台灣國際航電 (GRMN) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Garmin, Ltd.

first quarter 2010 earnings conference call.

At this time all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder, this conferece call is being recorded.

I would now like to introduce your host for today's conference, Miss Kerri Thurston, Director of Investor Relations.

Ma'am, you may begin.

Good morning, everyone, we would like to welcome you to Garmin Limited's first quarter 2010 earnings call.

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

Additionally this call is being broadcast live on the Internet.

Please note that this webcast does include slides which can be viewed during this call.

An archive of the webcast will be available until June 4.

A transcript of the call will be available on our website 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 share, product introductions, future demands for our products and objectives are forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin.

Information concerning these risk factors is contained in our form 10K for the fiscal year ended December 26, 2009, filed with the Securities and Exchange Commission.

Attending on behalf of Garmin Limited this morning are Dr.

Min Kao, Chairman and Chief Executive Officer, Cliff Pemble, President and Chief Operating Officer, Kevin Rauckman, Chief Financial Officer and Treasurer and Amdrew Etkind, General Counsel.

The presenters for this morning's call are Cliff Pemble and Kevin Rauckman.

At this time, I would like to turn the call over to Cliff Pemble.

Thank you, Kerri, and good morning, everyone.

As you read from our press release this morning, Garmin announced first quarter results with strong margins and proforma earnings per share growth.

We experienced revenue growth in three of our four segments including outdoor fitness, aviation, and marine, with exceptionally strong results in our outdoor fitness business.

However, consolidated revenue declined 1% due to a decline in sell-in in the automotive and local segment.

Our top-line performance along with strong margins allowed us to post proforma EPS of $0.38 per share, which is a 52% increase over 2009.

Gross margin was 54% and operating margin was 19% for the quarter, which is an improvement over 2009 levels of 45% and 13%, respectively.

We generated $196 million in free cash flow during the quarter.

Also in the first quarter we announced our proposed redomestication to Switzerland pending shareholder approval at our special meeting on May 20.

In conjunction with our redomestication announcement, we announced our 2010 dividend of $1.50 per share, which was paid in late April.

This represented one-time increase of $0.75 per share, reflecting our strong cash position and ongoing cash generation in 2010.

Moving to each of our segments, marine revenue grew 9% year-over-year, which is in line with our full-year growth expectations.

The industry is showing signs of recovery heading into the 2010 boating season and we are seeing renewed confidence from the industry.

We believe we are well position to take advantage of opportunities as growth returns to the marine industry.

We have had a number of new product introductions that support these initiatives.

The first is the GPSMAP 6,000 and 7,000 series which are large touch screen chart plotters targeted at larger boats such as sport fishing boats and cruising yachts, which we have not served in the past.

Another recent introduction is the GPSMAP 700 series, a midrange chart plotter featuring a seven inch wide screen touch screen display.

GPSMAP 700 series offers all the key functionality that value-oriented customers are looking for and at an attractive price point.

We anticipate this product line will be very popular during the boating season this year.

Finally, we recently released the 2010 version of our BlueChart cartography with further enhancements in detail, coverage and chart-like graphics.

This improves on what is already the industry bench mark for marine cartography and offers us a recurring revenue opportunity with our existing marine customer base.

Before leaving the marine segment, I wanted to quickly recap our offer to marine shareholders.

On April 28, we announced a cash offer of GBR0.15 per share to acquire Raymarine.

This announcement was the logical conclusion of many months of due diligence and consideration.

The offer represents consideration of approximately GBR12.5 million to Raymarine shareholders.

This equity offer, along with a net debt of GBR94.9 million, implies an enterprise value of GBR107.4 million or approximately $165 million at current exchange rates.

In order to formalize this offer and complete the acquisition, it will be necessary to receive regulatory approval in certain jurisdictions.

The filing process has already begun and we expect to receive approvals in the third quarter of this year.

Rationale for this combination is very simple.

Marine is a strategic core asset for Garmin and the combination would enable us to better compete against strong industry incumbents such as the Navico Group and Pherino.

Garmin's marine business and Raymarine are highly complementary as Raymarine has been focused on the OEM segment while Garmin has been focused on the aftermarket and retail segments.

