Garmin Ltd.

Good morning and welcome to the Garmin Limited fourth quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. To ask a question, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Terry Slack, Director of Investor Relations. Thank you. Please go ahead.

Good morning. We would like to welcome you to Garmin Limited's fourth quarter 2023 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, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. 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, Teri, and good morning, everyone. As announced earlier today, Garmin delivered outstanding results in the fourth quarter with strong growth in consolidated revenue and profit. Consolidated revenue increased 13%, to nearly $1.5 billion, representing a new fourth quarter record with three business segments delivering double digit growth. Growth and operating margins expanded year over year to 58% and 23% respectively, resulting in operating income of $340 million, up 27% for the year. This resulted in pro forma EPS of $1.72 up 27% over the prior year. We entered 2023 cautiously optimistic, but as the year continued, we experienced better than expected momentum in multiple segments, which resulted in a record-breaking year. Consolidated revenue increased 8% to $5.2 billion, which is a new annual record. Operating income increased 6%, to nearly $1.1 billion, and operating margin came in at 21%. During the year, component lead times and availability continued to normalize, while shipping bottlenecks eased. These factors, combined with healthy demand for our products, reduced inventory levels and boosted free cash flow to nearly $1.2 billion. We believe current inventory levels are appropriate and expect inventory will grow from this point forward at a rate that is roughly in line with sales. Looking forward, we have a robust lineup of recently introduced products and additional product launches are planned throughout the year. We anticipate 2024 consolidated revenue will increase approximately 10% to $5.75 billion. Our results and outlook for the year give us the confidence to propose an annual dividend of $3 per share, an $0.08 increase over the prior dividend amount, which will be considered by shareholders at the upcoming annual meeting. In addition, our board of directors recently approved a $300 million share repurchase program over the next three years. Before moving on to the performance and outlook for each business segment, I want to mention the recognition we received recently from Forbes, who ranked Garmin number two on their list of best large employers in America. We're honored to be recognized for creating a best-in-class workplace. Garmin associates are passionate about what we do and we share a deep commitment to serving customers and each other. Moving next to segment highlights, fitness revenue increased 21% for the year, with growth across all product categories, led by strong demand for our new running watches. Full year growth and operating margins were 53% and 17%, respectively, and operating income more than doubled to $232 million. At the recent Consumer Electronics Show, the Venue 3 was recognized with three awards, including best of innovation for outstanding engineering. With its rich wellness and fitness features, bright display, and long battery life, the Venu3 is indeed a best-in-class product. Looking ahead, we have a strong lineup of recently introduced running, cycling, and wellness products, and expect to launch additional products during the year to support growth. With this in mind, we expect fitness revenue will increase approximately 7% for the year. Moving to outdoor, revenue decreased 4% for the year, as solid performance in the second half of the year could not fully offset the weaker first half. Full-year gross and operating margins were 63% and 30%, respectively, resulting in operating income of $515 million. During the fourth quarter, we expanded our lineup of underwater diving products with the introduction of the Descent G1 Solar Ocean Edition, our first-ever product made with recycled ocean-bound plastics. We also launched the new Descent MK3 dive watch and the Descent T2 transceiver with enhanced sub-wave communication technology that enables diver-to-diver messaging and tank pressure monitoring on the wrist. For over two decades, our eTREX series of handhelds have been an essential product for outdoor adventurers. We recently launched the eTREX Solar, our first handheld GPS with solar charging technology. This new handheld can operate indefinitely, using only the power harvested from the sun. which is a game changer for hikers, explorers, and off-the-grid adventurers. Looking ahead, we expect that our strong outdoor product roadmap will result in revenue growth of 7% for the year. Looking next at aviation, revenue increased 7% for the year to $846 million, a new record driven by growth in OEM product categories. Full year growth and operating margins were 74% and 27%, respectively, resulting in operating income of $226 million, up 6% over the prior year. During the quarter, our G3000 integrated flight deck was selected by Embraer-backed EVE Air Mobility for its electric vertical takeoff and landing aircraft. EVE Air Mobility joins a growing list of advanced air mobility companies who have selected our state-of-the-art cockpit systems. More recently, Garmin was ranked number one for the 20th consecutive year in Professional Pilots 2024 Avionics Manufacturers Products Support Survey. This accomplishment is the direct result of the strong commitment and hard work of our aviation team and the investments we have made in this business. In recent years, the aviation segment has experienced growth in OEM equipment categories driven by an increased interest in private air travel. We expect this trend to continue in 2024 as aircraft makers work through historically high back orders. On the other hand, we expect softer aftermarket sales in the coming year. With these things in mind, we expect aviation revenue to be approximately flat to the prior year. Turning next to the marine segment, revenue increased 1% to $917 million, a new record, and included approximately $42 million of revenue from the recently acquired JL Audio business. Excluding JL Audio, revenue from marine decreased approximately 3% for the year. The marine market has slowed in 2023, with many players reporting double-digit revenue declines, but we outperformed by capturing market share from our competitors. Full-year gross and operating margins were 54% and 20%, respectively, resulting in operating income of $179 million. During the fourth quarter, we launched the ECHOMAP Ultra 2 chartplotter series designed with premium sonar, mapping, and wireless networking capability. We also launched the GFD28 sonar with rapid return technology for higher resolution imaging in deep water. These innovations demonstrate why our marine segment is performing so well in an otherwise soft market. Looking forward, we expect marine revenue will increase approximately 10% for the year, with growth driven by JL Audio, which is expected to be about 15% of total marine sales. Moving finally to the Auto OEM segment, revenue increased 49% to $423 million, a new record with growth primarily driven by increased shipments of domain controllers to BMW. Full year 2023 gross margin was 23%, and our losses narrowed progressively throughout the year, ending at just under $10 million for the fourth quarter. Many are wondering what lies beyond the BMW programs that are currently fueling our growth. I'm pleased to report that during 2023, we were awarded a new multi-year contract with another premium automaker to supply domain controllers on a global basis starting in 2027. This is projected to be the single largest award in the history of our auto OEM business, expanding our market share and customer base for domain controllers. We're also winning new business in other categories. We recently announced our motorcycle entertainment solution was selected by Yamaha Motors for certain motorcycles and smart scooters. This award adds to the already strong business we have with Yamaha across both two-wheel and marine vehicles. I'm proud of the progress our Auto OEM team has made in 2023. Looking ahead, we expect revenue to increase approximately 50% as deliveries of domain controllers continue to ramp up, and we expect to reach profitability on a quarterly basis in the back half of the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug.