Garmin Ltd. (NASDAQ: GRMN) Q1 2020 Earnings Call Transcript

Garmin Ltd. (GRMN) Q1 2020 earnings call dated April 29, 2020

Corporate Participants:

Teri Seck — Manager of Investor Relations

Clifton Pemble — President and Chief Executive Officer

Douglas Boessen — Chief Financial Officer and Treasurer

Analysts:

Ben Bollin — Cleveland Research Company — Analyst

Nick Todorov — Longbow Research — Analyst

Charlie Anderson — Dougherty & Company — Analyst

Will Power — Baird — Analyst

Paul Chung — J.P. Morgan — Analyst

Ivan Feinseth — Tigress Financial Partners — Analyst

Erik Woodring — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Garmin Ltd. First Quarter of 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today’s program may be recorded.

I would now like to introduce your host for today’s program, Teri Seck, Manager of Investor Relations. Please go ahead.

Teri Seck — Manager of Investor Relations

Good morning. We would like to welcome you to Garmin Limited first quarter 2020 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, earnings, gross margins, operating margins, future dividends, market shares, product introductions, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K and first quarter 2020 Form 10-Q filed with the Securities and Exchange Commission. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at anytime 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 — President and Chief Executive Officer

Thank you Teri, and good morning everyone. First quarter of 2020 continued the strong momentum we experienced in the back half of last year. Revenue increased 12%, resulting in a new record for the first quarter. Gross margin was stable to last year and operating margin expanded resulting in operating income growth of 17%.

Late in the quarter, the landscape changed as the COVID-19 outbreak became a global pandemic and governments responded with drastic measures to slow the spread of the virus. This resulted in unprecedented economic changes affecting every company and Garmin is no exception. Accordingly, we are withdrawing our fiscal 2020 guidance. However, we are optimistic for the long-term, as the markets we serve and the products we offer are well positioned to succeed in a post-pandemic world. I’ll explain why we are optimistic in just a moment, but first I want to share a few insights on how Garmin is approaching the most significant health and economic crisis of our time.

First, I’ll highlight our business priorities. The global awareness of the coronavirus is recent, but its impact was felt much earlier and parts of Asia were dramatically affected by its emergence and rapid spread. Since the beginning, employee safety has been our top priority starting in Asia and expanding as the virus spread to other regions of the world. Most of our employees can work from home and we’ve taken steps to protect those who continue to work within our facilities. Our employees adapted to these new circumstances with speed and resilience and I’m super proud and their response to this challenge.

Our second priority has been to strengthen our supply chain. In the early days of the virus outbreak, our supply chain teams were working hard to ensure we would not be affected by the widespread industrial shutdowns that were occurring in Asia. I’m pleased to report that our supply chain is healthy, and we have not missed any opportunities due to COVID-19 related disruptions. This is remarkable considering the unprecedented disruption occurring in global supply chains.

Our third priority is to focus on opportunities. A crisis is often defined by its challenges, but we are looking through the lens of opportunity. We’ve accelerated efforts to increase our mix of online sales with business partners and on garmin.com. We have plenty of inventory, allowing us to capture market share.

And finally, we’ll be using this opportunity to refine our product roadmap priorities, to make sure we have the right products now and after the crisis fades.

Next, I will talk about the leadership model we’ve embraced during this time of global crisis, an unprecedented disruption. First, we think to choose positively. In the contrast, constant rumble of negative unthinkable headlines there are positive thinking — things happening all over Garmin. All of us wonder what the new normal will be. No matter what happens, I feel good about the markets we serve and the product lines we offer. We believe every business segment has a bright future.

Second, we are responding accordingly. We recognize the world is facing the most significant health and economic crisis of our time. We understand it could take some time before the global economy recovers from the effects of the virus and the actions taken to control it spread. With this in mind, we’re taking pragmatic steps to maintain our strong financial position.

And finally, we’re focused on the long-term. In this dynamic environment, aiming at what we see today will only cause us to miss it, instead we’re aiming for where we want to be when the crisis fades. Paraphrasing our company mission, we aspire to be an enduring company by creating superior products that aren’t essential part of our customers’ lives. Our vision is to be a globally respected leader in every market we serve. We expect to emerge in this crisis as a stronger and more capable company.

This isn’t the first global crisis we face and it won’t be our last. During each test, past and present, we rely on a set of unique strengths that help us through times of crisis. First, our highly diverse business model provides a rich set of opportunities and reduces our reliance on single markets and product lines. Each market we serve and each product line we offer has an important role to play, both now and in the future. We are also well diversified geographically with roughly half of our revenue generated in the Americas, a third in Europe, and the remainder from Asia-Pacific. Our revenue diversity will help us capture opportunities as the pandemic evolves from region to region.

