Garmin Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 26, 2021

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Garmin Limited Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your first speaker today, Ms. Teri Seck.

Operator

Ma'am, please go ahead.

Speaker 1

Good morning. We would like to welcome you to Garmin Limited's 3rd quarter 2021 earnings call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations at www.garmin.com/stock. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projections and other forward looking statements regarding Garmin Limited and its business.

Speaker 1

Any statements regarding our future 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 ks 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-nineteen pandemic. This means that results could change at any time at any statement About the impact of COVID-nineteen on the company's business results and outlook is the best estimate based on the information available as of today's date.

Speaker 1

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.

Speaker 2

Thank you, Sherry, and good morning, everyone. As announced earlier today, Garmin reported record revenue of $1,200,000,000 for the 3rd quarter, increasing 7% over the pandemic fuel levels we achieved in the prior year. Operating income declined year over year to $283,000,000 Due to the combination of higher freight costs affecting gross margin and increased expenses As we invest in R and D, information technology and marketing initiatives, operating margin was very strong at 23.7%. There are two things to consider when looking at our performance in the back half of the year. First, financial comparisons to the prior year are more challenging due to the pandemic driven demand and retail disruptions of 2020.

Speaker 2

Also, we are facing one of the most challenging supply chain environments in history. Our vertically integrated business model and commitment to safety stock was a key factor driving revenue growth for the quarter, but supplies are tight And we expect freight costs to remain elevated as we rush to fill retail shelves in time for the important holiday selling season. I'm pleased with what we've accomplished in this tough environment and I'm very proud of our team who've worked tirelessly to maintain continuity From our factories to customers. Last time, I mentioned that we invested in a 4th production facility in Taiwan. I'm pleased to report that this facility is operational and will help us fill more orders during the important holiday selling season.

Speaker 2

Given our strong performance in the 1st three quarters of the year, we're updating our full year guidance. We now anticipate revenue of approximately $4,950,000,000 up 18% over the prior year With double digit growth expected in each of our 5 business segments. In a moment, Doug will provide more details on our financial results And updated guidance, but first I'll provide a few highlights for each business segment. Starting with fitness, revenue increased 4% to $342,000,000 with growth driven primarily by cycling products and Advanced Wearables. Our Connect IQ development platform is a strong differentiator for us And we are deploying it across a broader range of Garmin devices.

Speaker 2

We recently held our 5th Annual Developer Conference where we announced a partnership with DexCom to deliver real time glucose information via a Connect IQ app on selected smartwatches and cycling computers, even during activities. Business segment revenue has grown 26% year to date And we are maintaining our revenue growth estimate of 17% for the year. Moving to outdoor, revenue decreased 3% to $324,000,000 The decrease in revenue It's due to the strong sell in activity associated with the launch of our Solar Adventure watches in the prior year quarter and limited supplies of traditional handheld and dog products in the current quarter. During the quarter, we launched the Approach R10, Our first portable golf monitor. The R10 can be used on course or at home to help golfers improve their game with more than a dozen key metrics Shown in real time.

Speaker 2

Customers are very enthusiastic about the R10 and it's on its way to becoming another halo product for Garmin. Outdoor segment revenue has grown 26% year to date and we are maintaining our growth estimate of 17% for the year. Looking next at aviation, revenue increased 19% to $180,000,000 with growth in both OEM and aftermarket product categories. During the quarter, we were ranked number 1 in Avionics Product Support by Aviation International News for the 18th consecutive year. Being consistently recognized for unrivaled support Year after year, clearly shows our strategic focus on taking care of customers and standing behind our products.

Speaker 2

We launched SmartGlide, a game changing safety feature inspired by Autoland technology that will help pilots manage loss of engine power by automatically flying the optimal glide ratio and navigating to the best available airport. Also in the quarter, we announced the certification of the GSE 600H flight control system on the Bell 505 helicopter. This advanced autopilot includes state of the art safety features such as electronic stability control and a hover assist mode. We are pleased with how the Aviation segment has recovered so far this year and now expect full year revenue guidance to increase approximately 12%. Turning next to the Marine segment, revenue increased 25% to $208,000,000 With growth across multiple categories led by Chartplotters, we continue to be recognized for innovation and achievements in the marine industry.

