Garmin Ltd.

Good day, ladies and gentlemen, and welcome to the Garmin Limited's first quarter 2019 earnings conference call. At this time, all participants are in the listen-only mode. Later there will be a questioning and answer session and instructions will follow at that time. If you require any assistance during today's call, please press star and then zero your attention on the telephone. As a reminder, this conference call is being recorded. I will now like to turn the conference over to Terri Sack, Manager of Investor Relations. May I begin?

Good morning. Good morning, ladies and gentlemen. We would like to welcome you to Garmin Limited's first quarter 2019 earnings call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at .garmin.com. An archive of the webcast and related transcripts will also be available on our website. In the first quarter of fiscal 2019, we refined the methodology used to allocate certain selling, general, and administrative expenses to the segments. The composition of segments did not change. Prior year amounts are presented as they were originally reported as it is not practicable to accurately restate prior period activity in accordance with the refined allocation methodology. For comparative purposes, we have included in the appendix of this webcast an estimate of the segment operating income impact if the refined allocation methodology would have been used in 2018 for both the 13 weeks ended March 31, 2018, and the 52 weeks ended December 29, 2018. There was no change to either the consolidated SG&A expenses nor the consolidated operating income. 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 the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Temble, President and Chief Executive Officer and Doug Vesson, Chief Financial Officer and Treasurer. At this time I would like to turn the call over to Cliff Temble.

