Categories Earnings Call Transcripts, Technology

Garmin Ltd.  (NASDAQ: GRMN) Q4 2019 Earnings Call Transcript

Garmin Ltd.  (GRMN) 

Q4 2019 Earnings Conference Call 

Final Transcript 

Corporate Participants 

Teri Seck 

Investor Relations | Garmin Ltd. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Conference Call Participants 

Robert Spingarn 

Credit Suisse | Analyst 

Charlie Anderson 

Dougherty & Company LLC | Analyst 

Nikolay Todorov 

Longbow Research | Analyst 

Charles Erlikh 

Baird Equity Research | Analyst 

Erik Woodring 

Morgan Stanley | Analyst 

Paul Chung 

J.P. Morgan | Analyst 

Presentation 

Operator 

Good morning, ladies and gentlemen, and welcome to the Garmin Limited Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. 

I would now like to turn the conference over to your host, Teri Seck, Manager of Investor Relations. 

Teri Seck 

Investor Relations | Garmin Ltd. 

Good morning, everyone. We would like to welcome you to Garmin Limited’s Fourth Quarter 2019 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 and operating margins and future dividends, 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 not occur and actual results could differ materially as a result of the risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. 

Presenting on behalf of Garmin Limited this morning are Cliff 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 | Garmin Ltd. 

Thank you, Teri and good morning everyone. As announced earlier today, we finished 2019 strong with revenue for the quarter increasing 18% over the prior year to $1.1 billion. Fitness, aviation, marine and outdoor collectively increased 24% over the prior year. Gross margin was 58% compared to 58.9% during the prior year. Operating margin improved to 25.1% and operating income increased 24% over the prior year. These results generated GAAP EPS of $1.89 and pro forma EPS of $1.29 in the quarter, an increase of 26%. 

Looking briefly at our full-year performance. 2019 was a remarkable year of accomplishments. Revenue increased 12% to over $3.7 billion representing a new record for Garmin. Combined revenue from fitness, aviation, marine and outdoor increased 18%. Gross margin improved to 59.5%. Operating margin improved to 25.2% and operating income increased 21% to $946 million, another record achievement. This resulted in GAAP EPS of $4.99 and pro forma EPS of $4.45, an increase of 21% over the prior year. 

In light of these strong results at our upcoming Annual Meeting, we will be asking shareholders to approve an annual dividend of $2.44 a share, representing a 7% increase. Doug will discuss financial results in greater detail in a few minutes, but first I’d like to highlight some achievements from the past year and our outlook in each of our five business segments. 

2019 was an outstanding year for our fitness segment with each product category performing well. During the year, we launched sweeping updates to our running, wellness and cycling product lines and these products were strong contributors in the final quarter of the year. In addition, our recent acquisition of Tacx brought new revenue to the segment and expanded our ability to serve cycling customers indoors and outdoors all year long. 

For the year revenue from fitness increased 22%, exceeding the $1 billion threshold for the first time. Gross and operating margins were 51% and 18% respectively and operating income increased 6% over the prior year. In 2020, we plan to build on this momentum by launching new feature-rich products while also expanding the distribution of Tacx products. As a result, we anticipate revenue from the fitness segment will increase approximately 10% for the year. 

2019 was an extraordinary year for our aviation segment. ADS-B was a significant contributor to growth, but on a combined basis other categories contributed even more. We experienced growth in aftermarket systems as customers recognized the strong value proposition of modern cockpit electronics. We also experienced growth in OEM systems driven by popular new aircraft and from increasing demand for trainer aircraft. 

For the year revenue from aviation increased 22%. Gross and operating margins were 74% and 34% respectively and operating income increased 24% over the prior year. For 2020 we anticipate that revenue from aviation will be comparable to that of 2019 as growth in aftermarket systems is offset by declining ADS-B revenues. Trends in the broader OEM market should be in line with those of 2019. We anticipate that the early part of the year will be the strongest driven by residual ADS-B demand followed by a weaker back half as we move past the inevitable peak of the ADS-B cycle. We are focused on opportunities that lie ahead and we are confident in the long-term growth prospects for our aviation business. 

