Q4 2020 Knowles Corp Earnings Call
Good afternoon, and welcome to Knowles Corporation fourth quarter 2020 financial results Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero.
With that said here with opening remarks is Knowles, Vice President of Investor Relations, Mike Knapp. Please go ahead.
Thanks, Helane welcome to our earnings call I'm, Mike Knapp and presenting with me on the call today are Jeffrey New our President and Chief Executive Officer, and John Anderson, Our senior Vice President and Chief Financial Officer.
Our call today will include remarks about future expectations plans and prospects for Knowles, which constitute forward looking statements for purposes of the safe Harbor provisions under applicable federal Securities laws for.
Forward looking statements in this call will include comments about demand for company products anticipated trends in company sales expenses and profit and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.
The company urges investors to review the risks and uncertainties in the company's SEC filings included but not limited to the annual report on form 10-K for the fiscal year ended December 31, 2019 periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.
All forward looking statements are made as of the date of this call and Knowles disclaims any duty to update such statements except as required by law.
In addition, pursuant to Reg G. Any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at Knowles Dot Com and in our current report on form 8-K filed with the SEC today, including a reconciliation to the most directly comparable GAAP measures.
All references on this call will be on a non-GAAP continuing operations basis, unless otherwise indicated also we've made selected financial information available on webcast slides, which can be found in the IR section of our website.
With that let me turn the call over to Jeff who will provide some details on our results Jeff.
Thanks, Mike Thanks for all of you for joining us today.
For Q4, we reported revenue of $243 million up 18% sequentially and up 4% from a year ago period as.
As we mentioned in our pre announcement release stronger than expected Mems microphone demand in multiple end markets and improving trends in hearing health solutions drove the upside.
Gross margins improved 130 basis points to 38 per cent and our earnings per share was above the high end of our guidance range at 41 cents.
Overall, a very solid quarter, where we saw improving demand in audio in combination with solid operational execution across our businesses.
Now let me update you on the current customer demand across our end markets.
In audio sales were up 22% from the prior quarter versus our expert expectations of more than 7%.
In the second half for 2020, we saw broad based sequential improvement and Mems mic sales across mobile and non mobile and markets in.
In mobile stronger sales to North American and Chinese always at Chinese Oems drove the majority of the increase is five G. Bohn shipments have accelerated.
Non mobile applications also increased with sales into the ear Iot and computing markets driven by work from home and remote schooling trends.
We expect these trends and non mobile applications to continue to be payable for Mems microphone in the first half of 2021.
For hearing health shipments were higher than expected going into the quarter, but remained lower than the year ago period as COVID-19 challenges persist.
Data from the hearing industry Association shows that unit sales of hearing AIDS in the U S declined by seven five per cent year over year in Q4 with only modest improvement improvement in the VA channel during the quarter.
Under the umbrella of our hearing health business. We also saw high performance microphones and speakers to premium audio companies as well as many smaller customers for a diverse set of niche applications unrelated to hearing health.
One example is in gear headset monitors used by musicians in live music performances. These.
These type of customers have been severely impacted by Covid and account for the majority of the shortfall relative to pre pandemic sales.
We remain confident for the hearing health business will fully recover in the near future as the Covid vaccine becomes more widely available.
In precision devices Q4 sales were flat sequentially as expected as Covid continues to impact our med Tech and defense end markets.
Shipments of high performance capacitors into the Med Tech market continued to be negatively impacted by COVID-19 related delays in elective surgeries.
We are kind of just market will recover as the vaccine becomes more widely distributed.
In Defence Covid related program placed were a drag on growth in 2020, but we are beginning to see a recovery in bookings in this market have improved in the last two months.
These products have longer lead times, and we expect these shipments to begin to positively impact Q2.
Overall I was pleased we were able to grow precision device revenue in 2020, despite headwinds from the pandemic with growth coming from electric vehicles defense and industrial partially offset by Med Tech.
I anticipate we'll return to more robust growth in PD as med Tech and defense markets recover.
I'm very proud of our team's execution. During these challenging times, we not only weather whether an extremely difficult first half of 2020. We also took significant actions to improve our business.
As our Mems microphone business fully recovered from the second half of 2020, we saw the strong operating leverage and cash flow potential inherent in our business model, even while COVID-19 is still having a negative impact on a number of our end markets.
I believe our leadership position across the markets, we serve our strategy to deliver.
