Q4 2022 Knowles Corp Earnings Call

Good afternoon and welcome to the NOAA's Corporation 4th Quarter and Full Gear 2022 Financial Results Conference call. My name is Tamia and I'll be your operator for today. With that said, here with opening remarks is NOAA's Vice President of Investor Relations, Patent Hofer. Please go ahead.

Thank you, Tamiya. And welcome to our Q4 2022 earnings call. I'm Pam Hofer, Vice President of Investor Relations, and presenting with me on the call today are Jeffrey New, our President and CEO , and John Anderson, our Senior Vice President and CFO . Our call today will include remarks about future expectations, plans and prospects for roles which constitute forward-looking statements for purposes of the safe harbor provisions under applicable federal securities laws. Thank you.

Forward-looking statements in this call will include comments about demand for company products, anticipated trends in company sales, expenses and profits, 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 risk and uncertainties in the company's SEC filings, including but not limited to the annual report on form 10K for the fiscal year ended December 31, 2021. Periodic reports file from time to time with SEC and the risk and uncertainties identified in today's earnings.

All forward-looking statements are made as of the date of this call and noes is claimed any duty to update such statements, except as required by law.

In addition to pursuing RECG, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knolls.com. And in our current report on Form 8K filed today with the FCC, including a reconciliation to the most directly comparable GAAP measure.

All financial references on this call will be on a non-GAP, continuing operation, bases, unless otherwise indicated. Also, we've made selected financial information available in WebCast slides, which can be found in the investor relations section of our website. With that, let me turn the call over to Jeff, who will provide some details on our results. Jeff? Thanks, Pat. And thanks to all of you for joining us today.

Before we dive into the two four results, I want to refresh everyone on the new segmentation that we introduced during our investor update call in November , as this is how we will be discussing the company in the prepared remarks.

We separate our audio into two in segment and two. The first segment is called Medtech and Specialty Audio or MSA, which primarily includes acoustic solutions sold into the hearing health market.

The second is our consumer MEMS microphone segment or CMM, which is focused on microphones sold into the ear, IoT, compute and smartphone markets.

NOLS now operates and reports on their three segments, precision devices, MedTech and Session League audio, and Consumer Mems microphones.

With that, let me begin with a summary of our Q4 results.

We are pleased to report we deliver results at or above the high end of our guided ranges for gross margins, adjusted EBIT margins, and pre-cash flow despite a challenging backdrop in consumer electronics market and the COVID-19 related issues in China.

In the quarter, NOLZ generated a 197 million of revenue, which was down 16% versus the prior year, during primarily by weak consumer electronics and market demand and customers inventory adjustments in consumer mems and medtech and specialty audio.

Consumer revs mics was down 31% versus prior year levels, and MedTech and the audio is down 13%.

In contrast, precision devices delivered revenue growth of 9% versus prior year levels as we continue to see robust demand in defense, med-tax, EV and industrial and markets.

We deliver gross margins of 40.4%, above the high end of our guarded range, earnings per share of 33 cents in line with our guidance, and we generate just shy of $40 million in free cash flow, which was at the high end of our expectation.

I believe these results demonstrate that our focus on the markets and products where we have significant competitive advantages is paying dividends, particularly in our profit margins and cash flow.

For four year 2022, I would like to take a minute to highlight each segment's performance individually and their current market dynamics.

First, in precision devices.

We delivered record revenue, gross margins, and adjusted EBIT margins. Revenue grew 21 percent. Gross margins finished at 47 percent and increased 240 basis points versus prior year levels.

Adjust it even finished at 68 million and grew 29% versus the prior year.

We continue to see strong organic growth in the mid to high single digits going forward driven by defense, medtech and EV markets.

Both of our product categories, high-performance capacitors and our filters continue to demonstrate our superior technical capabilities providing a competitive advantage for noles in the markets

Second, Armetek and specially audio segment delivered record gross margins and adjusted EBIT in the year.

Revenue was flat with prior year levels and strong growth in the hearing aid market in the first half was offset by customer inventory adjustments and a softer end market demand in the second half.

Go as March and finish at 50%, 270 basis points increase over prior levels.

Adjusted even to finish at 88 million, a 10% increase versus 2021.

Although market conditions deteriorated slightly for the segment, we are able to deliver double-digit earnings growth on flat revenues.

