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S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
Biden signs bill extending a key US surveillance program after divisions nearly forced it to lapse
MarketBeat Week in Review – 4/15 - 4/19
The drug war devastated Black and other minority communities. Is marijuana legalization helping?
Morning sickness? Prenatal check-ups? What to know about new rights for pregnant workers
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S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
Biden signs bill extending a key US surveillance program after divisions nearly forced it to lapse
MarketBeat Week in Review – 4/15 - 4/19
The drug war devastated Black and other minority communities. Is marijuana legalization helping?
Morning sickness? Prenatal check-ups? What to know about new rights for pregnant workers
A man escaped Sudan's bloody civil war. His mysterious death in Missisippi has sparked suspicion
Record Store Day celebrates indie retail music sellers as they ride vinyl's popularity wave
Panama Papers trial's public portion comes to an unexpectedly speedy end
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
Biden signs bill extending a key US surveillance program after divisions nearly forced it to lapse
MarketBeat Week in Review – 4/15 - 4/19
The drug war devastated Black and other minority communities. Is marijuana legalization helping?
Morning sickness? Prenatal check-ups? What to know about new rights for pregnant workers
A man escaped Sudan's bloody civil war. His mysterious death in Missisippi has sparked suspicion
Record Store Day celebrates indie retail music sellers as they ride vinyl's popularity wave
Panama Papers trial's public portion comes to an unexpectedly speedy end

Garmin Q1 2023 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Teri Seck
    Director, Investor Relations
  • Clifton Pemble
    Director, President & Chief Executive Officer
  • Douglas Boessen
    Chief Financial Officer & Treasurer

Presentation

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Garmin Limited First Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you.

Teri Seck, Director of Investor Relations, you may begin your conference.

Teri Seck
Director, Investor Relations at Garmin

Good morning. We would like to welcome you to Garmin Limited's first 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/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. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introduction, 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 or 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. In particular, there is significant uncertainty about the duration and impact of COVID-19 pandemic. This means that results could change at any time and any statement about the impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date.

Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer.

At this time, I would like to turn the call over to Cliff Pemble.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Thank you, Teri and good morning, everyone.

As reported earlier today, consolidated first quarter revenue came in at $1.15 billion which is down 2% from the prior year. Four of our 5 business segments posted double-digit revenue growth driven by new product introductions and solid demand trends which mostly offset an expected decline in outdoor. Gross margin improved to 56.9%, driven primarily by lower freight costs. We generated $197 million in operating income, down 14% from the prior year and operating margin came in at 17.2%. We feel positive about our first quarter results which are consistent with the expectations we communicated in February. As such, we are maintaining the full year guidance issued in February, calling for revenue of $5 billion and EPS of $5.15. It's important to remember that Q1 is typically the lowest seasonal quarter of our financial year and much of the year lies ahead of us. Our diversified business model offers many different paths to achieve our goals and we believe we are on track to do just that.

Before turning the call over to Doug, I'll provide highlights by segment and a summary of what we see ahead. Starting with fitness, returned to growth with revenue increasing 11% to $245 million, driven by strong demand for advanced wearables, especially running watches introduced during the past year. Gross and operating margins were 49% and 4%, respectively, resulting in improved year-over-year operating income of $11 million. During the quarter, we launched the Forerunner 265 and Forerunner 965 which combine advanced training metrics, recovery insights and everyday health stats with a vibrant sunlight readable AMOLED display that does not sacrifice battery life. Moving to outdoor. Revenue decreased 27% and to $329 million, primarily due to year-over-year declines in the adventure watch category as we passed the 1-year anniversary of the highly successful Phoenix 7 Epic and Instinct 2 launch.

Gross and operating margins were 62% and 23%, respectively, resulting in operating income of $77 million. Our adventure watches are known for the rugged dependability, long battery life and rich biosensing capabilities that enable their use in demanding applications. During the quarter, we announced that the Phoenix 7 will be worn on the upcoming Polaris Dawn Spacelight mission to provide insights into the impact of space travel on the human body. Also during the quarter, we launched new handheld devices with the introduction of the GPSMAP 67 series and eTrex SE. These versatile handhelds offer longer battery life, improved positional accuracy and global communication via inReach satellite technology. We recently announced the DRIVE 53 GPS navigator featuring a high-resolution capacity of touch screen display, a fresh new design and built-in traffic options to simplify the drive.