High value differentiated solutions to a diverse set of growing end markets will enable us to come out of this pandemic well positioned to take advantage of future growth.
In addition, we have several opportunities to improve our gross margins, but I expect it will drive additional earnings in 2021 and beyond.
With that I'll turn it over to John to expand on our financial results and provide guidance for the first quarter.
Thanks, Jeff we reported fourth quarter revenues of $243 million up 18% sequentially and 4% from the year ago period, driven by increased shipments in the audio segment.
Audio revenues of $202 million were up 22% sequentially due to increased shipments of Mems microphones across multiple end markets and continued recovery in the hearing health market.
The precision device segment delivered revenues of $41 million flat sequentially and in line with our expectations.
Fourth quarter gross profit margins were 38% at the high end of our guidance range and up 130 basis points sequentially.
Audio segment gross margins improved 260 basis points, driven by higher factory capacity utilization and lower cost as well as favorable product mix related to increased shipments into the hearing health market.
In the precision devices segment gross margins were lower sequentially due to lower factory capacity utilization and unfavorable product mix.
R&D expense in the quarter was $20 million up 1 million sequentially as higher incentive compensation cost and a nonrecurring supplier payment was partially offset by reduced spending in intelligent audio.
G&A expense expenses were $27 million flat sequentially, and 2 million above our guidance due to higher incentive compensation cost.
For the quarter adjusted EBIT margin was 18% at the high end of our guidance range and up 430 basis points sequentially driven by increased shipment volumes higher gross profit margins and improved operating leverage.
<unk> was 41 above our guidance range due to higher revenue and gross margins and a three <unk> discrete tax benefit partially offset by higher incentive compensation cost.
Further information, including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's press release and can also be found on our website at Knowles Dot com.
Now I'll turn to our balance sheet and cash flow.
Cash and cash equivalents totaled $148 million at the end of Q4.
For the fourth quarter of 2020 cash generated by operations of 76 million was a record high and well above our guidance range due to higher EBITDA and lower than expected net working capital.
Capital spending was $12 million in the quarter.
For full year 2020 cash generated from operations was 128 million and free cash flow was $96 million representing more than 12% of revenues, we exited the year with net debt of less than $25 million and repurchased one 1 million shares in 2020.
Moving to the first quarter of 2021, we expect total company revenue to be between 190 and $210 million up 23% at the midpoint versus the same period a year ago.
Revenue from the audio segment is expected to be up approximately 35% from Q1 2020 due to increased Mems microphone shipments into non mobile applications as a work from home and remote learning trends continue in addition.
We expect higher mobile microphone demand at both our largest customer and Chinese Oems.
Precision device revenue is expected to be down approximately 12% over prior year levels, driven by defense project push outs and the continued impacts of COVID-19, non elective medical procedures, specifically for implantable devices.
As Jeff noted defense bookings have strengthened over the last two months and we are optimistic about growth in this market in 2021.
We estimate gross margins for the first quarter to be approximately 37% to 39% up 230 basis points from the year ago period, driven by increased audio demand and improved factory capacity utilization in our Mems microphone business, partially offset by price erosion and.
FX impacts.
R&D expense is expected to be between 19% and $21 million down 2 million from prior year levels due to a reduction in spending related to intelligent audio products, partially offset by increases in mems microphone and precision device spending.
We're projecting selling and administrative expense to be between 24% and $26 million down $9 million from the year ago period, due to a $4 million reduction in legal expense and the impact of restructuring actions taken in the second quarter of 2020.
We're projecting adjusted EBIT margin for the quarter to be in the range of 13% to 17% and expect EPS to be within a range of 23 to <unk> 27 per share. This assumes weighted average shares outstanding during the quarter of $95 1 million on a fully diluted basis.
We're forecasting an effective tax rate of 14% to 18% for the quarter. Please.
Please refer to our press release and to our form 8-K filed today with the SEC for a GAAP to non-GAAP reconciliation.
For the quarter, we expect cash generated by operations to be between 25, and $35 million and capital spending to be approximately $10 million.
I'll now turn the call back over to Jeff for closing remarks, and then we'll move to the Q&A portion of the call Jeff.
Thanks, John our company remains uniquely positioned across a diverse set of end markets poised to grow over the next several years, we remain the leader in hearing health solutions and expect recovery to 2019 levels in the next few months.
