Q2 2023 Knowles Corporation Earnings Call
Good afternoon, and thank you for attending today's Knoll's second quarter 2023 earnings Conference call. My name is Kayla Baker and I will be your conference operator today.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press just start in one eye.
I will now pass the conference over to your host patent Hoefer, Vice President of Investor Relations with Knowles. Thank you and you May proceed.
Thank you Kayla and welcome to our Q2 2023 earnings call I'm patent Hulbert, Vice President of Investor Relations and presenting with me on the call today are Jeffrey now.
And CEO and John Anderson, our senior Vice President and CFO .
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. In this call will include comments about demand for company products anticipated trends in company sales expenses and profits involve a number of risks and uncertainties that could cause.
Actual results could differ materially from current expectations.
Urges investors to review the risks and uncertainties, the company's SEC filings, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31 2022.
Arctic reports filed from time to time with the FCC 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 NOLA Dot com in our current report on form 8-K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measure.
All financial references on this call will be on a non-GAAP continuing operations basis.
Yes, otherwise indicated.
We have made selected financial information available on webcast slides, which can be found on 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.
<unk> delivered solid results for the second quarter with revenues of 173 million adjusted EBIT margins of 16% and EPS of <unk> 23, all finishing above the midpoint of our guided range.
Gross margins of 42% finished above the high end of the guided range as our teams around the globe continue to improve efficiency reduce fixed costs and improved mix in light of the macro challenges in certain end markets.
In precision devices Q2 revenue was down 20% from the prior year.
Inventory challenges in the industrial distribution and telecom markets have continued as we've experienced further revenue weakness in Q2.
<unk> was down versus the prior year and delays in project awards impacted Q2 bookings and revenue.
Finally, the electric vehicle market remains exciting for Knowles growing again in Q2 versus the prior year as we continue to secure additional design wins for onboard and fixed infrastructure charging.
In Med Tech and specialty audio revenue was down 2% from the prior year, but up more than 30% sequentially as customer inventory levels declined faster than we originally anticipated.
We are definitely past the inventory correction, we experienced in the first quarter of 2023.
I'd also like to take a moment to commend our MSA team as they delivered outstanding margins in the quarter, a true Testament to our differentiated products and operational excellence in our factories.
Computing was also a bright spot in the quarter, finishing better than expected as channel inventory sell through has improved and upgrade cycles are returning earlier than previously expected.
Well the smartphone market continues to be very difficult, especially in China, the shift of mix towards ear Iot and computing is positively impacting gross margins in this segment.
Now I'll spend a few minutes discussing the current customer and market condition for each segment before turning the call over to John to provide third quarter guidance.
Starting with precision device segments in the industrial and telecom markets, which currently make up approximately 10% of total company revenue. We are seeing continued weakness as inventory levels remain elevated we.
We previously expected the inventory situation to improve in the second half, but based on the current outlook. We now expect these markets to be down the remainder of the year.
For our three key end markets defense Med Tech in the EV. The long term outlook is unchanged from our previous expectations.
<unk> continues to expand as design wins in these growth markets with a broad range of customers.
For components in the Med Tech space has been relatively flat in the first half of the year with some excess inventory and based on current demand, we expect to return to year over year growth starting in Q3.
For defense, our previous revenue projections for the year factored a number of bookings in Q2 for communications radar electronic warfare programs, which have been delayed.
While we believe our position in our core markets for PD, along with the secular trends within these markets are unchanged continued weakness in industrial and a delayed bookings and defense are reducing our expectations for revenue in the second half of 2023.
To mitigate the impact of these delays we've implemented several measures to reduce costs in precision devices to improve profitability John will provide more detailed these actions during his portion of the call.
Moving to Med Tech and specialty audio the hearing health market demand has stabilized adhering inventories around the globe have returned to more normal levels.
Our Q3 guide reflects a more than 20% revenue growth versus the prior year driven by the improved inventory situation and increases in demand in the traditional hearing aid market, particularly in the U S.
It is a very positive sign that we are returning to growth in the second half of 'twenty, three which provides confidence for growth in 'twenty four.
Lastly onto our consumer Mems microphone segment.
To the normal seasonality of this business and improving market conditions and non mobile we're expecting sequential improvement for revenue throughout the remainder of the year.
Second half recovery is now expected to be less pronounced than we previously discussed driven primarily by smartphone the smartphone market.
And non mobile applications second half demand in computing and ear and Iot are expected to be up significantly versus the prior year, driven by improved channel inventory levels and replacement cycles and computing.