Second, we are a vertically integrated company. We control our own supply chain and are not overly reliant on outside partners to produce and distribute our products. This gives us a high degree of flexibility, efficiency and effectiveness, while operating in a highly dynamic business environment.

And finally, we have a strong balance sheet with no debt and over $2.6 billion in cash and marketable securities. We’re often ask why we maintain such a strong balance sheet, and our answer remains the same. Our balance sheet provides stability to our investors through our commitment to an attractive dividend and allows us to invest for the future when others are pulling back. In summary, our balance sheet is the cornerstone of our ability to face a crisis such as this.

With these things in mind, I’d like to spend a few minutes providing a market update for each of our segments. Fitness, had a strong quarter, driven by advanced wearables and our Tacx indoor bike trainers, which continue to experience strong demand during the current stay at home orders. A positive outcome of this crisis is the increasing focus on personal fitness, health, and wellness. People recognize that good health is an important defense against contracting the virus. And they’re looking for tools that can help them improve their health. Our fitness products are highly relevant today and will remain so in the future.

Marine posted a strong first quarter, driven by our strong lineup of chartplotters and game changing sonar technology. We were recognized as Supplier of the Year by Independent Boat Builders Incorporated for the second year in a row and our sponsored anglers swept the top three spots at the recent 2020 Bassmaster Classic. Boating is an active lifestyle pursuit that promotes family time, relaxation and a sense of freedom. In the long-term, we believe that the current crisis will increase consumer interest in boating and fishing. Certain restrictions have prevented some boats from coming out of storage as planned, which could impact the marine season. Once restrictions are eased, we expect to see strong demand for our products. Regardless of how things play out, we believe compelling innovation is driving market share gains, and we will continue to deliver innovation for the future.

Outdoor posted strong operating results, driven by adventure watches. Time in the outdoors is highly compatible with healthy social distancing and we believe that interest in outdoor activities will increase in the future. We already have a great lineup of products that support a broad range of outdoor activities. And in coming months, we will strengthen our position by introducing compelling new products and new categories.

Aviation delivered strong operating results for the first quarter. We saw additional growth in the ADS-B category, but at a lower rate than last year, which was expected. Retrofit systems were strong while OEM categories were roughly flat. The aviation market has been significantly impacted by the pandemic and economic damage caused by measures to contain the spread. First, travel has been brought to a near standstill by stay at home orders and international border closings. This has impacted both commercial and general aviation. Business confidence has been shaken by stock market volatility and rapidly declining economic activity. From history, we know that aviation takes longer to recover from severe economic shocks. Even so, we are optimistic about the future. We believe more people will seek transportation options that are secure, flexible, and convenient. These are the enduring qualities that general aviation has been known for throughout the decades. We are ready for this opportunity with industry leading cockpit systems for every aircraft from light sport airplanes to large business jets. We will continue [Indecipherable] and disruptive new cockpit technologies are on the way.

Revenue from auto decreased 17% in the first quarter and the segment was essentially breakeven. First quarter of the year is seasonally slower for our consumer products and some of our top performing OEM products are at a mature point of their life cycle. As I mentioned earlier, people will seek transportation options that are secure, flexible, and convenient. For this reason, we believe personal autos will remain an important part of the future. To prepare for this opportunity, we’ve been making significant progress transforming ourselves to be a Tier 1 auto supplier. New vehicles are launching this year with Garmin hardware and software solutions, which will lead to revenue growth for the OEM category. In addition, we will be introducing new specialty product categories that will appeal to automotive adventures.

Finally, I want to make a few remarks about our plans for guidance. The impact of the coronavirus and the economic damage caused by efforts to contain its spread are unprecedented. The ultimate outcome remains unpredictable, causing us to withdraw our fiscal 2020 guidance, as I mentioned earlier. While the long-term is difficult to predict, we want to share insights on what we have seen so far in Q2. On a consolidated basis, our April sales are trending about 40% [Phonetic] lower than last year as many retailers have curtailed operations and consumer activity has been severely limited by government restrictions. We expect — expect these trends to continue throughout the second quarter as restrictions remain in place across much of the globe. We anticipate being profitable in Q2, provided that our revenue development follows the trends we’ve been seeing so far. We’ve taken near term measures to defer discretionary expenses, prioritize uses of cash for critical capex and acquisitions and we’ve sharpened our focus in R&D. We look forward to providing annual guidance once economic volatility subsides and when consumer behaviors are better understood after restrictions are eased and the crisis passes.