We also announced the zumo XT2, a rugged motorcycle navigator that's built for adventure, with a larger and brighter 6-inch sunlight readable display. We expected the first quarter of the year to be challenging in comparison to the outstanding performance of the prior year. We believe these trends will moderate as we introduce new products throughout the remainder of the year. Looking next to the aviation segment, revenue increased 22% to $214 million, with contributions from both OEM and aftermarket product categories. Gross and operating margins were strong at 72% and 27%, respectively, resulting in operating income of $58 million. During the quarter, we announced additional certifications for our GFC autopilots which expands our addressable market, bringing the performance and safety enhancing benefits of our flight control technology to more aircraft models.

We also recently attended the Embraer Suppliers Conference, where we were named best supplier in the categories of systems as well as services and support for our G3000 flight deck in the Phenom 100EV and 300E aircraft. In addition, we were named the best of the best supplier to the entire Embraer organization. We also received an Operational Excellence Award from Airbus Helicopters. These prestigious awards are an affirmation of our reliable performance during the supply chain crisis and reflect our strong commitment to providing the best products and outstanding service to our customers. I'm very proud of what our aviation team has accomplished and believe there is much more we can achieve in this market. We are pleased with how our aviation segment has performed so far this year.

The supply chain disruptions of the prior year appear to be mostly behind us, while demand for new aircraft and retrofit systems remains resilient. Marine segment delivered another quarter of impressive results with revenue increasing 10% to $279 million, primarily due to the timing of spring promotions. Gross and operating margins were 54% and 26%, respectively, resulting in operating income of $72 million. During the quarter, we expanded our strong lineup of chartplotters with the introduction of the ECHOMAP UHD2 series which are preloaded with premium Garmin Navionics-plus cartography and offer wireless data sharing of live sonar and navigation information with other chartplotters on the boat.

Also during the quarter, we were recognized as the leader in navigation and sonar categories by Best Marine Electronics and Technology and for the fifth consecutive year, received a 2023 Top Product award from Boating Industry Magazine. Moving finally to the Auto OEM segment. Revenue increased 11% to $81 million, primarily driven by increased shipments of domain controllers to BMW. Gross margin was 28% and we recorded an operating loss of $20 million driven by ongoing investments as new programs move into production. During the quarter, we began deliveries of domain controllers for the 2024 BMW X5 and X6 from our Olathe, Kansas facility which represents an important milestone in expanding our manufacturing capability to serve world-class automakers. We also expanded our footprint in the 2-wheel market with the launch of an entertainment system for additional models of Yamaha sport touring motorcycles.

That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Douglas Boessen
Chief Financial Officer & Treasurer at Garmin

Thanks, Cliff. Good morning, everyone.

I'll begin by reviewing our first quarter financial results, provide comments on the balance sheet, cash flow statement and taxes. We posted revenue of $1.147 billion for the first quarter, representing 2% decrease year-over-year. Gross margin was 56.9%, 40 basis point increase from the prior quarter. It was primarily due to lower freight costs. Operating expense as a percentage of sales was 39.7%, 270 basis point increase. Operating income was $197 million, 14% decrease. Operating margin was 17.2%, 230 basis point decrease. Our GAAP EPS was $1.05 and pro forma EPS was $1.02.

Next, look at our first quarter revenue by segment and geography. In the first quarter, we achieved double-digit growth in 4 of our 5 segments, led by the aviation segment, strong growth of 22%, followed by the fitness, Auto OEM segments 11% growth and the Marine segment with 10% growth. Outdoor segment declined 27%, primarily due to lower revenue from adventure watches as they compare against a strong first quarter of 2022 launches. By geography, 7% growth in Americas was more than offset by a 12% decline in APAC, a 10% decline in EMEA, both were negatively impacted by foreign exchange rates during the quarter. Looking next at operating expenses.

First quarter operating expense increased by $22 million or 5%. Such a development increased approximately $12 million year-over-year primarily due to engineering personnel costs. SG&A increased approximately $13 million compared to prior year quarter, primarily due to increases in personnel-related expenses, information technology costs. Our advertising expense decreased approximately $4 million, primarily due to lower co-op advertising.

Key highlights from the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $2.7 billion. Accounts receivable increased year-over-year but decreased sequentially to $611 million following the seasonally strong fourth quarter. Inventory increased year-over-year and decreased sequentially to approximately $1.5 billion as we continue to work to optimize inventory levels. We anticipate 2023 ending inventory balance were relatively flat year-over-year, expected declines in our consumer inventory are offset by expected increases associated with both our Auto OEM business.

