台灣國際航電 (GRMN) 2005 Q2 法說會逐字稿

Good morning.

My name is (Luanna) and I will be your conference facilitator. [OPERATOR INSTRUCTIONS] Thank you.

Ms. Schwerdt, you may begin your conference.

Thank you.

Good morning.

We would like to welcome you to Garmin Limited's 2005 second quarter earnings call.

Please note that a copy of the press release concerning this earnings call is available at Garmin's investors relations site on the Internet at www.garmin.com/stock.

Additionally, this call is being broadcast live on the Internet, and a replay of the webcast will be available until August 26, 2005.

A telephone recording will be available for 24 hours after this call, and a transcript of the call will be available on the website within 48 hours at www.garmin.com/stock under the events calendar tab.

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, market shares, product introduction, future demand for our product and our 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 for the fiscal year ended December 25, 2004 filed with the Securities and Exchange Commission.

Attending on behalf of Garmin Limited this morning are Dr. Min Kao, Chairman and CEO, Kevin Rauckman, Chief Financial Officer, Cliff Pemble, Director of Engineering and Andrew Etkind, General Counsel.

The presenters for this morning's call are Dr. Min Kao and Kevin Rauckman.

At this time, I would like to turn the call over to Dr. Kao.

Good morning.

From the press release issued this morning, you can see that in the second quarter of 2005 we again experienced record revenue and earnings.

Total revenue for the quarter increased 39% and earnings per share increased 31% relative to the second quarter of 2004.

Excluding the effect of foreign currency, earnings per share increased 41% relative to the same quarter of 2004.

This was a record quarter for Garmin in both revenue and net income.

There were many significant accomplishments.

We recorded 31% growth in our aviation business, 42% growth in our (principal) business and over 70% growth in both the Europe and Pacific rim markets.

Over 700,000 Garmin products were shipped in the second quarter of 2005, a 24% increase over the second quarter of 2004.

Response to the 19 products introduced in the first half of 2005 has been very positive, and most of these products has been very strong, especially the new products well regarded for their ease of use.

The new 192C and 198C which have been built-in, highly detailed charts of the United States.

The new outdoor fitness product, Forerunner 301 which combines the popular features of the Forerunner 201 with a heart-rate monitor and Training Center software.

And the two new aviation XM satellite receivers, GDL 69 and 69A, which brings CD-quality digital audio, and weather information to the general aviation (cockpit).

Diamond aircraft announced they have selected the business jet configuration of the G1000 for their innovative D-JET.

We started the delivery of the Navus on-dash navigation product for Chrysler motor group.

This provides dealer-installed automotive navigation abilities for five vehicle models at a price, one significantly less than most (peer) systems.

We also announced and started delivery of the Roadtech Quest for Harley-Davidson motorcycles which provides premium navigation capabilities.

And, we added over 160 new associates company-wide, including 46 new engineer associates, bringing our research and development group to nearly 650 and to over 2700 total employees worldwide.

I am also pleased to report that our manufacturing facilities have been running very well and successfully delivered the 19 products that were introduced in the first half of the year.

We look forward to expanding our manufacturing capacities further in 2006 in order to meet the anticipated growing demands for our product worldwide.

Additionally, we have been successful in distributing our lower overall-inventories days and inventories while increasing our (inaudible)stock for the improvement of product availability.

As we look forward, we anticipate excitement and success for the remainder of the year.

Customer awareness and interest continues to grow which is clearly reflecting in our financial results.

While aviation and automotive product lines continue to meet Garmin's goals.

Marine revenues and hand-held also continue to show our market strength.

The demand for automotive navigation products is showing a significant expansion, and we believe we are positioned to take advantage of this development.

Our recent automotive product introductions complement the popular (inaudible) series, providing easy to use, innovative solutions to motorists in a broad range of (inaudible) and form factors.

We are also pleased with our OEM relationships with Chrysler and Mopar, BMW motorcycles, Honda motorcycles, and Harley-Davidson and we continue to explore other automotive and OEM opportunities.

In the aviation market, we continue to be pleased with the strong goals displayed by this business segment.

Certification activities for our additional airframes continues and we anticipate certification and shipment of U.S. government avionics for the Beech Bonanza during third quarter and the Baron will follow later this year.

We are also in ongoing discussion with other aviation OEMs and hope to have more progress to report later this year.

Additionally, the recent introduction of a new portable aviation product, the GPSMAP 396, which provides XM real-time weather information has been received inaudible and has started its delivery at this week's Oshkosh air show.

For the summary, we are very pleased with a record quarter.

The demand for our large portfolio of products remains strong, and our new product pipelines remain robust.

So we look forward to the remainder of 2005 and the many opportunities before us.

In light of our strong second quarter results, we have updated our financial guidance to include higher revenue and EPS for fiscal 2005.

With that, I would like to turn the call over to Kevin to discuss our financial results and the updated Fiscal Year, 2005 guidance.