Speaker 2

For the 7th consecutive year, the National Marine Electronics Association named Garmin Manufacturer of the Year And we also received 5 Product of Excellence Awards. During the quarter, we introduced Surround View, The industry's first intelligent camera system that provides a 3 60 degree bird's eye view around the vessel. We also announced our partnership with Malibu Boats. Our 7 inches touchscreen displays will be standard equipment across the Malibu Axis Boat line Beginning with the 2022 model year, given the strong year to date performance on the Marine segment, we are raising our revenue growth estimate to 30% over the year. And looking finally at auto, revenue increased 7% to $138,000,000 with growth primarily driven by OEM programs.

Speaker 2

During the quarter, we began production shipments From our new manufacturing facility located in Poland. We also recently announced a refreshed lineup of Drive Navigators Given the strong year to date performance of the auto segment, we are raising our revenue growth estimate to 17% for the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results and updated guidance. Doug?

Speaker 3

Thanks, Cliff. Good morning, everyone. I'd like to begin by reviewing our Q3 financial results, provide comments on the balance sheet, cash flow statement, Taxes and updated guidance. We posted revenue of $1,192,000,000 for the 3rd quarter, representing a 7% increase Year over year, gross margin was 58.4%, 180 basis point decrease compared to prior year quarter. The decrease was primarily due to higher freight costs.

Speaker 3

Operating expense as a percentage of sales was 34.7%, 3 10 basis point increase to the prior year quarter. Operating income was $283,000,000 11% decrease. Operating margin was 23.7 percent, a 490 basis point decrease. Our GAAP EPS was $1.34 Reformer EPS is $1.41 Next, look at our 3rd quarter revenue by segment. We have a highly diverse business model, providing a rich set of opportunities, reduce our reliance on single markets and product lines.

Speaker 3

During the Q3, we achieved growth in 4 or 5 segments, double digit growth in both marine and aviation. Fitness is our largest segment contributing 29% of the sales in the 3rd quarter followed by outdoor at 27%. Looking at revenue by geography, the Americas and EMEA regions grew 10% and 9%, respectively, with APAC region decreased 2%. The Americas region contributed nearly 1 half of our revenue, the remaining coming from the EMEA and APAC regions. Looking next, operating expenses.

Speaker 3

3rd quarter operating expenses increased by $62,000,000 or 18%. Research and Development increased $39,000,000 year over year, primarily due to engineering personnel costs. SG and A increased $21,000,000 compared to prior year quarter, primarily due to increase in personnel related expenses, information technology costs. Advertising expense increased approximately $3,000,000 due to higher media spend. A few highlights on the balance sheet, cash flow statement and taxes.

Speaker 3

We ended the quarter with cash Markel Securities were $3,200,000,000 Can't receivable decreased sequentially year over year to $639,000,000 Inventory balance increased both a sequential year over year basis $1,100,000,000 primarily due to raw material requirements in preparation for the seasonally strong Q4. During the Q3 2021, we Generated free cash flow of $204,000,000 $32,000,000 decrease compared to prior year quarter. Capital expenditures for the Q3 were $41,000,000 We expect full year 2021 free cash flow to be approximately $750,000,000 capital expenditures approximately $325,000,000 During the Q3 of 2021, we reported an effective tax rate of 5.9% compared to 6.9% in the prior year. Decrease was primarily due to impact to return to provision adjustments associated with filing the U. S.

Speaker 3

Tax return. Turning next to our full year guidance. We estimate revenue of approximately $4,950,000,000 increase of 18% for the prior year, Double digit growth in each of our segments. We expect gross margin to be approximately 58.2%, which has lowered our previous guidance 58.5% Due to higher freight costs, we expect an operating margin approximately 24%. Also, we expect the full year 2021 pro form a effective tax rate to be approximately 11.5 percent, which results in pro form a earnings per share of approximately $5.60 This concludes our formal remarks.