In the near term, we continue to see customer inventory adjustments and software and market demand.

We have confidence in the resilience of this market and based on booking trends, we expect to see strong sequential growth for revenue and profitability in Q223 as customers' inventory normalize.

Now, I'm to our consumer-bem's microphone business.

Revenue and the segment was down 144 million versus prior year level.

2022 was a difficult year for consumer trends around the globe as end market demand, customer inventory adjustments, and the impact that COVID lockdowns in China severely impacted the seconds cop line.

In August , we announced our restructuring actions to address current market conditions and dynamics to accelerate our strategy to diversify away from commodity microphones.

Today, I am pleased to confirm all the actions have been put in place to deliver greater than $28 million of annualized savings.

In Q1, we continue to see week and market demand in inventory adjustments by our customers.

These headwinds are across most end markets and jack-of-thlees, including PCs and smartphones.

Because of the weak demands, we will continue to operate at less than 50% capacity utilization Q1, negatively impacting growth margins.

Despite these near-term headlines, we expect sequential improvement in Q2 for revenues and profitability on the beginning of China market recovery and our customers' new products.

In summary, for the company, Q1 is normally sequentially well-ored due to seasonality, but is being further impacted by the regional demand, inventory, and the channel, and COVID-related challenges in China as they reopen their economy.

I am proud of the execution by employees, which has allowed us to continue to generate cash in the face of substantial headwinds.

As we look beyond Q1 in the Q2, we are anticipating 15 to 20 percent sequential revenue growth with all three segments contributing.

Lastly, I would like to highlight we have secured an extension of our $400 million revolving home facility until 2028.

This reflects the strength of our balance sheet and the expectations to generate significant pre-cache flow.

It also provides the substantial liquidity to supplement internal growth with acquisitions.

With that, let me turn the call over to John to detail our quarter. John ?

Thanks, Jeff. We reported 4th quarter revenues of 197 million, down 16% from the year ago period driven by lower shipment volumes in consumer mums, mics, and medtech and specialty audio, partially offset by higher revenues and precision devices.

The precision of ice segment delivered revenues of $63 million, up 9% from the prior year, driven by growth in Medtech, EV, Depans and Industrial End Markets.

For the full year, PD revenues increased 21%, including 18% organic growth and 3% from an acquisition, which was completed in 2021.

Full year 2022 revenues were record levels and driven by strong demand across all of our end markets.

In MedTech and specialty audio, fourth quarter segment revenue was $62 million, down 13% versus the prior year, as our customers reduced inventory levels and we faced difficult year-over-year comparables as the second half of 2021 benefited from strong COVID recovery.

For the full year, MSA revenue was flat with prior year levels.

Consumer MIME's microvenom of 72 million was down 31% versus the prior year driven by weak global demand for consumer electronics.

Channel inventory adjustments and COVID-related issues in China.

For the full year, revenue is down 33%, driven by weak consumer demand and inventory adjustments in most end markets and geographies.

Fourth quarter, gross profit margins were 40.4%, 190 basis points above the high end of our guidance range, and down two hundred ninety basis points from the same period a year ago.

Precision devices, segment gross margins, were 48.6 percent, down slightly from the prior year due to favorable inventory adjustments in Q4 2021 that did not repeat.

For the full year, Gross margins finished at a record high of 47.2% and up 250 basis points over prior year levels driven by favorable product and customer mix.

factory productivity improvements and the acquisition we completed in the first half of 2021.

Medtech and specialty audio segment gross margins were 51.6 percent of 120 basis points versus the prior year driven by favorable product mix and foreign currency benefits.

For the full year, MSA delivered record gross margins of 49.9%, up 270 basis points over prior year levels, driven by favorable product mix.

productivity improvements, and benefits related to foreign exchange.

Consumer MIME's microphone gross margins for the fourth quarter were 23.9%. Down more than 11 percentage points versus the prior year, driven by significantly lower factory capacity utilization, pricing, and unfavorable mix partially offset by benefits to the restructuring actions.

implemented in the second half of the year. For the full year, gross margins were 28.2%, down 960 basis points from the prior year driven by unfavorable capacity utilization and product mix, partially offset by benefits of the restructuring actions announced in August .

