Q1 2022 Knowles Corp Earnings Call
[music].
Okay.
Good afternoon, and welcome to the Knowles Corporation first quarter 2022 financial results Conference call.
Today's call is being recorded and all lines have been placed on mute to prevent any background.
After the speakers remarks, there will be a question and answer question unless you would like to ask a question. During this time. Please press star one on your telephone keypad. If you look like you withdraw your question. Please press star one again.
And with that thank you for the opening remarks, what well Bowman Investor Relations.
Thank you Savannah welcome to our Q1 earnings call I'm Sloan Bohlen and presenting with me on the call today are Jeffrey New our president and CEO and John Anderson, Our senior Vice President and CFO . Please be advised that today's conference call is being recorded by now you should have received a copy of our earnings release and webcast slides. If you do not if you do not have.
Not received both documents they're available on the IR section of our website at Knowles Dot Com. 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.
Forward looking statements include comments about demand for company products anticipated trends in company sales expenses and profits and future financial outlook 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, including but not limited.
To the annual report on Form 10-K for the fiscal year ended December 31, 2021 periodic reports filed from time to time thereafter, 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, we have provided both GAAP and non-GAAP financial measures on this quarter as referenced on this call will be a non-GAAP continuing operations basis, unless otherwise indicated please see our earnings release and webcast slides available on our website at <unk> Dot com and in our current report on form 8-K filed with the SEC for a reconciliation.
<unk> is the most directly comparable GAAP measures with that let me. Please turn the call over to Jeff who will provide some comments on our results Jeff.
Thanks, Lauren and thanks to everyone for joining us today.
We're very pleased with those performers to begin 2022 as you saw in today's release, we reported another quarter with gross margins and EPS above the high end of our guided range.
First of all we achieved these results despite stronger than expected headwinds from the reemergence of Covid in mainland, China, dampening demand and causing additional friction I had already stretched supply chain.
I will touch on our near term expectations for these headwinds in a moment, but before I do I want to reiterate our conviction to the midterm financial targets, we detailed at our Investor Day last November .
Our year to date results, particularly in our precision device segment have only increased our confidence in all significant opportunity to drive shareholder value through continued growth in higher margin end markets with highly attractive free cash flow dynamics.
With that let me give you a summary of our strong first quarter results.
Revenue of $201 million was in line with our guidance driven by a mix of very strong demand for precision devices and <unk>.
<unk> market growth and share expansion in hearing health.
Precision device segment revenues totaled $56 million in the first quarter, which was up 47% compared to a year ago with the vast majority of that growth being organic.
Additionally, the precision device segment delivered a nevertheless, another record quarter for bookings.
The demand for this segment was driven broadly across most of our end markets and it's rewarding to see our strategy, so well aligned with long tail secular drivers.
Turning to audio our hearing health business continued to show good growth as the end market for these products remains robust.
We continue to have strong execution on new products and managing ongoing supply chain issues, which has allowed us to gain share.
While the Mems microphone business did not grow year over year for the quarter is performing in line with expectations as we focus on higher margin products and markets.
Looking ahead this year's new product pipeline from our customers is more weighted to the back half of the year, which is typical seasonality for this business.
Next I would like to give a little more detail on the macroeconomic headwinds impacting our business before I speak to our continued success and profitability.
As you are hearing elsewhere in the industry supply chain challenges remain very real and we're for Knowles in the first quarter as well well, it's very difficult to predict what will happen next is impacting our business at this point.
Beyond supply chain challenges, we are increasingly seeing the latest COVID-19 outbreak in China associated government associated government lockdowns impacting consumer demand for smartphones and other consumer electronics.
This is causing demand demand headwinds in our Mems microphone business.
While both shelves are fluid situations, we believe the impacts on our business will persist in the first half of the year, we will provide more detail when discussing the Q2 guidance, but we do not expect to affect our ability to achieve our midterm financial targets.
The issues in China highlight the benefit of our revenue diversification and reinforce our commitment to continue to shift to higher value products and markets, which are inherently less economically sensitive to consumer demand.
With that let me turn to our profitability.