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

Douglas Boessen — Chief Financial Officer and Treasurer

Thanks, Cliff. Good morning, everyone. I’ll begin by reviewing our first quarter financial results, and do comments on the balance sheet, cash flow statement, and taxes.

We posted revenue of $856 million for the first quarter, representing a 12% increase year-over-year. Gross margin was 59.2%, 20 basis point increase from the prior year. Operating expense as percentage of sales was 38.5%, 70 basis point decrease from the prior year. Operating income was $177 million, a 17% increase year-over-year. Operating margin was 20.7%, a 90 basis point increase from prior year. Our GAAP EPS was $0.84, pro forma EPS was $0.91.

Next, to look at our first quarter revenue by segment. We achieved record first quarter revenue of $856 million, with four of our five segments posting double-digit growth. As seen on the charts, we have a diversified business model from both a segment and geography perspective.

Looking next, operating expenses. First quarter operating expenses increased by $29 million or 10%. Research and development increased $19 million year-over-year, investments in engineering resources, incremental costs associated with recent acquisitions. Advertising expense decreased approximately $1 million for the prior year quarter. SG&A increased [Technical Issues] compared to prior year quarter, but decreased as percentage of sales to 16%, 60 basis point decrease compared to prior year. Increase was primarily due to personnel related expenses, incremental costs associated with recent acquisitions. As Cliff mentioned, implementing expense control measures to defer discretionary spending and sharpening our focus in R&D.

Few highlights from the balance sheet, cash flow statement, and taxes. We ended the quarter with cash and marketable securities of approximately $2.6 billion and no debt. Accounts receivable decreased sequentially to $500 million from a seasonally strong fourth quarter and increased year-over-year in line with first quarter sales. Inventory balance increased on both a sequential and year-over-year basis as we have been preparing for the seasonally strong second quarter. We are aligning production levels and inventory with anticipated demand. However, we expect incremental increase in inventory in the near term. So it takes time to scale supply chain around near-term demand.

During first quarter 2020, we generated free cash flow of $185 million, $50 million increase over from the prior year quarter. We took another look — our capital expenditures, we now expect 2020 annual cap expenditures to be approximately $140 million. Two key capital expenditure projects for 2020 are the Tacx manufacturing facility and auto OEM manufacturing facility in Europe. Also during the quarter we paid dividends of $109 million. Returning attractive dividend to our shareholders is one of our current priorities for cash. In the first quarter 2020, we reported an effective tax rate of 9.3% compared to 15.7% in the prior year quarter. The decrease is primarily due to the migration of intellectual property ownership from Switzerland to United States.

This concludes our formal remarks. Jonathan, could you please open the line for Q&A?

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Ben Bollin from Cleveland Research. Your question please.

Ben Bollin — Cleveland Research Company — Analyst

Good morning everyone, thanks for taking the question. Cliff, I wanted to start, I think back in 2008-2009 you were I believe, President and COO of the organization, interesting any thoughts you have on how — what you’re seeing now, it’s similar or different versus then? And if you kind of take out your crystal ball and look into the future, how are you thinking about things developing or what are you looking for in the business before you start thinking about providing guidance on the year or even on a forward-looking basis? And then I have a follow-up. Thanks.

Clifton Pemble — President and Chief Executive Officer

Yeah, thanks Ben. Good morning. I think 2008-2009 was a totally different set of circumstances. I think Garmin was a much different company back then. About 70 plus percent of our revenue came from literally one product line and we were not as well diversified, then as we are now in terms of facing a crisis. So we had a lot to worry about at that time and we were facing also not only an economic crisis, but a declining market. I feel like things are totally different now. Our company is very well diversified and our product lines target all of the areas where we believe people are going to have a lot of interest in especially as these restrictions are removed. So one thing we learned in the past is that certainly, you have to have great new products, you have to be able to continue to invest. We’re doing all of those things today, but we’re a much different company than we were back then.

In terms of how things develop for guidance. As I mentioned, we’re going to be looking for changes around these restrictions. I think there’s still a lot of uncertainty that’s happening as every locales seem to have a different approach to removing restrictions and every locale has a different approach when it comes to how much things they allow. So all of these things probably impact consumer behavior that’s a big wild card. And then just trying to see how the economic volatility shakes out once we get a feel for that, we believe we’ll be in a good position to be able to predict the business going forward.

