Garmin Ltd. (NYSE: GRMN) Third Quarter 2022 Results Conference Call October 26, 2022 10:30 AMm. (Eastern Time)
Participating companies
Teri Seck – IR Director
Clifton Pemble – President and Chief Executive Officer
Doug Boessen – Chief Financial Officer
Conference Call Participants
Paul Chung – JPMorgan
David Macgregor – Longbow Research
Ben Bollin – Cleveland Search
Ivan Feinseth – Tigers Financial Investigation
Erik Woodring – Morgan Stanley
Operator
Thank you for your availability and welcome to Garmin Limited’s third quarter 2022 earnings convention call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, today’s program can be recorded.
And now I’d like to introduce you to your host of today’s show, Teri Seck, Director of Investor Relations. Continue.
Teri Seck
Welcome to Garmin Limited’s third quarter 2022 earnings call. Please note that the earnings press release and related slides are located on Garmin’s online investor relations page online at www. garmin. com/stock. An archive of the webcast and related transcript will also be available on our online page.
This call for effect includes forward-looking statements and other forward-looking statements relating to Garmin Limited and its business. Any statements relating to our monetary condition: our long-term monetary condition, revenue, earnings, gross margins, operating margins, long-term dividends or buyback percentages. , percentage product introductions to the market, long-term demand for our products, and our plans and objectives are forward-looking statements.
The forward-looking events and cases discussed in this call for impacts may not happen and the actual effects differ materially due to threat points affecting Garmin. Information related to those threat points can be found on our Form 10-K filed with the National Securities Market Commission.
In particular, there is significant uncertainty about the duration and effect of the COVID-19 pandemic. This means that the effects are a matter of replacement at any time and any effects related to the effects of COVID-19 and the business outlook. It is the most productive, data-driven estimate to 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 point, I would like to pass the word to Cliff Pemble.
Clifton’s Pemble
Thank you, Teri and good morning everyone. As reported today, consolidated third-quarter sales were $1. 14 billion, down 4% from a year earlier. Revenue was negatively impacted by approximately $70 million due to the strengthening of the U. S. dollar against other currencies. Excluding this impact, revenue would have been higher through about 2% last year.
While the stronger dollar and incomes have had a negative impact, the price of goods has benefited from the weakening Taiwanese dollar. In addition, freight prices have been minimized as more goods are shipped by sea and fees are reduced due to excess capacity in the shipping industry. These items, combined with a favorable segment mix, generated a gross margin of 58. 8%, a cumulative 40 base issues year-over-year.
Spending above 4%, expansion in the R
Given our performance to date, we are adjusting our expectations for the remainder of the year. We now expect an annual profit of approximately $4850 million, down 3% from the previous year. We are increasing our full-year steerage EPS to $4. 95 due to improved gross margins, increased power from our expense design, and lower effective tax rates for the full year.
Doug will provide more highlights on our updated financial effects and direction in a bit, but first, I’ll give you the highlights of each industry’s functionality and perspective.
Starting with fitness, cash declined 18% to $280 million, primarily due to declining sales of complex wellness apparel and indoor cycling products. Gross and operating margins were 53% and 15% respectively, resulting in an operating profit of $41 million. Quarter, introducing the Index BPM smart blood pressure monitor, which measures systolic and diastolic blood pressure at home or while traveling. When combined with our Garmin Connect app, users can view their measurement and trend history along with other fitness statistics.
We also introduced the Venu Sq 2 with a bright AMOLED display and up to 11 days of battery life, almost twice as long as its predecessor. Given the year-to-date functionality in the fitness segment, we expect a 25% decline in profit. for the year.
Upon moving, profits rose 5% to $340 million, driven by expansion and adventure watches and InReach and Array devices, but partially offset by declines and other product lines. Gross and operating margins were strong at 65% and 36% respectively, generating an operating source of profit of $121 million. InReach remote devices and reaction coordination have been a solid product category and a unique differentiator for the outdoor segment.
During the quarter, we introduced InReach Messenger, a flexible communication-focused device with global location sharing capabilities for SMS and SOS. Each time a visitor presses the SOS button, their communication is sent to our Garmin Response Center, which monitors and coordinates reaction based on the situation. Since launching InReach in 2011, Garmin Response Center has coordinated more than 10,000 InReach SOS reactions in more than 150 countries and on seven continents for activities ranging from hiking and backpacking to roadside assistance in spaces with little cellular network. coverage.
Many consumers say InReach products have been instrumental in safely returning to family and friends. Based on year-to-date functionality in the outdoor segment and existing trends, we now expect revenue to grow 17% year-over-year.