In the smartphone market demand expectations for new products and further weakness in China are driving additional pressure on the recovery in this business ultimately limiting the upside in the back half of 'twenty three for Sienna.
Overall for Knowles, although the outlook for improvements in revenue in the second half have softened.
We are still expecting margin expansion and earnings growth versus the prior year.
MSA the inventory situation in hearing health market is behind us as forecasted and we are increasingly confident of second half revenue growth.
In precision devices continued weakness in the industrial market, coupled with delays in defense orders have impacted revenue revenue expectations for the remainder of 2023.
We believe however, the secular trends in defense Med Tech and EV market remained robust.
Lastly for <unk>, we are seeing a slow recovery in consumer electronics, primarily due to the smartphone market and softer demand in China.
In summary, we're now expecting total company revenues in the second half of the year to be near prior year levels and with the cost efficiencies and the actions we've implemented along with favorable mix, we expect our second half adjusted EBIT margins to be greater than 19%.
Now, let me talk I'll turn the call over to John to detail, our quarterly results and guidance.
Thanks, Jeff.
We reported second quarter revenues of $173 million down 8% from the year ago period, driven primarily by lower shipment volumes and precision devices and consumer Mems mics the.
The precision device segment delivered revenues of $48 million down 20% from the prior year driven by continued weak demand associated with the excess channel inventory in the industrial and distribution markets and timing of shipments into the defense market.
In the Med Tech and specialty specialty audio segment revenue was $61 million down 2% versus the prior year as we faced tough year over year Comparables as the first half of 'twenty two demand benefited from strong COVID-19 recovery.
Sumer Mems mic revenue of $65 million was down 3% versus the prior year driven by weak global demand for smartphones, partially offset by growth in non mobile applications.
Second quarter gross margins were 42%, a 100 basis points above the high end of our guidance range and up 50 basis points from the same period a year ago.
Precision devices segment gross margins were 39, 7% down 700 basis points from the prior year due to unfavorable capacity utilization Med Tech and specialty audio segment gross margins were 53, 5% up 410 basis points versus the prior year driven by pre.
Activity gains lower factory cost and foreign currency benefits.
Tumor Mems microphones delivered gross margins of 33, 6% up 340 basis points versus the prior year driven by benefits of the restructuring actions announced in August 2022 improved product mix and a gain on the sale of assets, partially offset by pricing pressure in the mobile mark.
<unk>.
R&D expense in the quarter was $16 million down $2 million from the prior year with the reduction driven by the benefits of the restructuring actions taken in the consumer Mems microphone segment.
SG&A expenses were $30 million $6 million higher than prior year levels, driven primarily by higher incentive compensation costs and higher professional and legal fees, partially offset by restructuring actions and the consumer Mems microphone segment.
For the quarter adjusted EBIT margin was 16% at the high end of the guidance range EPS was <unk> 23 in the quarter slightly above the midpoint of our guidance range now I will turn to our balance sheet and cash flow.
Cash and cash equivalents totaled $54 million at the end of the quarter, we generated cash from operations of $1 million above the midpoint of our guidance range driven by timing of customer collections and capital spending was $4 million in the quarter and we repurchased approximately 300000 shares at a total cost of $5 million.
We ended the quarter with cash net of outstanding bank borrowings of $9 million.
Moving to guidance for the third quarter I want to comment briefly on some of the specific cost reduction actions, we're taking within the precision device segment to mitigate the impacts of our reduced revenue outlook.
In Q3, we expect to incur a charge of roughly $2 million was it which is expected to result in annualized cost savings of more than $5 million. These actions will be in place by the end of this year and when implementation is complete we expect <unk> operating margins to return near 2022.
This will also put total company operating expenses at the low end of our previous range of $43 million to $45 million per quarter.
Moving to guidance for the third quarter, we expect total company revenue to be between 170 and $180 million down 2% versus the same period a year ago.
We estimate gross margins for the third quarter to be approximately 41, five to <unk> 43, 5% up 400 basis points from the year ago period.
R&D expense is expected to be between 15% and $17 million down slightly from prior year levels, driven by restructuring actions and a consumer Mems Mic segment.
We're projecting selling and administrative expense to be between 24% and $26 million down $1 million from the year ago period, primarily driven by restructuring actions in the consumer Mems and precision device segments, where.
We're projecting adjusted EBIT margin for the quarter to be in the range of 18% to 20% and expect EPS to be within a range of 26 to <unk> 30 per share. This assumes weighted average shares outstanding during the quarter of $94 8 million on a fully diluted basis were.
We're forecasting an effective tax rate of 18% to 19% for the quarter and we expect cash from operations to range from $20 million to $30 million capital spending is expected to be $7 million.