For the first quarter of 2023, we generated free cash flow of $232 million, $106 million increase from prior year quarter, primarily due to lower use of cash and purchases of inventory. Capital expenditures for the first quarter of 2023 were $47 million, approximately $13 million lower than the prior year quarter. For the first quarter of 2023, we paid dividends of approximately $140 million. Also, we purchased $41 million of company stock and approximately $53 million remaining at quarter end, the share purchase program which is authorized through December 2023. We put an effective tax rate of 8.8% compared to 10.3% in the prior year quarter. Decrease in the effective tax rate is primarily due to favorable income mix by tax jurisdiction.

That concludes our formal remarks. Rob, can you please open the line for Q&A?

Questions and Answers

Operator

[Operator Instructions] And your first question comes from the line of George Wang from Barclays.

George Wang
Analyst at Barclays

Just maybe you can unpack if there's any change to the segment guidance for this year. In the last quarter, you guys talked about the kind of guidance revenue by segment. For example, to expand growth for the outdoor kind of MSD growth for the industrial, just curious if there's any update on that.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. As we mentioned, George, we're not changing our guidance. We're reaffirming what we said in February. The first quarter, as we mentioned, is the lowest seasonal quarter of our year, so there's a lot of the year left in front of us. So it's our practice to reevaluate more closer to the Q2 time frame.

George Wang
Analyst at Barclays

Okay. And also just a quick follow-up on outdoor, weaker than expected. Can you have impact kind of any sort of cyclical versus structural from the weakness in the 1Q? Or is it just a function of a tougher compare from a year ago? And any commentary on the channel inventory kind of across wearables and outdoor.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes, I think it was very difficult to predict what the outdoor performance would be because our Q1 of 2022 was so amazingly strong with the incredible launch of the Phoenix 7, the Epics and the Instinct. So it was a little hard to predict but we feel like the general trend was in line with what we expected. I think it's important to note that from a cyclical point of view, we're always introducing new products. And so we expect, as the year goes on, our performance will moderate and improve as those new products come out. And then in general, I would say, from the market standpoint and also the channel inventory, we don't see anything out there that's concerning. We have fantastic products that people want and the inventory and the channel appears to be at the correct levels.

Operator

Your next question comes from the line of Ben Bollin from Cleveland Research.

Ben Bollin
Analyst at Cleveland Research

Cliff, I wanted to -- the first question for you. Could you share any thoughts you have about the Auto OEM opportunity with BMW? How that -- how you expect that to ramp through the course of the year? And then any thoughts you have on the gross margin and operating margin profile of the business as it gets larger? And then I have a follow-up.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Okay. Yes. I think last quarter, Ben, we kind of outlined that we expect a significant ramp over the next 2 to 3 years, the awarded business that we have from BMW and others. Throughout this year, we, of course, expect that the ramp will accelerate into the back half as the new models are introduced and we begin deliveries from 3 different factory locations around the world to BMW's expanding model line that carries our products. In terms of the gross margin, operating margin profile, we've mentioned before, this is more typical Auto OEM structured business. So we would expect gross margins from the segment to gravitate towards the high double digits -- high teens, rather 19%, 20% operating margin and then gross margin and the operating margin would be more in line with the mid- to high single digits.

Ben Bollin
Analyst at Cleveland Research

Okay. The other question. You touched on inventory in outdoor. Could you share any thoughts you have about channel inventory levels in some of the categories that have been maybe more lean, marine, aviation? Where do you think inventory levels are there? And any thoughts on where that goes? And then, a second question around this maybe a little bit. Have you seen any observations that you could share around smaller go-to-market partners and how they're managing financing either for working capital or their own operations? And that's it for me.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes, I think what we're seeing in marine and aviation is as the supply chain issues have abated, definitely inventories in the channel are getting better. We did struggle some in marine last year quite a bit. In aviation, where we were able to kind of manage the situation to make sure that we kept all of our partners going, things are certainly much better and we see that inventories and the reflection of the past due orders are coming down to more healthy levels. In terms of those smaller partners, we really don't see any concern on -- in terms of them in their financial situations or their working capital. There's always exceptions but in general, it seems like the partners that we work with have healthy businesses.

Operator

Your next question comes from the line of David MacGregor from Longbow Research.