Ben Bollin — Cleveland Research Company — Analyst

Thank you. The follow-up, if you look at your retail footprint, my understanding is you have a little more exposure to smaller specialty stores versus perhaps some other OEMs. What is your approximate exposure to maybe smaller mom and pops, smaller specialty retailers that don’t have perhaps the same type of balance sheet as the larger big box stores? And any concerns on receivables from those partners? Thanks.

Clifton Pemble — President and Chief Executive Officer

Yeah, I don’t have a number I can share in terms of mix, but what I would tell you is that the execution of our retail partners has been varied. The smaller shops are looking for ways to be successful and to try to keep their business open. Some of the larger retailers have taken a more conservative approach and that’s impacted obviously the retail sellout and the availability of products for consumers, but we’ve seen a great improvement in terms of online sales. So we’re really excited about that and we’re working with our business partners to be able to enhance their online sales as well as on garmin.com.

Douglas Boessen — Chief Financial Officer and Treasurer

Yeah, and regarding receivable spend. So those, yeah we are getting some requests from some of our customers regarding extended payment terms and we’re granting some of those, but I do want remind — so our DSO probably will increase in Q2, but we want remind everybody that we do have trade credit insurance to limit of some of our exposure with our receivables.

Ben Bollin — Cleveland Research Company — Analyst

Thank you.

Clifton Pemble — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Nick Todorov from Longbow Research. Your question please.

Nick Todorov — Longbow Research — Analyst

Thanks, good morning everyone. I hope everyone is safe and well. Doug, can you comment or Cliff, on the current state of the channel inventories in each of the segments, maybe relative to historical norms. What do you think is going to be the retailer strategy for channel inventory for the remainder of the year. I understand your second quarter, there is going to be a lot of destocking, but do you have any visibility how these — your partners are thinking about the second half?

Clifton Pemble — President and Chief Executive Officer

Yeah, I think we don’t — we don’t have a lot of direct feedback. I would tell you this that we believe that the channel inventory is — is actually low, where we see less restrictions in some of the locale, we actually see sell-through as indicated by our Garmin Connect, indications as being very strong. And with the selling situation being much lower, we believe the channel inventory is being depleted.

Nick Todorov — Longbow Research — Analyst

Okay. And the second question, can you help us, how should we think about decremental margins, it’s very unusual to see revenue declines on the sequential and year-over-year basis for you. I think historically, it’s been the mid 30% range, but any color on how should we think about decremental? That will be helpful.

Clifton Pemble — President and Chief Executive Officer

Yeah, I think it’s not surprising that we see revenue declines in this environment. Today GDP, for the quarter was down 5% and most of the economic activity impact was in the last couple of weeks of the quarter. And so there is a severe economic impact taking place out there and we certainly cannot defy that gravity. But in terms of our margin impact, it all depends on product mix. We think some of the online sales will be accretive and of course our key product lines are still a strong part of the overall mix. And so we were not anticipating any gross margin impact to any significant degree.

Nick Todorov — Longbow Research — Analyst

Okay. And last question before I jump back in the queue. Can you help us think about opex, I mean a lot of companies have seen increased expenses related to COVID-19, are you seeing any — what is the impact of that? I know you alluded scale up R&D and SG&A, but at the same time, assuming that some discretionary spending is going to go down, any color on how should we think about operating expenses in the near future?

Douglas Boessen — Chief Financial Officer and Treasurer

Sure. Regard — this is primarily as we look at what’s happening with our demand. So we’ve taken a close look at our expenses across the board and put in place various expense control measures. Some of those of which are slowing our hiring, second of which is taking a look at all of our discretionary spend. Just to make sure that’s appropriate. And also as it relates to advertising with the lower demand there we are flexing our advertising down in response to some of that lower demands out there. As it relates to capex, I previously mentioned that, when you take a look at all of our capex also and making sure that’s all the critical capex we have. As it relates to Q2, looking at each one of those, probably R&D and SG&A, probably we expect that to be probably be up, dollar amount year-over-year just due to analyzing — annualizing some of the 2019 headcount additions. As it relates to advertising, that’s one that we would expect that to be down year-over-year just due to flexing that down of our demand. But we’re constantly looking to our expense structure and seeing how we want to make that fit the current environment we’re at.

Nick Todorov — Longbow Research — Analyst

Got it. Thanks guys, good luck.

Clifton Pemble — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Charlie Anderson from Dougherty & Company. Your question please.