Aviation revenue increased 4% to $188 million, basically driven by expansion in aftermarket product lines. Demand for aeronautical products remains strong. And we continue to revel in higher-than-general delays for our products. Supply chain constraints have improved, which continues our ability to absolutely eliminate backlog. Gross and operating margins were strong at 73% and 26%, respectively, resulting in revenue of $48 million.
During the quarter, we announced that our built-in G3000 flight deck had been decided through Tactical Air to modernize F-5 fighter jets operated through the U. S. Navy and Marine Corps. U. S. Our developing role in the F-5 demonstrates the capability and versatility of our built-in cockpit systems for use in non-easy military applications.
In addition, a recent Aviation International News survey ranked Garmin as the number one and avionics product for the nineteenth consecutive year. This long era of popularity demonstrates an unwavering commitment to meeting the desires of very complicated markets, from owner-piloted aircraft to the giant Part 135. Advertising operators
I congratulate our team on winning this award again, which is a testament to the quality of Garmin devices and the way our members care for our customers. in our initial plan until the end of the year. With this in mind, we are adjusting our earnings expansion estimate to 7% for the year.
Revenue decreased 5% to $197 million. Marine activity is highly seasonal and the third quarter is the lowest quarter of the year. Over the past two years, those seasonal trends have been difficult to expect due to the influence of the pandemic. We believe the market is returning to more typical seasonal trends. Operating margin expansion was 56% and 23%, respectively, for an operating profit of $45 million.
During the quarter, we began shipping the LiveScope XR system, which operates at greater depths and expands the potential market for live-action sonar for deep-lake and coastal fishing applications. We also introduced the LiveScope ice fishing package with real-time high speed. Image resolution, which creates the ultimate portable solution for winter fishing.
And finally, we continue to be identified by innovation and achievements in the marine industry. For the eighth year in a row, the National Marine Electronics Association named Garmin Manufacturer of the Year, and we also won five Product of Excellence awards. I am very proud of our achievements in the marine market and congratulate our team on those achievements. Given year-to-date functionality in the marine segment and the return of typical seasonal patterns, we are lowering our earnings expansion estimate to 3% for the year.
Finally, in Automotive, revenue declined 2% to $136 million, as declining customer product lines more than offset expansion in OEM systems. 40% gross margin and operating loss due to investments in automotive OEM systems particularly declined year-over-year to $16 million During the quarter, we announced that our tread navigators had been chosen through Artic Cat as a popular device on side-by-side selected off-road vehicles beginning in the 2023 style year.
Given year-to-date functionality in the automotive segment and existing trends, we now expect a 7% decline in earnings for the year.
That concludes my remarks. Then, Doug will walk you through other main points about our monetary results. Doug?
Doug Boessen
Thank you Cliff. Hello everyone. I begin by reviewing our third quarter monetary results, commenting on the balance sheet, cash flow statement, taxes, or updated forecasts. We had revenue of $1. 14 billion for the third quarter, down 4% from a year earlier. Gross margin was 58. 8%, a cumulative 40 core issues compared to the prior year quarter. The accumulation is primarily due to the segment’s favourable mix in lower freight rates, partially offset by the net adverse effect of exchange rates.
Operating expenses as a percentage of sales were 37. 8%, a cumulative of 310 foundation problems compared to the previous quarter. Source of operating income $239 million, a minimum of 15%. Operating margin of 21%, 270 foundation problems less. UPA $1. 09, UPA pro forma $1. 24.
Below, take a look at our third-quarter earnings by segment and geography. During the third quarter, expansion in the Outdoor and Aviation segments was more than offset by declines in the Fitness, Marine and Auto segments. Our geography, the Americas region, is down 2% EMEA had a negative effect through exchange rates, excluding the effect of exchange rates, EMEA sales functionality was more in line with Americas sales functionality. The APAC region grew by 10% compared to last year. The effect of approximately $16 billion from exchange rates, the APAC region would have an increase of 19% compared to last year.
Until next time, operating expenses. Operating expenses for the third quarter increased by $18 million or 4%. Research and progression increased by $10 million year over year, basically due to the prices of the engineering workforce. General and administrative expenses increased by $12 million compared to the previous year. quarter, basically because of the top of workers and data generation prices. Advertising prices decreased by approximately $4 million due to the decline of cooperative advertising.