I'll now turn the call back over to the operator for the question and answer portion of the call operator.
And at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And our first question comes from the line of Christopher Rolland with Susquehanna. Your line is open.
Hey, guys. Thanks.
Thanks, so much for the question here.
Just talking about.
Maybe your largest customer.
What we can kind of expect for the back half I know you've been deemphasizing them over time. It seems like strength came from other areas of the market as well, but how does this affect seasonality and in particular for your whole company you were expecting to have.
Really strong seasonal December .
Like 20th 20, plus percent sequential I think it was where the street was does this come into play here at all or is this still just PD related that might dampen that thank you.
Yes, so I would say that I'd say generally speaking.
Without going into customer specifics I think we're pretty close to where we thought the <unk> business would be in the back half, it's not altogether, it's slightly down, but driven primarily by smartphone and <unk>.
And in China, So I think ear Iot and compute Youll continue to look relatively strong for us, but smartphone is definitely coming in weaker and I would say even more specific China is coming in weaker so.
Our overall expectations for CNN is probably slightly less than we would've said three months ago. I think you are the primary driver of what we kind of talked about here would probably be more on the PD side versus the prior expectations.
Yeah, and then on the PD side of things as well I got.
The push outs defense related and other.
It sounds like maybe there's some inventory as well.
Maybe go through where you think there is some inventory build where you think it is in terms of weeks or however, you want to.
Define it and when you think that inventories is finally going to work through here and what what kind of caught you guys by surprise on the inventory side as well thanks.
I think in the.
Original projections for PD, we were kind of starting to see recovery in the industrial side distribution portion of the business in the back half and right now we're not seeing that recovery.
At all quite frankly, so I think that's going to be delayed into into <unk> for the recovery in industrial and.
Distribution to make a few more comments med tech was stable in the first half I'd call. It we do expect to return to growth in the back half for Med Tech with the BD.
And then I'll just make a comment on defense.
There's been a number of larger programs that had been delayed which we haven't changed our position but it's.
It's been delayed and the one I can kind of call out Chris is more specific Lockheed just announced.
About a week ago.
A little over a week ago that they were going to deliver 150 joint strike fighters. This year that was the original projection and now they are projecting to deliver only a 110 due to a number of issues on their side. So that's the kind of delays were talking about here in defense. There's a couple of other larger programs like that our position in defense really hasnt changed.
<unk>.
And in the long term prognosis for defense is still looks very good but but some of these orders are delayed we expected to get some of these orders in Q2, they didnt materialize.
They are probably going to materialize in the back half, but it really drives the question of whether we could deliver them within the.
For calendar year 'twenty three.
Great. Thanks, so much Jeff.
Okay.
Okay.
And the next question comes from the line of Bob <unk> with CJS Securities. Your line is open.
Hi, its lead you go in for Bob Tonight, How are you.
Yes.
So just to start with just to clarify your guidance I think I heard you say in the back half in total you expect flat revenues and EBITDA margins north of 19% is that correct.
That is correct.
Okay. So I guess that would also imply around flat revenue for Q4 and I guess the question for the first question is.
How much of that is conservatism without visibility versus you have visibility to.
What looks to be flat revenue consolidated.
Well I would sit there and say is deliberately go through it by business unit I think I think we're very comfortable with the projections within.
Within the MSA or the biotech and specialty audio.
Can you do is they do have growth year over year in the back half.
As you kind of talked about in the consumer Mems microphone business.
I would say that it's flattish.
Flattish euro year over year, and so maybe slightly up.
And then the precision device business, obviously is down now within precision device area I would just sit there and say.
On the defense side.
We are going to get these orders.
Can't predict the exact month, we're going to get it and so there could be a little bit of conservatism and the fact that the orders come sooner rather than later, we'll be able to deliver it within calendar year 'twenty, three but right now I wouldn't I.
I can't count on that yet because I don't have the orders in hand, yet when we're already in August .
The second piece is this industrial and distribution.
Distribution portion and quite frankly, we're not seeing a lot of recovery in this market.
Could it change, yes, but right now we're kind of saying don't expect that kind of trajectory in that market to shift hold till sometime in 'twenty four.
Got it and then.
I guess, along the lines of your balance sheet balance sheet keeps getting stronger.
You've talked about allocating 50% of your free cash flow towards share repurchase can you give us any update there and then with regard to acquisitions.
Has anything changed related to either size or areas of focus versus the last couple of years.
Well I think firstly cover the acquisition portion first.
We look at the acquisitions, we've done in the past since 2017.
On the O T C hearing aid market are you seeing any new entrants more demand.