Thank you, Min.

Welcome everybody, again.

As is customary, I would like to walk through the operating results of our business in the second quarter, then moving on to (inaudible) segment analysis of our business, talking about our year-to-date performance, spending a little bit of time on the balance sheet and then, finally, ending with updated guidance that you saw in the press release this morning.

So, beginning first with the financial summary that has been mentioned, the second quarter revenue reported this morning was 264.5 million, up 39% from the year-ago quarter.

We saw growth across all of our geographic regions.

North American revenue came in at 154 million, up 23% from 125.7 million a year ago.

Europe revenue was 97.4 million, a 73% increase from 56.3 million.

Our Asian revenue increased 70%, to 13.1 million, from 7.7 million a year ago.

Our gross margin increased 210 basis points to 52.9% from 50.8% in Q2 of '04.

Our operating margins were basically flat at 33.7% of sales compared to 33.8% in Q2 of 04.

We reported net income of 74.2 million.

And, if you exclude the foreign currency impact, that income number was 75.4 million.

Therefore or earnings per share for the quarter were $0.68 per share and excluding the FX $0.69 per share.

Our earnings per share increased 31% on a GAAP basis from a year ago.

Excluding our foreign currency the increase was 41% over Q2 of '04.

For the second quarter, the total units sold across the entire business increased 24% to 707,000 units compared to 569,000 units the second quarter of '04.

As I mentioned, we reported gross margins of 52.9% compared to 50.8% in Q2.

These results are within the range of our expectations both for our quarter and for the full year.

The consumer gross margin during the second quarter was 49.3%.

Our aviation gross margin came in at 67.1%.

As has been the case for several quarters, we continue to experience strong acceptance of many new products that we have brought to the market.

Approximately 38% of our second quarter sales were generated from products that we introduced to the markets within the last 12 months.

Moving next to our operating performance, the operating profit for the second quarter was 89.1 million, a 33% -- 33.7% of sales.

This operating margin decreased 10 basis points compared to last year.

During the quarter, our SG&A as a percentage of sales increased 230 basis points to 12.5% from 10.2%.

The SG&A dollar investment increased 71% over the second quarter of last year, and was driven primarily by increased advertising that was over 50% of the increase.

As we mentioned in our last conference call, we completed our corporate tax restructuring and we took a $3.8 million charge in that SG&A number during the quarter.

SG&A also increased due to legal and accounting fees, increased call center expenses and other administrative expenses during the period.

Our R&D decreased 110 basis points to 6.7% of sales from 7.8% of sales during Q2 of '04.

This represents a 21% increase on dollars over the prior-year period.

The increase primarily was due to the hiring of the new engineering staff and an increase in our overall engineering program costs.

As Min mentioned, we did hire 46 new engineers and engineering associates during the quarter, and we now employ a total of 641 engineers around the world.

Overall, our total operating expenses as a percentage of sales increased 120 basis points 19.2% of sales from 18.0% in the prior-year period.

We also experienced a 1.5 million foreign currency loss during the quarter as the U.S. dollar continued to weaken from compared to the Taiwan dollar, from 31.49 at the end of March to 31.36 at the end of June, and that is a 0.4% change.

As we have stated in the past, majority of our Company's consolidated foreign currency translation gains were lost as results from the translation into the new Taiwan dollars at the end of the end of each reporting period of our significant cash, receivables, and payables that are held in U.S. dollars by the Company's Taiwan subsidiaries.

This translation is required under U.S.

GAAP because the functional currency of our subsidiary in Taipei is the new Taiwan dollars.

However, there is minimal cash impact on this foreign currency translation, and we expect that our Taiwan subsidiary will continue to hold the majority of its cash in U.S. dollars.

During Q2, we reported interest income of 4.5 million.

That compares fairly to the 2.0 million from a year ago.

We are currently earning approximately 4.2% pre-tax return on our marketable securities, and approximately 2.9% on our total cash balances.

The tax rate during the second quarter was flat.

It came at 19.4%, right at our earlier guidance and is the same rate as a year ago, and we expect that our effective tax rate for the remainder of 2005 will be approximately 19.4%.

More on that later when I talk about overall year guidance.

Looking at the segment analysis, our second quarter consumer revenue was 210.3 million.

That represents a 42% increase from the second quarter of '04.

Consumer segment through the second quarter was 80% of total revenues.

And, we experienced growth in the segment across most consumer product lines but especially within the automotive product lines, a demonstration that our automotive growth strategy is working.

Our consumer gross margin increased to 49.3% in the second quarter from 48.4% a year ago.

This result is strongly influenced by the product mix within our consumer segment.

In the future, it is our goal to take advantage of the automotive growth opportunity by offering products at very attractive prices in order to drive both revenue and EPS growth.

If we continue to be successful with this auto growth strategy, we could see a more significant change in our margins.

Consumer operating margin decreased 200 basis points to 31.7%, from 33.7%.