In Mems mics, we expect non mobile applications to drive future growth in the mobile market to stabilize as more <unk> phones introduced.
For precision devices, we expect revenue to grow in 2021, driven by continued momentum in defense and electric vehicles and recovery in the Med Tech market.
As we look further into 2021 their markets continued to recover I believe we can drive shareholder value by delivering earnings and cash flow above pre COVID-19 levels are.
Operator, we can now take questions.
Just as a reminder, if you would like to ask a question press star one on your telephone keypad.
And your first question comes from the line of harsh Kumar with Piper Sandler.
Yeah, Hey, guys first of all let me just say congratulations you know this has been a phenomenal turnaround that you guys have executed.
Cross selling measures controlling opex and now I think you guys are really seeing the results from fed. So really appreciate what you guys are doing from from the side of investors.
I had a quick question, if I wish to shine a SKU.
Are you seeing the handset growth is for the year, we are hitting 10%, but im wondering here you talked a little bit about what youre expecting in ear and Iot growth for the year or call. It midterm and then also what do you think it could be the PD growth rate in other words I'm trying to get an idea of your growth rate for the mid term two to three years out.
So first let's talk about mobile first.
I think we've talked about this for a while and I think that overall debt.
Obviously, the last three years, when you're talking about full year mobile.
Our unit sales have not been great we've been kind of thinking about that.
We kind of looked at the numbers harsh in and I would sit there and say is.
I went back for 17 about 36 per cent of the company revenue came from mobile.
And in 2017.
We're expecting in 'twenty, one is going to be less than 25%.
And so our expectations for mobile or is that you know that.
Right now people are saying it will probably get back to pre pandemic levels in 2022.
But again, it's not that we're leaving the middle market, but we have other places where we're growing much faster and I think it can get better growth and can get better gross margins and so I think this is an area that that will continue to work it but I don't think we have super high expectations for mobile now and if I go to the non mobile.
Patients I would say, obviously, that's a little different and if I look at the same numbers about 19% of the company's total revenue in 2017 came from from non mobile applications in Mems mics.
It will probably be close to 30% in 2021 and so this is an area, where we still see growth right. We've talked about year, we've talked about Iot I think the other one that we talking about more recently is computing the whole work from home and the <unk>.
Of of school from Hall is driving a lot of demand in the laptop PC market and I would say it.
It may not say sustained at this level indefinitely, but I think it's definitely going to be larger than it was in the 17 18 time timeframe and so I think we're still very bullish on the on the debt.
Non mobile applications.
The last question, what kind of other like.
PD.
This is still good we have two separate businesses here with a number of markets.
A lot to digest in a quick call here, but just generally speaking.
The RF business.
<unk>, which is primarily driven by defense, we still think that's going to grow.
Going forward, we still have.
We still have growth.
That business in 2020, but it wasn't as great as we thought it was going to be based on the delays in defense. We think it's going to get stronger again in 2021, and we expect that it's going to continue to grow.
As far as the.
The high performance capacitor business EV.
<unk> starting from a small base, but we've had nice growth we expect to have growth again in 'twenty, one 'twenty, two and beyond and this will be a lot into high voltage portion of the all electric vehicle markets and we're specifically targeting like onboard Chargers and battery management, that's kind of where we're really focused in in the EV market and then.
We're expecting a recovery in the med tech market in 'twenty one.
Hard to say exactly when that comes but elective surgery start to come in and listen.
With some kind of a lots of our big customers in that market like the average of the world and for what they're talking about but longer term, we think med tech will be a growth business for us.
Hey, Thanks, Jeff I think you answered a lot of my other questions. The only other quick one that I have and I'll jump back in line was down.
Timing of hearing how is there I mean, I know, it's a moving target for the Covid stuff going on but do you want to even try to guess when you might get back to kind of a year ago, our full levels as you might think about it.
I would say as we look in Q1 hearing health getting and hearing health as in the traditional hearing aid market is getting pretty close to normal I think the one piece that we're missing and I don't I know, we haven't talked a lot about this but about 10 percentage of sales in this division go to these other applications.
And when I talk about other applications I'm not talking about that.
The other balance armature for true wireless I'm talking about like audio file like performers on stage wearing headsets. They have our seekers in them, we sell to the aviation market, we sell to other.
Non hearing health net markets and it's about 10% of the market that business is still significantly down we're hoping as the vaccine.