Our marine segment delivered another year of impressive results as market growth and market share gains boosted our performance. From time to time we’ve highlighted our halo products and technologies, achievements that speak for themselves and [Indecipherable] across the entire Garmin brand. Our Panoptix LiveScope sonar system is one example that is generating excitement and strong sales across a broad range of products. We also introduced our first electric trolling motor which is a new product category for us and brings game-changing new features to the market. 

For the year revenue from marine increased 15%, exceeding the $500 million threshold for the first time. Gross and operating margins improved to 60% and 22% respectively and operating income increased 73%. Looking forward, interest in our products remain very strong entering the 2020 boating season. In addition, our market share in the OEM category will grow as some of the most respected boat brands adopt our products as standard equipment on their 2020 models. With this in mind, we anticipate revenue from the marine segment will increase approximately 10% for the year. Outdoor delivered another strong year of product achievements and revenue growth. During the year, we launched the MARQ luxury watch series and we completely refreshed the Fenix adventure watch series. We also introduced versions of the Fenix with passive solar recharging technology which has resonated positively with the market. 

For the year, revenue from outdoor increased 13%. Gross and operating margins were 65% and 36% respectively and operating income increased 15% over the prior year. Looking ahead, we believe that the adventure watch category will continue to grow, driven by further innovation and new utility. We also believe that inReach will continue to grow as more people appreciate the convenience and life saving potential of two-way remote communication. With these things in mind, we anticipate revenue from the outdoor segment will increase approximately 10% for the year. 

Our auto segment also delivered many strong achievements in 2019. We integrated the Alexa digital assistant into our PND product line and we entered a new product category with the launch of the Overlander navigation device. At the recent Consumer Electronics Show, we announced the new Dash Cam Tandem that captures quality video both inside and outside the vehicle regardless of lighting conditions. During the year, we also secured a significant backlog of new business of the Tier 1 supplier to the world’s most respected automakers. 

For the year revenue from auto decreased 14%. Gross and operating margins improved to 47% and 10% respectively and operating income increased 50% over the prior year. Looking ahead, we believe that the negative trends in auto will moderate as contributions from specialty categories increase and as previously announced OEM programs contribute in the back half of the year. 

2020 will also be a year of accelerated investment to support recently awarded programs. We are equipping our manufacturing facility in Olathe for auto OEM production and we are opening a new manufacturing facility in Europe that will be dedicated to auto OEM production. We also plan to hire additional resources in engineering and operations to support these complex, intensive development programs. These things in mind, we anticipate that revenue from the auto segment will decrease 5% for the year. 

In summary, we are excited about the opportunities we see in every business segment. For 2020, we anticipate consolidated revenue will reach approximately $4 billion, up 6% year-over-year as growth in fitness, outdoor and marine more than offset a slight decline in the auto segment. We anticipate that revenue in aviation will be comparable to that of 2019. We anticipate gross margin of approximately 59.2% and operating margin of approximately 23.5% reflecting our plan for an increased level of investment to support long-term growth initiatives. We anticipate a full year pro forma effective tax rate of approximately 10% resulting in pro forma earnings share of approximately $4.60. Our estimated tax rate will be favorably impacted by an intercompany transaction to migrate the ownership of our consumer intellectual property from Switzerland to the United States over the next several years. Doug will be providing more details on this in a few moments. 

So that concludes my remarks. Next, Doug will walk you through additional details on our financial results and outlook. Doug? 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Thanks, Cliff. Good morning, everyone. Let’s begin by reviewing our fourth quarter and full-year financial results and maybe [Phonetic] comments on the balance sheet, cash flow statement and taxes. We posted revenue of over $1.1 billion for the fourth quarter, representing an 18% increase year-over-year. Gross margin was 58%, 90 basis point decrease from the prior year. 

Operating expense as percentage of sales was 32.9%, 210 basis point decrease from the prior year. Operating income was $277 million, a 24% increase from the prior year. Operating margin was 25.1%, 120 basis point increase from the prior year. Our GAAP EPS was $1.89 and pro forma EPS was $1.29, a 26% increase from the prior year. 