Charlie Anderson — Dougherty & Company — Analyst

Yeah. Good morning and thanks for taking my questions. I wanted to start on the comments around the April sales. I just want to double check if that was indeed a sell-in versus sell through comment. And then within, then I wondered if it’s one versus the other, if you could sort of speak to the others, so if it’s sell-in, what are you seeing in terms of sell through trends and then you have all kinds of different businesses here, I wonder if you could sort of speak to how uniform those declines are? What’s better off versus what’s worse off within the business units? And then I have a follow-up.

Clifton Pemble — President and Chief Executive Officer

Okay. Yeah, so April — the April trends that we’re seeing everything that we’re doing is of course sell-in to the extent that those sales came from our online mix of course that’s going more direct-to-consumer, but in general, it’s more influenced by sell-in. Sell out again as I mentioned earlier, our indications from our product registrations on Garmin Connect are strong in those regions where restrictions allow the kinds of activities our products are known for. So we’re encouraged by that and because of that we believe that the channel inventory is being depleted in some of those places as customers are looking for products and trying to find whatever they can.

In terms of segment by segments. We’re seeing right now in terms of the sell-in stronger results in outdoor and fitness compared to the trend that I mentioned. Marine is about where we expect and then aviation and auto are trending behind.

Charlie Anderson — Dougherty & Company — Analyst

Okay, great. And then as it relates to the auto OEM business, I wonder if you could sort of speak to what you’re seeing there? And then we have a few large projects on the horizon with BMW and Geely, if you could just update us on if those schedules are remaining on track? Thanks.

Clifton Pemble — President and Chief Executive Officer

Yes. So our current sell-in situation at OEM is affected by those programs that are more mature, like I mentioned in the remarks. So we’re seeing some weakness there. As an especially probably compounded by the fact that automakers are shutdown right now and their inventories are high. As we look towards the back half of the year, we do have those newer programs launching and those should be a boost to the overall auto OEM category. And the projects, the major ones especially the BMW project, it’s a very complicated and involved project, but it’s going well and we’re meeting all of the milestones there, including standing up our factories that we need to be able to support the program.

Charlie Anderson — Dougherty & Company — Analyst

Okay, great, thank you so much.

Clifton Pemble — President and Chief Executive Officer

Yeah. Thank you, Charlie.

Operator

Thank you. Our next question comes from the line of Will Power from Baird. Your question please.

Will Power — Baird — Analyst

Great. Yeah, thanks. I guess a couple of questions. Yeah, I guess either Cliff for Doug, I guess I’d be curious as to trends you’ve seen in Asia-Pac. I mean, it look like lower growth in Q1 and obviously they would have had an earlier COVID impact, but what have you seen trend there from March into April and how does that inform how you’re thinking about some of the other geographies?

Clifton Pemble — President and Chief Executive Officer

Yeah, Asia continues to struggle right now. China, I think was the first country that really was impacted from a virus outbreak perspective and the retail channels there completely shutdown due to the virus spread. And we’ve seen it kind of roll around from country to country. So some of the stronger countries as they get impacted and implement their own measures, then of course we see the situation change. So in general, as a whole APAC has struggled to regain their footing even though they are in the overall development of the pandemic, but we see encouraging signs in those countries where the virus is either been well controlled and restrictions are lifting or they haven’t yet had, the kind of spread that other countries have had.

Will Power — Baird — Analyst

Okay. I guess separately you talked about one of the areas of focus going forward is looking at opportunities longer term and I think you referenced the strong balance sheet and cash. So how should we think about potential M&A, what are — are you starting to see more opportunities, how aggressive might you be there and are there particular verticals that could look interesting here given some of the challenges for some of your competitors, potentially in the markets?

Clifton Pemble — President and Chief Executive Officer

Yeah, we’re still looking for opportunities. Of course we’re very discriminating, but I would anticipate there would be some opportunities that would come our way in the near term. And I think generally our experience in the past has been that this tends to shake out more opportunities. So again, we’re — we’re looking to leverage our cash for things that can help Garmin be stronger and grow in the future and that’s what we’ll continue to do during this time.

Will Power — Baird — Analyst

Okay, great. Yeah, hope you all state as safe and healthy as possible. Thanks.

Clifton Pemble — President and Chief Executive Officer

Thanks, Will.

Operator

Thank you. Our next question comes from the line of Paul Chung from J.P. Morgan. Your question please.

Paul Chung — J.P. Morgan — Analyst

Hi guys, thanks for taking my questions. So just first up, retail shops are seeing some zero traffic essentially. So how big of a shift to online channels are you seeing as a result? Is there kind of a percentage of sales on your website and e-commerce site you can share pre-COVID? And then as we move forward, post are you thinking about kind of like a shift in strategy to kind of place more emphasis on direct-to-consumer e-commerce channels, which would benefit margins, I assume. And then, then I have a follow-up.

