Good day, and thank you for standing by. Welcome to Garmin Limited First Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your first speaker today to Teri Seck, Director of Investor Relations. Please go ahead.

Good morning. We would like to welcome you to Garmin Ltd.'s First Quarter 2022 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 Ltd. and its business. Any statements regarding our future financial position, revenues, earnings, gross margins, operating margins, future dividends or share repurchases, 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 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 any time, and any statement about the impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date. Presenting on behalf of Garmin Ltd. 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.

Thank you, Teri, and good morning, everyone. As reported earlier today, consolidated revenue increased 9% to $1.17 billion, representing a new first quarter record. Four business segments reported revenue growth in the quarter, 3 of which delivered double-digit growth. We generated $229 million of operating income, down 8% from the prior year. Operating margin was 19.5% and was negatively impacted by gross margin performance, which declined due to historically high freight costs, combined with the strengthening of the U.S. dollar. In addition, operating expenses increased for a variety of reasons, including higher associate head count, increased compensation costs and the increase of certain operational expenses as business activities continue to normalize. We performed very well during the quarter despite a combination of old and new headwinds. Supply chain constraints persist, which limited the orders we could fill. Russia's invasion of Ukraine created an unthinkable humanitarian crisis and further complicated the global economic outlook. Despite these challenges, demand for our products remains strong and we are optimistic about the future. Our Board of Directors recently approved a $300 million share repurchase plan, which is in addition to the proposed $2.92 per share dividend that will be considered by shareholders at the upcoming annual meeting. Before turning the call over to Doug, I'll provide highlights by segment and a summary of what we see ahead. Starting with business, revenue decreased 28% to $221 million. Gross and operating margins were 48% and 0%, respectively. All product categories declined, but the normalization of demand for cycling products was the main contributor. While revenue from fitness wearables declined, on a combined basis, wearable device revenue across all segments at Garmin experienced robust growth. We expected the first half of the year to be challenging for the fitness segment as we compare against the outstanding performance of the prior year. While the decline was greater than expected, we believe these trends will moderate in the back half of the year as we move past the pandemic swings of 2021 and benefit from new product introductions. Moving to the outdoor segment. Revenue increased 50% to $385 million with growth in multiple categories led by strong demand for adventure watches. Gross and operating margins were 64% and 39%, respectively, resulting in operating income of $149 million. During the quarter, we announced sweeping updates to our adventure watch lineup, including our flagship fenix 7 series featuring a distinctive new design with a touchscreen display, and the Instinct 2 series available in 2 sizes, including versions that can operate indefinitely using our exclusive solar power technology. We also announced the all-new epix with a bright AMOLED touchscreen display and class-leading battery life up to 16 days. We believe that strong demand for these new products as well as other categories in the segment will be a growth driver for the remainder of the year. Looking next at the aviation segment. Revenue increased 1% to $175 million with growth driven by OEM product categories. Supply constraints impacted sales of aftermarket products but the situation improved throughout the quarter. Gross and operating margins were 73% and 23%, respectively, resulting in operating income of $40 million. Aircraft OEMs are reporting robust orders from both new and existing customers. Aftermarket demand is also strong as customers invest in new cockpit systems. We believe these are positive indicators of growth for the remainder of the year. The marine segment delivered another quarter of impressive results with revenue increasing 21% to $254 million. We experienced broad-based growth across multiple product categories led by chartplotters. Gross and operating margins were 51% and 23%, respectively, resulting in operating income of $59 million. LiveScope has proven to be a halo technology for Garmin, and the new LiveScope Plus sonar system raises the bar with higher resolution images and improved target separation. We continue to see strong demand for our marine products and LiveScope Plus builds on this momentum. We believe this is a positive indicator of growth for the remainder of the year. Moving finally to the auto segment. Revenue increased 11% to $138 million, with growth from both OEM and consumer categories. Gross margin was 38%, and we recorded an operating loss of $20 million driven by investments in auto OEM programs. In consumer auto, we continue to diversify our product offerings with the launch of the Instinct 2 dezl edition smartwatch for truck drivers. In the OEM category, we made significant progress preparing for the launch of the next-generation BMW computing module platform. BMW approved our new Poland factory, giving it a rare green rating for mass production readiness. We anticipate delivering production parts to BMW starting in the second quarter. Before I turn the call over to Doug, it's important to remember that our diversified business model offers many different paths to achieve our consolidated growth goals. We remain focused on creating highly differentiated products in all segments that excite our customers and lead to success. Regarding our outlook for the rest of the year, I mentioned several new and existing headwinds we face, and we cannot predict the impact that these might have on the business. Also, the first quarter represents the lowest seasonal quarter of our financial year and much of the year remains ahead of us. With these things in mind, we are maintaining our 2022 guidance issued in February, which called for consolidated revenue of $5.5 billion and EPS of $5.90 a share. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Thanks, Cliff. Good morning, everyone. I begin by reviewing our first quarter financial results and provide comments on the balance sheet, cash flow statement and taxes. We posted revenue of $1.173 billion in the first quarter, representing 9% increase year-over-year. Gross margin was 56.5%, 330 basis point decrease from the prior quarter. The decrease was primarily due to higher freight costs and favorable impact of foreign exchange rates. Operating expense as a percentage of sales was 37%, a 50 basis point increase. Operating income was $229 million, 8% decrease. Operating margin was 19.5%, 300 basis point decrease. Our GAAP EPS was $1.09. The former EPS was $1.11. Next, we look at our first quarter revenue by segment and geography. In the first quarter, we achieved double-digit growth in 3 of our 5 segments, led by the outdoor segment, robust growth of 50%; followed by the marine segment, 21% growth; and the auto segment, 11% growth. By geography, 21% growth in APAC, 13% growth in Americas was partially offset by 1% decline in EMEA, which was negatively impacted by foreign exchange rates during the quarter. Looking next at operating expenses. First quarter operating expense increased by $42 million or 11%. Research and development increased $20 million year-over-year, primarily due to engineering personnel costs. Advertising expense increased approximately $3 million due to higher spend in the outdoor and marine segments. SG&A increased $19 million compared to the prior year quarter, primarily due to increases in personnel-related expenses, information technology costs. A few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash, marketable securities approximately $3 billion. Accounts receivable decreased sequentially to $600 million following a seasonally strong fourth quarter and grew year-over-year, relatively in line with our sales growth. Inventory balance increased year-over-year to $1.3 billion. We're executing our strategy, increase days supply to support our increasingly diversified product lines to optimize the mix of ocean versus air freight shipments to carry sufficient levels of raw material safety stock to mitigate increased lead times. In the first quarter of 2022, we generated free cash flow of $126 million, a $206 million decrease in the prior quarter, primarily due to increased working capital needs and higher capital expenditures, also reported effective tax rate of 10.3% compared to 12.2% in the prior quarter. The decrease in effective tax rate is primarily due to an increase in U.S. tax deductions and credits. This concludes our formal remarks. Talon, could you please open the line for Q&A?