For full year 2022, total company gross margins were 40.6 percent. Down 110 basis points from 2021, with record annual gross margins in both the PD and MSA segments.

more than offset by significant year-over-year margin declines in the consumer MEMS-like segment. RD Expans in the quarter was 15 million, down more than 4 million from the prior year with the reduction driven entirely by lower incentive compensation cost and the benefits

Other restructuring actions taken in the consumer mems microphone segments.

SG&A expenses were $27 million, $3 million lower than prior year levels, driven by lower incentive compensation costs.

For the quarter, the Justin Bieber margin was 18.9% and 190 basis points above our expectations.

For the full year, EBIT margins were 18.6%.

EPS was 33 cents in the quarter at the midpoint of our guidance range.

Now, I'll turn to our balance sheet and cash flow.

Cash in cash equivalents totaled $48 million at the end of the quarter.

We generated cash from operations of 47 million, slightly above the midpoint of our guidance

capital spending was seven million and a quarter.

for full year 2022.

Free cash flow was 54 million, representing just over 7% of revenue.

We repurchased 2.3 million shares at a total cost of $44 million and exited the year with cash net of debt of $3 million.

This marks the first time since the spinoff we've ended the year in a net cash position.

Moving to guidance for the first quarter of 2023.

We expect total company revenue to be between 140 and 155 million, down 27% versus the same period a year ago, with the decline in revenues driven by weak demand in consumer-members, and, in inventory corrections and med tech and specialty audio, partially offset by year-over-year growth.

precision devices.

We have to make roast margins for the first quarter to be approximately 32 to 35 percent.

down 8 percentage points from the year-ago period driven by low factory capacity utilization and unfavorable mix in our consumer MEMS mic and medtech and specialty audio segments.

R&D expense is expected to be between $16 and $18 million, down $3 million from prior year levels, driven primarily by prior year restructuring actions in the Consumer Mems Mike segment.

We're projecting selling at administrative expense to be between 25 and 27 million, up 2 million from the year ago period, different primarily by higher incentive compensation cost, partially offset by restructuring actions we've taken in a consumer-mem's microphone segment.

We're projecting adjusted EBIT margin for the quarter to be in the range of 2 to 6% and expect EPS to be within a range of 1 to 7 cents per share.

This assumes weighted average shares outstanding during a quarter of $94.8 million on a fully diluted basis.

We are forecasting an effective tax rate of 16-18% for the quarter and full year 23, which reflects an expected change in jurisdictional income and the impact of the unmet conditions for a tax holiday in Malaysia.

For the quarter, we expect cash generated from operations to range between $15 and $25 going in

Capital spending is expected to be approximately 5 million.

Given the current macro headwinds and uncertainty in the market, we'd like to provide some select commentary as it relates to our expectations for the second quarter of 23.

As Jeff mentioned, we're expecting sequential revenue growth of 15 to 20 percent, with all three segments expected to drive the increase.

We also expect gross margins in the second quarter will return to 40 percent or more, driven by improved capacity utilization and favorable mix.

I'll now turn the call back over to Jeff for closing remarks. Jeff, thank you.

But there's no doubt we are dealing with some significant challenges in the global markets. Our Q4 and 2022 results continue to demonstrate our strategy to focus on high value markets and products is allowing us to achieve strong EBIT margins and continuing to generate cash.

Looking at 2023, we are expecting significant sequential improvement from Q1 to Q2 in both revenue and profitability, and our main confidence in our ability to achieve our midterm targets of 22 to 24 percent even margins and 15 to 17 percent free cash flow margins. With that, we can open up for questions.

Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, if you would like to ask a question, please press star one.

As a quick reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Bob Lebik with CJS Securities. Please proceed.

Good afternoon. Thanks for taking our questions.

We have to drop by...

Hey, so I just wanted to kind of dig in a little more on what you just gave us, you know, in terms of guidance and a look at the first half in general. If I do the quick math on the sequential growth in Q2, it looks like you're still looking for about 10% revenue to clients there. So 25 and plus or minus in Q1, 10 and Q2.

The question is, can you talk more about the first half end market demand versus inventory corrections and really talk about the end market demand for that first half five segment if you could in a new segment orientation that you've laid out for us?

Yeah, I'm happy to do that for quite some additional color around Q2. You know, it also just like maybe first start with Q2, but then maybe delve in a little bit about what we see.

right now for a full year. But let me start with Q2. Let me break this up by the business units. As I said in the prepared remarks, we expect about 15 to 20% sequential revenue growth in Q2 over Q1. So first, in the MedTech and specialty audio, what I'd say here is we're fully booked for Q1 already.

