our team on earning these awards, which is a testament to the quality of Garmin equipment and the amazing way our associates care for our customers. Looking ahead, positive market conditions, contributions from new products and platforms, and ADS-B provide growth opportunities in both OEM and aftermarket product categories. With these things in mind, we anticipate revenue in the aviation segment will increase approximately 10% in 2019. Looking next at marine, revenue increased 18%, driven by strength in a broad range of product lines. During the year, we launched Panoptix LiveScope, a sonar system that generates real-time video-like images underwater. LiveScope was quickly recognized by the marine industry as disruptive new technology and has become a halo product in our marine portfolio. Gross and operating margins improved to 59% and 14%, respectively. and operating income increased 26%. We recently introduced newer versions of our flagship GPS map and ECO map chartplotters, which include a new map combining the best of Garmin and Navionics content. This marks the achievement of a major objective we established for the Navionics acquisition. We continue to gain market share in the OEM category. During the year, we were named as an exclusive supplier to several boat manufacturers. We enter 2019 confident in our portfolio of strong products, such as Panoptic Flyscope and our Flagship GPS Map and Ecomap series. We anticipate revenue in the marine segment will increase approximately 10% for the year. Turning next to outdoor, revenue increased 16% on strong demand for outdoor adventure watches, golf products, and in-reach subscription services. Gross and operating margins were 65% and 36% respectively, and operating income increased 16% over the prior year. During the year, we built on the momentum in the Adventure Watch category with the introduction of the Phoenix 5 Plus series with streaming music, built-in maps, and mobile payments. We also expanded the category with the introduction of Instinct and Descent. Looking ahead, we anticipate revenue in the outdoor segment will increase approximately 10% in 2019, driven primarily by growth in watches and in-reach subscriptions. Looking next at fitness, revenue increased 13%, driven by growth in all product categories. Gross and operating margins were 55% and 21%, respectively, and operating income increased 24% over the prior year. In 2018, we launched new music-enabled wearables and added seven music providers into our Connect IQ app store, including Spotify, Deezer, and KKBox. Last week, we signed an agreement to purchase Tax, a leading provider of indoor bike trainers, and we expect this acquisition to be completed sometime in the second quarter. In 2019, we anticipate revenue growth of approximately 13%, which includes the acquisition of tax as well as organic growth within the segment. Looking finally at the auto segment, revenue decreased 19% for the full year due to the ongoing decline of the P&D market and lower auto OEM sales driven by program timing. Gross and operating margins were 43% and 6% respectively. Our global P&D market share remains very strong And at the recent Consumer Electronics Show, we announced our new Drive P&Ds with simplified road trip ready features. In the OEM category, we were awarded new business that will contribute starting in 2020. Looking at 2019, we anticipate revenue will decrease approximately 18%, driven by the ongoing decline of the P&D market, as well as softness in OEM due to program timing mentioned earlier. In summary, we begin our 30th year of operations with opportunities in all segments. We anticipate revenue of approximately $3.5 billion, up 5% year over year. Our plan calls for stronger growth in the second half of the year due to the timing of product launches. We anticipate gross margin of approximately 59.5% and operating margin of approximately 22.7%. We anticipate a full-year pro forma effective tax rate of approximately 16.5%, resulting in pro forma earnings per share of approximately $3.70. That concludes my remarks. Next, Doug will walk you through additional details on financial results. Doug?