<unk> grew gross profit to $83 million of about 7% compared to the year ago period on essentially flat revenue.
The major driver of the strength was precision device segment, where margins were up 920 basis points year over year unfavorable mix pricing power in the IMC acquisition.
It is worth noting our <unk> margins will face a more challenging year over year compare given the current lower factory capacity utilization in our Mems microphone business.
That said I am very pleased with the progress we continue to make on margins, especially given the macroeconomic headwinds in the Mems microphone business.
Our strategy strong execution and expense management has allowed us to achieve adjusted EBIT margins of close to 20% for Q1, an increase of 250 basis points over last year.
Similarly, we grew EPS to <unk> 35 per share, which is also above our guided range and represents over 20% growth from the year ago period.
Let me reiterate again, we are increasingly confident in our midterm financial targets and believe the strength and stability of our annual free cash flow is an underappreciated aspect of our business.
Finally on our last earnings call, we spoke about refining our capital allocation strategy. This quarter to that point. We are pleased to announce our board of directors recently approved a new $150 million share repurchase authorization.
In addition, we are committed to pursuing bolt on acquisitions, while planning to return 50% of our annual free cash flow to knoll shareholders short shareholders in the form of share repurchases we.
We believe capital return will be a more recognized part of <unk> value proposition to existing and new shareholders in the future and also hope that this commitment serves as a strong sign of our confidence in our strategy and the bright future for our company.
With that let me turn it over to John to review, our first quarter financials.
Thanks, Jeff.
Sorted first quarter revenues of $201 million flat with the same period, a year ago, driven by higher revenues in precision devices offset by lower shipments in the audio segment due to weak consumer electronics demand and continued supply chain shortages.
Audio revenues of $146 million were down 11% from the same period, a year ago, driven by a challenging supply chain and weak microphone demand in the smartphone and compute markets.
The decline in Mems microphone revenues was partially offset by increased shipments in hearing health on both share gains and market growth.
Precision device segment delivered revenues of $56 million up 47% from prior year, driven by strong organic growth in defense industrial and Med Tech markets and an acquisition completed in the second quarter of 2021.
First quarter gross profit margins were 41, 6%.
60 basis points above the high end of our guidance range and up 260 basis points from the same period a year ago.
Audio segment gross margins improved 40 basis points over 2021 levels, driven by lower factory spending and favorable product mix, partially offset by lower factory capacity utilization in our Mems microphone business.
Precision devices segment gross margins were 45, 6% up 920 basis points from the prior year, driven by favorable product and customer mix productivity gains improved factory capacity utilization and an acquisition completed in Q2 2021.
R&D expense in the quarter was $20 million flat with the prior year.
SG&A expenses were $25 million slightly above prior year levels driven by the acquisition completed in the second quarter of 2021, partially offset by lower legal costs.
For the quarter adjusted EBIT margin was 19, 6% up 250 basis points from the prior year driven by higher gross profit margins EPS was <unk> 35, which was <unk> <unk> above the high end of our guidance and <unk> <unk> above Q1, 2021, with the increase driven by higher <unk>.
Gross profit margins and a lower effective tax rate.
Now I'll turn to our balance sheet and cash flow cash.
Cash and cash equivalents totaled $51 million at the end of the quarter cash.
Cash from operations was $1 million, which was near the low end of our guidance range, primarily due to higher inventory levels and the timing of cash collections.
Capital spending was $7 million in the quarter and we repurchased approximately 300000 shares at a total cost of $6 8 million.
Before moving to our second quarter guidance as Jeff stated the board of directors recently authorized $150 million increase to our share repurchase program.
Our strong balance sheet, coupled with our improved financial performance and strategy to focus on higher value solutions will allow us to continue to pursue bolt on acquisitions, while planning to return 50% of our annual free cash flow to shareholders in the form of share repurchases.
Moving to our guidance for the second quarter, we expect total company revenue to be between 195 and $205 million flat with the same period a year ago.
Our revenue guidance reflects the negative impact of Covid related Lockdowns in China and continued supply chain constraints.
Revenue from the audio segment is expected to be down 7% from Q2 2021 due to lower demand for Mems microphones and continued global supply chain challenges, which are partially offset by increased demand in the hearing health market.