And I think we're probably a little head of number where we'd be at this time. So we're feeling pretty good that what's included in our guidance for Q1 is very, very achievable. And the trend generally is that as we move through the quarter, the bookings are getting better, even in Q2. We're already seeing.

strong bookings in Q2. So, I think when we think about the sequential growth improvement in Q2, I think we're pretty happy about where we are with that.

In the PD space, I would say it's kind of a similar story. The current bookings, which are even longer than out then where we would be in the Med Tech and Specialty Audio, are pretty good. In the expectations of the seat pros and defense, ED, Med Tech are quite good. So I think we feel pretty good about that as well.

And lastly, in the consumer-mum's market, I would say I'm cautiously optimistic for modest improvements in Q2. And I think the majority that will be in China improvements. Right now, I just look at my forecast or how I look at China.

China's at a really low point in Q1 still, and we do see some pretty nice growth sequentially, not year over year yet, but sequentially. But there's still inventory clearly in some of these places. And I would point out specifically compute. We're not seeing a real recovery or move out of the inventory until probably the back half of the year.

again. First for precision devices, very strong defense markets we're expecting in 23. I think steady growth in the Medtech portion of precision devices, and then the last piece in terms of growth is VV. And I would say since the last earning call.

Our visibility into growth, to nice growth in this space for 23, looks pretty good. The bookings have been strong and we expect them to continue to be strong. And that's being driven by the kind of the abatement of the global shortage of ships first for automotive.

But also, more of our designs are now entering production. We have more confidence that's rendering production, and that that's going to drive growth.

We are experiencing some softening in the industrial markets with inventory starting to come a little bit more elevated than normal in a district-reucion channel.

But overall I would sit there and say we still respect mid single digit growth for PD in 2023.

In the MedTech space for the full year, I would say based on what's going to happen in the first quarter, which is there is this inventory correction, I would say we're expecting the full year to be flattish for this segment. All of our data points and discussions with our customers.

Lead us to believe that we'll return to growth in this business in the second half of the year. But with the tough first quarter already being down versus prior year, it's probably going to be tough to get more than a flatish business for the full year.

I'll ask you probably to deal with one and I probably have the most, I would say, wide variety of outcomes would be the consumer-members microphone business. I mean, there's a lot of people who are predicting, you know, a, I would sit there and say, a big upswing in the back half. I mean, I mean, that could happen, but I'm not calling the bottom here.

But right now, again, you know, the first half continued to be impacted by demand in China, inventory clearing. I would say we'll definitely see sequential improvement from the first half based on normal seasonality in the back half of 23. And there's cautious optimism on return to growth in the second half for this segment.

driven by normal seasality, inventory being out of China and in a recovery in China. So I know there's a long answer, but all in all, I guess what I would say, given the PDF, mid-single digit, MFA, relatively flat, and given this first half challenge, it would see a map and I would say it's upside down, right here, kind of middle of the road.

We see revenue being flat full year in 23. I hope that kind of gives you some color on all the markets. It's a lot of markets, but I want to make sure we cover that.

Yeah, that's super helpful. And then it doesn't sound like this is the case at all, but I just want to clarify.

In terms of some of the changes, is there any...

It doesn't sound like there's any major, certainly like any major losses despite everything that's going on, but any market share shifts, potential wins, or how are you viewing the competitive landscape in this difficult macro environment?

I would say for precision devices, again, we always kind of say it's kind of hard to identify the real competition here. I don't think there's any shift. I would sit there and say we're taking shares in the defense portion of that market. And ED is a new market, so I don't know how you sit there and say we're taking shares. We're just capitalizing on a new market in terms of ED.

in that business. And then the consumer business, I really can't point to and say we've lost this or we've won this that's changing share significantly. I would say in the consumer space, we're probably taking more lower margin business in the short term than we would want because we're trying to optimize our capacity utilization.

But you know, and really to get the improvements we are hoping for in the back half from this business, we're going to have to get the full capacity utilization or near it in the back half of 23.

Got it. Great color. Last question from me. It relates to what you just said. You gave us the update on the restructuring. I think you plan the capacity to draw down. So to speak in back in.