The combination will expand our product offerings and boost our resources in R&D as well as sales and marketing.

Based on the most recent results from Raymarine, the acquisition will contribute at least $150 million in revenue during the first year of ownership.

Moving next to aviation, revenue grew 12% year-over-year in the aviation segment, driven by improvements in the retrofit market, new product introductions and timing of OEM shipments.

Our operating margin improved from 24% in the first quarter of 2009 to 29% in the first quarter of 2010.

While we were please with revenue growth in aviation, which is ahead of our full-year expectations of 5% to 10% revenue growth, a full recovery in the aviation market will likely lag that of the broader economy.

We continue to invest for the future, focusing on innovations for the business jet, helicopter and experimental air craft markets.

To specifically address the helicopter market, we recently introduced the G500H, which is an all- glass avionic system optimized for helicopters, bringing many of Garmin's market-leading technologies to this market for the first time.

Also for the helicopter market, we introduced a version of our terrain avoidance system, specifically designed for certified use in a helicopter.

This warning system provides both visual and audible warnings for threatening terrain as well as over 30,000 low-altitude obstacles.

This solution is available on both new products as well as in the form of an upgrade for products that are already install in the field.

And finally, we recently delivered a version of our synthetic vision technology that we call SVX, which is specifically designed for the experimental and light sport aircraft market.

SVX brings the benefits of situational awareness and enhanced safety to our light sport aircraft cockpit systems.

Turning next to the outdoor fitness segment, we achieved year-over-year revenue growth of 28%, this represents our best rate of growth since third quarter 2008 when we launched the Forerunner 405 and the fitness category has continuously outperformed expectations since that time.

Segment also posted strong operating margin of 38% in the first quarter.

The growth in this segment has occurred on a global basis with all three of our sales territories showing sustained growth.

We continue to focus on expanding our distribution footprint and to provide a broader set of product offerings that will expand our addressable market.

One example of this is the Forerunner 110.

This is a new value price running watch that provides all the essential information including time, distance, and pace.

We believe the Forerunner 110 will expand the market for GPS enabled fitness devices because of its strong features, ease of use, and value price points.

We also expanded our product offerings in the golf market with the introduction of the approach G3.

The G3 comes preloaded with over 12,000 US courses and all the essential functions but it's smaller and lighter than the G5 and is offered at a value price point.

For the Approach G5, we introduced statistics tracking to further differentiate the Garmin offering.

This free software download, leverages intuitive user interface with the G5 and allows golfers to easily track the most often-used statistics in the game including average distance, hit per club, fairways hit, greens and regulation, and putts per round.

We have also expanded the distribution of our golf products by launching versions for Europe and Australia.

In the auto/mobile segment, we experienced a 15% year-over-year revenue decline as selling volumes were weaker than expected due to the stocking of excess channel inventory following the fourth quarter.

While these results fell short of our expectations, some specific market trends point towards improved performance for the remainder of the year.

NCD showed that our North American sellouts has increased year-over-year and we improved our market share from 53% in the first quarter of 2009 to 58% in the first quarter of 2010.

Trends in Europe point to expanded market share where our selling trends are ahead of the market.

We also experienced growth in Asia as our P&D offerings gained share in countries like Australia, Taiwan, Thailand, Malaysia, and Singapore while sales to OEM customers also increased.

Given these trends, we expect 2010 unit volumes to be essentially flat with growth in North America and Asia, offset by declines in Europe.

Garmin will be targeting market share gains in both Europe and Asia in order to outperform the industry.

As channel inventory in the US has been reduced, we will expect sell-in and sell-through trends to normalize in the second quarter, leading to sequentially improved volumes.

Our focus in the segment remains unchanged.

We will be moving forward with mobile hand set launches around the world and we continue to invest in connected services with rich LBS content offerings.

We recently made an important product introduction in the auto/mobile segment, which is the nuvi 3700 series.

This new series redefines the nuvi platform and received the red dot award for product design.

The 3700 measures less than 9 mm thick and includes the capsitive muilti-touch display supporting zoom, pinch, press, and drag.

It also includes and accelerometer that automatically detects orientation, making this product easy to use in both the car or in pedestrian mode.

The 3700 also includes many new innovations for the market.