Precision device revenue is expected to be up more than 20% over prior year levels.
Driven by broad based strength in defense Med Tech and industrial markets and the acquisition completed in Q2 2021.
We estimate gross margins for the second quarter to be approximately 41% to 42% down 90 basis points from the year ago period, driven by lower factory capacity utilization in our Mems microphone business and unfavorable mix due to lower shipments to the higher margin compute market.
These negative impacts are partially offset by productivity gains and improved capacity utilization in both precision devices and hearing health.
R&D expense is expected to be between 19% and $21 million down 2 million from prior year levels due to lower incentive compensation cost.
We're projecting selling and administrative expense to be between 27 and $28 million down slightly from the year ago period, driven by lower incentive compensation cost, partially offset by the acquisition completed last year.
We're projecting adjusted EBIT margin for the quarter to be in the range of 17% to 19% and EPS to be within a range of 30% to 34 per share. This assumes weighted average shares outstanding during the quarter of $95 7 million on a fully diluted basis were.
We're forecasting an effective tax rate of 12% to 16% for the quarter and full year 2022.
For the second quarter, we expect cash generated from operations to be between 10, and $20 million and capital spending to be approximately $10 million.
I'll now turn the call back to our operator to open the line for questions operator.
Thank you.
Minor that is star one if you would like to ask a question, we'll pause for a moment to compile the Q&A roster.
Yes.
And our first question will come from Tristan <unk> with Baird.
Please go ahead.
Hi.
This is Tyler on for Jason. Thanks for taking my question could you talk a little bit about the extent of disruptions you're seeing from the China Lockdowns I know you talked about it but maybe you can quantify it or even talk a little more about it qualitatively either affecting you directly or indirectly.
Yes, I think so I think one of the things we talked about first with supply chain and I think.
We've talked on previous quarters about the fact that in the first half you were kind of held back by supply.
Wafers, that's still the case, that's not different than what we had said before.
I would say that that the things that we're dealing with now with in China is that we have some issues in terms of shipping materials, which is causing us to take longer to get products to our customers.
That's number one.
<unk>.
Some of our customers are starting to say well, there's a little bit less that we can ship to them right now because they can't get other materials rights in order to build and so I think thats probably the layer. That's been added on is that some of our customers are not being able to get all the materials that they need in order to build the third piece, which is not necessarily supply.
Jane related but we are seeing that there is a.
Definite slowdown in consumer demand in China, and I would say that's pretty broad based at this moment that we're starting to hear that.
And see in terms of forecast and it's reflected in our forecast that we're giving for Q2 that that demand is going to be down in Q2 compared to what our expectations would have been pre lockdown and so I think you are hopeful at some point Lockdowns will end, but right now I think.
That's the key I would add that our hearing health business very limited impact by what's going on with Covid.
And in terms of supply chain or demand in China.
Our operations are outside of China. Most of the demand is outside of China, and I would say the same thing for PD theres a little bit more.
Exposure for PD is we do have one manufacturing facility in China that makes up about 25% of their revenue and so overall, it's really affecting our mems microphone business. The most.
Great and then for my follow up is it fair to say that your defense exposure in the mid to high single digit of total revenue and then maybe if you could talk about the current.
Geopolitical events, if theyre going to healthier.
<unk> devices going forward.
I'm, sorry didn't hear the second part of that.
The current geopolitical geopolitical events or theyre going to benefit your precision device business going forward.
What are the benefits I mean, I think we've already been benefiting from that I mean, we have U S operations, we do a lot of work with the defense and med market I think we've been benefiting from that already but I think that'll be it could be a continued benefit as far as our defense exposure I would say, it's closer to high single digits.
If I take you back to our.
Our investor deck I believe we stated last year in 2021, it was about 10% of our revenue last year and we are.
Our expectations and our defense market, we are going to have pretty good growth, which is a mixture of of both organic growth as well as the acquisition of full year of the acquisition of IMC.
Great. Thanks for taking the questions.
Our next question will come from Bob <unk> with Vijay asked Mccarron. Please.
Please go ahead.