August or so before that probably the first half of the middle of last year. Are you done with restructuring? Is there more given that that will look now that you need to do to take out or how do you feel about the level of capacity that you have after this restructuring? Well, I mean it feels pretty good about those levels after you can have it right now.

There's a lot of background. He's out, there's a lot of background more than your site.

Okay, I, um, sorry. This is my last question, so if you can just answer, I'll hit mute.

So as far as the capacity utilization, our capacity we have, I think we feel pretty good about where we're at. We took out, again, a fair amount of capacity last year, and I think when the market recovers, we feel comfortable that we can fill that capacity with reasonably good gross margin business.

As far as restructuring, I think if there's one thing about it, you can say we're not shy about taking action when it's necessary. And we'll move forward with the restructuring if it becomes necessary in any of our business if it makes sense. So that's how I would answer that question.

Great, thank you so much.

Thank you. Our next question goes to Christopher Rollin with Susquehanna May proceed.

Hey guys, thanks for the question and thanks for all that info. I don't know if I followed all of it. There was a lot there. I guess maybe asking a different way for March. Can you talk about, I think I have you guys down roughly 25%.

sequential. Can you talk about the three segments and you know either four shrank them or how they kind of apply to that 25? My next question will be about inventories but I'm not quite sure how Selling is affected here.

for each of these segments into March. Yeah, so for the March quarter, I would sit there and say, what we're talking about, Q4 and Q1. Yeah, so I would sit there and say, in precision devices, typically seasonally Q1 is down. We're expecting growth in this business again in Q1.

It's very difficult to control that, but that's driving some sequential decline in Q1. In the hearing health business, MSA, I would sit there and say, we had a very strong first half of Q22.

It's definitely slow down and if you look at some of our hearing aid customers, they're starting to report. They're basically spoiling to 1 to 3, 1 to 4 percent full-year growth in the hearing and health market, weighted heavily towards the back half. So they're expecting the first half to be down.

So we're dealing with the first half being down in that business, the end market, but also inventory in the channel. And so, but I would, as I said, what I kind of see in this business is we are already fully booked for Q1. So the numbers that we're thinking in our guidance, we're already fully booked, which is probably a little earlier we expect.

If we go into Q2, we're already starting to see bookings that are stronger probably, you know, then, or stronger than, or, and we're kind of rocking. It means we're to 20% sequential growth in the Q2.

So, I think I feel pretty good about that business going into Q2 and into the back after year. I think the big wild card is the microphone business. We're not seeing obviously any recovery in Q1. Q1 is a very challenging corner. We're running a sub 50% capacity utilization.

We are expecting some sequential improvement in Q2, but I would say it's not a reduction or inventory coming down. It's just some recovery in China from what I would say, Q4 and Q1 being extremely low. And so, as I said, I'm cautiously optimistic.

that this business can return to growth year over year in the back half of 23.

Okay, I guess first following up on that, I guess maybe I don't totally understand if you're fully booked.

I believe you're still implying a sequential drop into Q1 for MedTech. Why would that be the case if you were fully booked out?

it's fully booked out to that lower expectation. But it's, I would say it's skewed toward the end of the quarter that the shipments are gonna happen. Okay, okay. And then my second question is, what is the

around inventories. I mean, if we have this very large

increase in June . I guess there's two things that first of all I'd love to understand the full industry dynamic perhaps you can quantify even how this inventory dynamic looks you know maybe revenue out there.

in terms of inventory that needs to be burned through in March in order to get that strong seasonal June . I assume that that's why June is so strong here because of this inventory dynamic overall. And then just to add one more thing to that, I apologize, but

for your largest customer, I think they're still your largest customer. A lot of people are guiding for a weaker June than we would have expected. Do you anticipate that in your guidance or is it now at the point where it's not meaningful?

They're still a meaningful customer, but we're not going to make any comments about our shipment specifically to them. But here's what I'd say is if you look at the sequential growth that we expect from Q1 to Q2, the vast majority is between PD and MSA.

so PD and the MedTech and specialty audio, I would say on an absolute basis it's incremental that we're expecting sequential growth in Q2. So it's not a huge amount of sequential growth. Secondly, as far as inventory goes, we're following a lot of things you're following.

in terms of mobile phone shipments, in terms of PCs. So let's give you one example. We just got the data for January sales on handsets in China. It was not good. I mean, it was not good. So we're still not seeing the inventory come out of the channel that's there in terms of finished product.