And this was driven by the improved gross margins that were more than offset by higher SG&A expenses as a percentage of sales.

And again, the significant SG&A increase was due to our advertising expenditures during the period.

Our second quarter aviation revenue increased 31%, to 54.2 million, compared to 41.3 million in the second quarter of '04.

Therefore, the aviation segment in the second quarter was 20% of our total revenue, and this revenue increase was due to the continued strong shipments of G1000 cockpits and other panel-mount products that were partially offset by a reduction in our hand-held aviation products sales during the quarter.

Our aviation gross margin increased to 67.1% from 64.0 a year ago, again primarily due to favorable product mix within our segment.

Therefore the operating margins within our aviation segment increased 7 percentage points up to 41.5%, compared to 34.4% a year ago.

This improvement was due to the improved gross margins and reduced SG&A and R&D expenses as a percentage of sales in our segment.

We will move next to the cash flow during the quarter.

Cash flow from operations came in at 46.6 million during the second quarter.

In our free cash flow, which is operating cash less any CapEx, free cash flow generated was 42.6 million.

Cash flow from investing during the quarter, 15.1 million source of cash.

Cash flow from financing activities during the quarter was 10.6 million use of cash.

Overall, our CapEx for the quarter came in at $4 million.

From balance sheet, our cash and investments at the end of the quarter amounted to 634.7 million.

Marketable securities made up approximately 334.5 million of this total cash position.

Our accounts receivable balance at the end of the second quarter was 154.7 million.

That represents an increase of 44.6 million from the end of the year 2004.

Shipment linearity during the second quarter was back end loaded into June which caused the higher receivable balance in the quarter.

We have seen strong cash flow in July as we have collected a significant amount of the June sales during the early part of our third quarter.

On inventory, we saw decrease of inventory on an absolute dollar basis down to 160.3 million from 166.4 at the end of the first quarter.

As expected, our inventory days-of-supply metric improved to 123 days of inventory at the end of the period from 139 days at the end of the first quarter.

Breaking our inventory down further, we came in with raw materials at 57 million.

That is a decrease of $15.3 million during the period and is 40 days of inventory.

Our rents and assemblies combined were roughly flat during the quarter at 34.4 million and represent 26 days of inventory.

Finished bids did increase $11.7million up to $81.8 million of inventory, and that is approximately 57 days of inventory.

We have stated in the past that we attempt strategically to hold around 60 days so we feel our finished goods is right where it needs to be at the end of the second quarter.

Inventory reserves increased during the second quarter to 12.7 million.

Overall, we continue -- we intend to continue to focus on our supply chain management during the remainder of 2005 and beyond.

Looking at the year-to-date financial summary briefly, our year-to-date revenue came in at 457.2 million, a 31% increase.

Gross margins -- 53.2 million.

Our operating income for the year-to-date -- second quarter year-to-date 154.9 with net income of 121.6.

GAAP diluted EPS year-to-date was $1.11 compared to $0.83 a year ago.

This 34% increase in EPS included a 12.7 million FX loss in 2005 compared to $4 million foreign currency loss in 2004.

Overall, our earnings per share results through the second quarter, excluding foreign currency, were $1.21, representing a 41% increase to the prior year.

Revenue by geographic region for year-to-date, 2005 -- our North American business 286.7 million, a 23% increase.

Our European revenue grew 47% for the year-to-date of 147.7 million.

Asian revenue -- up 54% to 22.8 million.

On a segment level, our consumer revenue during year-to-date 2005 has now increased 28% at 347.7 million and, through the first half of the year our consumer segment amounted to 76% of our total revenue.

Our aviation revenue increased 44% on a year-to-date basis up to 109.4 million.

Aviation is the rest of our business at 24% of total revenue.

And in total, all consumer and aviation units combined, we saw 23% increase on units, up to 1.29 million over 1.047 units a year ago.

Our year-to-date operating profits was 154.9 million, 33.9% of sales.

Our SG&A for the year-to-date increased up to 11.7% from 10.4% of sales a year ago.

SG&A dollars increased 48% compared to year-to-date, 2004.

We did see some one-time SG&A costs such as restructuring costs as I mentioned and a legal settlement.

If we excluded those restructuring and legal costs, our SG&A increased 36% on a year-over-year basis.

R&D decreased of the percentage of sales to 7.6% from 8.3% a year ago, and that represents a 20% R&D dollar increase versus year-to-date 2004.

Going forward, on our operating expenses we expect to see higher advertising costs especially in the fourth quarter of 2005 as a result of our strategic plan to promote the Garmin brand in the consumer market both in the U.S. and , increasingly, in Europe.

On the equity side, Garmin Limited has announced this morning that it will pay a $0.50 per share dividend for all shareholders of record as of December 1, 2005.

The payment will be made on December 15 of this year, and will require approximately $54 million of cash.

Under our share repurchase plan, Garmin purchased 286,000 shares during the second quarter for for a total use of cash of $12 million.