Clifton Pemble — President and Chief Executive Officer

Yes, so online and web has been very strong during this time. I think it’s a combination of the fact that many retailers, especially the bigger ones has restricted access to their stores and customers are looking for ways to get products safely, so they’re turning to online. For us, our website growth has been phenomenal during this period and we’ve been adding to our capabilities on the website to be able to support sales strategies there. With all of that said, our retailers remain very important to us and as soon as they can come back online, we’ll certainly be supporting them, but — but we do see a significant shift at this time. And I would anticipate, but generally speaking the shift to online, that has been occurring broadly across all of the geographies is going to continue in the future.

Paul Chung — J.P. Morgan — Analyst

Thanks. And then follow-up on the marine side, nice kind of growth to start the year, it sounds like some marine retailers are kind of seeing some positive trends in April though sales are probably going to be down for the year, but now you have like the New York Tri-State area kind of reopening marinas and boating arguably kind of suit social distancing. So usage, I assume would be fine possibly benefiting some accessory upgrades. I just wanted to get a sense for what you’re seeing from your customers and how much — how the month of April is evolving? And anything you want to call out on the marine side? Thank you.

Clifton Pemble — President and Chief Executive Officer

Yeah, I would say that it’s a mixed situation for marine, depending on the locale and the retailer. Some retailers are doing very well and some have had to operate under more restrictive circumstances even closing their stores. So this as hindered the access to marine products and generally, we’ve seen very strong end user demand for the products. Some of our top products even on our own website are marine products, which is somewhat counter intuitive because they’re more complex and require installation, but people are buying those. So again, it’s kind of a mixed bag. We would expect things will get better as you say, as states open up for boating. Michigan, has been a big one you mentioned, New York, that’s also been a big one. We hope that boats can come out of storage soon and we are hearing from the field that customers are excited about equipping their boats and getting them on the water.

In terms of the opportunity going forward. We’re very optimistic about marine. It’s a great market. I think a crisis like this when people are evaluating priorities. They tend to turn to things that inspire them and I think boating and fishing is one of those things that we’ll see a benefit in the future from people’s evaluation of their priorities.

Paul Chung — J.P. Morgan — Analyst

Thank you.

Clifton Pemble — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Ivan Feinseth from Tigress Financial Partners. Your question please.

Ivan Feinseth — Tigress Financial Partners — Analyst

Thank you for taking my questions. And again, congratulations on another great quarter and really nicely managing the company during this difficult and crazy time. My first questions, Doug had spoken about capex, something cut out my phone, you said that, investing in expanding the Tacx manufacturing and then you said one of those thing, it sounds like auto something. What are the two big capex projects?

Douglas Boessen — Chief Financial Officer and Treasurer

Yeah, Ivan, it relates to is the Tacx facility. So when we acquired Tacx facility we basically at that point in time made a decision to expand its manufacturing facility because of the increased demand we saw there. So we’re in a process of actually building a brand new manufacturing facility at Tacx to handle the increased demand there. And the second one relates to auto OEM manufacturing. So with that, expanding with some of the additional programs we have, we’re actually a standing up a manufacturing facility in Europe.

Ivan Feinseth — Tigress Financial Partners — Analyst

Okay. Then, yeah I think one of the things that when things go back to normal from my interaction and talking with people, I think the in-home fitness trend is going to be powerful. People seem to be willing to go to restaurants, theaters, all kinds of other venues that are crowded, but one thing is people seem to be reluctant to go back to the gym and are more interested in home fitness. So I think that’s going to be a huge opportunity. How do you view addressing that opportunity further?

Clifton Pemble — President and Chief Executive Officer

Well, that’s what we’re seeing, Ivan. And the back orders on our Tacx products are very strong. We’ve not been able to supply all of the demand that we’re seeing there. So we’re working hard as Doug said to increase our capacity and hopefully then be able to get ahead of the demand curve that’s occurring. We expect that there will be — people talk about a second cycling season if you will or indoor cycling season as people are more interested in staying indoors for a while and we expect strong sales to continue. And then of course as our factory comes online, we’ll be able to deliver a more volume.

Ivan Feinseth — Tigress Financial Partners — Analyst

Then one of the other things I noticed, which was really good that you added a lot of features and functionality to the Connect app that supported the watches were like downloadable exercise routines, that you could do at home and use your watch for and — but can you give us some color how you were able to coordinate that especially if people who normally where in the office and kind of collaborating together and they’re working from home because they did a nice job to increase the features during this time?