Thank you Terri and good morning everyone. As announced earlier today Garmin reported record revenue for the first quarter of 2019 with growth in operating income and EPS. Consolidated revenue came in at $766 million, up 8% over the prior year. Revenue for marine, aviation, fitness and outdoor collectively increased 12% year over year. Gross margin was 59% compared to 60% in the prior year. Operating margin was .8% and operating income grew 6% over the prior year. This resulted in gap EPS of 74 cents, pro forma EPS was 73 cents, up 7% over the prior year. We are encouraged by our first quarter results. Since Q1 represents the lowest seasonal quarter of our financial year and much of the year remains ahead of us, we are maintaining the guidance issued in February. Before moving on to segment highlights I want to mention the recognition we received recently from Forbes who ranked Garmin as one of the top five best employers in America. Speaking on behalf of all Garmin employees we are truly honored to receive this recognition. Garmin employees are passionate about what we do and we share a deep commitment to serving our customers and each other. Of the many qualities that make Garmin a great place to work, it's the commitment of our employees that sets us apart. Moving next to our segment highlights, revenue in the marine segment increased 18% on strong demand for chart plotters and panoptics live scope sonars. Gross margin was 58% and operating margin improved to 19%. During the quarter we announced the ECHOMAP Ultra Series, combining built in panoptics live scope compatibility with new mapping content. Also in our first year as their exclusive electronic supplier we were named the 2018 supplier of the year by Independent Boat Builders Incorporated. The boating industry's largest purchasing cooperative. It's an honor to be recognized by the IBBI and I want to thank our marine team for delivering superior products, service and support to our customers. Looking next at aviation, revenue increased 17% driven by growth in both aftermarket and OEM product categories. Gross and operating margin remained strong at 75% and 34% respectively. During the quarter we delivered the new G1000 NXI upgrade for the Citation Mustang, which is the first business jet to adopt our G1000 system. We announced compelling new products such as the GPS 175, GNX 375 and the G3X Touch which expand the addressable market for our retrofit systems. Our aviation team was also recognized as an outstanding supplier to the industry. At the recent Embraer Suppliers Conference we were named supplier of the year for electrical systems. This is the 10th supplier award we received from Embraer and again reflects the strength of our products, service and support. I want to thank our aviation team for their deep commitment to being the very best. Looking next at fitness, revenue increased 9% driven primarily by strong growth in our wearable categories. Gross margin was 50% and operating margin was 10% in the quarter. Margins decreased due to a combination of factors including lower selling prices and a shift in mix as certain products in our consumer wellness categories experience significant year over year growth. In early April we completed the acquisition of Tacx, expanding our reach into the indoor cycling and training market. Yesterday we announced a fully refreshed line of running watches with the Forerunner 45 in two sizes, the Forerunner 245 with optional music storage and the Forerunner 945 which has it all. These new smart watches offer features that will appeal to a broad range of running enthusiasts. Also, we announced the availability of our menstrual cycle tracking feature. This new feature was developed by Garmin Women focusing on the special needs of those who are highly active. This feature will help women make the connection between their current cycle phase, physical and emotional symptoms and their overall well-being. We also announced that we are cooperating with the University of Kansas on research to better understand how wearables and the biometric data they produce can help women manage and improve their health. Moving to outdoor, revenue increased 7% on strength across multiple product categories. The outdoor segment generated strong growth in operating margins of 63% and 27% respectively. During the quarter we introduced Mark, a collection of five premium smart tool watches. These watches were created from our active lifestyle DNA to inspire adventures in flying, racing, sailing, exploring and sports performance. Also, we recently announced the Approach S40, a stylish golf watch featuring a color touchscreen display and smart watch capabilities. Looking finally at the auto segment, revenue decreased 10% for the quarter due to the ongoing decline of the P&D market, partially offset by growth in certain specialty product lines. Our global P&D market share remains very strong. Gross margin was 45% and operating margin improved to 6%. During the quarter we launched the BC40, a new wireless backup camera that's easy to install and provides drivers with a wide clear view behind their vehicle. Also during the quarter we announced that BMW selected us as their lead design and production partner of infotainment modules for the BMW Group, validating us as a tier one supplier to the world's most respected brands. I congratulate our automotive team and thank them for their hard work and dedication in securing this win. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Thanks Cliff. Good morning everyone. I begin by reviewing our first quarter financial results, community comments on the balance of energy, cash flow statement and taxes. Posted revenue of $766 million the first quarter representing 8% increase year over year. Gross margin was 59%, 100 basis point decrease from the prior year. Operating expense, percentage of sales was 39.2%, 80 basis point decrease from the prior year. Operating income was $151 million, a 6% increase year over year. Operating margin was 19.8%, relatively consistent to the prior year. Our gap EPS was 74 cents, our performing EPS was 73 cents. Next, we'll look at our first quarter revenue by segment. We achieved record first quarter revenue of $766 million. The solid revenue grew 8% led by delgit growth in both marine and aviation. Also, both the fitness and outdoor segments achieved solid growth during the quarter. Combined basis, marine, aviation, fitness and outdoor were up 12% compared to the prior year quarter. Looking next, the first quarter revenue and operating income charts. Collectively, marine, aviation, fitness and outdoor segments contributed 83% of total revenue the first quarter of 2019 compared to 80% in the prior year quarter. Marine grew from 16% to 17%. Aviation grew from 21% to 22%. Fitness grew from 23% to 24%. To see the charts that illustrate our profit mixed by segment, marine, aviation, fitness and outdoor segments collectively delivered 95% of operating income the first quarter of 2019 compared to 98% the first quarter of 2018. Looking next, the operating expenses. Our first quarter operating expense increased by $16 million for 6%. Research and development increased $4 million year over year due to investments in engineering resources. Our advertising expense increased approximately $3 million year over year and represented .6% of sales, consistent with the prior year quarter. H&A was up $10 million, where .5% of sales consisted of the prior year quarter. The increase was primarily due to legal related costs and personnel related expenses. A few highlights on the balance sheet, cash flow statement and taxes. Win of the quarter with cash marked with securities of approximately $2.7 billion. Counter receivable decreased sequentially to $453 million following a seasonally strong fourth quarter. Inventory balance increased on a sequential, near-review basis to prepare for the seasonally strong second quarter upcoming product launches. During the first quarter of 2019, we generated free cash flow of $134 million, a $53 million decrease from the prior quarter. Also during the quarter, we paid dividends of $201 million, which includes both the December 2018 and March 2019 payments. During the first quarter of 2019, we reported an effective tax rate of 15.7%, credit at 16% of the prior quarter. This concludes our phone remarks. Shannon, can you please open the line for Q&A?

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to move yourself in the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Ben Bowlin with Cleveland Research. Your line is open.

Good morning, everyone. Thanks for taking my question. I wanted to start in the fitness business. Could you talk a little bit about the mix overall? What drove the higher mix of wellness devices in the quarter? What were the incremental legal expenses within that business in the quarter, and does that persist? And then any thoughts on margin trajectory through the year with new products launching? And then I have a follow-up.

Yes, so in terms of mix, then we saw strong sales of our Vivo Move HR line as well as our Vivo Active 3. So those were drivers of mix towards the consumer wellness categories. In terms of legal, we wouldn't comment on specifics of it and to say we wouldn't expect a repeat of some of these. But again, the environment is unpredictable, so we don't really know in the future what additional things we might face, but we view it as somewhat of a one-time thing. And in terms of margin trajectory, depending on how the mix goes, we would probably still anticipate some downward pressure on overall fitness margins, probably in the low to mid-50s range. But that will depend on, again, the overall product mix and the sales trajectory of some of those product lines.

