Garmin Ltd (GRMN) Q4 2021 Earnings Call Transcript

Good morning. We would like to welcome you to Garmin Limited's fourth quarter and fiscal year 2021 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 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 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.

Thank you, Teri, and good morning, everyone. As reported earlier today, we ended 2021 with fourth-quarter revenue of $1.39 billion, up 3% over the prior year, representing a new record for Garmin. During 2021, quarter-by-quarter comparisons to the prior year have been difficult to interpret due to pandemic-driven swings of 2020. It's interesting to note that revenue grew 12% on a CAGR basis compared to Q4 of 2019. We believe this comparison better reflects the underlying strength of the business, and we are very pleased with our development over these past two years. Operating profit came in at $315 million, down 15% over the prior year. Gross margin declined due to pressure that every business is facing, notably higher freight costs. In addition, operational expenses increased for a variety of reasons, including higher associate headcount, increased compensation costs and the increase of certain operational expenses as business activities normalize. Even with these headwinds, operating margin remains very strong at 22.6%. 2021 was our sixth consecutive year of revenue and operating income growth, establishing new records for the company. Revenue increased 19% to nearly $5 billion, and operating income grew 16% exceeding $1.2 billion; each segment delivered strong double-digit revenue growth. I'm very proud of what we accomplished, especially considering the challenging operating environment everyone is facing. The availability of electronic components has been a major topic of conversation over the past year. While we are not always able to get everything we need, we believe we've been very effective in managing the situation as evidenced by our results. Our vertically integrated business model gives us greater levels of agility and flexibility in this dynamic supply chain environment. However, it's the creativity, determination and teamwork of our associates that made these accomplishments possible. I'm very proud of our associates, and I'm grateful for all they have done. Looking forward, we are encouraged by the opportunities of the new year. We have a great lineup of recently introduced products, with additional introductions planned throughout the remainder of the year. We anticipate consolidated revenue will increase approximately 10% to $5.5 billion, driven by new product introductions and strong market trends in many of our segments. Our results and outlook for the new year give us confidence to propose a 9% dividend increase, which will be considered by shareholders at the upcoming annual meeting. Before moving on to segment highlights, it's important to share context on how we see the business and markets evolve in 2022. The pandemic drove additional demand in certain product categories, which is starting to normalize from peak levels. This will create additional dynamics to consider for the coming year. And I will note these as I cover each segment. The nuances of individual categories are not a major concern for us; rather, it's our strategic focus on diversification that brings many opportunities for growth, which is the basis for our outlook for 2022. Starting with the Fitness segment, revenue increased 16% for the year as strong demand for advanced wearables and cycling products fueled our growth. Full-year growth and operating margins were 53% and 24% respectively, resulting in operating income growth of 17% over the prior year. In the fourth quarter, Fitness revenue was flat over the prior year as growth in wearables was offset by lower revenue in cycling. Product differentiation is a key factor in our ability to compete in the market for wearables. Lily is a great example with its small form factor, appealing design and unique display that hides when not in use. Customers buying Lily are overwhelmingly new to the Garmin brand, demonstrating the power of differentiation to attract new customers. The cycling category has more than doubled over the past two years, fueled by pandemic-driven demand for both indoor and outdoor cycling products. The market is starting to normalize at levels below recent peaks but well above pre-pandemic levels. With this in mind, we expect Fitness revenue to be flat year-over-year, as growth in wearables is offset by lower revenue in cycling products. In addition, we expect revenue to decline in the first half as we compare against stronger periods from the prior year. In the back half of the year, we expect to return to growth as the cycling market stabilizes and with