Obviously, it gets out for farmers are going to start coming and there's going to be concerts again. This business is going to pick up. So I would say again hearing health is pretty close back to normal in Q1, but very close.
With this kind of other category, which is about 10% of the business still being significantly impacted.
Thanks, Jeff Thank you, John and Tony that you gain guys. Thanks.
Thanks for all fixed.
And our next question comes from the line of Anthony Stoss from Craig Hallum.
Hey, Jeff John and Mike Jeff in your prepared remarks, you talked about gross margins and that you have some more improvements to be made or some more programs to improve them.
Just if you could offer a guess maybe a range as to where you think you'll exit the December quarter. This year, what you need to do to get there and then secondly, maybe more for John are you done with all Opex cuts. There is still more to go and then Jeff also last question.
Are you seeing any component shortages every chip companies talking about it on wafers et cetera, I'm just curious what you guys are seeing.
Yeah. So let me answer that last question first.
In terms of wafer shortages.
During the day, we have not had any wage for shortages, what we have had as lead times go out right. So.
The riskier with lead times going out is we're trying to predict mix further out right and so that that's the best challenge so far we've seen.
But but as far as not having enough wafers that has not been an issue for us I think that we've got a good group of partners that have done pretty well for us on.
On the gross margin side I'm going to turn Regina the second I'll just make a couple of comments, we started talking about gross margin at the end of 19 and why to improve it and I would sit there and say, it's obviously 2020 was obviously tumultuous year, especially the first two quarters of the year and I would say why does it work that we've been doing the good work we've been doing.
<unk> is being masked by two things one is mix right two of our highest gross margin businesses.
Our hearing health business, coupled with the Med Tech business and NPD are down right. So mix is not helping us even now and then the second thing is obviously the absorption with all the factories that we have that we're running full debt has had an impact as well now I'll turn it over to John who will talk a little bit about some other things that we're doing.
What that really how that translates to what it means for 2021.
Sure Yeah, just add Tony.
I guess first of all I would just say I am pleased with the trajectory and our gross margin, which was up more than 130 basis points sequentially. We had gross margins of about 36 seven in Q3, they're up to 38 in Q4, and then if you think about the potential to improve those margins Jeff talked about.
Selected portions of our business are still being impacted the audio file business.
P D. The med Tech business and defense all three of those end markets typically carry above average gross margins. So when we recover to fully recover in those markets I think there's clearly some tailwind in.
In addition, we did in the fourth quarter, despite delivering 38% we had some workforce disruptions in our north American manufacturing facilities related to Covid and so again if those.
We don't expect those to continue.
That will also be a tailwind for us moving forward. So I think if you take all that together I think based on the current end market conditions. There's no reason, we can't have full year 2021 gross margins above 2019 levels, we finished right around or just.
$39, one I think in 2019.
So hopefully that gives some color.
Got it if I can sneak in one more Jeff any update on when you can get the automated equipment.
Caught me, then and then up and running.
Yes, I'll give you a quick update on that.
The line is shipped its actually on the ground in the Philippines in the facility.
We have not yet been able to get the installation team there.
In order to.
For all the machine.
But we're hopeful with the distribution of the vaccine that we're not too far off from being able to send the team there and that any restrictions relative to travel the Philippines will be fully cleared once we get it there.
Dissipating, it's about eight to 10 weeks to get it fully installed and so you know we have a pretty good pipeline of opportunities for the back half of the year.
Which.
I hope, we don't have to push out I don't think we will I think we're gonna get this line up and going but but I think the pipeline for the back half year is looking pretty good you know and so we got to get this thing install but I think it should happen sometime in late Q2.
Hey, Thanks, all the details yet.
Did we address your Opex question that not yet no I think I think I was going to save that for a follow up call.
Call Tonight, but go ahead.
I would assume you're getting pretty close to being at the tail end of it.
Yeah, I mean Q4, we incurred about $47 million of Opex, a couple items that I want to pull out is we had abnormally high incentive compensation cost about $2 million higher than normal we really finished strong in and on the higher EBIT, we had higher incentive comp costs. We also had some engineering.
<unk>, which is a little more than a million dollars. So if you take those out call. It a 44 to 45 million run rate.
I would say very modest increases from there going into 2021 Theres nothing line of site, where we see this big opportunity to reduce further but I think we can get great operating leverage if we can grow the top line and really just we shouldn't have much more than 2% to 3% increases in 2021 and opex.