We continue to purchase -- repurchase Garmin shares into Q3 and have now purchased 638,000 shares year-to-date, for a total use of cash of 26.7 million.

We now have 2.3 million remaining shares that are available to purchase under the 3 million share repurchase plan that was approved a couple of years ago.

We also granted 381,000 stock options during the quarter at an average exercise price of $43.18.

Finally, I'd like to conclude with the final Fiscal Year, 2005 guidance.

We did update our guidance as you saw in the press release this morning.

Let me just reiterate what those numbers are.

We now expect our revenue to come in between 950 and $975 million, which is a 25 to 28% growth rate on the full year.

Our gross margins we expect to come in at between 52 and 53 percentage points of sales.

Operating margins -- between 32 and 33%.

As I mentioned earlier, our effective tax rate should say constant at 19.4%.

Therefore, our net income range we expect will be between 266 million and 271 million, excluding any foreign currency effects.

That generates an EPS range between $2.43 and $2.48, excluding FX , which is a 17 to 20% EPS growth rate on the full year.

In that number, we assume outstanding diluted shares of 109.1 million.

And finally, we continue to expect our capital expenditures to come in at the full year about 30 million.

Through the first half, we are right about 50% of that number at 15 million CapEx.

That is a rundown of our financial performance for the quarter.

At this point, we'd like to open it up for any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from John Bucher.

John Bucher with Harris Nesbitt.

I was wondering if you guys could talk about the second quarter seasonality for marine products -- whether you saw that.

I know you mentioned the 192C and 198C shipped well.

And also, if you could talk about what categories of products were shipped late in the quarter -- I am guessing in large volume based on your comments on the receivables.

Thank you.

The first question -- on marine, I think when stated that we saw growth across most of our product lines, we did see growth in marine.

I would say in general we saw a slower growth in marine than we have seen in the past.

So, really the key driver for the quarter was the automotive products even though we did see growth in the marine side.

As far many area were backend-loaded in the quarter, I think with the introduction of the C series, we saw that really do well toward the end of the year or toward the end of the quarter as well as the 192C and 198C in June.

It is really the new product introductions and the acceptance of those.

I know you don't normally break down the consumer subsegments, but would it be fair to say that the automotive was your largest subsegment of consumer?

Yes, it would be fair to say that.

Okay.

I will yield the floor here and get back in the queue.

Thank you.

Your next question comes from Bill Stanton.

Good morning, guys.

Congratulations on the strong quarter.

Thanks, Bill.

In terms of you said, Kevin, that most products grew.

You said the marine grew.

Can we assume -- I guess we can't assume it but did recreation not grow?

No.

I said recreation grew as well.

Okay, you did say recreation grew.

And the strength on the navigation side, the automotive side -- it looks like Europe was very strong this quarter.

Can we assume a lot of that was actually in Europe?

I think Europe, as you saw in the overall numbers, Europe had a faster growth rate, so you can definitely assume that we had stronger performance in Europe, but we did grow in the U.S. market as well.

Okay.

And then just in terms of maybe a bigger picture question, obviously you introduced a lot of new products and you changed the pricing strategy.

I am curious if you could talk maybe strategically on how you guys thought about that.

Because, obviously the C-series is a new product and how you guys were thinking about your segmentation -- the speed of segmentation -- and maybe the magnitude of the pricing shifts required, because it does seem like you were very competitively proactive here.

And, I am just to get at kind of how you were thinking that.

I think we have seen increased competition and, I think in general, it is reasonable to expect price to continue to fall.

I think you are probably primarily talking about the high-growth automotive market.

Right.

We do expect that to happen as the overall product category advances towards mass-market levels.

The way we have looked at it is we want to continue to offer new products with enhanced features that potentially can command higher margins.

We also want to closely with our dealers and distributors to promote the overall Garmin brand and, where needed, we will adjust prices to be more competitive.

That is kind of how we looked at that -- the overall pricing market and the auto market in general.

I guess my key question was -- the introduction of the i2 and i3, do you expect that, given the timing of that introduction -- where do you expect that to have any sort of impact on the C-series or do you expect any with respect to maybe some sort of shift given the timing of the introduction here is very close with the C-series.

Bill, this is Cliff Pemble.

I think our i-series will appeal, probably, to a different set of consumers that are more value-oriented.

But at this moment, we wouldn't expect it to have a significant impact on the C-series.

And just quickly on the Mopar front, can you give us any idea on how that is shipping along?

Or is it anything you can give in terms of magnitude there?

We can confirm that the delivery of our Navus system to Mopar began in May.

And we have got -- we do have units available at five models -- five auto models -- and we expect additional platforms to be announced shortly.

I think the initial results have been slow but within our expectations.

I think we expect to see an increase in the take rates as we approach the end of the 2005 model year and the dealers that you have seen in the press recently are offering more incentives to sell additional vehicles.

Great, guys.

Thanks again, and congratulations.

Your next question comes from J.B Groh.