[Operator Instructions]. I show our first question comes from the line of Paul Chung from JPMorgan.

First up, you had a very nice head start in outdoor off the strength of fenix and other product releases. Any update to kind of the year and how we think about that? Should we expect kind of more product releases throughout the year? And then can you help us on the kind of seasonal outlook for outdoor? That would also be helpful.

Yes. I think in terms of the update to the year, we basically are still seeing things the way that we've laid them out, and it's very early in the year to really make any conclusions based on the start that we've had. But we do have a strong product lineup right now, and we have more new products coming throughout the year in all of our segments. And so a lot of our momentum and growth is driven around new innovation and new products.

Got you. And then a similar question on fitness. The pace of decline was a bit more kind of than expected. How do we think about the balance of the year as well? And what drove the minimal operating profit in the quarter? Is that mostly component and cost related? And how does that rebound throughout the year?

Yes. So fitness was weaker than we expected for sure. And the cycling category is the biggest contributor to that. We are comping against really strong results from last year. So there's lots of moving pieces, lots of dimensions to this. But the cycling side of things is really the one that's the biggest impact. But if you look at it from a different angle, the operating profit was mostly affected by FX and freight costs. If those things would have been under normal circumstances, we would have been pretty much in the range of where our gross margin and operating margin profiles are for the segment.