Thanks, Cliff. Good morning, everyone. I begin by reviewing our fourth quarter and full-year financial results. I'm going to do comments on the balance sheet, cash flow statement, and taxes. It posted revenue of $932 million for the fourth quarter, representing a 4% increase year-over-year. Gross margin was 58.9%, a 280 basis point increase from the prior year. Operating expense for ascended sales was 35%, a 70 basis point decrease from the prior year. Operating income was $223 million, a 21% increase from the prior year. Operating margin was 23.9%, 350 basis point increase from the prior year. Our GAAP EPS was $1. Reform EPS was $1.02, a 26% increase from the prior year. Looking at four-year results, we posted revenue over $3.3 billion for the year, representing 7% increase year-over-year. Close margin was 59.1%, 150 basis point increase from the prior year. Operating expense, its percentage of sales, 35.9%, a 20 basis point increase from the prior year. Operating income was $778 million, a 14% increase over the prior year. Operating margin was 23.3%, an increase of 140 basis points from the prior year, driven by the increase in gross margin. Our GAAP EPS was $3.66. Reforming EPS was $3.69, a 22% increase from the prior year. Next, we look at fourth quarter and full year revenue by segment. During the fourth quarter, we achieved double-digit growth in three of our five segments, led by the outdoor segment with 25% growth, followed closely by the aviation segment with growth of 22%. For the full year of 2018, we achieved 7% consolidated growth with double-digit growth in four of our five segments. Looking next at fourth quarter revenue and operating income. Collectively, the aviation, marine, outdoor fitness segments contributed 84% total revenue in the fourth quarter of 2018 compared to 77% in the prior year quarter. Outdoor grew from 23% to 27%. And aviation grew from 14% to 17%. You can see from the chart to illustrate our profit mix by segment, the aviation, marine, outdoor and fitness segments collectively delivered 97% of operating income in the fourth quarter of 2018, compared to 88% in the fourth quarter of 2017. Outdoor operating income, the percentage of total operating income, increased from 40% to 43%. Looking next, the full year charts. For the full year, the aviation, marine, outdoor, fitness segments made up 81% of total revenue compared to 75% in 2017. A similar shift occurred in operating income, with 95% of 2018 operating income collectively coming from the aviation, marine, outdoor, and fitness segments, compared to 88% in 2017. All segments, besides auto, had year-over-year increase in both operating income dollars and operating margins. Looking next, operating expenses. Fourth quarter operating expenses increased by $6 million, or 2%. Research and development increased $12 million year-over-year due to investments in engineering resources. Our advertising expense decreased $4 million for the prior year quarter, representing 5.9% of sales, 60 basis point decrease. Decrease was primarily due to lower media spend in the fitness segment. Decreased $3 million compared to prior year quarter, plus 13.5% of sales. 90 basis point decrease compared to prior year. Decrease was due to prior year litigation-related costs, partially offset by increased personnel-related expenses. A few highlights on the balance sheet, cash flow statement, and dividend payments. We ended the quarter with cash and marketable securities of approximately $2.7 billion. Account receivable increased sequentially to $570 million during the holiday quarter and decreased year-over-year due to timing of cash receipts. Inventory balance increased both sequentially and year-over-year to $562 million. During the fourth quarter of 2018, we generated free cash flow of approximately $185 million. For the full year of 2018, we generated free cash flow of approximately $764 million, a $243 million increase for the prior year. We announced that we plan to seek shareholder approval for an increased dividend beginning with a June 2019 payment. The proposal is a cash dividend of $2.28 per share, $0.57 per share per quarter, an 8% increase from our current quarterly dividend of $0.53 per share. For the full year 2018, we reported an effective tax rate of 15.7%, a 520 basis point decrease in the prior year, primarily due to benefits from U.S. tax reform. We expect our full-year 2019 Performa effective tax rate to be approximately 16.5%. The year-over-year increase in the 2019 Performa effective tax rate is primarily due to lower expected reserve leases compared to 2018. To conclude our formal remarks, Chanel, please open the line for Q&A.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the one carrying your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask you to please place your line on mute once your question has been stated. Once again, ladies and gentlemen, that's star one to ask a question at this time. Our first question comes from Lionel Roberts in Garda. Credit Suisse, your line is now open.

Good morning.

Good morning.

Very good numbers, guys. I wanted to ask you just to start with on the margins, on the gross margins, Cliff or Doug, How do we think about that improvement, you know, considering volume, mix, pricing, those three factors, and anything else that I should be throwing in there?

Yeah, on the year, our margin improvements is primarily segment-driven mix. On the quarter, it's both segment and product mix.

And then, you know, go ahead, Doug.

Yeah, we did see some improvement, you know, in the outdoor gross margin. year-over-year for the quarter is primarily due to Cliff mentioned product mix, higher percentage of wearables year-over-year, and also some improvement in the marine gross margin also due to product mix.