And I would sit there and say for PCs, we've talked to the customers, but we're also looking at what the industry is saying. And most people are saying that the inventory won't be cleared out until the end of the second quarter.

Okay, great. Thank you very much. That's helpful Jeff.

Thank you. Our next question comes from Anthony Stahls with Craig Hallum. Your line is open.

Hi guys, Jeff let me start with you. I wanted to focus in more on the PD side which is still doing quite well. Do you have a view on the imagery in the channel particularly just for the PD side? Where do you think it is?

So I would sit there and say that the majority of stuff we do with the custom stuff, which is MedTech, Defense, and EV, I would say that there isn't a lot of inventory in the channel at all. I think they order for specific bills. We deliver their custom products. We're not seeing people say, oh, I got too much inventory.

in that portion of the market. So if you look at the PD business, I would say the industrial slash distribution business, it was somewhere in the neighborhood of $50, $60 million on an annualized basis.

We are definitely because we watched that inventory. It's definitely especially in the distribution where we can see it. It has been starting to creep up some. So we are expecting a little bit of weakness here in the short term. But overall, we still expect mid-single-digit growth for this business in 2023. I mean, and driven by.

Very strong defense growth, very strong EV growth, and steady medtech growth.

Got it. And then, just the nature of your competitors. And I know you guys have shot away from really the mobile market. But I'm curious generally what you're seeing on ASPs. And maybe I guess I'm more interested on the PD side is are your competitors acting fairly rational at this point?

I would say in the PD phase, again, most of our stuff is custom, long-term contracts, and I would sit there and say I haven't seen much pricing on pressure at all in that portion. There's been a little bit more discussion in that distribution side.

you know on pricing but it's not you know big. Now I'll make a comment on the CMM business, I'll be honest I mean you know the pricing has been challenged in Q4 and Q1. If you look at 2022 in 2021 2020.

We've really limited price erosion in that microphone business for the last three, four years. We've done a pretty good job of keeping that sub-forced, even sub-three percent. But as you look at the end of this year, as we started saying, okay, we've got to fill some of this capacity.

The price erosion has become more and we're expecting that to kind of persist in the first half of 2023 because there's a lot of excess capacity chasing less business. So we're hopeful with new products and things will happen in terms of back-up next year and into 2024.

that will reverse that trend again, but in a short term, it's kind of top on pricing in that business. I didn't ask, but on the hearing health, I think a business or MSA business, I think the dynamics really haven't changed dramatically. I think we're seeing essentially flatish pricing.

Yeah, Tony just got to say just add on PD one of the big drivers of one of the drivers of gross margin expansion in 22 was pricing we increase gross margins, you know over 250 basis points. There's some mix There's some productivity improvements, but we've also been really good at passing on our inflationary input costs

to the customers through price increase. Got it, makes sense. And John , since I have you, I'm going to hear your view on the full year CapEx. I know you gave us for Q1 and on top of that, you guys have done a good job of free cash flow over the last 12 months. What are your thoughts now?

given on the reduced expectations for 2023, where your cash flow goes. I know in the past you were hoping that it nearly doubled, but I'm curious what your updated view is for free cash flow. I thought you led with CapEx, usually CapEx or free cash flow? From a CapEx, I think we're gonna, yeah, we're gonna be kinda in the four to 5% of revenue from a CapEx.

side, Tony, at one point, 65, 70% of our cat-backs used to go when we were at 7, 8% towards the microphone business. Now it's like 33% of 4% to 5%. So you can see how we're shifting where we spend our dollars. In terms of the cash flow, despite some pretty tough macro conditions, we still delivered it.

7% free cash flow, the percent of revenues in 22, and we had a big headwind Tony with networking capital. Inventory increased, our payables, because we really started turning off the spiket, our payables were at a historic low as we exited 22.

So it's a $40 to $50 million working capital headwind in 22. We don't expect that to recur in 23. You know, that's one of the metrics that I feel pretty good about is we have a very reasonable shot at getting back to that 15% so kind of doubling the 22 rate as a percent of revenue.

in 23 and again not having the headwind being a little more disciplined on our CAPEX and then some operating potential. And that kind of points that you know getting back to the pre-cash flow percent of sales back to where we were in 21. Yeah. One more question if I can sneak it in and maybe I'll be...