Looking at the full-year results, we posted revenue of over $3.7 billion, representing a 12% increase year-over-year. Gross margin was 59.5%, 40 basis point increase from the prior year. Operating expense as a percentage sales was 34.3%, 160 basis point decrease from the prior year. Operating income was $946 million, a 21% increase over the prior year. Operating margin was 25.2%, increase of 190 basis points from the prior year. Our GAAP EPS was $4.99 while pro forma EPS was $4.25, a 21% increase from the prior year. 

Next, we’ll look at fourth quarter, full-year revenue by segment. During the fourth quarter, we achieved strong double-digit growth in four of our five segments, led by fitness segment with 34% growth, followed by the aviation and marine segments, growth of 22% and outdoor with growth of 16%. For the full year 2019, we achieved 12% consolidated growth, double-digit growth in four of our five segments. 

Looking next to fourth quarter revenue and operating income. On a combined basis the fitness, aviation, marine and outdoor segments contributed 89% of total revenue in the fourth quarter 2019 compared to 84% in the prior quarter. Fitness grew from 30% to 34%. Aviation grew from 17% to 18%. 

[Indecipherable] illustrate our profit mix by segment. The fitness, aviation, marine and outdoor segments collectively delivered 99% operating income for the fourth quarter 2019 compared to 97% in the fourth quarter 2018. All segments besides the auto segment had year-over-year increases in operating income dollars. 

Looking next to full year charts. For the full year fitness, aviation, marine and outdoor segments made up 85% total revenue compared to 81% in 2018. All segments had year-over-year increases in operating income dollars. Looking next operating expenses. Fourth quarter operating expenses increased by $36 million or 11%. 

Research and development increased $17 million [Phonetic] year-over-year to investments in engineering resources incremental costs associated with recent acquisitions. Our advertising expense increased approximately $8 million with the prior-year quarter due to higher fitness and outdoor expenses, represented 5.7% of sales, 20 basis point decrease compared to prior year. 

SG&A increased $12 million compared to prior year quarter, but decreased as a percentage of sales 12.5%, 100 basis point decrease compared to prior year. The increase was primarily due to personnel related expenses, incremental costs associated with recent acquisitions. 

A few highlights on the balance sheet, cash flow statement and dividend payments. We ended the quarter with cash and marketable securities of $2.6 billion. Accounts receivable increased sequentially and year-over-year to $707 million due to strong sales in holiday quarter. Inventory balance increased year-over-year to $753 million. The increase is due to our strategy to increase days of supply to support our increasingly diversified product lines and the acquisition of Tacx. 

During the fourth quarter 2019 we generated free cash flow of $208 million. For the full year 2019 we generated free cash flow of approximately $581 million, $183 million decrease from the prior year due to increased working capital needs. For 2020, we expect free cash flow to be approximately $750 million and approximately $225 million of capital expenditures. 

We announced our plans to seek shareholder approval for an increase in our dividend beginning with the June 2020 payment, proposal for [Phonetic] cash dividend of $2.44 per share or $0.61 per share per quarter, a 7% increase from the current quarterly dividend of $0.57 per share. 

For full year 2019 we reported income tax expense of $5 million which includes an income tax benefit of $180 million due to revaluation and step-up of certain Switzerland deferred tax assets as a result of the Switzerland tax reform. Excluding the $118 million income tax benefit the full year 2019 pro forma effective tax rate was 15.5%, 20 basis point decrease from the prior year. The fiscal year 2020 pro forma effective tax rate is expected to decrease 10% primarily due to the migration of intellectual property ownership from Switzerland to United States. Taking into consideration the recent major tax reforms in Switzerland and United States, the migration maintained an efficient tax structure and responds to the changing global tax landscape. 

Migration includes an intercompany license agreement that shifts intellectual property ownership for consumer products from Switzerland to United States to royalty payments. This results in a favorable shift in income by jurisdiction, reduces our level of expense related to uncertain tax positions, entered the multi-year license agreement, higher percentage of income recognized in United States. 

So it concludes our formal remarks. Mike, can you please open the line for Q&A? 

Questions and Answers 

Operator 

[Operator Instructions] Your first question comes from the line of Robert Spingarn from Credit Suisse. 

Robert Spingarn 

Analyst | Credit Suisse 

Hi, good morning. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Good morning. 