David MacGregor
Analyst at Longbow Research

Maybe just to pick up on that Auto OEM for starters. When we spoke last quarter, you expected a flat first quarter and then a significant inflection upwards in the second quarter. First quarter up 11%, a good number there. But are you seeing incremental business? Has there been a revision in the production schedule? Or is there something that would drive that better-than-expected result? Or was there -- was this primarily timing and pull forward?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes, David, I would probably say right now, it's mostly timing as carmakers ramp up their new model years. And we'll see some variation from quarter-to-quarter as they adjust their plans. They are navigating a very complex supply chain. So sometimes things vary up and down but we try to be flexible and role with what they need from us.

David MacGregor
Analyst at Longbow Research

Okay. If I could just ask about the Marine business. We talked about that briefly a moment ago but I guess I'm just interested in what you're seeing in terms of order patterns early in the season. You mentioned that inventory seemed to be in good balance. I'm just wondering about retail sell-through and anything you're seeing there and then just replenishment of orders that may be coming in and give you some perspective on what to expect in the next couple of quarters.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. I think the promotions and retail activity that we've had so far in 2023 have been very successful. It shows that there's a lot of enthusiasm on the part of customers to obtain the latest technology and people are certainly excited by the promotions and the ability to obtain the products they want at lower prices. So we feel like that's going very well. In terms of other indicators in the market, I think there are some areas of the OEM market that are starting to slow down a bit in terms of where they were at a very torrid pace that typically tends to be in the lower-end boat ranges and inventories are starting to be more healthy, so people can actually buy some of those off of a lot now. But the mid- to upper range of the market where a lot of the boats are built to order, there's still many back orders as we understand it from our partners and they're still taking orders for those products. So we feel like there's still a lot of demand out there for -- especially the higher-end products.

David MacGregor
Analyst at Longbow Research

Okay, that's good color. Very strong new product introduction calendar here. So congratulations on the progress there. How would you characterize the willingness of retailers to support all that new product introduction with inventory? They seem a little more reticent at this point. Or I noticed you pulled back on -- are you seeing a pullback in cooperative advertising. So I'm just looking to kind of reconcile a couple of these points.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. I think the pullback in co-op advertising was not a change in strategy by anyone. It was really just a matter of the sales volume that was being pushed last year in our Outdoor segment. So it's squarely associated with the dynamics of that product launch from last year. But there's no change in the commitment of retailers in terms of carrying these products and getting on board with the exciting launches that we have coming up.

David MacGregor
Analyst at Longbow Research

Okay. Last question for me is just on your direct-to-consumer business growth and what you're seeing there.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

We're still seeing strong results from our direct-to-consumer. We're seeing growth in both online sales as well as subscriptions and services across the business. So we're very excited about that and we continue to look for ways to differentiate in that area.

Operator

Our next question comes from the line of Paul Chung from JPMorgan.

Paul Chung
Analyst at JPMorgan Chase & Co.

So just on aviation, very strong performance to kind of start the year. I know there were some pushouts into 2Q from 1Q of last year that helped the quarter year-on-year but -- is this the right kind of quarterly run rate of revenues to kind of think about through the year? And can you end on both industry trends which look quite positive for business jet, how pricing has evolved as volume and kind of expanding wallet share per plan? And then I have a follow-up.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. I think in terms of our performance in Q1 as compared to the last year, last year was somewhat uneven by quarter because of supply chain challenges that we had. So we would expect that to smooth out more this year. We've offered our guidance on aviation and we were able to certainly do well in first quarter. I would remind everyone that second quarter of last year was also up and down compared to the first quarter because of the supply chain issue. So we see that evening out. And right now, we feel very comfortable with our guidance and we'll update people after the end of Q2. In terms of the overall market, what we're hearing from our partners is that, again, orders are very strong, tend to be at least even book-to-bill, sometimes even greater book-to-bill. So there's a strong backlog out there and still a lot of people looking to obtain either new or recent model business jets, turboprops and even piston aircraft are in the popular demand. So we continue to see good trends in that area.

Paul Chung
Analyst at JPMorgan Chase & Co.

Okay, great. And then on fitness, on the 965, what's been the customer feedback there? I know there's been some extended wait periods for shipments. I assume demand is holding up pretty well? Or is there something else going on? Are you seeing new customers rising there? Or upgrades from existing users given the kind of attractive AMOLED screen? And did you recognize any benefits for the product in product releases in 1Q? And then on the operating margin side, there's a big dip here similar to last year. What is driving that? I know it's seasonally weaker but typically has been in that mid-teens to 20% in the past. So will this kind of be a recurring 1Q margin hit in fitness kind of moving forward?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. I think, Paul, with regard to the 965 and 265 launches, what we've seen is that the 965 has been surprisingly popular at the top end of the range. So we see customers gravitating there and the demand has been a little bit stronger than what we had predicted which means that we're scrambling to catch up on some orders and things. But we're very delighted with that and it seems to me that coming into Q1 that the running market has been reinvigorated and we're excited to see that and we have some great products to offer there. In terms of user mix, I mean, specifically on those kinds of products, we tend to see kind of a balance of new users versus existing users. But across our wearables, the situation just varies depending on whether it's more of a consumer product such as our venue series or more of the specialty products like n Forerunner and Phoenix.

