Garmin Management Discusses Q2 2012 Results - Earnings Call Transcript

Garmin (GRMN)

Q2 2012 Earnings Call

August 01, 2012 10:30 am ET

Executives

Kerri Thurston - Director of Investor Relations

Clifton A. Pemble - President, Chief Operating Officer, Director, President of Garmin International Inc, President of Garmin USA Inc and President of Garmin AT Inc

Kevin S. Rauckman - Chief Financial Officer, Principal Accounting Officer, Treasurer, Treasurer of Garmin International Inc, Treasurer of Garmin Usa Inc, Director of Garmin International Inc and Director of Garmin Usa Inc

Analysts

Mark Sue - RBC Capital Markets, LLC, Research Division

John F. Bright - Avondale Partners, LLC, Research Division

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Scott P. Sutherland - Wedbush Securities Inc., Research Division

Charles L. Anderson - Dougherty & Company LLC, Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

James E. Faucette - Pacific Crest Securities, Inc., Research Division

Jonathan Goldberg - Deutsche Bank AG, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Michael Holt - Morningstar Inc., Research Division

Presentation

Operator

Good day, and welcome, everyone, to the Garmin Ltd. Second Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Kerri Thurston. Please go ahead, ma'am.

Kerri Thurston

Thank you, and good morning, everyone. We'd like to welcome you to Garmin Ltd. Second Quarter 2012 Earnings Call. Please note that a copy of the press release concerning this earnings call is available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. Additionally, this call is being broadcast live on the Internet. Please note that this webcast does include slides, which can be viewed during this call. An archive of the webcast will be available until October 1, and a transcript to the call will be available on the website under the Events calendar.

This earnings call includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, market share, product introductions, future demand for our products 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 for the year ended December 31, 2011, filed with the Securities and Exchange Commission.

Attending today's call on behalf of Garmin Ltd. are Dr. Min Kao, Chairman and Chief Executive Officer; Cliff Pemble, President and Chief Operating Officer; and Kevin Rauckman, Chief Financial Officer and Treasurer.

The presenters for this morning's call are Cliff and Kevin. At this time, I'd like to turn the call over to Cliff.

Clifton A. Pemble

Thank you, Kerri, and good morning, everyone. As we announced earlier this morning, Garmin delivered strong revenue and margin performance, resulting in pro forma EPS growth of 56% in the second quarter.

Consolidated revenues increased 7% year-over-year to $718 million with growth in Outdoor pacing all of the segments at 24%. Our traditional markets of Aviation, Marine, Outdoor and Fitness contributed 45% of the total revenue mix. Gross margins improved to 59% from 48% in the prior year. Kevin will discuss specific items impacting margin performance later during his remarks.

Operating margins also improved significantly to 28%, with our traditional markets posting 10% operating income growth in the quarter. Revenue growth combined with improved margins resulted in both operating income and pro forma EPS growth.

Operating income for the quarter grew 55% to $204 million, while pro forma EPS was $0.98, a 56% improvement over the prior year. We sold 3.9 million units in the quarter, up 4% year-over-year. Next I'll walk you through the financial and strategic highlights segment by segment.

Starting first with Marine. Revenue in the Marine segment declined 14%, driven by weak economic conditions around the world. However, better gross margins largely offset the impact of lower sales. Sales in Europe were down sharply, while sales in other regions were comparatively better but still soft during the normally robust second quarter selling season.

While industry statistics indicating that boating sales have improved, the trend seems to be towards low-end boats where there's little to no Marine Electronics content. We maintain a high level of confidence in our long-term opportunities in the Marine segment and are continuing to invest in new product development and strategic alliances that position us for market share gains. As we have mentioned previously, these investments will create near-term operating margin compressions.

In Aviation, we posted revenue growth of 4% as improvements in OEM deliveries were partially offset by weakness in the aftermarket. In recent quarters, operating margin has trended below historical norms as new programs require a higher level of R&D investment compared to what we have seen in the past. We remain confident that these investments will lead to stronger revenue and operating margin growth for the future.

During the quarter, we made additional announcements that demonstrate the progress we are making to expand our presence in the business jet market. Cessna selected are G5000 integrated flight deck where the new Citation Longitude, which is the longest range business jet operating in the Cessna lineup. This expands upon the already successful relationship we have had with Cessna for many years now.

In addition, we announced a new relationship with Bombardier. We selected the G5000 for the new Learjet 70 and 75, which are scheduled for delivery in 2013.

Due to the steady increasing number of new confident certifications that are in progress, we thought it would be helpful to provide a summary of the major wins that have been announced so far and projected entry into service based on publicly available information from the aircraft manufacturers.

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