Thanks, Good afternoon, congratulations on strong operations.
Thanks, Bob.
You, obviously just spoke about the headwinds from the impact of demand in China in China. One thing most of the companies. We're talking to are also talking about is just the overall macro impacts of inflation what are the biggest inflationary pressures you're facing if any and what actions are you able to.
Take to maintain your margins as strong as they've been.
Yeah, Bob I can I can take that as John we have seen a significant increase in input costs. So recently.
The primary areas being labor cost <unk> chips, and then certain commodities like palladium.
And to date I mean, you can see in our gross margins. They are up year over year. We've been we've been pretty successful in passing these cost increases onto our customers in the form of permanent price increases our surcharges I'd say, the only exception being in the area of maybe commodity microphones, but elsewhere, whether it's PD or <unk>.
And some of the higher value solutions and mikes, we've been pretty successful at passing these calls and living and you see it in our gross margin and let me add a little more color I think we've talked about last year mobile was about 2021 versus 2021 'twenty, 2% of our sales. This year, we expect mobile to be less than 20% of our sales and so.
Right now there are a fair amount of our commoditize, Mike are in that space and as we've said on previous calls.
We're trying to reduce our exposure to commoditize mics, I wouldn't say necessarily mobile, but but but reduce our exposure to commoditize mikes, where it's harder to pass on inflation.
Yes, that's great.
And then obviously our exciting news on the capital allocation.
We repurchased authorization and the commitment to repurchase.
Shares with 50% of free cash flow.
<unk> been very successful in M&A in the precision device market and you said Youll still look for tuck ins. There can you just give us a sense of what the pipeline looks like.
If you would expect to potentially have any in the next I don't know six months to 18 months any tuck ins.
Well.
I would say that as we said in the past specifically in the kind of PD area.
It's a pretty target rich environment, but we do want to be very disciplined in what we do here.
And the deals that we've done for PD over the last five years for in total have all been extremely successful for us I mean, whether from a financial standpoint, you look at it or from how it added to our total whether it in terms of consolidation and some cases addition of new products and customers right. It's been very successful.
Vessel I would say that I'd say that the pipeline looks pretty good right now and I would be hopeful for next year.
We can do some more tuck in acquisitions that being said I think when you look at our balance sheet. That's why we kind of felt really strongly that we can continue to do these things coupled with returned 50% of our free cash flow to shareholders in the form of share repurchases. This is not something that.
It's going to be very difficult for us to do that.
On the prepared remarks, we really do think it's an underappreciated portion of what <unk> does which is generating a fair amount of cash flow.
Absolutely congratulations thank you.
And our next question will come from Christopher Rolland with Susquehanna. Please.
Please go ahead.
Thank you this is stuck San Shang on behalf of Chris.
I just want to ask about your gross margins. They are very strong obviously and you talked a lot about how mix what's driving this strength.
But as shortages are going to alleviate over the second half and as Mems.
Mems microphones come back how do you how should we think about mix and margins going forward. Thank you. Yes, I mean I think this is a trend that's been going on for a.
A couple of years now which is <unk>.
As you see our hearing health business grow and our PD business growth mix has been a very important piece in order turned towards growing our gross margins.
That being said I think you are right, we will have more mems microphone business in the back half, which is typically lower than those two other businesses.
On the other side, assuming that the market gets stronger in the back half. We will also have better capacity utilization in the back half. So so I think as I see it and again ill ask John to add some color to this is that the thing that we're going to you're going to keep hearing from US is that if you look at back to our Investor day, the market that are growing the <unk>.
<unk> for US Mad Defense. These type of markets. Both in hearing health PD EV versus say mobile is.
Generally a flat to down market in terms of the end market plus we're trying to walk away from Commoditized vehicles, I think mix will continue to be a big strong driver for us in the future in order to get to that kind of mid term goal, we laid out a 43%.
Yes, I mean, just kind of along the same lines of what Jeff just mentioned I mean, the themes related to our gross margin expansion that we've realized over the last several quarters. It really unchanged as we continue to benefit from mix shift from a higher proportion of sales coming from PD.