So in terms of Q1 benefit, we did see some benefit there on these new products. But certainly, as we move into Q2, it should be stronger since we have a full quarter of those products available. And in terms of the profitability, the operating profit, specifically in fitness, it is under pressure for a few reasons. Year-over-year, we are carrying still some excess capacity on the tax side of things which is impacting our results as we work through the normalization of that market. And we did have some obsolescence that we took in the segment associated with some raw materials in the tax area which impacted our results. But our targets for the segment are more of the mid-teens operating profit.

Operator

Your next question comes from the line of Ivan Feinseth from Tigress Financial Partners.

Ivan Feinseth
Analyst at Tigress Financial Partners

Congratulations on the great cadence of new product launches and the launch of the Phoenix into space.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Thanks, Ivan.

Ivan Feinseth
Analyst at Tigress Financial Partners

And so on Automotive OEM, where could we start to see some of the functionality that is contributed by Garmin into various vehicles?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

So as we mentioned, we started shipments for 2024 models of the X5 and the X6. So I guess maybe you have to in the state, you might have to wait to see some of those vehicles. We're delivering in Europe to additional models there and also in China.

Ivan Feinseth
Analyst at Tigress Financial Partners

Okay. Then on -- a lot of the products you're launching, there more and more coming with like a subscription component like the Plain Sync has a subscription component, where do you see going with that? And also as far as like your robust Connect app that has a lot of functionality to your outdoor and watch products, do you envision at some point creating 2-tiers like a paid level above the free level?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. I think, Ivan, we are strategically focused on creating some recurring revenue across our product lines where we can offer additional value to our customers for content or services that go along with our products. So Plain Sync and the GDL60 is one example of that. In terms of Connect, as everyone knows, that's a long-standing app and relationship we have with millions of customers that use that every day. As we go forward, we're certainly examining ways that we can provide additional value to those customers as well as revenue opportunities for Garmin. But we're very careful about how we do that because we want to make sure that we don't take anything away from our users and we only provide additional value that they would be delighted with. So we're looking at that but it will take some time, I think, before we arrive at the final answer.

Ivan Feinseth
Analyst at Tigress Financial Partners

And then, one last question on the Connect IQ app platform. What are your thoughts on creating a standardized payment process because there are a lot of great apps that are for free but there are a lot of good apps that have a fee but the fee is usually direct to the provider rather than, let's say, a standardized process of just paying Garmin and, let's say, then you pay the provider.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. Yes, I think Connect IQ certainly has a lot more opportunity to build on what is there with monetization and payment capability. We do have mobile payments on our devices and we certainly are looking at ways that we can extend that into a broader payment platform. On our wearables but we do have some work to do in order to put all the pieces together there.

Ivan Feinseth
Analyst at Tigress Financial Partners

And congratulations on a great start to the year.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Thanks, Ivan.

Operator

Your next question comes from the line of Erik Woodring from Morgan Stanley.

Erik Woodring
Analyst at Morgan Stanley

Maybe if we just start on fitness, realizing you're not updating guidance but you guided to the year down 5%. You started the year up 10%. And the comps are pretty easy throughout the year. So I guess I just want to make sure, is there anything that we -- are there any kind of like speed bumps that we should think of for the rest of the year that would suggest performance is really going to deteriorate through the year? Or is this just kind of like you said at the top of the call, Cliff, a bit of a wait-and-see approach?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes, Erik, I would say that going into 2023, it was very difficult to predict what would be the ongoing effect, especially of the indoor trainer market which was one of the biggest impacts that we had in fitness last year. So it's going to take some time, obviously, as we move into 2023 to see what the demand trends are. We're really pleased with what's happened so far, definitely ahead of our expectations. And we certainly don't anticipate that things will go down from here. So -- but we need to see more of the year come in before we can decide what we think the 2023 outcome will be.