For example, traffic trends uses both historical traffic and recurring trends in your area to recommend the best route in calculating even more accurate arrival times.

My trends automatically remembers frequent destinations and will display anticipated arrival times accounting for traffic information without the need for manually selecting the destination.

This feature is extremely useful for both commuters who travel familiar routes to and from work destinations and want to take advantage of available real-time traffic information along the way.

Finally, I would like to provide an update on our mobile hand set initiatives.

Two weeks ago we announced our relationship with T-Mobile USA who will launch our android-based 850 later this spring.

The 850 includes all the benefits of the android platform and has been enhanced to include a distinctive user-friendly interface as well as powerful features such as enterprise e-mail and location-based weather messaging functions.

Pricing and availability details will be available soon from T-Mobile.

We also introduced the nuvi phone 810 which is a value priced android devise that offers all the same features as the 850 in a smaller, more affordable form factor.

The Netherlands-based carrier KPN will launch this device and we anticipate announcing additional carriers in the coming weeks.

Finally, the nuvi phone M10 is selling in nine countries around the world including France, Germany, Taiwan and many others.

This smartphone is built on windows mobile 6.5.3 and deeply integrates our location content and technologies throughout the device.

I would like to review our 2010 guidance.

Although we did experience weakness in our sell-in for automotive and mobile segments, due largely to destocking trends, PND sell-through remained on track.

Given the strong performance of our remaining segments, we are reiterating our annual guidance for 2010.

This concludes my business update and next I will turn the call over to Kevin who will walk us through the financial results in more detail.

Kevin?

Thanks, Cliff.

Good morning, everyone.

I would like to jump right in and start walking through the first quarter income statement.

We reported revenue of $431 million and net income of $37 million and proforma EPS $0.38 per share which excludes are foreign currency loss during the first quarter.

Revenues declined 1% year-over-year.

However, gross margins were quite strong with 53.6% which was an 870 basis point improvement over the prior year.

And 770 basis point improvement sequentially.

This increase was partially driven by refined warranty estimates in our results that contributed 510 basis points to the gross margin line.

For operating income, increased 43% to $83 million compared to $58 million last year.

Operating margin of 19.3% was up from 13.3% last year.

This was driven by the 870 basis points favorable gross margin.

Our advertising was down $6 million on a year-over-year basis and was 130 basis points favorable.

The other SG&A was up $8 million on a year-over-year basis and 200 basis points unfavorable and R&D increased $8 million year-over-year and was 190 basis points unfavorable to operating margin.

The pro forma EPS of $0.38 represents a 52% increase year-over-year on the strength of our margins and includes an effective tax rate of 18%.

The total units shipped within Garmin business were down 12% year-over-year at 2.1 million units (inaudible) during the quarter.

Decrease was driven by automotive mobile segment.

Our total company average selling price was $202 per unit, an increase of 12% from 2009.

The auto/mobile ASP increased 7% compared to the prior year, to 148 from 138 a year ago.

On the proforma net income, the Non-GAAP measure that we report represent net income per share excluding the effect of foreign currency.

During Q1, this impact was $0.19 favorable during 2010 and was $0.01 favorable per share in Q1 of 2009.

Looking next at the breakdown of revenue by our segment, during Q1 we experienced a 15% revenue decline within the auto/mobile segment, as retailers cleared excess inventory exiting Q4 of 2009.

As Cliff mentioned, our outdoor fitness segment continue to grow with 28% revenue increase when compare to Q1 of 2009 with both the outdoor and fitness categories contributing to growth.

Our aviation segment revenues increased 12% compare to Q1 of 2009 with growth in both retrofit and the timing of our OEM shipments.

Marine segment revenues increased 9% compared to Q1 of 2009 as the industry began to show signs of recovery and in total our revenues declined 1% during the first quarter.

During Q1, Europe and Asia posted year-over-year improvement.

However, North American market declined 8% due to the excess PND inventory.

The auto/mobile segment represented 51% of our total business during the quarter, down from 59% in 2009.

Outdoor fitness grew to 24% of revenues in the quarter, a 6% increase from a year ago while aviation and marine also increased 1%, respectively.