Okay, and within Outdoor, any thoughts you have on the initial interest for Mark or how you feel about the current lineup and what Mark does to the overall team as you move into these higher price point products?

Well, we feel like the initial interest in Mark has been very encouraging. So we're now starting to deliver those devices into the field, so we'll start to see some impact from that. In terms of what it does to our overall product lineup, I think it expands our reach towards the upper end of the watch market in terms of where we're at today, obviously not the upper end of where watches are in total, but for us, it expands our reach and we feel very good about it. We receive high marks in terms of the design of the product and the materials we've selected, so we feel very good about it.

Thank you.

Thank you.

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

Thank you. I was hoping you could comment on the BMW deal and sort of how you'll get paid on that and what you'll actually get paid on. Thank you.

Well, I think maybe you're referring to some capitalized costs, so that's basically an agreement that we have to be able to recover some of our R&D costs that go into that project and those will be capitalized as we go along. But in terms of once we reach the production point, then it's like any other arrangement where we sell a product and they pay us for it.

Yeah, I guess the question was what exactly will you be selling them, software, hardware, and you can kind of just give us a sense of the magnitude of what will be going into each vehicle.

Well, it's the main media computing modules that go into every vehicle and it drives the instrument cluster as well as the center stack and in some configurations it will also drive infotainment in the backseat.

Got it. And then just on aviation, if you can kind of give us an update on your thoughts on the ADS-B, one, the sort of contribution this year and then how you think about that going into next year post the mandate.

Well, we don't break it out by category, but it is generating growth. It's not the only growth driver though in the overall aviation segment because we're also seeing strong demand for retrofit systems, integrated cockpit systems as well as display systems and GPS systems that go in the cockpit. We think the trajectory is still strong for this year, although towards the back half of the year there could be some tailing off of the growth rates. We do see that in 2020 that the market will probably continue somewhat because we don't think that every airplane that wants to be equipped will be, but we'll have to see how that goes as we reach that point. Okay. Thank you. Thank you.

Thank you. Our next question comes from Charlie Anderson with Doherty & Company. Your line is open.

Yeah, thanks for taking my questions. Just going back to the wearables and some of the gross margins you're seeing there, I know Cliff, you've had sort of a multi-year trend of people going maybe more up market on wearables as opposed to down market. I wonder if we're seeing a reversal of that trend at all or if this is just a function of where we are point in time on the product cycle and then if you all follow up.

Well, actually in the tracker category it is people going up market because they're moving towards the higher end VivoMoveHR as opposed to a basic tracker band. It so happens that the margins on those products are lower than the headline of fitness. So depending on mix of course that impacts the overall segment margin.

Okay, great. And then just a housekeeping question for Doug. I noticed in the queue that we did see that reclassification of SG&A a little bit more to aviation, a little bit less to marine. I wonder if you could just walk us through the basis behind that change.

Thanks. Sure. Actually it's refinement of methodology for the general administration expenses. And as time goes by, there's an evolution of our different segments, different dynamics with it, some of which relating to the late facility expansion here, some of which is aviation becoming a bigger piece of our business, international. So looking at all the different dynamics, we took a look at allocating our administrative expenses where we thought of each one of our segments. So yes, there are incremental additional expenses being allocated to aviation. Okay, great. Thanks so much.

Thank you. Thank you. Our next question comes from Paul Costor with JPMorgan. Your line is open.

Hi, thanks. This is Paul Chung on for Costor. Thanks for taking my questions. So I have a couple. On marine, were you kind of seeing pockets of growth, whether it's region, product, subsets of the boating market, and then given the strong start for both marine and aviation for the year, has your outlook for 10% growth for both segments changed at all?

Yes, so in terms of marine growth and trying to add a little more color to that, I would say it's strong globally. Particularly, it's strong here in the U.S. market. A large majority of our revenue is generated in the Americas market. And so products like Panoptix LiveScope and our chart flotters are driving some significant growth there. In terms of our outlook for both marine and aviation, as we mentioned, we're not ready to think about guidance yet because it's still early in the year. But we're encouraged by the results we've seen in both of those segments. I would say, as I mentioned earlier, in aviation that towards the back half of the year, we would naturally expect that the growth rates of ADS-B might come down a bit as the rush of people that are trying to get in to be installed tapers off a bit. That's what we're anticipating and that's why we're just holding back a little bit.