contributions from new products. In the Outdoor segment, full-year revenue increased 14% with growth across multiple categories, driven by strong demand for adventure watches. Full-year gross and operating margins were 65% and 38% respectively, resulting in operating income growth of 9%. In the fourth quarter, Outdoor revenue decreased 8% primarily due to component constraints in our traditional handheld and dog product categories. We ended the year with unusually high back orders, which were pushed into the new year. On January 18, we announced sweeping updates to our fēnix adventure watch series featuring a distinctive new design and a touchscreen display. We also announced the all-new EPIX with a bright AMOLED touchscreen display and class-leading battery life up to 16 days. Last week, we announced the all-new Instinct 2 Series in two sizes, which will expand the addressable market for this unique adventure watch. Select Instinct 2 models with solar technology can operate indefinitely using only the power of the sun, which is a breakthrough achievement in the smartwatch market. Demand for these new products has been very strong, and we expect them to be a significant catalyst for growth in the coming year. With these things in mind, we anticipate outdoor revenue will increase approximately 20% for the year. Looking next at the Aviation segment, full-year revenue increased 14% due to contributions from both OEM and aftermarket categories. Full-year gross and operating margins were 73% and 27% respectively, resulting in operating income growth of 40%. In the fourth quarter, Aviation revenue was up 13%, driven by growth in OEM categories. Aftermarket sales were flat due to component supply constraints. Aviation also ended the year with unusually high levels of back orders, which carry into the new year. The pandemic highlighted the unique value proposition of general aviation. 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 expect these trends to drive revenue growth of 10% for the year with revenue exceeding the peak we experience during the ADS-B mandate. We expect incrementally stronger growth in the back half as production levels increase over the course of the year. Moving to the Marine segment, the segment delivered another year of impressive results. Revenue increased 33% with broad-based growth across all categories, led by strong demand for chartplotters. We benefited from both market expansion and share gains driven by our strong product portfolio. Full-year growth in operating margins were 57% and 28% respectively, resulting in operating income growth of 39%. In the fourth quarter, Marine revenue increased 14% as the strong trends we experienced throughout the year continued. We recently acquired Vesper Marine, a company specializing in the design of modern VHF radio systems for the Marine market. Looking forward, we anticipate that strong interest in boating and fishing will remain strong. Boat builders continue to report strong sales, and retail partners are preparing for another year of growth. With these things in mind, we anticipate revenue from the Marine segment will increase 15%, surpassing the $1 billion threshold for the year. Moving finally to the Auto segment. Full-year revenue increased 26% with contributions from both auto OEM and consumer auto categories. Full-year gross margin was 39%, and we recorded an operating loss of $71 million, driven by investments in auto OEM programs. In the fourth quarter, auto revenue was up 21% with contributions from consumer specialty categories and new OEM programs. In consumer auto, we continue to launch new specialty categories that lead to growth opportunities. At CES, we announced the tread series for the side-by-side vehicles, bringing off-road specific features and inReach communications to the side-by-side market. Last week, we announced the Instinct Dezl Edition, the first smartwatch designed specifically for the trucking market. BMW recently unveiled their vision for in-car entertainment, bringing a truly cinematic experience into the vehicle. This immersive entertainment system is powered by a multimedia computing platform designed and built by Garmin. We continue to invest heavily to bring this and other BMW systems to market. The investment has been more significant than anticipated, and these investments are expected to continue throughout the remainder of the year as we fulfill our obligations to BMW. This will result in auto OEM operating loss for the year that is roughly comparable to that of 2021. We expect to start production of the next-generation BMW computing platform later this year at low volumes, with more meaningful production ramp occurring in 2023. With these things in mind, we expect total auto revenue to grow approximately 5% for the year.