Mr. Groh, your line is open.

Hello?

I am sorry.

There is no response from Mr. Groh's line.

We will proceed with the next question in queue.

Your next question comes from Mike Rappaport.

Good morning guys, and thanks for the great quarter, particularly the balance sheet improvement.

Thanks, Mike.

The question I have is with this new tax strategy that you reorganized.

How quickly can you upstream legacy earnings, the money that is already sitting in Taiwan, back up to the Cayman holding company?

And basically, are we going to move all or -- do you plan to move almost all the earnings upstream through that sandwich.

We will not state how much we will move upstream, but I think the earliest you will start to see a significant change there would be next year because that is one the largest benefit of -- is for us to do that, to move those earnings up.

It overall increases our flexibility but you probably won't see a large change until we get into January of '06.

What is the tax rate on moving money that you have already earned and is already sitting over in Taiwan back to the holding company level?

Is it zero or is it some nominal amount?

I think it is zero.

That is pretty nominal.

Pretty nominal.

Well, thanks again for the great quarter and particularly the balance sheet.

It is looking much better.

Thanks.

Your next question comes from Jeff Evanson.

Good morning, everybody.

Good morning.

A couple questions here on the back half.

Last year, back half, the G1000 was very strong with the Cessna ramp-up.

Could you talk a little bit about how challenging you think the comparables are in the back half for this year in aviation?

And, maybe that is a pretty fairly focused conversation on the G1000.

I think in general, we have -- like you said, we have harder -- we had more difficult comps, but I think we are pleased that the demand for both OEM and after-market product in aviation has continued to be strong.

I think overall, when we look at the back half, we expect our year-over-year growth to be closer to 20% since we did begin shipping the G1000 roughly a year ago.

We certainly had more models of aircraft that we are shipping into in the back half of this year which helps us with that 20% growth.

That is roughly how we are looking at the back half on aviation.

So, it is aviation 20% back half with the new airframes?

Yes.

Okay.

Moving on to the new i-series, do you think that is at a price point where you could be in the higher-volume end-cap market for the holidays at some of the biggest retailers out there?

Actually, this is Min -- actually, we already know that we will be end-cap at one of the major retailers.

Well, why not tell us which one then?

We normally allow the retailer to announce that or you will see it in the market.

All right.

That is good news.

Thanks a lot.

Thanks.

Your next question comes from Jim Duffy.

Thanks.

Let me add my congratulations on a great quarter.

Thank you.

Very strong routes from Europe.

Can you talk about some of the things you are doing differently there, maybe some things that helped you towards those strong results?

I don't know that we have done anything major differently other than we are focusing on the high growth that is in the automotive market.

The auto is particularly -- I think Europe is ahead of the U.S. in the portable navigation devices which is where we are particularly strong with the C-series and, soon to be, i-series.

I think that is one thing we are doing.

I think we are spending more advertising and overall marketing efforts to take advantage of that opportunity.

I think, as we have already mentioned briefly on this call, the i-series and various price points that we have offered in the European market are going to help us to continue expand that -- that overall business.

Does that relate to comments you made last quarter that, if you were successful growing the automotive business in Europe, it could have some pressure on the margins?

The margins held up very well this quarter despite the --

yes.

-- increase in the European businesses as a contribution to the mix.

Yes.

I think that does relate to the same comment and we still expect that.

I even mentioned that earlier in my comments that, depending on how fast that market grows and how successful we are, we could see downward pressure gross margins driven by European sales.

Tom Tom had some delivery issues in the quarter.

Did that help the European business?

I think it is probably hard for us to tell.

We did have robust growth of our automotive products in the quarter.

Can you guys provide an update on your thinking of what you are going to do on manufacturing capacity in Taiwan?

As I indicated that we are looking for the new facility to expand our capacity.

I can say that we have identified building which we have interest in but have not negotiated the price yet.

It is likely that we acquire new facility in the next few months and have it up and running sometime in the first quarter of next year.

Okay, that is great, one final question.

Any comment on the inventory levels in the channel?

I think our new product pipeline is robust.

The demand continues to be strong, as we have said in various ways during this call.

I think we are pleased at where the inventory levels stand right now.

We didn't see a major change in terms of the dealer channel inventory.

Thank you, guys.

Your next question comes from Peter Friedland.

Hey, guys.

As far as the portable automotive products, when do you expect shipments to ramp within the third quarter to support holiday-related sales?

And, is that different from the rest of the consumer business?

I think, just based on the product analysis that we came out with a couple weeks ago, that most of those probably really kick in toward the August, September timeframe -- September in particular, which is very common with when we begin to sell into the holiday channel.

If you were to look at timing of the back half, we certainly expect the fourth quarter to be a very strong quarter for us.

Does the increased weighting towards automotive pull in some of the sales in Q3 that you normally would have had in Q4 and vice versa or is there no noticeable change?

I think in this country we might start to fulfill high demand by September.