Speaker 3

Rachel, could you please open the line for Q and A?

Operator

Thank you. Our first question comes from the line of Paul Chung from JPMorgan. Please proceed with your question.

Speaker 4

Hi. Thanks for taking my questions. So just on Aviation, 4Q Implied guide kind of suggests a sequential downtick. You typically see an uptick in 4Q. So what's going on there?

Speaker 4

Is that An impact from supply chain headwinds and then on op margins, it stabilized in 3Q, but You still remain well below that low 30s range you've seen historically. So is this the right level to think about moving forward or Is there also some transitory hits in the near term?

Speaker 2

Yes. Thanks, Paul. I think Certainly, there's some noise associated with aviation in the prior year versus this year as well. So part of it is timing of shipments that occurred from year But also lead times on equipment and aviation is getting longer. So we're accounting for that and wanting to make sure that we're taking into account all of those factors that might affect Q4 revenue.

Speaker 4

Thanks. And then as we think about next year in the context of pretty strong business jet demand, Do you see this business growing along with the industry or at a faster pace given kind of the new certifications, auto LAN And smart glide that you've introduced?

Speaker 2

Yes, I think we have the most innovative product line for sure. So across Aftermarket and OEM, we're well positioned with our products and on the platforms that are the most popular. The most Significant interest in business jet demand right now is in the sweet spot of where our products are installed. So I would expect that we would continue to perform well as the industry performs.

Speaker 4

Okay, great. And then lastly, Inventory balances have increased as you signaled. How comfortable are you heading into the holiday season With Supply Components Logistics and then separately as we head into fiscal year 2022, how should we think about Working cap, particularly in inventory, you're going to have a bigger harvest and then the pace of CapEx in 'twenty two would be helpful as well. Thank you.

Speaker 2

Yes. I'll just make a comment on the general inventory and then ask Doug to finish the other parts of your question. But in this environment, I think Inventory is definitely a positive thing, and we've been able to secure the kind of inventory that we feel we need To make for a successful year, I think nobody would ever say they have too much in this environment and with shipping delays that are Taking place that we hear of every day in the news, definitely a higher level of inventory is required. So Doug?

Speaker 3

Yes. First regarding Free cash flow and inventory levels, as Cliff mentioned, we'll be continuing to keep our inventory levels at the appropriate level to meet our demand. So there will be increased levels at year end with that. As it relates to CapEx, our forecast For the current year, it's $325,000,000 There's a number of projects that we do have in place For that, so we do expect some elevated CapEx going into 2022. So those things will need to be factored into free cash flow when we come up to it, 2022 relating to the inventory levels as well as CapEx.

Speaker 4

Thank you.

Speaker 5

Thank you.

Operator

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

Speaker 6

Good morning. Thanks for taking the question. Cliff, I was hoping we could talk a little bit about how you think about the Advanced Wearables business, near term, longer term Within fitness and outdoor in particular, any thoughts you have on maybe you saw some pull forward during COVID, How significant do you think that might have been versus kind of broader secular category growth? Also interested in any thoughts you have Sell in inventory stocking versus like sell through performance and where channel inventory you feel is today versus maybe history?

Speaker 2

Yes. So, I would say in terms of the general performance of those categories over the Nearly 2 years now, certainly there was a lot of pandemic related interest in those products in the early part Of the pandemic cycle, that interest of course still remains very strong and we believe as the industry has reported that There's still a lot of growth potential in the wearables market. I think we're positioned really well in that market because We are differentiating ourselves around the active lifestyles theme. So everything we do with our products has a purpose and is built for In terms of sell in versus sell through, I think we can definitely see those trends With our product registrations and we feel like the sell in and sell through has matched very well at this point and the inventory levels in Channel are better than they have been, although, again depending on product lines, there can be pockets of imbalances, here and there.

Speaker 6

And then the other question I have is just in regards to calendar 4Q this year versus prior years. Have you seen any notable changes either in timing around retailer commitments as they prepare for the holidays? Any thoughts around the promotional environment versus prior years? And anything along the lines with consumer behavior? Do you think they're shopping earlier versus Prior?