Clifton Pemble — President and Chief Executive Officer

Yeah, we’ve had the capability in our devices to be able to put custom workouts and even provide instruction on the device that some of the newer devices that are out there and our Connect IQ platform has been a solid investment for us to be able to expand the interest that people have in the product through third-party apps and our own apps that can expand utility. So our teams have been able to be very agile in rolling these things out and it’s helped create more engagement and interest in our products, which we’re really thrilled about.

Ivan Feinseth — Tigress Financial Partners — Analyst

Then I have one last question. I know it’s a hard question to answer, but as this increased interest in home fitness grows, you know there is a lot of small companies that have interesting products that could benefit from say your expertise. Are you looking at growing through acquisition in that area further, the way you did with acquiring Tacx?

Clifton Pemble — President and Chief Executive Officer

Well, I think Tacx is a great example. And we did see the opportunity for that and that’s where we put a big that in terms of expanding into new category. I would say generally our MO for acquisitions is that we look for things that are either a complementary product or a technology enabling technology that can help us expand into new product categories. And so that’s what we’ll continue to do, not speaking specifically about Fitness but really across the board.

Ivan Feinseth — Tigress Financial Partners — Analyst

Thanks and congratulations again and I hope — everybody stays safe and well. And I look forward to hopefully a different environment on the next call.

Clifton Pemble — President and Chief Executive Officer

Thanks, Ivan. Same.

Operator

Thank you. Our next question comes from the line of Erik Woodring from Morgan Stanley. Your question please.

Erik Woodring — Morgan Stanley — Analyst

Hey guys, thanks for taking the call and a great quarter here. So, just curious if you could provide some color on just what you’re seeing, obviously spoke to sell-through and the outdoor and fitness segments, but obviously your results kind of buck the trend that we’ve seen or heard with other consumer name, so just any high level color on how coronavirus as an impact? And then perhaps asking that question a little bit of a different way, how far in advance do your channel partners typically purchase inventory, and is that changing in the current environment? And then I have a follow-up. Thanks.

Clifton Pemble — President and Chief Executive Officer

Yeah, so we saw strength in our business through most of the first quarter. Remarkably strong, really through most of about mid-March and then then things started to come down as the panic over the crisis quickly spread into Western Europe and North America. So we were super strong. We believe that’s encouraging, because again our product lines are very strong and our business in general have a lot of momentum.

In terms of retailer behavior even when times are good, they don’t try to over index on inventory. I think they’re very cautious. They have a certain amount of open to buy dollars. So it isn’t as if they had stocked up with a significant amount of inventory. I would say it was, it’s fairly manageable inventory levels and as their businesses have scaled back as they respond to the crisis, we believe that the inventories are depleting.

Erik Woodring — Morgan Stanley — Analyst

Okay, that’s super helpful. And then can you just provide some commentary on what you’re hearing from your OEM partners in the aviation market. If you look back to ’08, ’09, obviously those markets where — that market was very weak. So just curious how they’re viewing the current crisis relative to a little over a decade ago? Thanks.

Clifton Pemble — President and Chief Executive Officer

I think for aviation probably the situation is very similar to ’08, ’09 a significant economic downturn and loss of confidence, particularly in the business sector. So generally I think they are very concerned and some of the more public things that have been announced, you see some OEMs that have done some furloughs and different things like that and they’re trying to scale their production to demand. But again, that said, I feel like the longer term, is that general aviation has a bright future. Even now many communities are actually losing their commercial airline services, airliner scaled back. And so the only options for getting certain kinds of transportation is through general aviation and we think because of the security of the — the safety, the convenience and flexibility of general aviation that it can play big role in the future and this kind of concern over viral spread.

Erik Woodring — Morgan Stanley — Analyst

Super. Thank you. And then just last question, just a clarification question, did you say earlier that you still expect the auto OEM business to grow in 2020? Just want to clarify that point and them I’m done. Thanks.

Clifton Pemble — President and Chief Executive Officer

Yeah, I think it will be towards the back half as newer products launch from the OEMs and of course their schedules are more in doubt as well as they face supply chain issues and also demand issues. But in general, all of the indications was that these new products are launching as they plan.

Erik Woodring — Morgan Stanley — Analyst

Perfect. Thanks guys.

Clifton Pemble — President and Chief Executive Officer

All right, thank you.

Operator

Thank you. Our next question is a follow-up from the line of Nick Todorov from Longbow Research. Your question please.