Due to seasonality and destocking, the auto/mobile segment represented 51% of total revenue and 20% of our operating income in the quarter.

These percentages will grow in the second quarter as our auto/mobile segment improves during the spring selling season.

And the operating income contribution of both outdoor fitness and aviation segments were significant at 46% and 23%, respectively.

Revenues by geography shifted towards Europe and Asia as those markets grew.

Asia increased 300 basis points and represented 10% of our total revenues in the quarter while Europe increased 200 basis points to 34% of total revenues.

Looking next at the margin by the segment, our first quarter auto/mobile gross margin and operating margins were 43% and 8%, respectively.

This represents year-over-year improvement as ASP improvements and warranty estimate refinement contribute to margin expansions.

Outdoor fitness gross margin was 64%, up from 61% last year as ASPs have increased modestly while material cost continued to fall.

Operating margin was 38%, an increase from 35% a year ago quarter due to strong gross margin.

The marine gross margin was 59% compared to 60% a year ago.

Operating margins were 22% of this segment, down from 28% a year ago.

The decline was driven by modification in the allocation of expenses to the other consumer segments.

Q1 aviation gross margin was 70%, a slight improvement from 69% in Q1 of 2009 and operating margin within aviation was 29% for the quarter, an improvement of 430 basis point from the prior year, due primarily to 12% revenue increase, which created operating leverages (inaudible) segment.

Looking next at operating expenses, Q1 operating expense line increased $10 million on a year-over-year basis from $138 million to $148 million in Q1 of 2010, an increase of 260 basis points as a percentage of sales.

As I mentioned earlier, R&D increased $8 million year-over-year and was up 190 basis points to 14.5% of sales.

We now employ over 2100 engineers and engineering associates (inaudible) and remain committed to continue product innovation.

Our advertising spend decreased $6 million over the year-ago-quarter and decreased 130 basis points for the percentage of sales from 5.3% to 4.0% in Q1 of 2010.

This was largely driven by a decrease in cooperative advertising associated with lower volumes during Q1 2010 period.

Other SG&A increased $8 million compared to a year ago, an increase of 200 basis points to 15.7% of sales, as IT's legal administrative finance costs increased during Q1 2010.

The balance sheet continued strong at the end of the quarter with cash and marketable securities of nearly $2 billion.

You can see that our accounts receivable decreased to $419 million as we collected on sales from the seasonally-strong fourth quarter.

Accounts receivable accounted for approximately 52 days of sales, which is up slightly from 47 days a year ago.

In our inventory balances, increased $46 million, up to $356 million as we increased finished goods inventory entering into the seasonally-stronger second quarter.

Our days of inventory metric basically flat at 74 days at the end of Q1 2010 as raw materials increased and finished goods increased.

We currently hold the following levels of inventory.

$89 million in raw materials representing 16 days of inventory.

$39 million in work in process and assemblies, eight days of inventory.

$273 million in finished goods, 50 days of inventory, and we currently hold $45 million in inventory reserves at the end of the period.

We will continue to manage the supply chain appropriately given seasonal and cyclical conditions facing our various segments and it's our goal to have adequate inventory to support customer needs but we do intend to carry the right level and mix of inventory to minimize risk of obsolescense.

Looking next at our cash flow statement, we continue to generate strong cash flow across our business as cash flow from operations was $200 million during Q1.

We also invested $4 million in capital expenditures during the period, leaving free cash flow of $196 million during Q1.

Cash flow from investing provided $64 million of cash.

Which was created by $4 million spending on CapEx, $72 million net redemption of marketable securities and $5 million purchase of intangibles.

Financing activities during the period were the use of cash $43 million.

We spent $47 million on stock repurchases during the period and earned an average of $1.4 million on all cash and marketable securities balances during the quarter.

And finally, in Q1 we announced the 2010 annual dividend at an increased rate of $1.50 per share and paid that dividend last Friday.

This represents a one-time increase from $0.75 per share reflective of the Company's strong cash position and expected ongoing cash generation in 2010.

This dividend was a $300 million use of cash in the second quarter.

As I mentioned during Q1, we also repurchased 1.4 million shares of common stock for approximately $47 million.

The repurchase plan of 300 million expiring at the end of 2011 now has 253 million available for purchase.