Thanks, Cliff. Good morning, everyone. I’d like to begin by reviewing our fourth-quarter and full-year financial results, provide comments on the balance sheet, cash flow statement, taxes, and 2022 guidance. We posted revenue of $1.3 billion for the fourth quarter, representing a 3% increase year-over-year. Gross margin was 55.5%, a 300 basis point decrease from the prior year quarter, primarily due to higher freight costs and favorable impacts from foreign exchange rates. Operating expenses as a percentage of sales were 32.8%, a 170 basis point increase. Operating income was $315 million, a 15% decrease. Operating margin was 22.6%, an 80-basis point decrease from the prior year. Our GAAP EPS was $1.48, pro forma EPS was $1.55, a 10% decrease from the prior year pro forma EPS. Looking at the full year results, reported revenue was over $4.9 billion, representing a 19% increase year-over-year. Gross margin was 58%, a 130 basis point decrease compared to the prior year, primarily due to higher freight costs. Operating expenses as a percentage of sales were 33.6%, a basis point decrease. Operating income was $1.2 billion, a 16% increase. Operating margin was 24.5%, a 70-basis point decrease compared to the prior year. Our GAAP EPS was $5.61, pro forma EPS was $5.82, a 13% increase from the prior year pro forma EPS. Next, we’ll get to fourth-quarter revenue by segment and geography. During the quarter, we achieved consolidated growth of 3% with double-digit growth in the Aviation, Marine, Auto segments, partially offset by decline in the Outdoor segment. Fitness segment is relatively flat year-over-year. By geography, 8% growth in APAC and 5% growth in the Americas was partially offset by a decline of 2% in EMEA, which was negatively impacted by foreign exchange rates during the quarter. For the full year 2021, we achieved 19% consolidated growth with solid double-digit growth in all of our five segments. By geography, we achieved double-digit growth in all three regions led by 21% growth in APAC followed by 19% in Americas, and 18% in EMEA. Looking at operating expenses, fourth-quarter operating expenses increased by $37 million or 9%; research and development increased by $22 million year-over-year, primarily due to engineering personnel costs. SG&A increased by $15 million compared to the prior year quarter, primarily due to increased personnel-related expenses and information technology costs. Our advertising expense was consistent with the prior year quarter. A few highlights on the balance sheet, cash flow statement, and dividends. We ended the quarter with cash and marketable securities of approximately $3.1 billion. Accounts receivable increased sequentially to $843 million on the strong sales in the fourth quarter and was relatively flat year-over-year. Inventory increased year-over-year to $1.2 billion due to several factors, including preparation for first-quarter product launches, increased levels of indoor cycling products, expansion of our global manufacturing footprint, and executing our strategy to increase supply to support increasingly diversified product lines. During 2022, we expect our inventory balance to continue to grow, working to optimize the mix of ocean versus air freight shipments while carrying a sufficient level of safety stock to mitigate increased lead times and generally manage the supply of raw materials. In the fourth quarter of 2021, we generated free cash flow of $49 million. For the full year 2021, we generated free cash flow of approximately $705 million, a $245 million decrease compared to the prior year, primarily due to increased inventory levels and higher capital expenditures. For 2022, we expect free cash flow of approximately $725 million and approximately $310 million of capital expenditures. For 2022, we expect to continue making investments in platforms for growth, including our Taiwan manufacturing facilities, continued renovation of our Olathe facilities to increase workspace capacity, and IT-related projects. Also, we announced our plans to seek your approval for an increase in our dividend beginning with the June 2022 payment, proposing a cash dividend of $2.92 per share or $0.73 per share per quarter, a 9% increase from our current quarterly dividend of $0.76 per share. For the full year 2021, we reported an effective tax rate of 10.3%. Turning next to our full-year guidance, we estimate revenue of approximately $5.5 billion, an increase of 10% over the prior year, with double-digit growth in three of our five segments. We expect gross margin to be approximately 57.5%, which is lower than our full-year 2021 gross margin, primarily due to higher supply chain costs and less favorable foreign exchange rates, partially offset by increases in selling prices. We expect an operating margin of approximately 22.8%, and the full-year pro forma effective tax rate is expected to be approximately 10.5%, resulting in expected pro forma earnings per share of approximately $5.90. Finally, I discuss the changes in our methodology for classification of certain expenses and an allocation of certain expenses among the segments, trying to reflect these changes in our reporting for the first quarter of 2022. The new expense classification results in less indirect SG&A costs classified as R&D expense, which we believe will provide a more meaningful representation of the costs incurred to support R&D activities. Consistent with the way management will use information for decision making, approximately $61 million of expenses classified as R&D in 2021 will be recast as SG&A. Future reports will also reflect refined methodology to allocate certain SG&A expenses to segments in a more direct manner, based on analysis of activities supported by the expenses. We believe this refined allocation approach will result in a more meaningful representation of segment operating income. We estimate that Fitness and Outdoor will be allocated more SG&A expenses, resulting in lower operating margin, while other segments will be allocated less SG&A expenses, resulting in a higher operating margin. These changes have no impact on consolidated operating income or net income.