In Europe, it might probably be later, maybe more in October.

Great.

Thanks, guys.

Thanks, Peter.

Your next question comes from Ron Epstein.

Good morning.

Hey, Ron.

My kudos again on a very nice quarter.

I was just wondering if you just could give us maybe a feel for how the avionics, the G1000, is going for the Cessna Mustang -- how the autopilot and all that, how the development is going.

Ron, we feel like it is going well.

The Cessna Mustang has been in an aggressive flight test program, and we have been supporting that fully with Cessna and our flight control development is also going well.

Okay.

I don't know if you can answer this or not, but I will ask it.

Do you guys have aspirations to get into yet even larger business jets but still Part 23 aircraft?

Definitely Part 23 has been our focus.

Great.

Thank you.

Thanks, Ron.

Your next question comes from John Bucher.

Was wondering if you could talk in general terms about the bid and proposal activity that you are seeing in both the aviation segment and the automotive segment -- if there's been any changes from what you saw in the latter half of '04 or the beginning part of this year?

Any color you can provide on what you are seeing in the bid and proposal activity in those two segments?

John, I think aviation has been steady.

As you know, we are working on new airframes that have been announced and there's some additional ones that we are working on as well that have not.

On the automotive side, we have seen definitely an increase in the amount of work there closely with OEMs and other types of programs.

Would you say on the automotive side that you feel that your positioning is improving as time goes on, as you get feedback from the potential customers?

We think so, yes.

Is the level of competition increasing as well?

Well definitely the competition is very high right now.

I think it is somewhat of a buyer's market if you will, but product innovation and brand recognition are all things that go in our favor.

And then, one last question.

Are there any materials issues at all?

I know, as you indicated in your last call, you purposely made sure you had plenty of raw materials for the high volume shipments of the C-series.

I am wondering, has there been any major trends in any of your key bills of materials, any shortages, or any large price decreases that you have seen?

Other than a few supplier issues, this really hasn't been a significant problem lately much like we said last quarter.

We are also taking a more defensive approach, I think you saw, by maintaining this higher level of finished goods in critical parts so we have an ability to meet increasing demand and we are not impacted by the component shortages.

Thank you very much.

Thanks.

Your next question comes from Noelle Swatland.

Hi, guys.

Hi.

I guess just a few quick questions.

First of all, can you talk about the U.S. market for a little bit?

I know this relates more on the integrated auto side, but just some of the recent promotions that GM and others have recently launched in June, if you have seen any benefit from that.

And also if you could comment on strength so far to date in the Jul;y quarter.

And then, secondly you talked a little more about your plans to address some of the share loss that you saw in the second half of last year in Europe.

Maybe you could talk a little bit more in detail around some of the strategies you plan to execute in the second half.

Thanks.

Noelle, on your question for integrated automotive, you mean the factory-installed systems?

Exactly.

The factory-installed systems are definitely increasing in numbers of deliveries, but they are a very expensive option still in the car, so it still allows the portable solutions to have a lot of appeal in the market.

So it is fair to say, then, that you also saw an acceleration in June from the recent incentives that were launched in the June period.

I guess my question largely around the U.S. market is do you think that some of the strength that the auto nav market saw in the second quarter was almost a pull-through of the some of the sales, maybe, in the third quarter -- if you, so far in July, are actually seeing the strength from June continue?

I don't know that it is so directly related to current incentives offered by auto makers.

The automotive market is huge in terms of its potential because most cars that are on the road don't have any navigation system in them.

I guess the reason I was asking is because on their call last week Navtech was talking a little bit about some strengths there and I know that their exposure is largely on the integrated side.

I was wondering if you had been seeing similar trends around demand sales here.

But if you could maybe just talk about your plans in the second half, some of your strategies there, that would be great.

I think we mentioned that a little bit in terms of the advertising, the overall marketing efforts that we intend to take to take advantage of the European opportunity.

Again, the products that we have recently brought to the market, going anywhere from a 299 price point all the way up to the 1099 price point, with various key features are -- that is really the way we are going after the market.

I think there have been recent reports, (Canallis) for example, that said that we have about a 19% share in the European business.

We think that, according to our own results, we are probably a little bit higher than that and hopefully can see that grow as we tap into the market opportunity there.

And then just lastly, I am not sure if you guys comment at all on book-to-bill, but is it fair to assume that -- .

Can you guys make any comment.

We usually do not make comments on that other than we are generally a fairly low backbone business just because we book and bill much during the quarter.

That is about all we can say at this point.

Okay.

Thanks.

Your next question comes from John Braatz.

Good morning, guys.

Kevin, getting back to sort of the capacity issue, a lot of your automotive products are moving down in terms of price -- more of a value area.

To the extent those become really popular over the next 6, 9 months, is there any concern about capacity issues, manufacturing capacity in Taiwan?

That is again, if the popularity of these products really are exceptional, will there be manufacturing issues?