And are there any pricing trends at work here that we should think about? Is pricing stable or do you see, you know, any kind of moderation as technology gets, you know, with competition and technology somewhat matures?

Yeah, competition is obviously still a factor, especially around holiday promotion times. Our product life cycles within the various segments do also have an impact, particularly in outdoor where we had the new Phoenix watches for most of the year. So, you know, going forward, I think all of those things are dynamic. We would anticipate just following the market and doing the best we can.

Okay, and then just on the sales guidance, the sales guidance is a little bit short of what you delivered in 18, but then again, you did better in 18 than you initially guided. You did 7.5% against, I think, the original guidance about three. Is this just typical conservatism, or are there any fundamental elements that we should really be thinking about? For example, maybe ADS-B activity, fading as we get into 2019 or anything else across the segments we should be thinking about?

I think the segment-level guidance speaks for itself. I think that in terms of our overall guidance, we spent a lot of time on that, and we've articulated a roadmap that we believe we can deliver. So that's really what goes behind our guidance at the beginning of the year. There's still a lot of the year ahead of us. So as things develop, of course, we'll update. But right now, that's our view and our roadmap.

Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Ronald Epstein of Bank of America Maryland. Your line is now open.

Hey, guys. It's Caitlin Delante on Front Epstein today. My first question is, how did the U.S. government shutdown affect the ADS-B upgrades today? Did you encounter any delays, and if so, should we expect to see a pickup of pent-up demand going into 2019?

We really didn't see any impact from the shutdown on ADSD itself. I think that there's lots of puts and takes at the shop level of the industry, so I wouldn't say that there was zero impact, but it was hard to detect, at least from the activity that we saw. And so going forward, I don't think there's a major wave that, that comes through because of the reopening. We expect that the upgrades will continue strong into 2019 because there's still quite a few aircraft to equip and shop capacity is still a factor.

Okay, thank you. That's very helpful. And then can you talk a bit about how the two new product launches, such as the Instinct Watch and the GPS MAP-66 handheld, contributed to outdoor growth in the quarter?

Yeah, Instinct really opened a new category of product for us, a new kind of customer. So we view that as new opportunity within the overall wearable. And the GPS map was a refresh of our product line. And so whenever we do that, we're able to capture people who upgrade and people who are looking for new features and products that they might already have. So kind of a new product refresh bump there.

All right. Thank you so much.

Thanks, Caitlin.

Thank you. Our next question comes to the line of Charlie Anderson of Dow Trading Company. Your line is now open.

Yeah, thanks for taking my questions, and congrats on a really strong 2018. Thank you. Cliff, I wanted to start with a question on auto. So, you know, P&D continues its current rate of decline, which looks like it's in kind of the low 20% range. You know, I realize that you have some program timing that's impacting OEM right now, but you do have BMW, Geely, and others coming in later. I think you've also referenced in the past that you have some unannounced wins. I wonder how should we think about that business over the next few years? Is there a point at which it stabilizes or even grows? And then I've got to follow up.

Yes, we believe there's a point where we're definitely able to stabilize and grow.

Could you speak to if, you know, that's something we could start to consider in the 2021-2020 type timeframe or any more color there?

Well, it's a little early to talk about 2020, but I would say, you know, consistent with the remarks that we made earlier that, many of the programs we've talked about start to hit in 2020. And so that will be a key year for us and looking forward as well as we have additional programs that come online. Okay, great.

And then on aviation, I wonder what are some of the key assumptions you guys are making this year as it relates to the ADS-B rollout? To any degree do you think it spills over into 2020? And then, you know, in a sort of a post-ADS-B world, how should investors sort of think about the growth within the aviation category? Thanks. Thanks.

Yeah, our outlook today is very similar to what we provided back in July. We are seeing that, based on run rates we have today, that we would have about 100,000 aircraft equipped by the time the mandate takes effect. And looking into 2020, I would say that there still appears to be opportunity for additional aircraft that come either due to the fact that they weren't able to get into shops or perhaps they're just laggers in terms of overall buying behavior. Great. Thanks so much. Thanks, Charlie.

Thank you. Our next question comes from the line of Rich Valera of Needham & Company. Your line is now open.