<unk> and high value Mems microphone solutions, I'm, not giving guidance for the second half of the year, but we do expect full year gross margins to be higher than they were in 2021.
Got it thank you.
Then you also mentioned that there are new products coming in the second half.
And that also tends to be seasonally stronger period do you have enough supplies coming online to support that growth.
Because I think you said wafer shortages are still ongoing and impacting the June guide. Thank you, yes, So again I'll get I'll piggyback did very similar what we said before.
I think.
In total even in the first half we were getting enough wafers in total, but the mix was wrong in other words, we had excess capacity or availability wafers at certain certain fabs and not enough at another and I think in the short term, it's very hard to change that that will let's say from one fab to enel.
In the longer term as we introduce new products and our customers introduce new products. It gives us an opportunity to bring in a new wafer supplier, where we have more demand. So our hope is is that we look towards the back half of the year will be better aligned in terms of where we have capacity at our wafer suppliers.
Relative to where our demand is.
Thank you.
Okay.
And as a reminder, star one if you would like to ask a question and our next question will come from Sanjay <unk> with Roth capital.
Please go ahead, Jeff Hi, John Hi.
Hi, Jeff Hi, John So.
I'm just trying understand given the demand.
Softening a bit.
Can you articulate the either numbers or qualitatively how much of your.
Microphone segments are China versus non China smartphone versus ear Iot component I mean sort of end customer demand do you have a sense.
Yes, I would sit there and say I mean, and this is kind of a broad statement, but in our Mems microphone business.
Demand is down across all of our kind of life segments right in terms of when you say mobile ear Iot for China right.
Then with the overall backdrop is and I think we predicted this that the laptop laptop slash our compute market was going to be soft Q1 into Q2.
We're thinking starting to recover in Q3, and that's a global phenomenon I think more of the laptop business and so I think what we've seen is in March a pretty abrupt.
Duction and forecast from our customers.
Uh huh.
Well, what do you call that that is across the board in terms of consumer electronics now again, it's hard to say, what's going to happen to the quarter holidays Lockdowns are going to go but the bottom line is as I keep coming back to US we still expect revenue growth. This year, we still expect earnings growth this year.
As we continue to focus.
On moving towards higher value higher margin portions of our business.
Okay.
<unk>.
As you look ahead to the second half, maybe what segments or sub segments.
Do you have some of the most optimism about in terms of helping drive growth or recovery.
Yes, I mean, I think if I look at our PD business continues to look very strong.
I mentioned this on.
On my script in my prepared remarks.
In the press release, we had another quarter of record just blockbuster bookings and PD.
And I just.
Very bullish on that because a lot of people will say are these bookings like things that could be canceled later relative to the fact that there may be people over ordering and I'd say the answer for the vast majority of that the bookings are not these are custom products that are built either for markets like the defense or the medical market, where we.
See the demand and so I feel very good about the PD business.
I'd, just add to Jimmy and our biggest challenge in PD is increasing output.
Working to increase output sequentially from Q2 to Q3 to Q4 of <unk> on this backlog correct correct and so.
And again this we don't feel like this is turns business that could disappear if the market weakens to hit this was like real demand in our hearing health business demand remains robust I think I always say this that the team they've done an excellent job of executing our new products, coupled with a really minimize the supply chain issues.
<unk>.
In terms of during this kind of ramp up from from when the hearing health business was affected by Covid.
Back in 2020 and so.
The demand looks robust, we obviously continue to monitor that but the hearing health business with robust and I think on the Mems microphone business I think it's a little more wait and see how these deep lockdowns develop.
I think it's factored into our numbers for Q2, but want to see how this all develops as the rest of the year goes by but I think from my perspective.
And I feel like we're still increasing our operating margins were increasing our EPS and so this is a really good story that said that when we get back to growth in our Mems microphone business you can really see the power that's going to come in this business in terms of profitability and also cash flow.
Okay, great. Thanks, guys.
Yes.
And with no further questions that will conclude today's call have a great evening and thank you for your interest in <unk>.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Thanks.
Okay.
[music].
Okay.
Yes.
Okay.
Yes.
Okay.
[music].
Sure.
Okay.
Sure.