I think that was what Min attempted to -- he answered that earlier where we are looking at acquiring a second Taiwan factory to give us that extra production capacity.

So we feel like, given our current plan and where we stand today -- and we do expect that the automotive demand will pick up -- that we will have an alternate source there to be able to handle that increased capacity as we get into '06.

Is that Min what was referring to?

Is that something in addition to something more permanent or was this along the lines of what you have been talking about all along in terms of adding capacity?

I think it is along the lines.

We had several alternatives there.

The most likely alternative now is that we acquire a second Taiwan factory.

Then lastly, Kevin any -- I think there has been some discussion, or I have heard some, about an autopilot being introduced in the second half of the year.

I know maybe you don't want to comment specifically on new products, but I thought I'd throw it out.

Is an autopilot ready for the second half?

John, are you talking about aviation, correct?

Yes.

Yes.

Correct.

The Beech Bonanza will have our flight control system on-board.

Cliff, will it then be available for all the other models, too?

Joe, each model requires certification work, so we anticipate that other models will incorporate the autopilot, but it will take some time.

Thank you.

Your next question comes from Bill Stanton.

Just another quick follow-up in the segmentation side.

I am just curious if you have got any feedback.

Obviously you guys have outsegmented the competitive market, I think, at this point.

How do you feel -- I mean, when you are talking to maybe some of the distribution out there -- what is your general sense on how many models they are going to accept and maybe how they are going to approach their own stocking levels -- in stocking units, I should say, different SKUs.

I think each retailer has their own shelf space and real estate constraints, so they tend to select a product assortment that matches their customers that they are targeting.

Our philosophy has been to offer abroad range so that we can serve all of the needs of various retailers who tend to be a little bit different in how they select products.

Is your general sense that maybe -- I mean the C-series, I own one of them -- I mean, so I used to have a 2620.

Does the 2620 actually -- maybe, that StreetPilot 2600-series -- maybe get pushed out of some of the dealers as the higher-priced point -- maybe out of a Best Buy or a Circuit City and maybe a fuller series of the C-series and i-series takes over?

Actually, that the higher-priced 2620 -- actually, we have the Christmas product, 2720, will remain on the shelves of Circuit City and Best Buy.

Great guys.

Thanks.

Your next question comes from Rich Valera.

Thank you.

Kevin, I don't know if you would be willing to go a little bit further on your comment about auto being the largest segment in consumer but can you just confirm you are talking about three sort of subsegments in consumer so it was over a third of revenue in the quarter?

Well, I won't confirm that other than to say that we have talked about marine products, recreation products, PDA products, and automotive products making up the lion's share of our consumer segment.

I just confirmed that the automotive was the largest in the second quarter.

So, you are counting four segments --

Well, we don't -- it is not segment.

It is --

-- or subcategories.

Alright, yes.

Can you give any color at all on the year-over-year change there or expected year-over-year growth in that business in any sort of detail?

I think we can confirm that the automotive market, just during the second quarter, grew in the triple-digit range.

That is helpful.

Thanks very much.

[OPERATOR INSTRUCTIONS].

Your next question comes from Jeff Evanson.

I was wondering, for a little more follow-up here.

Could you tell us if you have had any changes in your thinking about your approach to a hand-set based GPS device in the quarter?

In the quarter?

Yes.

I think we knew where you were as of last quarter, so any updates?

We are working closely with some partners in that area.

We don't have anything to announce yet so can't comment on any timing just yet.

Do you expect something shortly?

Again, I think that market is driven by particularly carrier roll out plans, and so we probably can't comment on any timing right now.

Can you comment on hardware versus software or a combination?

Our approach in that market is really the application approach, so it is software-based.

Thank you very much.

Your next question comes from Rich Valera.

Thanks.

A quick follow-up.

I saw the announcement of the GPS 18 product recently.

Can you talk about your position in that market, sort of the component market going into the OEM market and whether you are looking to make more of a strategic push there?

It seems like there is some pretty healthy end markets, whether it be agriculture or machine control there and maybe a good potential market for your products if you really made a push there.

That is really a niche market area for Garmin.

The GPS 18 added some features that can play into some of the areas that you talked about, such as agriculture, but it is really a small focus for us.

Okay.

Thank you.

Your next question comes from (Corey Johnson).

Hey, guys.

I appreciate that you could also include a cash flow statement when you put out results.

It makes things a little easier on the number-crunching side.

Thank you for all the disclosure.

Kevin, can you explain a little bit about the margin philosophy?

You had one line about that where you said something about as auto becomes a bigger part of your business?

Do you have a -- please, let me -- finish that statement for me if you would.

That will become the larger part of our business.

We expect that our consumer growth margins in total -- there could be some pressure on those because it is a competitive market.

Price is -- I think it is more of a mass market.

Price is more sensitive and it is a large growth business for us.

Those are some hopefully -- help kind of layout the way we view the market and what, potentially, could happen to gross margins.