Thanks Best of luck guys.
Thank you.
And our next question comes from the line of Bob Ladies from C. J.
Good afternoon, and also congratulations on some very strong results.
Yeah.
I wanted to stick with the gross margin question and obviously you just spoke about the opportunity to have very strong gross margins this year looking out.
Further can you talk a little bit about the opportunity to perhaps get above 40%.
You know what would be the drivers there and maybe you know it is.
As your mix changing even within mobile or what are the current drivers right now of the improved gross margins. Despite having some of the higher margin businesses being suffered so I guess, that's two questions there sorry.
Okay.
So I would say you know what I think we talked a little bit about.
2020, being kind of like a little bit more challenged in terms of pricing. We made some decisions on pricing I would say in the you know the fed.
February March April timeframe for the back half of the year that without you know it's hard to tell what the demand was going to be but it's clear Bob that the the pricing and the demand are much better aligned now and going even in as we're in 2021, they're much better day.
Allied and so you know I think we've talked about this before which was you know you go back a few years, we were averaging on mature products like 7% to 8%.
Price erosion on mature products by the time, we got to 19, it was less than 4% and we kind of fell off the rail here with the demand how it kind of came in.
And in Q1, and Q2, and we're making decision about pricing for the back half of the year I don't see that being sustained so you know I think.
As for introducing new products in Mems mics, if theyre coming in at higher gross margins and as also we have less mobile I cover this kind of an earlier question that the non mobile applications continue to grow where the gross margin is higher and so I think.
Within Mems mics, it's mix, it's for sure mix is helping us in 2021 as we look into the other businesses you know I think about where we think our growth is going to come from you know in hearing health, we talked about balanced armature receivers.
I think that is going to be at that growth, that's going to be higher gross margin than our corporate average there is still ongoing within the hearing health market a shift from the old style microphones to Mems microphones, and while that doesn't add to our sales level. It changes the gross margin.
And then of course in P. D defense in Med Tech our areas and in E D, where we're focused where gross margin is higher. So so what you see is the R&D dollars for new products are being focused towards the markets that have higher gross margin and you're going to start to see some of that come through in <unk>.
In 2000 2021.
Okay, Great and then I think you started to touch on this a little bit too, but if you could.
Talk about your thoughts on kind of the longer term consequences of Covid, you had mentioned that in the computing market.
Work from home and remote school and stuff should increase.
Increase that over pre COVID-19 levels. So are there any other changes in your book.
End markets or your thoughts about the future that have changed as a result of COVID-19.
No I'll make couple of comments about the hearing health market, which is kind of interesting which is.
If you go back when we were talking about this in February and March last year, we were saying that there's two things that had happened one was people had to feel comfortable we're going to have a solution to COVID-19 and number two as people feel comfortable coming out.
I've talked to the hearing health customers.
The Audiologist are open the consumers are coming I, we're not seeing people staying home right and so I think the recovery once the vaccines out should be pretty good for us in these markets I do think there is especially in our PD side in Med Tech. It would appear to me that there was some pent up demand in med Tech.
And you know I think the other thing I would say is and this is not COVID-19 related, but but I think we're very well positioned in defense.
With PD.
We were in the areas where investments being made relative to you know.
Electronic warfare right. We've got some very unique products, there and I think that's gonna be a nice growth market, but 90 that recovering again as COVID-19.
It starts to dissipate.
Okay Super Thank you.
Okay.
And your next question comes from the line of Christopher Frozen from Susquehanna.
Thanks, guys I guess my first question is a follow up.
Can you talk about.
And I didn't totally understand.
Jeff What you were talking about with pricing were you, saying that pricing has improved from down 3% to 4% that you talked about could we even see pricing up in this kind of environment.
And then secondly is capacity utilization nearly 100 per cent for the full year here as lead times are stretched and your visibility into perhaps some tightness in the back half.
How hard are we going to be running this year, yes. So.
So yeah I think the first question on pricing again.
'twenty was kind of a difficult year, having made some decisions on pricing when the market was very poor right about that about the back half, but as we go into 2021 pricing has stabilized and what's happening is new products of course are being introduced like we normally do which is resetting the numbers.
And price erosion is becoming in less than 4% it could be even less than 3% for quite frankly for for <unk>.