Thank you, and congratulations from here on a strong 2018 as well. Just wanted to follow up on the ADS-B question. Can you give us any sense of the revenue level you're seeing from ADS-B related retrofits right now and how you think that sort of trends into 2020?

It's probably a little hard to quantify because we are seeing customers step up to additional equipment when they bring their airplanes in for modification. I think that's critical because it shows that customers they realize that the effort it takes to put the equipment in is significant, and so they want to take advantage of all of the potential features and opportunities they can have with the latest equipment. So consequently, we're seeing, you know, improvements in a lot of our retrofit product lines in addition to ADS-B.

I guess I understood, but to the degree that you're getting all the sort of pull-through from ADS-B-related activity in 19, and then that was to significantly decreased in 20, it would seem you could have almost the reverse effect. So just try to think about how to think about 19 versus 20 given the expected high level of ADS-B in 2019.

Well, we're not ready to provide a lot of color around 20 yet because we still have a lot of 2019 to play out when it comes to the mandate. But we've said all along that certainly there will be a drop-off as people become equipped and The way we see it today, there will still be sales that occur into 2020, but the level of those sales and the impact and the pull-through that comes with those is still unknown.

Fair enough. And I wanted to ask one on tax, if I could. Interesting acquisition there. First, I was wondering if you'd be willing to give the expected revenue contribution from tax, you know, either on an annualized basis or in however many months you expect to have that acquisition done. with you in 2019?

Well, from our guidance, we would say that about half of the growth that we're projecting in fitness is due to tax and based on our projected closing date. So those are the assumptions we've made so far.

And can you share that projected closing date?

I think there's still a lot to happen, so we don't really have a specific yet, but we expect it to be sometime in second quarter.

Got it. And then Is there anything else you're looking to do with Pax from an integration with some of the Garmin software or other Garmin products? I'm just thinking, what are the types of things you could do with Pax once you get that as part of the Garmin portfolio?

Well, we've built a very solid cycling business based on outdoor cycling activities, and so Pax allows us to bring cycling indoors and allows us to integrate across our platforms, both in terms of head units as well as Garmin Connect. So we see a lot of opportunities and synergies that we can work together with tax in order to better serve the overall cycling market.

Got it.

And one more, if I could.

Can you give a marine organic growth number for 4Q18, if we were to back out some of the recent acquisition impact?

Yeah, for the fourth quarter, the vast majority was organic growth, about three-quarters of it, and maybe about 25% of that was avionics. Got it.

Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Eugene Anderson of Morgan Stanley. Your line is now open.

Good morning. Thanks so much for taking my question. First, I wanted to follow up on the previous outdoor question that was asked of Looking at Q4 and just considering the acceleration year-over-year, can you just give us a better idea of how much of that was a contribution from the new product that you cited there versus performance of the underlying or performance of the older Phoenix watches, for example?

Well, definitely the new products like Instinct and Descent contributed totally new dollars to us, but we still saw strong growth for the year and for the quarter in our Phoenix line as well.

That's helpful. And then on the operating margin guidance, so it is a tick down from 2018. I guess when we look at this longer term, should we be thinking of the company as kind of hovering around this low to mid-20 percentage range, or should we just think of 2019 as being particularly investment-heavy and we should expect more meaningful operating leverage in the outer years?

Yeah, so this is Doug. Let me give you a little perspective probably on, you know, operating expenses and the gross margin and kind of feed into that. So, you know, for the gross margin, we do expect that to tick up a little bit. That's primarily all due to a segment mix. Then as it relates to operating expenses for 2019, you know, we would expect, you know, operating expenses to increase, you know, on a consolidated basis at a similar level as it did in 2018. Probably, you know, maybe as a percentage of sales, maybe 100 basis points increase year over year. And about, I should also mention that about 25% of that year over year increase in our operating expenses were attributing primarily to the acquisition of the tax acquisition there. And looking at maybe a little more granularity on each one of the expense lines, as it relates to advertising, our goals for 2019 are as a percentage of sales to look at advertising to be relatively comparable, as a percentage of sales as 18. We do expect R&D investments to continue, probably maybe as a percentage of sales, probably a 50% increase there, basis point increase. And then SG&A, Expect that to increase year-over-year, maybe about a 50 basis point also. But we do tend to make investments, you know, in our business on a go-forward basis to drive the top line.