This concludes our formal remarks. Valerie, please open a line for Q&A.

Thank you. Our first question comes to Nik Todorov of Longbow Research. Your line is open.

Yes, thanks, and good morning, everyone, and congrats on great execution and results. Cliff, I think I heard you mention during the prepared remarks that you are raising prices in some segments. Can you talk about which categories or segments are you able to mitigate the rising input cost, and how should we think about the cadence of that mitigation throughout the year? I’m assuming in some segments it’s harder to pass through increased prices immediately.

Yes. Nik, we have a diversified business. And so, each segment and sometimes within each segment, different product categories have different considerations when it comes to pricing. We’re looking at a combination of both broader price increases where we are able as well as resetting product pricing as we introduce new products. I think that’s most of what I would comment on right now, and I think it will take some time for some of these changes, of course, to come through, but I’m confident that we’ll be able to see a difference as time goes on.

Okay. And as a follow-up, can you talk about how you are navigating through the component constraints? I think particularly in navigation, something we’ve heard is that obviously component lead times have stretched quite a bit, but some components that are used in avionics have been announced as end of life. So, I’m just curious, are you facing any redesigning activity, and how should we think about potentially that impacting aviation margins in the near term?

Yes, I think component constraints have been a challenge for a while now. As I mentioned in my remarks, vertical integration is a huge differentiating factor for us, because we’re able to use alternative components, and we’re able to redesign things when we need to. And we have maintained very good relationships with suppliers. They’re under a lot of pressure at this time too. And they certainly get a lot of people beating them up. We try to focus on relationships. But that said, particularly in aviation, you mentioned end of life as a potential issue. That’s really not a new thing in aviation. I think avionics designs tend to have longer life cycles. So consequently, we’ve dealt with that issue for a long time and we manage through that mostly through a combination of redesigns and also safety stock. So again, I think we’re able to handle this situation better than most because of our strong R&D and our focus on vertical integration.

Got it. Very helpful. And Doug, if I can sneak one in for you. Just can you talk about OpEx puts and takes in 2022? I know you mentioned you’re going to be changing that and reallocating expenses. But based on the current reported basis, how should we think about OpEx parts moving as a percent of sales?

Sure. So yes, percentage of sales for the full year and looking at the different categories, I’ll talk about it on the new methodology from that standpoint. That’s the way we’re reporting in 2022 and recasting 2021. So, we expect on overall operating expenses as a percentage of sales year-to-year probably about a 120 basis point increase year-over-year. And looking at the various categories, first advertising, we expect advertising as a percentage of sales to be up slightly, maybe about 10 basis points. And looking at R&D, we expect that to be up probably about 40 basis points as a percentage of sales. There we’re continuing to make investments in headcount as well as compensation-related items impacting R&D. Then in SG&A, we expect that to be up about 70 basis points as a percentage of sales year-over-year. The big driver is primarily IT costs, but also we’ll see increased costs in other parts of our business, such as product support and operations, just because of increased volume as well as more consumers and users.

Got it. Very helpful. Thanks, guys.

Thank you.

Thank you. Our next question comes from Paul Chung of JPMorgan. Your line is open.

Hi. Thanks for taking my questions and very nice quarter. So just on margins, given the very strong kind of outdoor aviation, revenue guide would’ve thought that kind of overall margins would’ve seen some benefits there, even with the negative auto contribution this year. So, can you quantify maybe the freight components kind of headwind baked in the margin guide?

Yes, this is Doug. We don’t give a breakout of the different components of gross margin on freight. I can give a little bit of background on what’s driving that. The 50-basis point decline, so we do expect to see higher supply chain costs year-over-year. Freight increased during the year in 2021. So, we’re going up against tougher comps in freight for the first part of the year. Also, we’ll see some headwinds related to FX, also foreign exchange rate in there too, that will give us some headwinds in there too. And then as Cliff mentioned, we’re looking to increase selling prices where we can. But as you mentioned, there are a lot of puts and takes, a lot of moving parts, and that gross margin you have, like you’ve mentioned, some different things relating to segment mix. And there we factored in new product launches, but there overall, still some headwinds on the supply chain side of things and FX that are bringing that, I’ll say, from an overall basis down about 50 basis points.

Got you. And then just on outdoor, you know, with handheld and dog products maybe pushing into 2022, should we expect a little less seasonality in Q1 as a result? And then if you could expand on the outdoor guide, which is quite impressive. What’s driving the confidence in that guide, and how has the fēnix refresh been received?