Got you. And then lastly, Doug, on free cash flow. Kind of any update on the annual guide? And the share buyback messaging, that's new. We haven't seen buybacks in 4 years -- last 4 years. How should we think about kind of the pace there and potential for more kind of material buybacks given kind of $3 billion net cash?

Yes. Yes. Regarding free cash flow, yes, still early in the year, but there's a couple of things you need to consider, one of which is our working capital needs. We did have some of those working capital needs here in Q1, where we saw inventory increased more than the previous year. You also need to factor in last year, we had a large amount of inventory increases in the back of the year. So hopefully, we won't have as much of an increase in the inventory, I'll say, year-over-year than we did last year in there. But the working free cash flow and other things, CapEx is pretty consistent year-over-year for the full year in there. It depends also on the operating side of things, but we'll give you more guidance on that in Q2. As it relates to the share buyback, it's something that we evaluate with the Board, and we felt that was something that was appropriate at this point in time. Regarding the amount that we're going to be doing, it's really depending upon market conditions, business conditions at a point in time, the amount that we buy back during the period.

I show our next question comes from the line of Will Power from Baird.

Great. Maybe just a follow-up first on fitness. I think we, and you all noted, there were some particularly tough cycling comps year-over-year, but it sounds like there was some year-over-year weakness in the other fitness categories, too. I guess I'm wondering if there are any areas you'd call out there. Any key drivers of that? Maybe any comments on changes in the competitive climate? Just trying to understand the broader fitness picture.

Yes. I think that as we mentioned, all categories in this segment were weaker year-over-year. We're comparing against a really monster quarter from the last year. So that's one dimension. And then you can't discount the impact of our overall wearable product lineup across the company and particularly the release of the new adventure wearables on the outdoor side, which probably impacted things as well. So as I mentioned, we experienced robust growth across all wearables at Garmin. So we feel like the market is robust and our position in the market is also very robust.

Okay. That makes sense. Cliff, it'd be great to get a little more color as to what you're seeing kind of real-time across Europe. As you talk to your retail partners, have you seen any change in kind of purchasing trends, appetite from them just as you think about the impacts of the Russia-Ukraine conflict and inflationary pressures kind of across the continent, particularly in Eastern Europe? As you exit Q1 and obviously now into Q2, anything you'd call out there with respect to demand trends?

Yes. I think Europe is more notably weak as you can see in our geographical results. I think really 2 aspects to that. One is the Ukraine situation. We definitely did see a noticeable impact in product registrations as that conflict broke out and was weaker for the initial period and has only recently started to show some signs of kind of popping back as people maybe normalize or get used to the risk environment that they're in there. But the other factor for Europeans is the high inflation. It's really not just European, but it's global, but they particularly are impacted by much higher fuel prices and concern and worry over the economy. So I think those factors impacted us in Europe, but we saw a much stronger growth in Americas and APAC.

Yes. Okay. I guess maybe just a last question. You maintained guidance for the year. Maybe just any other color as to your confidence there. I mean it sounds like it's really built just on the diversity of the business, and I recognize we're still early in the year. But as you think about the various uncertainties that are still out there, whether it's supply chain, inflation, et cetera, maybe just any other color as to what gives you confidence in maintaining that outlook at this point?

Yes. As you said, we're maintaining what we said in February. It is early in the year, and this is our lowest seasonal quarter. So we like to see how the year is evolving before we make any material changes to our outlook. I would say that in general, we see positive indicators, as I said in my remarks, across many of our segments. And at the same time, the uncertainties have increased and the complexities have increased, so we recognize that as well. But the diversity of our business is very high. The demand in several of our segments is strong. And so that's what we base our confidence on as we go forward.

Our next question comes from the line of Nik Todorov from Longbow.