Yes. Let me just break it down by a segment. We're expecting growth in precision devices in the back half over the back half of 2022. That's all the dynamics we've talked about. In MedTech, we started seeing this inventory correction.

in the back half of 22. I think we have a lot easier comps. And again, the market is expecting, the end market, our customers, and there is a lot of data out there, are expected to return back to growth in the back half of the year. So we are expecting some nice growth year over year. The wildcard is really around the microphone business. You know, I think.

You know, right now I would sit here and say, yeah, I would expect you're over your growth in the back half, but I'm being very cautious in calling that out. And I would sit there and say, if we really start seeing really nice growth in that business and there's a recovery, I kind of set in my kind of, to Bob's question, we will end up flatish.

When we start seeing some strong growth in the microphone business in the back app, we'll do better than Flattish for the full year.

Got it. Thanks guys. Appreciate it. That's a lot. Thanks, though.

Thank you. As a quick reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Suji De Silva with Rock Capital. You may proceed.

Hi, Jeff. Hi, John . Maybe hitting on a subsegment you haven't talked about much yet, the EV auto market. Can you talk about what the potential for that to ramp up is in terms of program visibility? I know it's longer visibility. Whether that can grow to be a material part of the revenues two to three years out.

Yeah, I think it's kind of mentioned that. So I think last year we had some reasonable growth last year and I think we had expected expectation it was going to be around $15 million in sales at the EV business. It actually was slightly over that so we exceeded that.

I think we could have probably shipped more in that segment if it wasn't for the chick shortages that a lot of our customers were experiencing.

You know, right now, you know, I would sit there and say for this year for 23, you know, we would expect another 30 to 40 percent growth in terms of revenue so that, you know, that it'll be over probably over $20 million in revenue. But I think the other part about this, Suji, I just kind of would make the comment.

The bookings are becoming very strong. And so, I mean, I don't want to get into how the bookings exactly translate into when the revenue come. But, you know, I'm hearing from the team that we could have like in excess, obviously, with more bookings in the back half, more than $30 million in bookings in this business.

And that kind of kind of starts to give you the indication of where that business could probably go in 2024. So all that said, design wins are strong. It depends on who are the winners, three or four years from now. But I think we have said we hope this business could be like $50, $60 million in three to four years. I think that's achievable.

You know, and if we win with the winners, we'll see who those are, you know, in terms of how much content we have, it could be even more than that. So, you know, it's starting to become a material, you know, later this year in the 24.

Okay, and then my other question is for John perhaps. You know, you talked about a lot of the elements looking ahead.

to in revenue and gross margin and free cash flow intermediate term. But in terms of the cost and you already did the restructuring here and had that question before in terms of more restructuring, is the revenue, I'm sorry, is the cost index in one queue way to think about a run rate going forward in here John is or more.

flow through with the restructuring benefit and is that the right baseline to start with as we move forward.

Yeah, if you look at Q4 and actually the numbers I gave in Q1, the benefits are full of the restructuring we announced last August are entirely jaked into that. You know, I've talked before about a $45 million run rate, which is about 180 million annualized. That's kind of what I would expect sitting here today that is up over

We also are adding some headcount in the PD to support the growth there. And then we also have conversely the benefits from the restructuring we took. So again, I think kind of a $45 million run rate is appropriate. Okay, thanks John .

Thank you. Our next question comes from Christopher Rollin with Susquehanna. You may proceed. Sorry about that, you button. This one's for John and I might have heard this incorrectly, so I apologize. But did you guide Q2 to an EBIT margin of 22 to 24? I have gross margins.

Well, hello. I said, yeah, because I said, gross smart, we'd have sequential growth of 15 to 20 percent. And I said, with that, gross margins will be back at 40 percent or above in Q2.

Yeah, I didn't say that. Gross margin getting back to 40% is dependent on increased capacity utilization, but we do have that. There's going to be a significant improvement even margins in Q2, but not to that level. Here's the gross margin in Q1, use it in Q2, look at the revenue. Most of that is going to go right to the bottom line. We kind of gave you a pretty good trail. If you think of sequential growth, gross margins at 40 above, and I just gave the run rate on OpEx. So you can. Yeah, I must have had some bad notes. Apologize guys. Thank you. No worries. Thanks, Chris. Thank you. There are no other questions waiting.