Gotcha. And then my follow-up is on tax. What's your -to-market strategy there? Can you give some more details on margins, revenues? I think you mentioned maybe six points of growth for fitness, but has that view now changed that you closed the acquisition? It really

no changes in terms of -to-market. They're the market leader, particularly in the European region, and so we expect to continue to capitalize on that strength. And we see opportunities for growth then in the Americas and Asia where they're less represented. So we're working hard to implement those sales strategies right now. In terms of margins, it's fairly consistent with the overall headline margins of fitness, so we don't anticipate really any impact there. There will be allocation of the purchase price to fitness, so that will impact some of the operating margins. But on a pre-amateurized basis, it's very positive to our fitness segment on a cash flow basis.

Thank you. Thank

you.

Our next question comes from Nick Todorov with Longbow. Your line is open.

Hey, guys. Good morning. First, a paragraph for a background noise. On aviation, my sense is that results came a little bit better than expected. Maybe a figure track from your aftermarket OEM, what surprises you saw in the quarter. And then secondly, some of your competitors are affected by the pricing environment given the price and strength of activity. Maybe if you can comment on that, we would like to see any changes there.

So, Nick, sorry to say, but your call quality was kind of challenging, so I'm not sure that we've really tracked your question. I don't know if you could maybe try to restate it or help us out a little bit there.

Sorry about that. Can you hear me?

It's incrementally better.

Sorry. Can you hear me better now?

It's better now. Thank you.

Okay. Sorry about that. So, in aviation, the sense is that a result came a little bit better than expected. Maybe can you talk about whether you saw some surprises either on the OEM or the aftermarket side? And secondly, can you comment on if you see any changes in the pricing environment? On the aftermarket side, some of your competitors have talked about some changes given the supply constraints. I was wondering if you see anything different.

Yes. So, in terms of aviation in our view there and what we saw, I would say that aftermarket was very strong and that reflects true demand and sell through to customers that are out there. In terms of OEM, there is some timing-related things that helped us in Q1. But in general, we still feel very positive about the OEM environment. In terms of pricing and aviation, I would say that pricing has been firm. We did go through some pricing increases at the first part of the year, which didn't seem to have any impact in terms of our demand that we're seeing in the segment.

Okay. So, you said you went through some pricing increases in the first quarter this year, or that was last year? I'm sorry.

It was basically in January.

Okay. Got it. And, Doug, can you comment on whether some of the changes in OPEC's allocation changes your outlook? I believe last quarter you were talking about expecting about 100 basis points increase, OPEC's percent of sales. Have that outlook changed?

No. We're consistent with that outlook for the full year. So, we have about 100 basis points increase for total operating expenses. We expect advertising and percentage of sales to be relatively consistent -over-year, and probably about a 50 basis point increase in R&D on a full year basis, and then a 50 basis point increase in SG&A on a full year basis. I should also mention the tax acquisition. About 25% of that -over-year increase in operating expenses will be attributed to the tax acquisition, which we closed on here in the second quarter.

Okay. And last for me, automotive gross marketing came a little bit stronger than we know the trend over the last couple years. Is there anything worth calling out? Was it anything maybe tied to the specialty products that offset some of the P&D declines or something else?

Yes. One thing we did see in P&D is that we had a new drive line, a P&D that was launched here in the first quarter. So, with that new launch, we did see some improvement relating to our gross margin. Okay, guys. Thanks. Good luck.

Thank you.

Thank you. Our next question comes from Ivan Farnsev with Tiger's Financial Partners. Your line is open.

Thank you. Thank you for taking my call, and congratulations on another great quarter and being named one of the top five places to work.

Thanks, Ivan.

I have a few product questions and platform questions. First, at this year's Connect IQ Developer Conference, like -over-year, how is attendance growing and what have been some of the topics covered? I really do like also the new Connect IQ app that organizes the applications.

Yes. So, our Connect IQ Summit was actually very, very good. We had strong attendance, same as the previous year, so we're not seeing any decrease in the level of interest. We announced new features for Connect IQ that allows app developers to further leverage the platform so they can have better access, thorough access to the wireless capabilities of devices. There's great new animation tools that they can use to create more lively apps. So, a lot of enthusiasm around the things that we've been doing.

Now, is there any plans to create a marketplace so that those who want to offer apps that they could charge would be able to do that? I know most of the apps are free. Some of the developers say if you'd like to send the money, let's say through PayPal, you can do it. But is there eventually going to be a formalized e-commerce process on the platform?