Some highlights about balance sheet, money flow, and taxes. It ended the quarter with approximately $2. 7 billion in cash and marketable securities. Accounts receivable remained relatively strong year-over-year and declined sequentially to $641 million. The stock balance increased year-over-year to about $1. 5 billion. This accumulation is in line with our expectations. We have implemented our strategy to reduce freight prices through a greater mix of ocean shipping rather than air shipping.
During the third quarter of 2022, we generated a loose cash flow of $104 million, a minimum of $100 million compared to the prior quarter, primarily due to minimization of the operating source of revenue and increased current capital requirements. Capital expenditures for the third quarter were $50 million. We expect the loose cash flow for all of 2022 to be about $450 million, capital expenditures of about $250 million. Also in the quarter, we paid dividends of $141 million by purchasing $83 million of corporate stock, with $186 million remaining at the end of the fourth.
Legal share buyback program until December 2023. Al 3rd quarter of 2022, the effective tax rate 4. 3%, compared to 5. 9% in the last quarter. The reduction in the effective tax rate is basically due to the distribution of the source of income through tax jurisdiction, an accumulation of deductions and tax credits in the United States.
Now let’s move on to our forecast for the whole year. We estimate revenue of approximately $4. 85 billion compared to our previous average of $5 billion. We expect gross margin of approximately 57. 5%, higher than our previous average of 56. 7%, primarily due to year-to-date performance, adding a favorable segment mix and reduced costs.
We will be expecting a steady margin of approximately 20. 7%. In addition, we now expect the pro forma effective tax rate for full year 2022 to be approximately 8% lower than our previous guidance of 8. 5% to the projected full-year tax-negative earnings mix, resulting in pro forma earnings consistent with a percentage of approximately $4. 95.
This concludes our formal observations. Jonathan, can you open the line for questions and answers?
Q&A session
Operator
Surely. [Operator Instructions] And the first comes from the lineage of JPMorgan’s Paul Chung. Please?
Paul Chung
Salut. Bonjour. Et, thank you for answering my questions. Aviation is on track to achieve record annual revenues, even before the 19 levels. Strength and what new products excite you?
And then, on the margin front, can you see operating leverage with some kind of record cash heading towards 23 as the effects of inflation and the source chain component have dissipated?I know that the ADS-B cycle in 2019 resulted in that profit margin of around 30%. But can he get to that low 30 soon? And then I have a follow-up.
Clifton’s Pemble
Yes, hi, Paul. I think in aviation, we’ve been building the revenue stream that became vacant through the ADS-B mandate thanks to a couple of things. We have new product lines, like our autopilot systems, that as we certify every new aircraft, we’re going to offer an entirely new product category to that specific organization of aircraft that exist. So, we are definitely gaining market share as a new product category in autopilots.
And then turn signals, autonomous turn signals, our GI 275s, as well as our G5s and our autonomous NAVCOM GPS products, the GTN series has been very strong in this environment where other people are modernizing their aircraft.
Looking ahead, we’re not really in a position to communicate about 2023, but aviation will, of course, be a market where the operating result will be driven by the investments we want to make. And so, as new systems come in, which we regularly have a long life cycle, we have to invest upfront. So that’s a variable we’re going to consider when we think about our forecast for 2023, and then sales volume will also drive leverage. And again, we haven’t gotten there yet to communicate about 2023, but those are points we’re going to consider.
Paul Chung
Super. Then, track Fitness. Here you see a recovery of margins. He spoke of component inflation earlier this year as one of the main drivers of underperformance in the early part of the year. So how are those two shocks evolving? And can we get back to 20% here in a while as we approach the holiday season?
And then, in the competition, does Apple have Ultra and Google Pixel here booming?What information does it show about market share?And how do you protect your niche categories, and adjust costs a bit, creating promotions, building marketing?Everything you can comment on there? Thank you.
Clifton’s Pemble
So, in terms of fitness, FX definitely impacted us. I think the improvement we saw is basically due to the product range, as we had new products in the segment. Our racing categories, in particular, were very strong with the launch of the 255 and 955 series.
In terms of specific focus, I think where we landed in the third quarter was historically where we targeted in terms of mindset around the functionality of that segment. The middle adolescence type is a very clever result and will vary up and down depending on promotions and product cycles.
As for the competition, we are attentive to this. We still believe, even with the launch of Apple Ultra and Google Pixel, that we have unique differentiators, one of which is that some of our products can have 25 times the battery life of those devices. That’s a significant advantage, and we’re more geared toward our users’ unique desires around activity and adventure. Therefore, we continue to believe that we can create exclusive spaces for ourselves, and we do not believe that we are wasting part of the market because of that.
Paul Chung
It is ok! Super. Thank you.