Another use of cash would be to continue to evaluate a number of acquisition opportunities.

Finally our tax rate for the quarter was 18%.

We continue to expect the 2010 rate to be -- range between 15% and 18% during the year.

This concludes our formal remarks for the morning.

I'd like to now open up the conference call to any question that you might have.

Thank you.

(Operator Instructions) Our first question comes from John Bright of Avondale Partners.

Thank you.

Kevin, could you characterize the B&Ds customers and talk about how accurate sell-through data has been historically to give the confidence in reentering your guidance?

Yes.

I think we feel like we do have good visibility and information from our major retailers that we track this -- I think you know we track this data from those major retailers on a weekly basis.

Clearly the data we feel like is pretty accurate and suggests, for example, in the North American market we're up between 5% and 10% year-over-year and believe that data.

As we have gone in the second quarter, the trend have picked back up in our sell-in because we realize the channel inventories are much lower and at a point where the retailers need product.

Got it.

Cliff, have expectations changed the nuvi phone?

I think a big introduction coming forth.

What are those expectations looking forward and what's the minimum that will continue the change in this segment?

I think our expectations are at or slightly below what we mention in the past, roughly a million units.

We're planning some strong launch with the phone, as you've heard with T-Mobile.

And some others during this year.

I think this remains an important segment for us so we will continue to invest.

With that in mind, of course, we always look at things pragmatically, so, you know, we're evaluating the market response to the phone, which we feel to date has been quite strong from the carrier level and interest on the carrier level and on that basis we'll continue.

Thank you.

Thanks, john.

Thank you.

Our next question comes from -- excuse if I pronounce this wrong -- Vivek Arya with Banc of America.

Perfect.

Thank you.

I'm trying to understand the inventory based on you comments in Q1, Is it excess channel inventory and if it is, why not lower prices to clear the inventory?

I'm trying to understand what was different in Q1 versus your expectation on the B&D side in the US markets, specifically.

I think in Q1 the price did come back up after Q4.

As you have seen in the ASP and sell through data we see, I think that as we said, we have been tracking the sell-out data from the retailers and actually, their data is reasonably good.

And so on that basis, you know, we don't really see an issue in terms of the channel level other than they have excessive inventory out of the fourth quarter.

I see.

But if it's excess inventory, Cliff, why not lower prices, I guess is my question?

Again, the sell-through trend were trending quite well.

I see.

Also, you know, there's reset timing of major retail that come into play as well so I think all those factors combined just contributed to a sell-in that was weaker than expected.

All right.

Secondly, Kevin, I missed your comment on inventory in Q1.

Could you please maybe repeat those -- inventory level still seems somewhat high, given the comments on the destocking.

Are you referring to number of days of inventory?

Yes.

74 days of inventory.

If you look historically at what we typically have, it's between 60 and 90 days so we don't believe our inventory levels are high.

In fact, obsolescence review that quarterly and obsolescence reserves have stayed relatively low.

We believe that we have the appropriate amount of inventory and seasonally, if you look out of Q1 as we go into spring season, inventory levels almost always increase from Q4 up to the end of Q1 so again, no anomalies in terms of our inventory levels at the end of Q1.

Got it.

Next, I think you launched new B&D products seasonally in the third quarter but it seems this year the 3700 was announced earlier.

It is possible that you start launching that even in Q2?

Yes, it will be launching eminently but I don't think it's really true we only launch in third quarter.

We launched a lot of product in season as well.

In fact, we introduce if 1200 and 1300 and 1400 and got a lot of sell in Q2 but introduced at the end of Q 2.

I don't think there's any unusual circumstances here.

Got it.

And just lastly, given Q1 results, Kevin, what are your expectations for free cash flow generation this year?

thank you.

I think after $200 million in a strong Q1, the number will be between $700 million and $800 million of precash on the heels of over $1 billion so the business is performing very well from cash flow and we expect it to continue.

Okay, great.

Thanks and good luck.

Thank you.

Thank you.

And ladies and gentlemen, please limit your questions to two questions.

Our next question comes from Amir Rozwadowski of Barclays Capital

Thank you very much.

And good morning to you.

Good morning.