Yes, I think the handheld and dog products as I mentioned, Paul, the back orders for those of course, push into the New Year, and those were driven by supply constraints that we experienced at the end of last year. Those are getting incrementally better, although we still are taking a wait-and-see attitude that we’re building and shipping everything that we can. I think that those categories are meaningful but small in the overall scheme of the outdoor segment. So, I don’t think you’re really going to notice a lot of seasonality effects because of that. In terms of the guide and the potential impact from the new adventure watches that we introduced. The reception to those watches has been very strong, as I mentioned. And of course, the interest in those products and the momentum from them is behind our 20% estimate growth for the year. So, we’re very pleased with that and we think we’ll have a very good year in outdoor.

And then lastly, on aviation, your guide implies, revenues now well above the record 2019 levels on ADS-B, but what’s driving the guide this year? How’s the product portfolio evolved? And then how should we think about operating margins for 2022 in aviation? Can we end the year approaching that 30% or exceed that? Thanks.

Yes. So definitely we’ve recovered a lot of revenue that went away after the ADS-B mandate. We expected that revenue to go away because it was a once-in-a-generation mandate from the FAA to equip every general aviation aircraft, which once that’s done that opportunity, of course, has gone. But we’ve been able to recover those revenues through a strong product line, particularly our flight control systems which are very strong, very well-received in the market, and that’s driven upgrades in cockpits. And as I mentioned in my remarks, the general sentiment around OEM aircraft makers is that order books are strong. Customer interest is very strong, and of course, we’re in the bell curve of general aviation, which gives us the ability to grow along with the market there.

Thank you. Our next question comes from Jeff Harwin of Deutsche Bank. Your line is open.

Hi, thanks for taking my question, and congrats on a good quarter and a year. Your auto OEM business is clearly a good growth opportunity for you going forward, but at a lower margin compared to some of your other businesses. How do you think about the revenue growth opportunity versus the headwind to gross margin for the overall company for this business?

Well, I think Jeffrey, the opportunity in auto OEM, of course, is the large scale that comes with these big programs. So that’s what we’ve been investing to bring to market. As I mentioned, they do come with a different margin profile that hasn’t really been our concern relative to the rest of the business because we’re focusing on the revenue growth and the scale opportunity. But the challenge for us in going forward, of course, is proving that we can get that scale and also be profitable in the business.

Great. Thank you. And as a follow-up, you noted a reduction in your cycling products in your prepared comments, and there have been some demand concerns that one of the largest indoor cycling companies recently. How do you think about this business going forward? And if there was some pull in during the earlier part of the pandemic, how long do you think this takes to work through before the business kind of returns to typical growth?

Yes, I think your question is interesting. We’re not here, of course, to talk about specific names, but I think I understand your comment. And I would say that our indoor cycling products are very different from some of the headline companies that have been talked about a lot recently. Our products are focused on athleticism and performance. And we're not really in the spin bike business, which has been hit pretty hard by people returning to gyms. But in terms of a pull in there, there probably was some, people got interested in those kinds of products. So they did equip their bikes, they did equip their homes with training devices, but as I mentioned we're seeing the market sell out, normalize around levels above that of 2019, which was the last normal year in that cycle. So, there's some high channel inventory right now, not necessarily specific to our product lines, but every trainer maker rushed into the market and filled the channels. And so that will take some time to work through. We expect probably the better part of this year before things really normalize.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Ben Bollin of Cleveland Research. Your line is open.

Good morning, everyone. Thanks for taking the question. Cliff, I guess it's been danced around a little bit, but when you look at the spread in terms of your 2022 guidance for outdoor and fitness, there is the widest gap we've seen since I guess 2017 being about a 35-point spread between the two in terms of year-over-year growth. But I guess I'm interested in your thoughts on the high-end wearables within the segments. Do you see any secular changes out there which are moving the difference between the two outlooks in the growth rates, or going back to that last question, do you think it's just inventory in cycling? What's driving that spread?

Well, lots of moving pieces, Ben. And you've kind of hit on the major ones. The one thing I would just highlight in addition is that product life cycle differences between the two segments can definitely impact the growth patterns between the segments. We're coming off a super strong launch in outdoor, as I mentioned, with the new fēnix, the epix, and the Instinct products, and the cadence of introductions in fitness is a little bit different, combined with the overall normalizing of the cycling market. That's why there's the difference between outdoor and fitness.