Robert Spingarn 

Analyst | Credit Suisse 

Cliff, I wanted to dig into aviation just a little bit here and now that you’re — I think you’re through some of the tough compare with your guide for ’20. But how do we think about the relative size of ADS-B in ’19 versus ’20. That’s the first question. And then the second question that we’ve been getting a lot of from investors is, to what extent was ADS-B driving associated retrofit activity when aircraft were in the shop for the mandate upgrade? And how do you contemplate any fade in those associated revenues looking forward? 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So as we exited the year, there were approximately 118,000 airplanes that had been equipped out of a total park, if you will, of about 160,000. So, ideally, that would mean there is something over 40,000 aircraft there could be left to equip. We don’t think that all of those will be. Some of those are probably airplanes that maybe aren’t in the best shape and might be scrapped. So there’s going to be some fallout from those for sure. We expect that most of the activity would take place in Q1 and some in Q2 and then the activity would tend to go down in Q3 and four. 

In terms of the retrofit activity, while it’s true that ADS-B probably prompted people to come in and look at other things as we got towards the end of the mandate, particularly most of ’19, I would say shop capacity has been a real issue. So as a result, people may not have been able to do everything that they wanted to. And meanwhile, we’ve been introducing a lot of great new products and these are generating a lot of interest. So we would expect that people will come back and do more. And the reality is is that not everybody wants to put down the big bill for all of their retrofit needs at one time too. So they may shop and continue to watch and then do more later. So we’re optimistic about the retrofit market. We think that it still has a lot of room to grow. 

Robert Spingarn 

Analyst | Credit Suisse 

So if — just reflecting back on what you just said, if Q1 and Q2 see a little bit of ADS-B activity and probably at a lower rate than the quarters of 2019, is it fair to say that you’re anticipating a decline of something like, I don’t know, let’s call it 60% or so, maybe a little more? 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah, we don’t have guidance specific on that. I would tell you that ADS-B goes to zero because transponders need to be replaced. There is new features, new products that introduced. So there will always be an underlying market for ADS-B out there and of course new airplanes always need ADS-B. So there will be a run rate of ADS-B going forward. 

Robert Spingarn 

Analyst | Credit Suisse 

Okay. And then just I wanted to ask you to what extent you factored coronavirus into the guide and that’s it fro me. Thank you. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So coronavirus. I think it’s still an emerging situation and the cases seem to be peaking, but we’re watching that. I would say it’s also early in the year. So we don’t — even if there is some short-term impact, we feel like there is a lot of room to make up for that. So far out impact has been minimal and our safety stock situation has helped us there. If the outbreak continues to go on, then of course that would change the game and — for us and a lot of other people. But for now, we are optimistic that things are coming back online. Our suppliers seem to be coming back, although obviously there is a ramp-up period that we’re managing through all of it. 

Robert Spingarn 

Analyst | Credit Suisse 

Thank you. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thank you. 

Operator 

[Operator Instructions] Your next question comes from Charlie Anderson from Dougherty & Company. 

Charlie Anderson 

Analyst | Dougherty & Company LLC 

Yeah, thanks for taking my questions and congrats on a stellar 2019. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thanks, Charlie. 

Charlie Anderson 

Analyst | Dougherty & Company LLC 

I want to — I want to start with automotive, a few things. I think number one, Q4 was a little bit lower operating income, looked like higher R&D, was that just a start-up ahead of the BMW? I was curious there. And then you did make some comments in your prepared remarks about production in the US and then in Europe. I know you’ve talked about the Ford deal recently, but I wonder if there are any others to highlight the drives putting those facilities together? And then lastly on automotive, I know PND is kind of continue to probably to be a headwind, assuming we’re not basing there. So maybe just kind of curious what you are embedding in the guidance in terms of the rate of decline in the PND business? Thanks. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So in terms of the lower operating income in Q4, there was a mix of some one-time items there as well as increased R&D associated with non-capitalized projects. So both of those kind of came together to generally lower the overall auto operating income. The PND side is very profitable, and so that’s something we’re not as worried about. We do see that the market will continue to decline in 2020 although at a moderated pace as the specialty products become a bigger part of the mix. And we also see a shift in terms of buying behaviors to the more advanced products that we offer. So that’s all good news in our view. 