Do you want to put some numbers to that statement, in terms -- not so much guidance as in terms of just goals and how low you are willing to go.

Well, I think we view the market as a top line -- the sales really going to drive the story here.

I think even if you compare our last -- our 2005 guidance last quarter to this quarter, we basically came down about 100 basis points just during 2005.

I am not willing to say how much that is going to be in '06 and '07.

We want to remain flexible.

You want to remain what?

Flexible.

Yes, indeed.

You also talked about this building -- adding new plants in Taiwan.

Is that cost included in guidance?

No, because that would most likely be an '06 event and we haven't given 2006 guidance yet.

And finally, you talked about last quarter, you said you were building inventory for the marine business.

How did the marine business turn out in the last quarter?

We didn't specifically say we were building inventory just for marine but we were building it for the overall business.

As I stated, I think we saw growth in the marine but not as high as we probably have in the past.

It has become more of a mature market.

That is the big picture there.

Thank you very much.

Thank you.

Your next question comes from Peter Vogel.

Yes, I am wondering if you can comment on the channel specifically for auto and maybe either qualitatively or quantitatively discuss across the new products you have introduced, the i-series, the C-series, how much you have filled, meaning how many of your partners actually have the products?

Do they have as much as they want?

And, how long you would expect to -- expect it to take to kind of fill the channel to acceptable levels?

I think the C-series came out in March, and we definitely filled the channel in the second quarter which was one of the reasons our consumer did as well as it did. i-series has not been delivered to the market , so I think you'll see a channel filled just in this quarter as we approach the end of September.

In terms of just the number of partners, retailers, distributors, are you satisfied with that number or could you see that expand?

I think we are fairly satisfied with the broad-based distribution.

We periodically add one or two large, or even regional, retailers.

That, primarily, is offering more SKUs and trying to get more shelf space in the channel.

Right, and a follow-up on Europe.

Europe was very strong.

It sounds like the automobile segment drove that.

Tom Tom mentioned that currency negatively impacted them.

I am just wondering if you could comment on whether you saw benefit from that?

We are different than our competitor in that regard.

We don't have -- we have virtually no foreign currency impact.

Much of our sales in Europe are just in European dollars, so we have very moderate impact there.

So is it just the strength of the market that drove your results?

That is right.

Your next question comes from Ron Epstein.

Just a follow-up, a quick one for Kevin -- just a detail.

I just didn't really hear it when you said it.

In the consumer business, what was the operating margin if you could just repeat that?

Consumer operating margin -- just a second -- 31.7% of sales.

31.7%.

Okay.

Thanks, Kevin.

Your next question comes from Todd Smith.

Good morning.

Congratulations on a nice quarter.

I wanted to ask a little bit more about inventories.

Kevin, I think you had said that on finished you were at 57 days target -- it is within a target range of 60 days I think you guys have.

Right.

What about on raw and on WIP and assemblies?

Do you guys have targets on those?

Other than -- no.

We haven't really stated a target base.

I think that is where we saw some of the -- with raw in particular -- we saw the most improvement in the quarter.

And I think that is where we would continue to target if we were to see additional reductions over time.

Raw went down 15.3 million to 40 days.

Is 40 days -- is that where you guys feel is a low water mark?

I mean, is that where you want to keep it?

You think it will go lower?

I am not going to state a number.

I think it depends on -- we want to give -- as Min mentioned, we want some flexibility here because the business is growing.

And, there may be times when we need to buy more in order to handle the increased demand.

But in general, I think we are comfortable with that level.

And on the finished, the 60-day target -- is the reason why that number is such -- is it because of all of your different retail customers who have -- who take various products of yours, either exclusively or semi-exclusively, and that you guys have to stock a lot of different inventory and the different product sets to satisfy the various retailers?

Is that essentially it?

I think it is combination of both, just to roughly 2000 dealers and distributors in the U.S. plus the increasing number of SKUs that we needed to stock the shelves with.

And then Kevin, one more thing.

A lot of talk about the automotive side here on the call.

I think you guys have been trying to distinguish between sales into automotive that are channel-fill and presumably also sales out on the other side, but maybe for folks like me who are less familiar with that business, you could talk a little bit more about that.

You said that automotive grew triple digits, I believe, in the quarter.

Is that correct?

Yes.

Does that suggest, though, that that is mostly just channel fill or is that sellout on the other ends through the dealers and what have you?

It is both.

It is not just channel fill.

Okay.

So you think that the sellout on the other end at the dealers --

We have heard positive comments and seen reorders in many cases, yes.

Was that skewed, in automotive -- was it skewed more towards motorcycle applications or more towards automotive types?

Automotive type.

Have you given ever -- have you given percentages, broken that out?

No.

Okay.

Thank you.

Thank you.

At this time there are no further questions.

Are there any closing remarks?

Other than to thank you all for your interest and we will be at the next conference call with you.

Thanks.

Thank you.

This concludes today's Garmin second quarter release conference call.

You may now disconnect.