Doug and Cliff, first question on gross margin for fitness. How should we think about the trajectory throughout the year? Obviously, I think FX headwind, if anything, is probably going to increase in 2Q sequentially and the logistics piece is probably not changing much. So any kind of color on trajectory of fitness gross margin through the rest of the year?

Yes. As it relates to gross margin for fitness, yes, 2 of the big drivers there, obviously, are freight and FX. And actually, FX is a bigger impact on the fitness business just given our EMEA side of the business in there. So as it relates to the year, it's still early in the year here, but we have to manage through those headwinds, and we'll have to see how those mitigate hopefully. We're doing things, hopefully, help mitigate some of the freight. I previously mentioned inventory. We're trying to optimize our ocean versus air to mitigate some of the increases there. But FX, that's something -- and we've seen more of the strengthening of dollar there and increases. So we have to see how that all plays out for the rest of the year.

Okay. And then, Cliff, I think you mentioned in your remarks that you're starting to see some improvement in aviation in the aftermarket business as it relates to component supply. Do you have any visibility into further easing into the rest of the year? And do you expect maybe a return to some normal environment to the second half? Or that's too early to call?

Yes. I think one of the things we mentioned actually last time is we expected the first half of the year to be more challenging for the aviation aftermarket because of the supply chain constraints we were experiencing. We've started to see that improve, especially as we rolled into the month of March and onward. But we do expect still to be able to see more improvement as we get into the back half because we're taking actions to dual source some parts as well as we're getting more supply from our existing suppliers.

Okay. And last question for me. There's been some signs of moderation of retail boating demand, and I know you're exposed more on the aftermarket side. But I'm just wondering, are you seeing any spillover effect, any signs of moderation on the aftermarket side of marine?

Yes. I think really nothing to speak of. We still see very strong demand for our most popular products and especially driven by the technology developments that we've made in the area of live sonar, and our display systems are all very good and sought after. I would say in terms of retail boating or I would say the OEM side is what we would call that, but in general, we still hear our OEM partners say that they're sitting on years of backlogs in their business and working very hard to deliver the boats that have been ordered. So we still see a strong demand cycle moving forward from the OEM side of the business.

I show our next question comes from the line of Jeffrey Rand from Deutsche Bank.

How are the current inventory levels of your channel for your cycling business? And how do you think about end customer demand for cycling products through the rest of the year?

I think in terms of inventory, it varies by product line, but the one that we've been talking about most is the indoor trainer inventory. Retailers do have a lot of inventory in the indoor training category, and they're selling through that, of course. And we also have inventory that we have in our warehouses that would go into the channel as soon as it kind of clears up. But that's a situation that's going to be around for a while. We don't expect it to improve quickly. So we're just going to have to be patient and work through that. In terms of other categories, it really depends by geography, by retailer, by product line. But in general, we think channel inventory levels are reasonable, and we don't see any concern there.

Great. And then operating margins in your auto OEM business were relatively flat sequentially. How do you think about operating margins for this business over the next few quarters as projects ramp up further?

Yes. I think in terms of what will happen going forward, as our deliveries increase, we will be able to experience scale in that business. So it should improve our overall operating margin performance, although we're not expecting that to swing to a positive number in the near term. But as we start to deliver the new products to BMW and as our production scale increases, it should generally improve.

I show our next question comes from the line of Ben Bollin from Cleveland Research.

A couple of questions. The first is, Cliff, could you talk a little bit about how you think of fitness and outdoor wearables? And how much of that business do you think is completely new buyers versus how much might be refresh of preexisting buyers? And then I had a follow-up.

Yes, thanks. I think in terms of the customer profile of our wearables, it really depends by product line and by segment. But at the highest level, if you look across all our wearables, we are mostly selling to brand-new customers to Garmin who are registering a new device for the first time and creating a Garmin Connect account. But we also have, of course, a sizable amount of business that we do with people who love to stay current on the latest products that we release. And so we see that side of the business as well. But right now, it's still more of an -- it's still a majority of people that are new to our wearables.

Okay. The other different question, can you remind us on the revenue recognition methodology with BMW. How it may change as you go into the broader platform outside of China? And any thoughts on content opportunity?