In talking about sorts of the P&D demand trends, given the sell and shortfall in the first quarter, and your expectations for more normalized or sell into match -- sell through -- should we expect more pronounced seasonality through the course of the year in order to hit that target of sort of flat unit?

And what would give you that comfort if we were expecting more pronounced seasonality in being able to achieve that?

Well, I think the possibility of that as you know, we don't give quarterly guidance -- but at this point, the annual numbers that we had laid out and reiterated this morning suggested we would make up our first quarter miss during Q2 and subsequent quarters.

At this point we're looking at the overall P&D market trends to be same as what we thought when we last spoke with you on the conference call.

So nothing has really changed in our opinion there.

You know, the data currently suggests the overall P&D market will be around 38 million units and we feel like that's an appropriate number.

Okay, thank you very much, Kevin.

And on the channel, excess channel inventory, was this broad-based across the industry in the US, or specific to you folks?

Well, I think that some of the major retailers did have excess inventory of our products as well as some others.

Really can't comment on the details of some of the others, but it was definitely, in our view, common to more than one player.

Okay, that's very helpful.

Thank you very much, Cliff.

Thank you.

Our next question comes from -- excuse if I pronounce this wrong Ilya Grozovsky of Morgan Joseph.

Thanks.

Can you just, given that you're reiterating guy dance, update your assumptions for APS's and units?

Well, the ASP's -- I'm assuming you're referring to more of the P&D.

Yes.

Assume a 10% ASP decline.

We were ahead of that, given a 7% increase out of Q1 that will be in the same range, 5% yo 10% decline year-over-year is what our expectations are.

Unit, we have not really given -- roughly flat unit expectation for the full year on P&D.

Nothing really changed there.

On the auto-mobile segment.

Okay, great.

Thank you.

Thank you.

Thank you.

Our next question comes from Mark Sue of RBC capital markets.

Thank you.

Will the days of inventory gravitate towards the low end to 60 days over the next few quarters or does it still kind of depend on what the retailers will or will not do (inaudible) just some thoughts on the next few quarters.

I think we generally manage our inventory levels pretty well.

I think we have seen it, you know, get under 70 -- I think 60 would be too low in general but I think between the 75 and 90 day is the target of where we're we're looking for on inventory.

Okay.

And then maybe just on the exercise with the nuvi phone have your recalibrated your opportunity as it relates to -- should we look at lower units this year but perhaps better APS's on those devices or maybe the other way around?

Any thoughts on what the carriers may be in North America would be helpful.

Thank you.

I think ASP's on Nuvi phone will be on the higher range of what we experienced on P&D buzz the margins will be lower as we try to penetrate the market.

North America?

Carriers?

Worldwide.

Got it.

Helpful.

Thank you.

Thank you.

Thank you.

Our next question comes from Jonathan Goldberg of Deutsche Bank.

Hi, good morning.

Hi, John.

Good morning.

I wanted to ask about nuvi phones, big picture, smart phone navigations space.

How do you think it's shaping up against both google navigation, the free services that are coming and carriers turn-by-turn services?

Well, I think that free navigation on google is somewhat old news.

It's been around on the devices since last year.

I also think that included navigation has been part of the carrier picture for longer than that.

We don't feel like that's new information.

As I mentioned earlier, we continue to see strong interest in the carriers on the unique blend of location function that we put in.

Integrate location into device that is going to integrate location capability and broadly into the devise to many applications as opposed to holding on a navigation application.

And then are you seeing any pushbacks for carriers who are cautious around getting to close to google?

Are you getting carriers telling you they're sort of pushing back on installing google navigation phones?

I can't real comment on how they feel specifically about google.

You see a variety of trends and available public information out there where some carriers have specific choices about what they want to use and application that are loaded.

So I think you kind of have to look at that on your own and interpret how it means.

Is it safe to say that we're not seeing google navigation preinstall in all android phones?

To my acknowledge it's definitely part of most, if not all, android phones at this point.

Thank you.

Thank you.

Our next question comes from Thomas Lee of Goldman Sachs.

Hi, thanks for taking my call.

I just had two questions.

First one on the warranty expanse.

Curious -- I know you mentioned most of it was, I believe, in the auto-mobile segment.