Mike So so we're seeing a lot better pricing environment as I as we go into 2021. So I think that was the comment and then.
Your second question relative to utilization capacity utilization.
Let me just make I'm going to let John talk about the utilization.
But let me just make one quick comment right.
Now that the demand obviously based on our guide.
For Q1, it's quite strong in Q1, I think other areas that that we're talking about for the back half of the year.
And getting prepared for is you know is our largest customer is it going to be another big year for <unk> for mobile phones in the back half of the year. That's a question that we have to think about it right. The second one is is that in.
Within our non mobile applications.
C and a laptop and tablet have been extremely strong.
The Covid and the question is I do believe it will be above 2019 levels, but the question is will they sustain at this level all the way through the back half of the year yet.
Alright, I think thats yet to be seen.
And then the last piece before we talk about Cat pass utilization I would just say is as debt.
What we're saying how I see it is that EBIT. If some of these markets are.
Or a little bit weaker in the back half from say 2020, we do have all these other stuff coming back right Med Tech within PD. We have defense. We have this audio file slash aviation slash other med tech for H H T. So this stuff should be coming back. So so I kind of view is this is the valley.
<unk> diversified business right that you you have some things up something down but overall, we feel pretty good about about 2021 right now.
But for better or just Chris in terms of capacity utilization I'm really talking about the the Mems business, but Q4, we ran close to very close to 100%. We actually in addition to that 100%, we actually sold and took down our inventory as well.
I would say as we look into Q1.
Higher than normal and we're actually going to work through Chinese new year.
And it would be higher than the normal normal first quarter is seasonally low and let me yeah. Let me make one more comment is I think normally we expect you know that Q1, you know with some of the dynamics in the mobile market, it's the seasonally low quarter. It could shift slightly in Q2 on mobile right.
Because because of the timeline of when things were introduced that's kind of where I was going Q1, we're gonna have abnormally high or or norm higher than normal.
Utilization Q2, we will but it will be replenishing inventory in Q2 Q1, we're kind of fallout can meet demand.
Again, that's based on kind of the conditions that we see right now no significant supply chain constraints. Today, you know lead times for wafers have extended a little bit, but it's not a bottleneck for us today.
Okay I understood.
Very helpful. Thank you guys and I.
I guess my second question is around five key handset.
You know the kind of China handset complex in particular here can you talk about some trends that you're seeing there in terms of content for you guys in terms of multi mic adoption in terms of better Mike is this a driver for you guys as well.
And then people have gone to talk about an inventory of handsets building in China as people aggressively.
TAC the lost Huawei share that's out there are you seeing that as well thanks.
We saw a very strong Q4 sequentially from Q3 in China.
Looking at the numbers here.
Yeah, we saw very strong.
And so.
So.
It's definitely going to be down sequentially.
From Q4 to Q1, we're already projecting that but it is up significantly over Q1 of 2012 2020, so so I.
I would say.
Generally speaking the.
The Android market has been kind of a little bit of a mixed bag here and obviously trying to drive a lot of us.
And.
My personal feeling right now is I'm not feeling like there's a big inventory issue. If I look at kind of what our forecast were starting to see for Q2.
Still will be up sequentially.
In Q2, so so although you know again I always.
Preface that with we got to wait till after Chinese new year, right, So, but right now our forecast seem pretty good sequentially from Q1 to Q2.
Understood. Thanks, guys appreciate it and congrats on the solid quarter here.
And your next question comes from the line of Tristan <unk> from Baird.
Hi, good afternoon.
Given your commentary that you were almost at a 100% utilization rates in Q4, and you're going to be higher than normal in Q1, if we assume 10% growth in smartphones this year.
Would you have to build capacity for the second half for this year and also I wanted to go back to the commentary that you expect Q1 shipments in smelter for them to be higher than normal and in Q2, you expect debt is going to be some inventory replenishment.
Given that some investors have been concerned about that for shipping in Q1.
Is that something that you believe could impact the second half for the year, where there is at some point just excess inventory in the channel and I'm just trying to put on a day.
Together and what it means for your utilization rates for small chain and shipments wanted to two wheel end demand.
Yeah, I mean like right now kind of I feel interest in about the full year is that we will be probably building full out through the full year with Q2 being more of building inventory right. I mean, I think we've talked about before our kind of our strategy here is because we have such diversity of customers and markets that.