Operator
The following comes from the lineage of David MacGregor of Longbow Research. Please.
David MacGregor
Hello. Thank you for answering the questions. I guess I just looked for something to get started, I think I heard you say that the loose money consultant for the year was $450. I was wondering what, how do you see the actions in this context and what your end-of-year goals would look like?
Doug Boessen
Yes, the right question. Yes, our full-year loose money estimate is $450 million. And stocks are a big driver. As you may have noticed, our stocks have increased year after year and increased here in the third quarter. Looking ahead to the end of the year, we would expect our entire stocks: our year-end stocks to decrease sequentially. Compared to the third quarter, perhaps about 10%, which would mean our year-end shares would likely rise compared to the comparable era in 2021 around mid-teens. So there will be, and last year, comparing that to that, you saw in 2021, really a buildup in inventories of about 10% from the third to fourth quarter.
David MacGregor
It is ok. And then I realize that it varies significantly from segment to segment. But can you tell us a little bit about the stock in the field?
Clifton’s Pemble
At this time, I would say that we believe that the stock of channels is sometimes moderate. The only exception to this has been indoor cycling coaches, whose chain is full of trainers from all manufacturers, not anything expressed to clothing due to the shift from indoor cycling education pandemic to outdoor cycling education. Therefore, this is the only domain in which the market continues to function. But, overall, it seems that the titles are pretty good.
The only thing that exists, while we are looking for it and it is difficult to wait how it will happen. But stores regularly stock a lot of other things right now. So as they enter the fourth trimester, many have reported that they are promoting. So, as we take a look at the fourth quarter, we’re going to look for signs related to opening up to buy dollars and the promotions they’re willing to do given their overall stock picture. .
David MacGregor
So, the last query for me is how you think about 2023, and I realize you’ll probably have a lot more to say with 2023 once we get to January. But thinking at a higher level, if 2023 ends up being the maximum negative type of macro situation and things have actually decreased significantly. Can you simply tell us about your ability to scale your operating expenses and the flexibility you have there?
Clifton’s Pemble
I think we have some flexibility around OpEx, in the advertising spaces and some of the discretionary spaces. I think slowing down some of the other things in terms of R commitments.
But for the time being, I would say we’re taking a cautious view of waiting and seeing how things go, and we’re very careful about how we spend and increase our numbers.
David MacGregor
Super. Thank you so much.
Operator
Merci. Et our next one comes from Cleveland Research’s Ben Bollin lineage.
Ben Bolin
Hello everyone. Thank you for answering the question. Cliff, I was hoping you could tell us a little bit about what you think about updating devices. And how has this COVID evolved, what have you noticed in recent years?And then I have a follow-up.
Clifton’s Pemble
Ouais. Je I think we still see the majority of consumers coming to our platforms as new Garmin consumers. So, there is definitely a detail which is that other people buy a momentary device or a new device of some kind. And there is also a momentary market for our devices. So they can sell them online, and then we give you a new visitor to decrease the device. But overall, it’s still a little more than most of those consumers are new to Garmin.
Ben Bolin
It is ok. The last query is, if I don’t forget correctly, last year I think Garmin had slightly higher stock availability compared to many other categories. And I felt like that might have benefited some of the retailers’ commitments over last year’s holidays. . Correct me if I’m wrong, but I’m curious if this influences anything you see this year. And I’m also curious to know what you see from your partners in terms of thinking about executing capital commitments over the holidays and beyond?Have you noticed a change in the amount of stock they are willing to buy?Or how far in advance do they order the product? That’s right. Thank you.
Clifton’s Pemble
So last year we felt we had availability while many others weren’t due to supply chain issues, I think we were still limited in some of the things we can also get and some of our deliveries came very late. quarter. , which possibly would have missed the Christmas season. So, there was a lot of momentum last year that we probably wouldn’t make up for this year because things are more normal. And, of course, we will have to wait and see how the visitor reacts in the fourth quarter to the holiday shopping season.
In terms of our partners, as I mentioned earlier, I think what they call loose acquisition dollars in the retail channel is a big deal. Retailers have a giant stock of many other things. sell well. And they can also maximize their results. So it’s a bit of a different environment this year, because last year was about getting as much as they could and this year it’s about promoting the right things.
Ben Bolin
Thank ou
Operator
Merci. Et our next comes from Ivan Feinseth’s lineage of Tigers Financial Partners.
Ivan Feinseth
Thank you for answering my question. And congratulations on the maximum speed of new product introductions. So, as far as blood pressure goes, is this the item at the moment on your index line?Or are you making plans to expand the index as a product line now that you have the blood pressure monitor?What else type of products in this segment are you thinking about?