Speaker 6

That's it. Thank you.

Speaker 2

Yes. So in terms of our Q4 versus prior years, last year, I think the market was still very distorted with many retailers starting to reopen or figure out how to open In light of the pandemic and their inventories and online warehouses were very much depleted. So we're still seeing that Pandemic driven spike on a year over year comparison basis. In terms of promotional environment this year, I would say that Things feel like they're getting a little bit back to normal, although it remains to be seen. I would say that There is not a rush as far as we can see that everyone is trying to shop early.

Speaker 2

There is obviously reports of that in light of General inventory situation you see with products on the market, but in general, I would say that it's looking more normal in

Operator

Your next question comes from the line of Will Power from Baird. Please proceed with your question.

Speaker 7

Okay, great. Yes, I guess a couple of questions. First, I was hoping to come back just to some of the supply chain commentary. And I guess just trying to Better understand if possible where you're seeing the primary impacts, what segments I guess in particular and how you're thinking about the overall impact Q4 versus what you saw in Q3, do you expect it to get worse, is it stabilizing, just some broader views on that front would be great.

Speaker 2

Okay. Yes. I would say that the supply chain environment, as I mentioned earlier in my remarks, is really tough. We're handling thousands of components on a day to day basis and managing the in Flow and the use of those components and in some case allocating how they're allocated to product manufacturing. In terms of our Q3, I would say that definitely we saw an impact in the outdoor segment with regard to those products I mentioned, the dog products And the traditional handhelds, but for the most part across the business, we're doing okay and managing Again on a day to day basis.

Speaker 2

So that's generally what we see.

Speaker 3

Okay, thanks. And then

Speaker 7

a question on auto, I guess maybe 2 part. As you think about the OEM segment, What's the current thought process on margin outlook there? I know there have been investments as programs ramp up, but any thoughts As to how to think about the cadence of margins from here. Then I guess on the consumer side, Margin is down a bit year over year, operating margin is down a bit year over year. I assume that's just something tied to mix, but any color there would be helpful too.

Speaker 7

Thanks.

Speaker 2

Yes. So Auto OEM, in the margin outlook as our business transitions to the Tier 1 Manufacturing opportunities that we've been talking about, of course, those have a thinner margin on the gross margin line. So that will definitely impact our gross margin as we develop the scale and get these programs into production then Of course, our what we're working towards is profitable bottom line. But again, you should think of those in terms of traditional Auto OEM margin structures. On the consumer side, definitely we saw some impact on margin there.

Speaker 2

Part of that is freight, but we also had some Costs in the consumer auto side that impacted the gross margin.

Speaker 8

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of for Ivan Feinseth from Tigris Financial Partners. Please proceed with your question.

Speaker 9

Hi. Thank you for taking my call and congratulations on good performance in a difficult time.

Speaker 2

Thank you.

Speaker 9

Some of the headwinds you spoke about freight, things like that, are you starting to see them abate? Or what is your near term outlook on some of these?

Speaker 2

In near term, we would say it's an ongoing thing. We probably don't see anything In the near to intermediate term that really changes, what's happening right now until there's really more capacity brought into the system and some of these bottlenecks It gets solved.

Speaker 9

But maybe you have a slight increase in cost, but it's not really disrupting your manufacturing process, right?

Speaker 2

Like I've mentioned, we've managed the situation very well, probably as well as anyone could ever imagine. And I would say In this environment, of course, we're very sensitive to the profitability. So we're using this situation To reevaluate pricing of both existing products as well as new product introductions and promotions that we do in order to adjust.

Speaker 9

And your CapEx spending, you said you're going to increase spending on R and D, IT and marketing. And what kind of R and D areas can you give some idea of what you're working on or see like new opportunities Also in your IT, what areas are you looking to invest in and improve? And what type of marketing initiatives could we expect to see going forward?