You know that we don't have to have capacity in place for the peak in the back half of the year because of we have enough customers and a debt. We're very confident we're going to buy and what part numbers that we can build those in the first half so.
Right now I would sit there and say.
I think we're going to build pretty close to full out for the book full year that would.
Be my guess as.
As far as mobile I think.
Mobile is for US you know if I think about it is going to continue to decline as a percentage of our total company company revenue and I think what other things that we are thinking more about just in it as we go into this year is that we've got a great product portfolio, we got a lot of great end markets.
Yes at the higher end of the market, we still sell.
Microphones, we liked like those sales, but when we start thinking about the lower end of the market. There may be other methods for us besides selling the full microphone.
To sell into lower partially for the mobile market and and you know and so when I think about this is is over the long term is we are going to start moving away from the lower end of the markets in mobile and what really drives me there for US is first of all what's the gross margin.
It's also the absolute AFP that I'm filling my factory with when we sit there and we see microphones in the low end being sold at 10 to 15 cents at a gross margin. That's you know.
Some of the corporate average versus we could sell that to ear Iot compute our higher end mobile at a higher gross margin.
It's both a revenue driver and it's a gross margin driver and I think we're getting to the point, where again, where I could I see that the demand for microphones continues to rise and so we're able to kind of like not go as aggressively after the low end of the market.
Yeah.
Great. That's it that's very useful and then.
As he put it up so you mentioned in your products that you're going to launch outside of some non tons.
Price it would be higher asp's and driving mix.
Is this going to be just a shifting to higher asp's Hyatt Maui in products outside of smartphone or do you think those products can also help you gain share outside of smelter and Oh, you just rely on to them.
Those are non smelter in end markets to just grow faster year over year.
I mean, I don't know if you've done any analysis of results.
Our results in share gains are but I would just say is the primary goal here is higher asps and higher gross margins, that's where we're focused and in some other cases with these won't be dual sourced and others. They won't be I think what we feel interest.
This is I think we've talked about this it's really a two.
Two competitor situation here within the microphone market and I don't think anything really changing with that so I think we will get our fair share with the new products that we have in the markets that we're attacking.
Yeah.
Thank you.
Okay.
And your next question comes from the line of.
Hey, John This Silva from Roth capital.
Hi, John.
Up here.
The balanced armature I'm talking about the supply side, you guys are trying to get to the right.
Equipment installed I understand travel is hard but on the demand side or the programs that would understand that capacity in second half ramp.
Are those programs waiting for your products that they've been pushed out or I mean, I'm just to understand the demand aspect about Patrick I would I would say the way. This is working is like literally meet with the team about the demand side of this weekly.
Trying to supplement some of the lower volume opportunities with manual production, we don't want to do a lot of it because it's not good for gross margin, so and we haven't done a lot of that but what we keep talking about it is we're not ready okay. How about the next one and so I wouldn't say, it's waiting, but what I would sit there that day.
Is that people want to use the product, but we havent been ready to say, we're going to give us in high volume and so so I think we're getting much closer to being able to say that and you know I think if you remember this produces the lineup lose about 1 million units a month. So if you think we can get this going by the end of.
Q2 that would say that there's probably some are depending on yields when we first run full out somewhere in neighborhood of four to 6 million units in the back half of the year incrementally.
Okay, Great and then on the on the hearing health business, just trying to understand magnitude wise from close you'd want to pre pandemic levels and whether there's any reasons for kind that we couldnt accurately.
Awesome.
Yeah, I mean again just.
What I would say is in Q1, we're pretty close back to pre pandemic levels. The one piece that is still not come back as these other applications that we sell the same exact technology to like the live musicians.
A fair amount of microphones in aviation, we sell a fair amount of what do you call it microphones into non.
Hearing health and medical applications and these businesses are still like net not still down and the interesting thing about these are all smaller customers. So if you imagine these are some of our highest gross margin customers as well that have not come back.
Okay, and if I could sneak one quick one in.
A comment about smartphones and the launches being kind of an irregular timing I was curious if you could elaborate on that comment for things from 'twenty 'twenty pulled and pushed out to 'twenty. One are things pulled in from 'twenty later 'twenty, one or is it just that there was no pattern because COVID-19, we didn't know so we.
We already saw that you know normally our peak quarter in Q3, it got pushed to Q4, which is kind of leading us into the path that the low quarter in mobile specifically, maybe Q1 Q2 Q2 right and so that's that's one thing, we're saying it because of that delay.