Clifton’s Pemble
yes, hi, Ivan, I would say that in general we are looking for new category opportunities. So, the index was a wonderful category for us as a wellness device on the scale first, and the blood pressure monitor was a lovely marvel. In terms of the interest we had in it and we temporarily sold what we had available and looked for more deliveries. Therefore, we are excited about this and are constantly looking for new categories to grow our business.
Ivan Feinseth
And on your new, say, wearable devices, can you give an indication of the percentage of other people who already own a Garmin product and upload another because you can tell by activating and logging into your app or what percentage are new and let’s say, how many other people, say, continue to use two devices or, say, give them to a family member or have had other people?
Clifton’s Pemble
Ouais. Je I don’t have express statistics in front of me about that. We see it and maintain it. That’s at a lower point than what I mentioned earlier in terms of other people buying Garmin devices, but I don’t have the express statistics in front of me.
Ivan Feinseth
Thank you. Congratulations again.
Operator
Merci. Et our next comes from Morgan Stanley’s Erik Woodring lineage.
Erik Woodring
Yes, hello. Thank you for accepting my question. I think maybe, Cliff, I’ll start with you, maybe just a high-level question. And that’s how do you expect a geopolitical threat and how does that influence your production footprint?Or is the premise of this question, some of that a lot. And then I have a backup. Thank you.
Clifton’s Pemble
So, Hello, Erik. Geopolitical dangers are therefore all we have been facing since the beginning of the company. They are not new. They have a tendency to move around the world as things change. In terms of pursuing new capabilities, I mean, we have recently shown that we have the capability and experience to establish new plants in new regions, such as our automotive OEM. Several years ago, we established a factory in China. So, we have that diversity and we can develop capacity temporarily where we want it. Therefore, we constantly seek this and evaluate our desires.
Erik Woodring
It is ok. It helps. And then, maybe just digging deeper into the consumer-facing businesses you have, is there any way you can help us perceive here in the current part of the year, how we think about volume versus costs and what is the most important reason?Restrictive force of expansion or decrease relative to the other?And then one more. Thank you.
Clifton’s Pemble
Ouais. Je think this volume as opposed to the pricing factor is the big question when you think about pricing your products and running promotions. And the call of the game is maximization. For us, we need to maximize Garmin’s profits that will enable us to succeed. So, it’s a great question, and I don’t think anyone has a magic way to do it, but we try to balance all the points and also take into account the availability of products at other stages of the lifecycle that we can advertise older ones, for example, and allows us to keep the costs of newer products higher.
Erik Woodring
It is ok. It’s useful. And then, the last consultation for me, maybe it’s for Doug. It’s just a very clever functionality on the margin side, whether raw and operational. Maybe if we stay on the thick sidetailwind, maximum or less impactful, headwinds for smart margin functionality this quarter?And then, secondly, maybe it helps us perceive what percentage of COGS is in Taiwanese dollars compared to US dollars. And that’s all about me.
Doug Boessen
Yes, gross margin. So, as you mentioned, there are a lot of other moving portions in this gross margin figure. So some of our headwinds, probably at the top, that we have, is just the effect of the exchange rate that we have. I have had in the income.
Now, we have, as Cliff said, the other aspect that with the strengthening of the U. S. dollar against the Taiwanese dollar, there’s a decrease charge similar to that detail, but it’s not able to offset all those similar exchange rates. Headwinds on the earnings side. Then, going back a bit, one of our biggest headwinds we had in the past was related to our freight. Freight was slightly higher year after year.
So now we’re seeing some of the transportation prices go down. And it has gone down for two reasons, one of which has to do with falling freight rates. And the other is that we send a higher percentage of our shipments by sea compared to air, which gives us some merit from one point of view.
So they’re great drivers. And you have other things there related to a set of segments from a consolidated point of view, a segment has a higher percentage of the total, such as, for example, aviation or outdoor grows more than others, which gives it a point. of advantage view.
So, you also have a combination of there. Regarding the new we launched in the age of time and the proposed eras of the year we have also had. Many other combinations.
Erik Woodring
Super. Thanks for the color, Doug.
Doug Boessen
Yes. Enjoy.
Operator
This concludes today’s Q&A query. I would like to hand over the program to Teri Seck for any comments.
Teri Seck
Thank you all for your time today. Doug and I will be here to remember each other this afternoon. Review of Merci. Au.
Operator
Thank you, gentlemen, for your participation in today’s conference. This concludes the program. You can now log out. Have a great day.