Anything along those lines.
You know that the the short answer as we continue to see that is actually doing better than we originally expected. So far but we are not seeing a lot of sell through data I would sit there and say you know our traditional hearing aid market is doing better than expected then we would've said six months ago. So.
I would say two things one I think it's a little too early so we see sell through data or over the counter market. That's to say that this is sustainable and again, it's not a super meaningful number in the first half of the year, but it is better than expected in the meantime, you know like you know.
Maybe you know what we could be seeing here is that you know the over the counter market is actually getting people interested in looking at hearing AIDS and.
They're opting for the traditional hearing aid market when they see that there's only a marginal difference in price and you'll get full service with a traditional hearing it because the original hearing aid market is doing quite well right now.
Great I appreciate it.
And as a reminder, if you would like to ask a question. Please press start then the number one on your telephone keypad.
And our next question comes from the line of Anthony Stoss Blitzcrank Harlem. Your line is open.
Hey, guys nice gross margins in a tough environment.
If I wanted to follow up on Q4. So is Q4 is roughly flat with a year ago Q for us and up 12% are you expecting.
China smartphones et cetera to bounce back in the December quarter of what do you really need to come through the head kind of an up 12% sequentially for December yeah.
Yeah, I mean, we do have some sequential improvement from Q2, Q3, and Q3 Q for but I mean, if I go back to the numbers you know prior to 22 I mean, we're nowhere near the numbers, we were shipping per per quarter in 2001 at the end of 21, and so you know what I mean, I would sit there and say okay.
Our expectations have come down.
Reasonable amount since last quarter for China, and it seems like this is doable I mean looking at China essentially for the full year being flat.
Flattish with 22, I mean, that's what we're talking about which 22 is not a great year for China and the sequential improvement Tony from Q3 Q for it is very modest great. We have built in here correct.
Got it.
And then if you if you backed up the delays and defense on the Ped side.
I mean, how much can.
Can you tell us just business in general slowing down or is it closer to what you guys would expect if you didn't see those delays on the defense defense side.
I would say I would say of the shortfall compared to what with the thought of quarter ago, I would say probably about 30% to 35% of it is defense and the rest is the industrial distribution.
There we were expecting if I look back at.
A quarter ago, we were expecting for industrial distribution tectonic start coming back in a stronger way I mean, not quite back to 2002 levels, but starting to come back.
We're just not seem that we're just not seeing reba.
Rebound at this point so.
60% industrial distribution not improving in about 35, 40% of its delays in defense.
Got it and the last question for me you called out computer P C being stronger.
Definitely nice to see I'm, just curious if you looked at that.
That business as a whole do you think P. C's arguments there'll be down year over year 2023 vs 2022 for you guys.
I would sit there and say right now RPC market is going to be flattish year over year, but definitely growth in the back half.
Compared to what it was last year. So the first half was really low, especially Q1 and the local tablet market.
We had a really weak you one.
We're expecting you know based on orders and demand in.
In Q3, some some nice growth year over year.
So, but overall for the full year, it's going to be roughly flattest or computer or compete Margaret I guess, what I would say target markets ear Archie compute.
We're seeing a lot of it being I would say you know.
Flattish year over year right in terms of ear, Iot compute but definitely weaker in the first half and stronger in the back half. The one exception as smartphones smartphones, we're just not seeing a recovery in that market.
Yeah, I know that's definitely better than your peers My compliments on how you guys are performing in the sixties and that's for sure.
And then I guess, let me throw into John I'm. The Opex 4300, 45 is that a good number to use kind of on a go forward basis or are there are still more leverage that you think you might pull and drop it even further.
Yeah, Tony I, I think I think I would go towards the low end of that number from a run right. We did have in in this quarter higher than normal Opex. We had some professional fees spending that we pulled forward from the back half of the year into Q2, but you can see in my guide Opex go back down to I think it's $41 million is the midpoint of the guide for Q <unk>.
Three so I would keep it in that kind of 41 $43 million for the remainder of 2023, Yeah. Just to say 20, we've taken a number of actions based on you know we were at the beginning of the year, we were expecting some very nice growth from P. D, which is not materializing and so we've taken action on the cost side to make sure that you know that.
That we can maintain profitability you can kind of see even with Ah.
Shortfall in revenue, we're pretty close on the profitability and the operating margins are holding up yeah, I would say both gross margins and operating margins are holding up fairly well given the challenges on the top line.
Yep exactly alright, thanks, guys appreciate it.
Yeah.
And there are no further questions at this time. This concludes today's conference call and you may now disconnect.
[music].
Mhm.
Mmm.