Erik Woodring
Analyst at Morgan Stanley

Okay. Super helpful. And then similar to one of the earlier questions on fitness but this time on outdoor. Obviously, tough comparison in the first quarter but we saw some pretty significant operating margin deleverage there. I believe operating margins were down to an all-time outdoor low. And so can you help us understand what some of those significant margin headwinds are? What is kind of temporary versus permanent? And if a return to kind of like that 30% range is how we should think about normalized operating margins? Or if that's changed and why?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. I think a few thoughts there. Certainly, with the major change in the product mix within the segment compared to last year, that impacted our leverage and, of course, the sales coming down as well. So that's one factor. I mean this is a very happy problem because the segment is very strong in the upper 20% kind of operating margin. So we would see that improve as we have more new products that get introduced later in the year.

Erik Woodring
Analyst at Morgan Stanley

Okay, perfect. And then, I guess the last question; just on the Auto OEM business. I appreciate all the color that you've provided first there. One thing I wanted to try to square away was gross margins falling from where they are today to, call it, the high teens but operating margins increasing from where they are today to things had -- implies like a ton of operating leverage in the business. And so maybe help us gain comfort on why you can see opex almost cut more than in half over a span of 12 months? Why there's such significant leverage business in such a short period of time? And that's it for me.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Well, I think it really relates to the scale as the volumes increase. So we're looking for the revenues and the gross profits to contribute to offset the expenses that are there. So that's our plan based on the committed business that we have.

Operator

[Operator Instructions] Your next question comes from the line of Noah Zatzkin from KeyBanc.

Noah Zatzkin
Analyst at KeyBanc

I think this is kind of maybe been touched on a bit. But in terms of outdoor declining 27% in the first quarter, I understand seasonality is a component of that. But as we think about the new products launched during the quarter, like how are you thinking about those new products and kind of the cadence of just new launches moving through the year and the kind of ability to lap the anniversarying of the Phoenix 7?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

Yes. No, I think we'll have a very strong first half of the year with new product introductions. And then we'll be in a good position in the back half to be able to work with promotions and holiday seasons with these products.

Noah Zatzkin
Analyst at KeyBanc

And then just in general, in terms of the cadence of the different segments in the second quarter, just any color there as we start to model out?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

I think we'll be heavily weighted in the front half of the year in terms of introductions in outdoor.

Noah Zatzkin
Analyst at KeyBanc

Got it. And fitness as well?

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

There is probably more, I would say, balanced kind of product introduction calendar for fitness across the year. So we had some, obviously, in Q1 and we'll have some throughout the remainder of the year, some really exciting products, I think.

Operator

We have a follow-up question from the line of David MacGregor from Longbow Research.

David MacGregor
Analyst at Longbow Research

I just wanted to come back to the comments about lower freight costs. And you attributed the 40 basis points of gross margin improvement to freight. That's roughly $4 million or $5 million by my math, if I've got that correct. Is that how we should think about the benefit in 2Q and going forward until an anniversaries out? Or does that savings actually become a more significant number in 2Q and going forward?

Douglas Boessen
Chief Financial Officer & Treasurer at Garmin

Yes. As it relates to the freight costs being lower, there's really 2 things that are driving that, first of which is optimizing some of our shipping method. We're actually shipping a larger percentage of our products, ocean versus air. And then secondly is year-over-year, there is just a lower freight rates. Now, as it relates to the freight expense as a percentage of sales, we expect that to kind of continue for the rest of the year. Now we have to think about it is the comparability of the different quarters as we did see some of those freight rates improved during the year when you think about it on a year-over-year basis. But freight rates are a thing that over the first quarter, we did see a kind of a benefit on.

David MacGregor
Analyst at Longbow Research

Okay. And just a follow-up. I guess, talk about Europe and Asia Pac and just what you're seeing there in terms of consumer behavior, consumer order patterns. Any color you can provide there would be helpful.

Clifton Pemble
Director, President & Chief Executive Officer at Garmin

I think Europe, we've said before, has tended to be a little more impacted by some of the geopolitical and macroeconomic issues that have been going on. But that said, if you even look at it on a constant currency basis, it's not bad. And I think certainly, Europe is more impacted by the year-over-year dynamics of the Phoenix Epic's launch from last year than other areas. I think Asia is generally as we expect. I think currency impacts are a factor there and, of course, also the year-over-year product introduction cycles.

Operator

There are no further questions at this time. Ms. Teri Seck, I turn the call back over to you for some final closing remarks.

Teri Seck
Director, Investor Relations at Garmin

Thanks, everyone, for joining us today. As typical, Doug and I are available for callbacks throughout the day. Have a great one. Bye.

Operator

[Operator Closing Remarks]

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