Okay, and the last one for you is, if you look through the elevated auto OEM investments that are happening right now, when you're on the back end of this, when you're into 2023, any thoughts on what a normalized margin might look like within that business over time?

I think we've mentioned before, and it's very typical in the auto business that the margins can be in the mid-to-high teens on certain highest volume product lines. So that's what we're expecting, I think that's what we've communicated before to the market.

Thank you. Our next question comes from Will Power of Baird. Your line is open.

Okay, great. Thanks. Yeah, I guess a couple of questions, maybe circling back on fitness. I know, Cliff you noted some of the cycling headwinds, which probably aren't a big surprise, but I'd love to get a bit more color on the confidence and key drivers within the wearable segment that you expect to help offset some of the cycling pressure. And I guess within that, any color on Forerunner and what you're seeing there? Is that something that you think can grow as we kind of come out of the pandemic? Just thoughts there too?

Yes, I think we put out our view of the year based on a high level of confidence that we can achieve what we say. I think that we’ve seen continuous strength in the advanced wearables. That’s really all products with GPS smartwatch capability in our fitness product line. So, we – that includes Forerunner that includes Venu and vívoactive and all those kinds of products. We’re coming off of strong releases from last year, and some of the advanced consumer wearables, and then our running products have refreshes coming as well. So, all of those things coming together, we feel like will be positive things. And when you consider that events, particularly races like 10-Ks, half marathons, and marathons have been mostly canceled during the last two years, as some of those start to come online, we think it will drive additional interest in running products.

Okay. And then just second question on marine, how do we think about the potential pull forward impact you saw there? Obviously, you’re confident in a continuing strong growth outlook. So, it feels like you’re not expecting as much of a comp issue there, but would love any kind of color there? And then, any thoughts on Vesper Marine and the impact that would have on the 2022 guidance.

In terms of a potential pull forward in marine? It’s always a possibility, I suppose, but in general, the marine market has been very constrained with the supply of boats, whether it’s new boats from manufacturers or used boats, people are not letting go of their boats. And so consequently, they’re equipping their boats; there are a lot of boats out there in use that have very old equipment. These are long-lived assets on the boats. So, there’s plenty of opportunity for retrofit in the market. As the new boats are built, many of them are equipped with Garmin products. And so, we believe that the growth opportunity in marine is still very good. In terms of Vesper, just a quick comment on that. I would say that it’s a technology and engineering acquisition for us. So, it’s not material in terms of revenue or cost structure, but the group had very significant design capabilities in the area of VHF radios. And so, that’s an area we want to build our capability in.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Erik Woodring of Morgan Stanley. Your line is open.

Hey guys, thanks for taking my question. Maybe if we just stay on marine for one second. Can you help us just better understand how the drivers of the marine business are changing at all? Meaning, we know there are still backlogs that’s in the OEM business, that’s typically a smaller part of your marine business, but what do you just see in 2022 versus 2021 that gives you the confidence in the 15% growth?

Yes, I would say Erik it’s really the same factors that drove 2021 carry forward into 2022. We see strong demand from the boat builders as they ramp up production to fill the demand. They’ve got historic back orders on their books as well. So, they’re increasing their production that benefits us. And then generally, the enthusiasm around new technologies in marine, particularly the fishing area and the advanced sonars that we offer continues to be strong, bringing new people into the market, causing them to replace their old equipment, including both sonars and chartplotters. So, these trends have been the same for a while now, and we expect those to continue in 2022.

Okay. Thank you. And then maybe if we just touch on the cost side. I guess based on the kind of the revenue and segment revenue, and then total gross margin disclosure, we do have to assume that gross margins are down across most segments. Is that fair to think, or should it be more acute in certain segments? And then on the operating side, just, is the pressure mostly blamed on investments in autos, or again is there investment outside of autos that is going to be more elevated in 2022 relative to say 2021?