In terms of the production plan, in the US we’re equipping our factory here to be able to supply the BMW program that we won a few years back for North American production. And then the European investment is for the most recent BMW win that will supply the European factories for BMW. 

Charlie Anderson 

Analyst | Dougherty & Company LLC 

Okay, perfect. And then for my follow up, with the change that you made that influences the tax rate, I’m just sort of curious how that impacts where cash is accessible to corporate — for corporate purposes. I wonder if you could sort of update us on kind of where everything stands in terms of where cash is and accessible and if there is any change there. Thanks so much. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Sure. Thanks, Charlie. So as it relates to where the cash is, it does not change that. So, let me give you a little bit of a — a little bit more detailed color on the transaction that we went through. So this relates to intercompany license agreement between Switzerland and the United States. And so, the situation is that United States is going to be paying a royalty payment to Switzerland for the use of certain consumer IT we have in Switzerland. So as a result of that that lowers the amount of income recognized in the United States and increases it in Switzerland. And as a result of that it gives us a favorable income mix by jurisdiction during that license period. So during the license period the situation is that higher percentage of the income will be going to the US. 

Charlie Anderson 

Analyst | Dougherty & Company LLC 

Great. Thanks so much. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thank you. 

Operator 

[Technical Issues] comes from Nik Todorov from Longbow Research. 

Nikolay Todorov 

Analyst | Longbow Research 

Thanks. Good morning guys and congrats on great 2019 results. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thanks, Nik. 

Nikolay Todorov 

Analyst | Longbow Research 

Cliff, you talked about expanding distribution of Tacx in 2020 and I think you’re also having some additional capacity coming up online for Tacx specifically in 2020. In your veiw, can you give us some sense on how should we think about overall fitness gross margin in 2020? We see that in fourth quarter gross margin dipped below 50% for the first time, I believe, since 2010 or before. So can you give us some color how should we think about that? 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So the fitness gross margin definitely is influenced by product mix and in the fourth quarter, we had a lot of products that were sold obviously for the holiday season, particularly promotional products and Tacx itself is a product line. As we’ve said before, that is slightly dilutive to the overall gross margins of the segment. And so the — just under 50% was obviously a result of all of that mix. We would expect that to go up and down as the year progresses depending on the seasonality and the kind of products that we offer. And generally we’re targeting around a 50% gross margin for the segment and mid to high teens operating margin for the segment. 

Nikolay Todorov 

Analyst | Longbow Research 

Okay, got it. And Doug, I believe you said our capex for 2020 is expected to be around $225 million, if I’m not mistaken. That’s about QX an increase. Am I assuming correctly this is mostly coming from investments on the auto side and facilities and so forth or are there something else to that? 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Yeah, so let me give you — yeah, it is at an elevated level compared to 2019. So, yeah, 2020 will be an investment year for us as it relates to capex and probably going into 2021. So what’s driving that is exactly what Cliff mentioned, we’re making some investments relating to our auto OEM. We are equipping our facility here in Olathe to handle OEM. Also we will be opening a European facility — manufacturing facility for OEM. Also, we are building a new manufacturing facility for Tacx in Netherlands with that acquisition. Another piece relates to our overall Olathe facility expansion. If you remember, we built a new facility for our manufacturing as well as our distribution. We’re complete with that. What we’re doing now is actually renovating our previous manufacturing operation facility there. We’re renovating that to increase our workspace because of increased headcount to support our R&D expansion as well as innovation. 

Nikolay Todorov 

Analyst | Longbow Research 

Okay. 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Little bit drivers we have. 