Was this related to perhaps lower nuvi phone sales?

I wanted to get a little bit more color in terms of, you know, what cause that kind of -- I guess, refinement there.

It really had nothing to do with nuvi phone.

It was -- [Indistinct] It also took into account our claims system, numbers vary quite a bit from quarter to quarter.

It's a combination change in east mate and also looking at claims and number of coming back under warranty.

Got you.

The warranty reserve you're accruing should -- new level that's been set should be kind of the roughly the go forward level going forward?

Yeah.

we think so.

We're still evaluating and continue to evaluate what those claims will be.

It occurred across all our segments.

Impacted by that estimate.

Got it.

Last question on that one -- as you expect to ramp your nuvi phone business, is there some possibility you could see that number increase or you think you have given accurately accounted for that?

The warranty number increase?

Right.

If you recall on our older products, the G 60, we took a large reserve at the end of the fourth quarter so we feel there's virtually no risk on warranty for the existing unit that are out in the field.

Got you.

And last question is just on your auto-mobile operating margin -- you said Q1 will be a bottom but in terms of trajectory for the remainder of the year -- it is likely that we'll see 20% plus levels or is that maybe too steep?

just wanted some context in terms of the trajectory going forward.

Seasonally Q 1 is the low end of the margin.

The guidance we reiterated of 23% to 24% for the full year, I would expect that Q 2 and subsequent quarters would be in that range to get us back on -- keep us on track for the rest of the year.

And that's in the auto-mobile business?

Auto-mobile only?

Yes.

that was the question.

I was looking at total business.

Auto-mobile in the 20% range.

Okay, thank you.

Thank you.

Our next question comes from Yair Reiner of Oppenheimer.

Thank you.

Just a follow up question.

If you are to take out the warranty reserves in the quarter, what would the gross margins be on the P&D segment?

We didn't quantify that exactly but the 5% basically is what would apply there, roughly.

500 basis points.

So roughly, evenly spread throughout the businesses?

Yes.

Yes.

And then in terms of FX, the dollar strengthened quite a bit over the course of the quarter.

What impact did that have on your margins?

If you look at year-over-year, a very minimal impact during Q1 so I think the timing of the FX a year ago -- very little impact on the margins.

And quarter on quarter?

Quarter over quarter, I don't know if I have those numbers but can get back to you on that.

Okay, good.

I would say abnormally low in the first quarter.

Is 4% something you can sustain going forward or should we expect that to increase more -- that percentage to increase more historically?

Yes.

I think it's about half of our ad spending is volume and it's cooperative advertising with our major retailers.

That's one of the major reasons ad spending was down.

In fact, if you look at what we expect for the rest of the year, should be between 5% and 6% of sales, now down at 4%.

And we have some Q2 ad placement and media span that's planned coming up in the next few weeks so you'll see some new TV ads that will be coming to market shortly.

Okay.

And one last one if I could -- Your major competitor characterized overall P&D market as being about 3% down in the US on the basis and about 14% down in the EU basis.

Do you you the overall mark in more or less the same terms?

We definitely see some more decline in -- if the US if you look at the data, you will see it's increasing.

Our view in North America is it's single to maybe low double-digit growth and declines in Europe.

Great, thank you.

Thank you.

Thank you.

Our next question comes from Scott Sutherland of Wedbush Securities.

Great, thank you.

Good morning.

Hey, Scott.

I want to ask about the nuvi phone.

Joining T-Mobile also carrying the Nokia navigation phone.

What differentiates the nuvi phone to sell against the Nokia phone as well as the android phone with navigation?

My understanding of the Nokia phone is it's a -- it's not android-based phone and so it has a lot of limitations.

Our phone, on the other hand, is a full android-based phone with access to the android market.

As well as, as I mentioned earlier, your unique LBS functions broadly into the device.

Okay.

And on your overall inventory, the destocking occurred in Q1, back in Q4 I think on the last call you felt it was at equilibrium and appears extra inventory.

Was there something that surprised in the holiday season things out of the channel as well that allowed the access to have excess inventory?

I don't think we can really -- we didn't really have anything to comment on that, other than there was a little bit more than we thought coming out with the major retailers.

Always easier to look back and understand better than it is coming out of a period, yeah.