Great. Okay. That's very helpful. And then just one more quick one, if I may. On the aviation guidance, at this point, are you building in new production from OEM designs such as the Citation Longitude? And I guess just more broadly, like how do you build in – the production ramp for new platforms such as that versus what those OEMs might be saying publicly? Do you give yourself room for potential upside if things kind of track according to what they're saying publicly?

Yeah, so we do have new platforms such as Longitude in our plan. We work closely with the teams at our partners such as Textron to plan for OEMs basically articulate or create our plan around their plan. And so that's what we've done. And, you know, I can't really comment in terms of our views versus theirs, but we're ready to support their launch and rollout.

Okay. Thank you so much.

Yep. Thank you.

Thank you. Our next question comes from the line of Paul Foster of J.P. Morgan. Your line is now open.

I've got two questions. I've got two. First off, Cliff, the guidance issue seems obviously quite encouraging. Can you talk a little bit about the sort of macro environment that you're assuming for that, both domestically and internationally?

Yeah, sorry, Paul. I think your question broke up during the first part, so if you wouldn't mind to repeat that, then we'll try to tackle it.

Just asking with regard to the 2019 guidance, what kind of macro assumptions you've made both domestically and internationally?

Well, I think we're assuming what all people are, kind of steady state the way things are right now. I think aviation and marine are segments that are definitely very sensitive to the macro environment, so our outlook there is assumes that we're going to continue to see reasonably favorable conditions to support those markets.

If the China-U.S. trade dispute is resolved amicably, what kind of impact does that have, if any?

Well, I think to the extent that it improves the situation in the China market itself, it could positively impact us. But China is a challenging area just in terms of the overall global economy and Our revenue exposure there is somewhat small, but on the other hand, we still are looking for growth opportunities in the Asian market.

Okay, great. Got it. And then my last question is on the Halo products, which you referred to. Can you just talk to us what you mean by Halo? I think I can guess, but how does it mobilize the rest of the sort of product lineup and marketing, and what's the broader takeaway for us in terms of the technical approach to

The example we gave was Panoptix LiveScope. As we've been mentioning since LiveScope was launched, it is disruptive technology. Marine people and fishermen view it as something that truly doesn't exist anywhere else. It casts a positive glow across the marine segment and additional pull-through sails with our other equipment as well. That's what I call a halo product.

Okay. All right. Thank you.

Thank you.

Thank you. Our next question comes from the line of Ivan Fonsek of Tiger Financial Partners. Your line is now open.

Thank you for taking my call, and big congratulations on another great quarter and a great 2018. Thanks, Ivan. My question is about tax. It's a really exciting acquisition, and could you give us some of the insight to how it came to be, and then like your big picture view as far as distribution and branding and how it's going to be integrated and how their product line is going to be integrated into Garmin.

Yeah, so we've been working to build relationships across the industry, and we did reach out to TACS and introduced ourselves and built a relationship with them. They're an awesome company. They're a family-owned company over generations that's well-run, has a great product line and technology. They're vertically integrated, and so we felt like they were a great fit with our company as well. In terms of how we view them going forward, they have a great brand, and it's a brand that we want to support and keep around for the long term. We intend to integrate them into our sales and our fitness area. like I mentioned earlier, to have a strong offering for both indoor and outdoor cycling activities.

And how will the products be available, let's say, in the U.S., for example? What will be the distribution channel?

Well, we would anticipate the distribution would be through existing sports retailers. Already the product is available through REI, but there's an opportunity to expand tax distribution in the U.S. and Asia markets. They're very strong in Europe, but less strong in the U.S. and Asia, so we'll be working to expand that distribution.

And what about, like, ramping up the exercise bike and the treadmill and integration? So, I mean, I assume you'll be integrating that to connect with, you know, monitor your heart and fitness with your smart wearable, integrating the Connect IQ app and also software to monitor that. Are you also going to be, let's say, offering online or video classes similar to the Peloton model?