Nikolay Todorov 

Analyst | Longbow Research 

Yeah. I see. And last one for me, the implied guidance assumes about 100 basis points of increase in operating expenses as a percent of sales. Doug, can you give us some color? Is it mostly coming up from higher R&D expenses or is it across the board? 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Yeah, sure. So as it relates to 2020 on operating expense, to give you a little bit of flavor of that by category, first on advertising, for advertising as a percentage of sales, we would expect our advertising to be relatively consistent year- over-year. We’ll probably spend more advertising dollars, but we try to keep that in line with our sales growth. As it relates to R&D, yes, there will be increased R&D as a percentage of sales year-over-year. We expect that to probably be up maybe about 100 basis points. And then as it relates to SG&A as a percentage of sales, we expect that to be up about 50 basis points or so. So what’s really driving that increased operating expenses really is our increased revenue growth. So, one of which is the situation as we talked about for OEM business. So we’re making some investments there to cover increased R&D, operations as well as IT for a different system there. 

From a R&D front overall, we will continue to invest in R&D to make sure that we have innovation in our products. And lastly, I would say is that there is some full-year impact to some acquisitions, most notably Tacx that we did in 2019 and we’ll have the full-year impact of those items. So all those expense items as well as the capex, we talked about really to support our top line growth in revenue. 

Nikolay Todorov 

Analyst | Longbow Research 

Got it. Okay, guys. Thanks. Good luck. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thanks, Nik. 

Operator 

Your next question comes from Will Power from Baird. 

Charles Erlikh 

Analyst | Baird Equity Research 

Hey guys, this is Charlie Erlikh on for Will. Thanks for taking the question. I wanted to ask about the fitness segment and the strength in the quarter. Could you talk a little bit more about what specifically drove that strength and it’s been a real stand-out in 2019. It looks like you’re expecting another strong year in fitness next year. So how have you been able to successfully navigate the competitive environment where Apple continues to do really well as well? 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

I think for us the strength, Charlie, for the year and also for the quarter was really around new products, our new Venu, vivoactive 4 product lines were very popular as well as the new running product lines that we introduced last year, we completely refreshed all of those product lines. So they did very well. And then separately, we got very promotional with some of the previous generation products, which drove a lot of sales activity in the holiday quarter. 

In terms of just drivers around the competitive landscape, I would say that we feel like the landscape is generally narrowed a lot. Of course Apple is a big one out there, just in terms of total wearables market share. We believe that we differentiate from Apple and others with our products that are built specifically for active lifestyles. And we focus on all day 24/7 wearability, long battery life and the ability to track detailed health metrics. So we’re very focused on those categories and we believe we’re doing very well with our space. 

Charles Erlikh 

Analyst | Baird Equity Research 

Great. I know that makes sense. And congrats on surpassing $1 billion in revenue, and that’s something that’s quite an accomplishment. That’s it for me. Thanks guys. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yes, thank you. 

Operator 

[Operator Instructions] Your next question comes from Erik Woodring from Morgan Stanley. 

Erik Woodring 

Analyst | Morgan Stanley 

Hey. Good morning, guys. Congrats on the quarter. Just a quick procedural question here. As I think about the tax rate going forward, should we think about 10% as somewhat the normalized tax rate as this license is intact beyond 2020, basically into 2021 and out, or how should we think about that beyond 2020? And I have a follow-up. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So as it relates to our tax rate, we do not give any detailed guidance beyond the current year. So there’s a number of things that really impact that tax rate, all the way from the amount of income we have, the income by segment, income by country, reserve releases as such. But while — from a high level perspective is while we have the license agreement in place, we will see that favorable income mix by jurisdiction. Then when we no longer have the license agreement, at that point in time we’ll have a higher percentage of our income go into US. So that’s actually what it is. But like I said, there is a lot of puts and takes in that tax rate, but it’s something that we looked at to make sure that we do maintain as efficient of a tax structure as possible. 

Erik Woodring 

Analyst | Morgan Stanley 

Perfect. That’s super helpful. And then I guess if I just think about the autos business, I guess your guidance would imply and your commentary would imply that you’re going to see more of a mix shift towards the OEM business away from the PND business in 2020. And so I guess what I’m trying to get at is, is this mix shift a tailwind to gross margins, a headwind to gross margin, just would love to hear kind of the puts and takes as you think about auto gross margins in 2020? Thanks. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So as it relates to gross margins, you’re correct, in the autos segment as a total OEM will be a higher percentage of the total. So that will be a situation where auto OEM gross margins are lower than the PND. So that will be something that will impact and decline the total auto gross margin in 2020. 