Debt that the mobile specific portion.
It will be probably less in Q2 than Q1.
Okay, great. Thanks, guys.
And your next question comes from the line of Bill Peterson from Jpmorgan.
Yeah, Hi, Thanks for taking my question and nice job on execution.
The other care.
My first question and then I know, it's a smaller part of your business, but you know the intelligent audio.
Refocused on Iot.
Hoping if you could just give us an update what type of Iot markets or are you focusing on from here.
What does the competition look like Where's your best chances for success any updated products beyond the dual core quad core processors, you have and you can just give us an update for this business. Yeah. So so again I think we talked about there's a fair amount of applications now that we're in.
That are relatively low volume.
To give you some examples.
We're in a number of Dow sound bars, I think we've we've won designs on some.
Consumer brands, you would recognize for Bluetooth speakers.
I think the other area that we seem to be doing well as remote controls.
We have a couple of ear applications appliances.
Got a few design wins.
You know that are more referenced at the beginning but smart Tvs, so, but they're all like lower volume applications and I think there's a couple of points I would make about this bill.
First.
Obviously, we're not spending anywhere near as much money as we as we were a year ago and I think we're out of it.
At a position now where this is not only driving.
Sales of the DSP, but it's also driving sales of microphones to customers in this long tail that we really havent dealt with in the past.
The third piece is is that I would sit there and say as I'm looking at the DSP for selling because of the smaller customers.
The gross margins are in excess of 50% and so I think when we look at this and I think we're looking at this a little bit differently than say, we did obviously a year ago that Iot long tail could actually be with microphones.
And.
These DSP could be a growth market for us now I think my experiences with these long tails as it takes time to develop right.
Because it's a lot of small customers, but I think the positive thing I've seen so far is we win a design with some of these customers sometimes it's with their own software. They are writing software to our DSP.
They they use the next generation and the next generation and so I think it I don't see it as being $100 million business, but I do see that maybe being a 20 $30 million business, possibly.
Microphone sales being driven towards more digital mics towards more high performance bikes in order to get a more.
Concept.
Okay. So for 2000 30 million, probably more more long term plus you know Mike doesn't matter.
Yeah, I, just think I can do it just book.
Well, let's comment right.
She is driving as new applications, where microphones weren't used before.
And I think that's you know like in the TV is a good example of that right. If we're successful with Tvs yet to be seen Michael.
Microphone aren't a big portion of the T V's and we've talked about this before from the fact that there's no reason your TV can act like your Amazon Echo, which sits in your room. Their TV can do the exact same function and so these are the types of things, which if we could start having every TV have for microphone, there's millions of Tvs.
Built every year they don't have that today.
Understood.
In terms of use of cash are hoping again.
Maybe on your Capex plans for this year, maybe even.
Above that any sort of idea on cash flow from operations and working capital.
Stranger things going on related to Covid and then.
Use of cash.
Debt pay down and things like that if you can give us a feel for the priorities. This year Yeah sure Bill I was hoping somebody was going to ask about cash flow and liquidity. That's at the metric I'm pretty proud of the team's execution on but as.
As we exit 2020, we've got about $550 million of liquidity as I mentioned in my.
My script $150 million of cash and then we've got a revolver.
That's untapped for $400 million, we do have converts $172 million of converts that will mature in this November so we've got a lot of optionality with how we retire those converts are combination of either our existing using existing cash on hand or borrowing from our revolver and in <unk>.
Terms of Capex for the year I mean, I will say 2020 was unusually low we were right around $32 million in Capex I think as you look out into 'twenty, one will be we'll be closer to the 5% to 7% of revenue.
Type of Capex Capex level, you know primarily on our new products.
And then I think your other question with capital allocation you know I don't think there's a big change in priority you know our priorities will continue to be funding all of the or granted organic growth opportunities. We have we will you know kind of step up the pace at looking at accretive acquisitions and in precision devices and then lastly.
We'll always look at Opportunistically at return of capital through share repurchases, we purchased repurchased about.
A little over 1 million shares in 2020.
Very clear thank you.
Thanks Bill.
And I have no further questions in the queue.
Great well, thanks, very much for joining us today as always we appreciate your interest in Knowles and we look forward to speaking with you on our next earnings call, Thanks and Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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