Nick Todorov — Longbow Research — Analyst

Sure. Thanks for taking follow-ups. You mentioned inability to meet fully the current tax demand, can you try to quantify that and also remind us when the new tax rate is expected to come online?

Clifton Pemble — President and Chief Executive Officer

Well, it’s hard to quantify because we haven’t — we haven’t found where the demand is. It’s been so strong. So we’re chasing as much of that as we can and trying to serve our customers the best that we can. The new factory is scheduled to come online about mid-year and should start to ramp up into the fall as we prepare for the next indoor cycling season that occurs next winter.

Nick Todorov — Longbow Research — Analyst

Okay. And then you mentioned the channel inventories are depleted and I’m assuming in the fitness, the trends are strongest among all the segments. Yet, how do we — can you provide any additional colors other than just April orders are down 40%. How much are orders for fitness segment trending year-over-year, if you can share?

Clifton Pemble — President and Chief Executive Officer

The fitness and outdoor has been above that trend. And again these — to clarify are sell-in trends. So the sell-out is everything is a case-by-case basis, but in those regions and countries where restrictions allow, we see strong registration activity on our Garmin Connect platform. And in places where restrictions are very tight, of course, you see a very predictable downturn in what’s going on. So we’re optimistic that as restrictions ease that things should get better.

Nick Todorov — Longbow Research — Analyst

Are those restriction kind of implying more of a flattish environment or year-over-year growth in sell-through, how should we think about this?

Clifton Pemble — President and Chief Executive Officer

Well, I every country, every region has a case by case situation to look at. If you look at the countries with the strongest restrictions such as Italy, Spain and France, sell out is very confine there and some of the cases in those countries, you need permission to even go out of your house. In other places, such as the Nordics, which have been taken a different approach to how they manage the crisis, the sell-out is very strong and they are actually in strong growth mode over the last year or so. So it’s a mixed situation and everything that we’re seeing points to the fact that the restrictions on people is impacting the sales more than anything right now.

Nick Todorov — Longbow Research — Analyst

Okay. And last question from me. In the marine segment, can you compare and contrast, obviously it’s different business and your overexposure to aftermarket helps you here, but compare and contrast that to the ’09 period where it kind of took two years for the segment to reach the ’08 peak. It seems like this cycle is going to perform much better, but what specifically gives you confidence and allows you to be more positive on the marine segment here given it’s still a discretionary spending and it’s — they are rather high price products?

Clifton Pemble — President and Chief Executive Officer

Yes. So there is a few things that are different this time. In ’08 and ’09, the production capacity was so high that when the pullback occurred there was simply no way to sustain that kind of production capacity in marine products. And so the marine market, especially the OEMs felt a significant impact from the reduction in demand. There was also a lot of crazy financing going on with boats. And so the — the overall financial situation of people buying boats and the financers that we’re financing the boats was very, very precarious. Rolling forward to where we are today, the boat market has slowly recovered from those lows and so it hasn’t overbuilt in the same way that it was back in ’08 and in ’09 and the kinds of products that are being offered are in the bell curve of where demand still exists. Tends to be in those mid-range center console type of boats that still remain popular. And many of our OEM partners that are shutdown right now are very anxious to go back to work because they have customers that want their boats that have ordered them and are anxious to get them. So we’re optimistic about that. We don’t think it’s the same situation, but I would also say that anytime there’s economic shocks that will takes a certain number of customers out of the market. So there is bound to be some impact, but we hope it’s not as bad as what it was before.

Nick Todorov — Longbow Research — Analyst

Got it. Thanks guys, good luck.

Clifton Pemble — President and Chief Executive Officer

Yeah, thank you.

Operator

Thank you. Our next question is a follow-up from Erik Woodring from Morgan Stanley. Your question please.

Erik Woodring — Morgan Stanley — Analyst

Thanks guys. Just one last question here. Was just wondering if you could detail kind of on the — in the fitness and outdoor segments, what the contribution to growth was from units versus pricing?

Clifton Pemble — President and Chief Executive Officer

Yeah, we don’t break out just in terms of ASP and units versus pricing, but we’re seeing in the Q1 growth in both as we’ve had newer product lines in fitness and also our new product lines in outdoor, especially in the Phoenix area.

Erik Woodring — Morgan Stanley — Analyst

Okay. Great, thanks guys.

Clifton Pemble — President and Chief Executive Officer

Yeah, thank you.

Operator

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Teri Seck for any further remarks.

Teri Seck — Manager of Investor Relations

Thank you all for joining us today. Doug and I are available for call backs and we hope you all stay safe and healthy. Bye.

Operator

[Operator Closing Remarks]