Well, I probably can't comment on specifics, but like I mentioned earlier, there's many different assets within Garmin and TACS that we can now look at together and create a much more high-fidelity and interesting experience for customers that go both outside and inside. So that's our goal, and we have a lot of work ahead of us for sure.

Very good. Very exciting. Thank you.

Thanks, Ivan.

Thank you. Our next question comes to the line of Nick Todorov of Longbow Research. Your line is now open.

Hi. Thanks. Hey, congratulations, guys, on a great execution. Really great job. Thanks, Nick. Question on Cliff. You said that in fitness, I think you said all of your categories experienced growth in the fourth quarter. Can you give us updates on what portion of your fitness segment is now the basic trackers? Do you see some stabilization in that segment or the trend of switching to smartwatch is still intact?

We did see growth across all of our categories in fitness. The basic category has come down quite a lot, as you imagine, with the overall market that Where we saw growth was in unique products that we offer, such as the hybrid analog smart devices, VivoMove HR, as well as the kid trackers as well. But we see it as a solid category where we offer something unique, so that's where we're investing. And then the overall fitness categories outside of that and advanced trackers, we're also strong for the year.

Okay, thanks, Peter. And the fitness guidance, aside from the tax acquisition contribution, assumes some really decent product refreshes. I know you don't speak about the upcoming launches, but can you share at least in what product line you expect the strongest product refresh in fitness?

I think we have a strong roadmap across all of our lines, so we would expect during the year that we'll have refreshes across the entire portfolio. Okay.

Okay. And how are you thinking about 80 is big growth per se? Are you baking in any kind of deceleration over here due to capacity constraints? Or how are you thinking about capacity? Has the picture there changed? Are you seeing anything different?

Yeah, we're really not seeing anything different than what we reported midway through 2018. We do see that shop capacity appears to be a factor in limiting the growth of installs. And so on a percentage basis, that would obviously represent a deceleration, but again, a lot of demand that still has to be worked through for the year. So we're working as hard as we can to help our shops get through that, and we'll continue to monitor and see how things go into the following year.

Okay, great. Then the last one for me. Doug, how should we think about free cash flow and CapEx in 2019?

Yeah, so we had a very strong pre-cash flow in 2018. A big piece of that was driven by operation, but also we did have some very strong working capital improvements year-over-year. I wouldn't expect to see all of those working capital improvements year-over-year. So probably for 2019, I'm estimating pre-cash flow around $675 million and assumed in that is about $150 million of CapEx, which is a similar level that we had in 2018.

Okay, awesome. Thank you. Good luck, guys.

Thanks, Nick.

Thank you. Our next question comes from the line of Ben Bowen of Cleveland Research. Your line is now open.

Good morning, Cliff, Doug, Terry. Thanks for taking my question. Doug, where are you in the capacity expansion with for aviation, what's left to do, and where is the utilization of that footprint today?

Yeah, I'll probably comment on that. Ben, this is Cliff. We are producing aviation products now in our new facility, so that part is up and running. We're still outfitting our distribution center with new equipment in order to turn that on, so we're not yet operating out of the distribution side of the new facility.

Okay. As a follow-up, longer term, you know, the company has executed really well in the broader aviation segment with OEMs. How would you characterize your objectives longer term with commercial opportunities? What's that process look like from start to finish? How long is kind of the training effort of the pilots, and how long is the ramp and spares inventory? I know it's a very open-ended question, but could you walk us through what a win could look like or, how you think that could translate to opportunity over time. Thanks.

Our objective is to grow share across the whole segment, including moving upstream in both business jets as well as getting our foot into the commercial side as well. We do already have some commercial opportunities that we're executing on in terms of some smaller pieces of equipment, but we continue to aspire to and work on additional opportunities to move upstream It is a more intensive activity, as you can imagine, and in order to do that, we have to invest in ourselves and our team and our capacity, which are things that we've been doing over the course of years now. And in terms of actually executing that, of course, we would have to achieve a very high level of service for our customers in terms of spares and general support for their operations. So these are all things that we're evaluating and making methodical investments in order to be ready. Thank you. Thank you.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Ms. Terri Sack for closing remarks.

Thanks, everyone. Doug and I are available for callbacks throughout the day. Have a good one. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.