Yes. So, we're evolving the platform to be able to support monetization. As you say right now, it's not as strong of a link in terms of helping our app developers. But we're working on a roadmap that gets us there. I think in the coming year we should have improvements.

Very good. I love the new product cadence and the number of new cycling computers. My one question is, on the Zumo line, for example, it connects to the tire monitors. Are you going to be offering the ability to have tire pressure monitors on a bicycle that connects to the cycling computers? I think that's a pretty cool feature.

Yes. It's definitely a technology we can leverage in cycling. I wouldn't rule it in or out at this point because we're evaluating our roadmaps. But it is something that we can leverage across multiple product categories.

As far as product line, are you looking to want to refresh to Zumo? What are your thoughts on the Zumo line?

The Zumo line is an integral part of our overall P&D lineup. So we have a strong roadmap there, as we do in the other areas as well, truck RV.

And then the Garmin Canik is pretty cool. Have you thought about some kind of other onboard diagnostic port connection to any of your other GPS devices that could incorporate that data into the screen of the GPS?

We've invested some effort in understanding OBD connections to the vehicle. Of course, on our OEM side, we have a lot of access to the vehicle in terms of the CAN buses and things. But in terms of aftermarket diagnostics, it's somewhat of a crowded market. So we've struggled to find a place where we can really carve out our own unique niche there. So it's not something that we've been actively pursuing recently.

Okay, understood. And then I love the new Mark watches. They are beautiful. Can you give some thoughts on unit volume?

Well, we don't break out by volume, but I would say, as we mentioned in the remarks, that the reception has been good and we're pleased with that. And so we're just at the front end now of delivering those products to market and we'll have an updated view in the future.

Thank you. And also on tax, can you give us some thoughts as far as product branding? Are you going to maintain the tax name or somehow incorporate the Garmin name with it? Also, do you see any focus on specific products and expanding the product availability into the US and the marketing strategy behind it?

Yes, so the tax name is very strong, so we want to maintain that. And so the branding will be definitely taxed as the headline on those products and for the website and things, we're calling it a Garmin company. In terms of our specific product focus, our emphasis at tax, tax's emphasis before we acquired them was that smart trainers and advanced trainers is their specialty, and so we're going to continue investing in that. And then in terms of bringing the product to other markets, we're working very hard to bring it into US distribution now in a more complete way. And so that's ongoing and should be more evident as we move into the back half of the year.

Thank you very much. Congratulations again.

Thanks, Ivan.

Thank you. Our next question comes from Eric Woodring with Morgan Stanley. Your line is open.

Hey, guys. Congrats on the quarter. Good morning. I just wanted to get at, you know, first quarter revenue growth of 8% was strong, but in the past you've talked about how the ramping of product launches and new product launches will essentially help accelerate growth in the back half of the year versus the first half. And so with guidance unchanged, I just kind of wanted to reconcile those data points given the outperformance in the first quarter.

Yeah, so we mentioned in the last call that our product releases were back half loaded, and I think that's certainly playing out as we're just now getting our new fitness products to market and we'll have more releases as we go through the year. So, you know, we'll have to wait and see. We've mentioned before that this quarter is literally the smallest contribution to our overall yearly revenues. So we don't want to get too excited or disappointed on first quarter because there's a lot that lies ahead of us in terms of the overall sales environment and the competitive environment.

Okay, thanks. And then just as my follow-up, you know, auto results, you know, revenue down 10% was essentially the best performance you've had for that segment since the first quarter of 2016. So just curious, is that just the new Driveline P&D that was launched or was there something else that contributed any puts and takes or understanding any puts and takes to be helpful there? Thank you. Yeah, Drives certainly helped.

That was a sell-in event, although we've heard good remarks from our retailers on the sell-through of that product. So that's one dynamic. But we also saw strong demand for our specialty P&Ds, particularly in the truck, RV, and motorcycle areas. And that helped a lot. And so that represents really true demand in the market. So we were pleased with the result and we'll have to wait and see how things go throughout the remainder of the year.

And just curious, is that a trend you think that could continue or would you call that or think of that more as a one-time, you know, like a one-time benefit to the quarter?

Well, hard to say. Again, we're waiting to see more data as we experience the sell-through of the new products especially and as the driving season comes upon us here. So we'll have to wait and see.

Okay, great. Thank you for your time.

Yeah, thanks, Eric.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Terry Sack for closing remarks.

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

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.