Okay, fair enough.

Thank you.

Thank you.

Thank you.

Our next question comes from Jeff Rath of Canaccord.

Great.

Kevin, I was wondering if you could help us a bit -- you put an offer out to the marine shareholders and it's subject to proper response and approvals, etc.

Beyond the impact you have articulated, how should we think about the impact to the marine segment on a consolidated basis?

Does the mix of that business -- is there a restructuring recall?

does that hold back some of the consolidated margins?

How should we think about the accretion there?

Thanks.

I think cliff's earlier comment -- we expect the first year on the revenue side, it would add about $150 million, given the expectations on their business.

It's complementary so the two businesses combined would, I think, be much stronger because of their presence and presence in the aftermarket retail.

From accretion, we would expect it to be the first year but too preliminary to give details on how much that would be accretive.

We need to do further analysis to go through the process to comment on that further.

I guess just the second question I had, Kevin or Cliff -- if you could speak to it, can you speak to us on the overall P&D volumes were in Q1?

that was -- you sold into the channel?

Yes.

Our overall units 2.1 million and we sold around 1.5 million P&D units during Q1.

Thank you very much.

Thank you.

Thank you.

Our next question comes from James Faucette of Pacific Crest.

Thank you very much.

I wanted to ask, first, on the channel inventory.

I guess if I understand stood correctly, the sell-through was pretty consistent with your expectation, particularly here in North America.

But there was more inventory so I'm trying to get a sense for what changed from your partner's perspective.

And then the second question I had, if you could talk about your pipeline for the aviation and marine businesses going forward during the course of the first quarter.

Thanks.

I think the first question has been answered three or four times but I'll address it again in terms of sell throughs.

We were watching on a week-to-week basis thinking the major retailers would order product and they elected to hold off items we got into the second quarter so I think that's what delayed our shipments to them.

That's what changed, our expectations on when those replenishment orders would come in.

We have seen that beginning of Q2.

We're starting to see positive trends on the sell-in.

The sell through, our opinion hasn't changed.

As cliff and I mentioned, somewhere around high single digits to low double digit in term of year-over-year growth.

In terms of pipeline on aviation and marine, I think aviation, again we have double-digit growth through the quarter.

We start to see some positive trends.

We're cautiously watching to see what happens the rest of the year.

Sales growth expectations for 5% to 10% for the year, end of Q2 on that.

Marine does appear to be in a recovery mode.

11% growth and so far in Q2 the trend are positive so we're positive.

I didn't mean to repose the same question.

I guess what I'm wondering is, it is your sense that your retail partners have taken down their inventory levels or did they just take longer to start to stabilize and rebuild those than you had expected?

James, we really feel like it's the latter and as Kevin mentioned, due to the timing of their orders, we saw some locations run short on product.

It's really varying through the inventory they had and it wasn't a change in their approach at all.

Great.

Thank you very much.

Thank you.

Our -- final question comes from Ben Bollin of Cleveland Research.

Thank you.

The first question I had -- you talked a little bit about material cost reduction in the quarter.

I was hoping you could discuss a little bit about what you have seen in component pricing trends with respect to the map and the GPS chip set.

And then also, Interested in how you feel about the mix of units in the P&D business.

You have given a percentage in the past.

Any replacement trend you feel you're seeing out there.?

Thanks.

In terms of components, we feel like the pricing has been relatively stable.

There's some components that have some upward pressure and we're still focused on decreasing our costs, billing material cost, through design changes as well as negotiations.

Generally stable.

There is some components defy trend, the home market right now, because of reduced capacity in the economic crisis, the foundries are running at full capacity right now so supply has changed somewhat.

In terms of the mix of P&D's, we really discontinued giving that kind of data because the market is definitely not, you know, a hyper growth market any more and have seen roughly 80% of our units sold at the low end or really value price point with 20% premium products.

Nothing's really changed in terms of that mix of the P&D's and unlikely it would going forward.

Replacement trends we don't have great date on this.

We're gaining more data but we estimate between 20% and 30% of our units are replacement at this point.

I think that is all the questions from the call.

We want to thank you for your interest and we look forward to updating you a quarter from now.

Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may all disconnect.