Speaker 2

Well, in terms of R and D, one of the bigger pieces of the increase in Q3 was The investment in the auto OEM programs to bring the next generation BMW system to market, which will launch later next year. And then across the business, we've had higher personnel costs as we work to retain our people. And also general growth as we invest in new product categories and new markets across our segments. IT, our business is very much driven around the cloud and the online component of our Products and the things that we offer and so we're investing in the IT infrastructure that we need to support all of that Marketing wise, again, we've got exciting product roadmaps and so we're working on all those and getting ready to launch new products.

Speaker 9

I really like the DexCom partnership, the integration of into your app and wearables there. What other Can you give some idea of stuff that you're looking at?

Speaker 2

I think Connect IQ is a very versatile platform That allows people to tap into by far the best hardware based platform For wearables and purpose driven devices that we have in cycling and outdoor traditional those kinds of products. So, it's a great asset for us and we're constantly working on new opportunities to showcase Connect IQ apps with our devices.

Speaker 9

Okay. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Nik Todor from Longbow Research. Please go ahead.

Speaker 8

Yes. Thanks and good morning everyone. Question on Marine. I think you guys continue to perform exceptionally well there and even versus Stuffer comps, especially if you compare it to some of the other segments that benefited last year from COVID like fitness and outdoor. So Can you give us some a little bit more details on what's driving the ability to address upside in marine?

Speaker 8

Is it Ability to have better supply than competitors in gaining share or what's the kind of some of the drivers there?

Speaker 2

Well, there's a lot of moving pieces in all of that for sure. I would say that our product line is superior And we're gaining market share with particularly some of the halo technologies that we have such as LiveScope. The supply chain issue is again across the business, but in marine, we were able to benefit there by being able to continue to deliver products and take advantage of opportunities. And then on the OEM side of marine, They're of course ramping up their production lines to meet the boat demand that is still Very persistent and extends even now we're hearing into 2023 in terms of their backlog. So we're working to support those Customers, those OEM customers and support the general growth of the market that's taking place right now.

Speaker 8

Okay. Thanks for that. And then a question on the model, Doug, maybe sorry if I missed this, but you took gross margin down for the year, Then the operating margin up. So can you share what is the offsetting factor there?

Speaker 3

Yes. It's really leveraging operating expenses. So looking at our operating expenses, really gave that difference between the operating margin as well as the gross margin decline there.

Operator

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

Speaker 5

Thank you and good morning everyone. Cliff, I guess this one is just for you. I just want to be clear, would you say as you sit here today, Obviously, we know about the supply chain challenges, but do you feel confident right now in Garmin's ability to have products On the shelf for the holiday season. I just want to start with that one, then I have a follow-up.

Speaker 3

Yes.

Speaker 5

Excuse me enough.

Speaker 2

I'm not sure you heard me correctly. You said, are you confident? And I said, yes.

Speaker 5

Yes. No, that's perfect. Second question was just, if we look by geographies, APAC was noticeably weaker than North America and EMEA. Just curious if you could share some color there why that would be? Thanks.

Speaker 2

Yes. In APAC, there's really two factors. 1 was the rolling progress of the pandemic as Delta swept through various Countries across the region and so we had some impact in the markets generally as there were more stringent lockdowns And measures taken to control the delta spread. And then the other major factor was the timing of product introductions, particularly in outdoor. The APAC market is definitely reliant on those product introductions and so they're comping again The very strong introduction of our solar products that we did last year in Q3.

Speaker 5

Got it. Thanks. And if I could just sneak one last one in there. Just you made those comments about the boating market, specifically the OEM market. I guess with that, the fact that backlog is potentially extending out to 2023, is it accurate to say that There might not be as weak of a off season this year similar to last year.

Speaker 5

Is that a fair thing to say?

Speaker 2

I think the OEM part of the business is a smaller percentage compared to aftermarket. So Even if it swings to a greater degree, it's less influential on the overall business just because of the mix of that. But that said, I would say that the seasonality of marine is a little bit more normal In the current year versus where we saw last year. So we would expect as economies and business

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Terry. Please go ahead.

Speaker 1

Thanks everyone for your time today. Have a great day. Bye.

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