Erik Woodring 

Analyst | Morgan Stanley 

Awesome. Thank you very much guys. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thank you. 

Operator 

Your next question comes from Paul Chung from J.P. Morgan. 

Paul Chung 

Analyst | J.P. Morgan 

Hey guys. Thanks for taking the question. So as we think about free cash flow for 2020, you had kind of a working cap drag in ’19, part of that was from tax [Phonetic]. But how should we think about ’20 working cap dynamics and then what is your kind of free cash flow guide for the year? Should we expect kind of like a bounce back in conversion this year? And then as we think about seasonality for the business, you had some aviation flow through in the first half and then a pickup in the second half in auto OEM. So a lot of moving pieces, but how should we think about kind of seasonal patterns from last year, relative to last year and prior years or anything you want to call out? And then I have follow-up. 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Yeah, sure. So it relates to free cash flow for 2020. You’re correct — first start with 2019. So yeah, 2019 we did have some significant capital — working capital needs, primarily an inventory area. That situation as previously talked about for 2019 we basically made a strategy to increase our day supply, to increase our safety [Indecipherable]mitigate Brexit all those types of things, as well as we had increased AR just because of the increase in our sales year-over-year. 

Now turning to page 2020. We expect our free cash flow to bounce back. Our current estimates for free cash flow for 2020 are about $750 million. So with that, we are not anticipating to have the same type of year-over-year working capital needs that we had in 2019 and 2020. I should say, related to inventory, we would expect inventory — year-end inventory, 2020, to increase from 2019 levels, but probably more in line with what the sales increase, not the type of a step function that we have. So we’ll get some benefit in 2020 relating to that situation I have [Indecipherable] 

So it relates to how it falls out to the year. The situation is, we were building inventory throughout the year. So there will probably be a situation where we may have — a situation where we have inventory year-over-year higher than just the level of sales as we get through the year in the first few quarters. But by the end of the year, hopefully it will be in line with that as we go forward. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

But also capex plays into that also, that’s partially offsetting that to increased capex we have which I have previously talked about. So go back to — we’re making some increased investments in there for building us for the — revenue for the future. 

Paul Chung 

Analyst | J.P. Morgan 

Got you. And then your kind of seasonality of top line, if you could follow up on that? And then also the increase in opex, is that going to be pretty measured throughout the year? 

Doug Boessen 

Chief Financial Officer and Treasurer | Garmin Ltd. 

Yeah. So as it relates to the top line, I’ll give you some real high level point on that. I think Cliff alluded to the situation in auto. The back half of the — back half of the year we will see some of that increase relating to OEM. Also I should mention in the fitness side of our business leading to the acquisition of Tacx so the Tacx was the acquisition that was the first part of the second quarter. So we’ll get some benefit in Q1, relating to that. So that will kind of be the seasonality relating to revenue. And then as it relates to opex, I said that. That’ll be something where we started to basically build some of those operating expenses here in Q4, moving into 2020. So that will be something that we’ll see that build throughout the year. 

Paul Chung 

Analyst | J.P. Morgan 

Okay. And then last question on Tacx. What was the contribution in the quarter and then as we lap it in 2Q, how should we think about the kind of growth in the second half and fitness for 2020? How much of that growth are you kind of baking in for expanding your distribution efforts for Tacx? Thank you. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Yeah. So the majority of the growth that we saw on fitness was organic. Tacx was less than half of the growth that we saw and of course, we have one quarter in 2020 that we’re basically comping until we comp against the acquisition of Tacx. So going forward then the outlook would be for all organic growth, Tacx contributing to extended distribution and then of course, we anticipate a strong year for our wearable products as we had in 2019. 

Paul Chung 

Analyst | J.P. Morgan 

Okay, great. Thanks guys. 

Clifton Pemble 

President and Chief Executive Officer | Garmin Ltd. 

Thank you. 

Operator 

I’m showing no further questions at this time. I would now like to turn the conference back to Teri Seck. 

Teri Seck 

Investor Relations | Garmin Ltd. 

Thanks everyone. As always, Doug and I are available for calls throughout the day. We hope you have a wonderful day. Bye. 

Operator 

[Operator Closing Remarks] 

 

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