Yes. So as revenue recognition standpoint, probably shouldn't be that much different than we have at this point in time in the different models that come out from that standpoint -- from a revenue recognition standpoint.

Any thoughts on content going forward? As you get into more of these models, does that change the amount of dollar content per vehicle? Or is it similar with what you saw in China?

I think actually, Ben, the content per vehicle on the newer platforms that we're delivering is much higher per vehicle than what we're seeing on the current products delivered out of China as well as out of the U.S. factory here. In some cases, once we get to full production mode with BMW, they've adopted it across all of their platforms. Some vehicles could have 3 or more of these modules within the vehicle. So it will dramatically increase per vehicle based on what we're delivering over the long term to BMW.

I show our next question comes from the line of Elizabeth Grenfell from Bank of America.

As we think about the cycling business and the normalization that we're seeing, when do you expect it to completely have normalized? And at what level do you consider normal?

Yes, I think that's a very good question. During the first half of 2021, we saw elevated demands for all cycling products, including the indoor trainers where every factory -- and speaking broadly beyond just Garmin every factory and every manufacturer of those devices were delivering all that they could make to the market because of the demand. So the first half was very robust because of that really strong pandemic-driven demand and then that tailed off significantly in the second half. So we are expecting to see that those comps will improve starting in the second half and will probably take throughout the remainder of the year to really normalize. In terms of the levels we're seeing, generally, we continue to see that the levels we're settling at for cycling products are in line with reasonable growth of the overall market over the past 2 to 3 years. So what that means is the CAGR is probably somewhere in the 5% to 10% range of the overall market, and it's settling in at some reasonable growth level over 2019 or even early 2020 type numbers.

[Operator Instructions]. I show our next question comes from the line of Erik Woodring from Morgan Stanley.

Maybe just a few for me. Starting with one clarification question, Cliff. And Cliff, you mentioned earlier about channel inventory levels being reasonable. Was that just a fitness comment? Or was that a total company comment?

I would say total across all of our product lines that are popular in retail.

Okay. And then in your -- in the prepared remarks, in the presentation deck, you made similar comments in outdoor, aviation, marine, calling out positive indicators. Any way that you can just maybe, for each of those markets, elaborate just a bit on what those positive indicators are?

Well, I think if we just look at those one by one, I would say, in outdoor, our new product releases and the adventure watches are -- we continue to work to fill all of the demand that we're seeing for those. And in addition, there's some golf products that we've struggled to match the demand popularity of some of the products that we have there. So that's the outdoor side of things. On the marine side of things, our new Panoptix LiveScope Plus system is extremely popular. And so we're working to fulfill a lot of back orders on that product, which also drives display systems. So there's kind of a broad-based demand in our marine segment because of that. And then finally, in aviation, I think our biggest opportunity right now is the aftermarket side of things. We've been constrained because of the supply chain situation. And as I mentioned, we're starting to see that get better incrementally, but it will take some time to really fully recover. But the backlogs that we have there of things that we need to deliver is strong.

Okay. Super helpful. And then one last question for me on outdoor. How much of the outperformance, so to speak, in 1Q was a result of sales being pushed from 4Q into 1Q? And then kind of second to that, were you able to fill the channel with all of your -- with all of the new products that you were -- that you launched in outdoor? Or is there still more to come, you'd say?

I think most certainly, we tried to time the launch of the new products optimally, and we felt like it was not the best time to launch in late Q4. So there's probably some impact that shifted demand because people were waiting for our new products for sure. But it's hard to speculate on how much of that there was. And would you say your second part again?

Yes. Just curious if you were able to get enough supply to fill the channel to your ideal levels for those new products launch in outdoor, if there is still more of that to come in the future, you'd say?

I think for our initial plan, we definitely were able to fill the channel. And what we found is that the reorders have continued to be strong. And so we're still chasing initial demand for that product line that we're working to fill.

I'm showing no further questions in the queue. At this time, I would like to turn the call back over to Teri Seck, Director of Investor Relations, for closing remarks.

Okay, everyone. Thanks so much for your time. Doug and I are available for callbacks and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.