Yes. Regarding gross margin it’s a lot of factors to take place there; product launches, new products take out consideration, some are more impacted on FX than other ones. And as Cliff mentioned some relating to selling prices. So, we do expect probably some kind of depressed overall consolidated, but I think it's going to be a mix among the various segments to get that overall one. And I probably would say one would probably see that gross margins would be down year-over-year just because the BMW would be a bigger piece of that overall business. And then fitness, also some of the pressures that they have probably would be down there too, depending upon what the product launches are and all those different things related. Late into the cost side, yes, auto inside R&D expenses will probably be up over the previous year in 2021 but also, we're seeing increased investments across all of our businesses. R&D will make those investments to drive innovation, as well as seeing some from the SG&A side of things, IT type of costs increasing, those type of things just higher level of our business, larger footprints. We have manufacturing operation, those type of things are driving some expenses in there also.

Okay. Thanks guys. I appreciate it.

Thank you.

Thank you. Our next question comes from Ron Epstein of Bank of America. Your line is open.

Hey Cliff. Good morning.

Good morning.

In your supply chain relative to aviation, right? I mean, the private aviation market is pretty much on fire, right? So, I would imagine the demand signals you're seeing from some of your OEM customers, if they're not really strong right now, they will be soon. I mean, how are you set up for that potential ramp?

Well, we're prepared with plenty of factory capacity. We have always focused on a strong supply chain in aviation so that we can meet the needs of our customers. As I mentioned in my remarks, absolutely we see the demand from the OEM side, and they're reporting robust orders and so we feel like we're very prepared for the increases that they're looking at.

Great. And then what, in terms of – if you can even shed any light on it, because I know it's a sensitive thing to talk about, but what's going on on the new platform side? I mean, are you guys actively working with OEMs on potential new platforms?

Sure. Well, we're always working on things, and of course, we can't share anything in advance, but we're always working with new customers and new platforms.

Right. Fair enough. I know that's a tough question. But, and then with the fēnix in the EPIX – the fēnix 7 and the new EPIX, which are you seeing a better response to? Because they seem to be pretty similar products?

They're similar in some respects, but they're really very different and they probably appeal to different users, but they've both been very strong. We're especially pleased of course with epix. I think people have embraced that very quickly, and in both of those product lines, we're seeing very strong demand, which exceeded our expectations.

Got it. And I mean, the natural question that exceeded your expectations. Did you have the supply chain to meet that demand?

We feel like we have plenty of contingencies, and we're working on increasing our supply.

Got it. And then maybe just one last question around just logistics, given that you've got a relatively complex supply chain, meaning you've got stuff coming from Asia, and then you've got stuff built here in the U.S., how are you seeing the kind of the transpacific logistics of product?

I think that the situation is challenging, like everyone is reporting. So, we are no different than that. We see the same things, and we're working on managing that situation the best we can. It's a pragmatic balance between product availability, which speaks to shorter, faster shipment methods, which of course are more expensive versus inventory levels, which allow us to get inventory on slower modes of transportation, which are more affordable. So, we're doing our best to balance, and I think we have a lot of levers that we can use in doing that.

Okay, great. Thanks, Cliff.

Thank you.

Thank you. Our next question comes from Derek Soderberg of Colliers Securities. Your line is open.

Hey guys. Thanks for taking my questions. Cliff, just curious if you could talk more about the retail channel broadly. There have been some reports that a lot of Q4 growth came from inventory building. So, if you could just share what you're seeing as it relates to sell in, sell through broadly, that'd be great.

I think retail channels were very dry for all the reasons that we know. And so, certainly retailers wanted to have inventory available, so that they could sell to customers. But at this moment, we feel like sell-through is very good. We can definitely track sell-through through our product registrations and our app platforms, and we feel good about what we see there, and we don't believe there's any imbalances that are material out in the channel, except for the ones we've noted, which is really the trainer market.

Got it. And I also wanted to ask about supply; you guys have done a really good job on inventory. Seems like you've done better than most. Now you have more capacity online with the new facility. Have you been, to any degree benefiting at all from supply chain issues, relatively speaking, versus competitors, and I guess in terms of Garmin, just more product on the shelves?

Yes, I think we have been the beneficiary of some of the challenges that others have faced. Our investments in inventory, our investments in capacity, and our ability to be agile with our product designs have helped us a lot in several segments.

Got it. Thank you.

Thank you.

Thank you. I'm showing no further questions at this time. I could turn the call back over to Teri Seck for any closing remarks.

Thanks everyone. As always, Doug and I are available for callbacks throughout the day. Have a good one. Bye.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. Thank you for participating. You may now disconnect.