Q4 2023 Knowles Corp Earnings Call
Audra: Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Knowles fourth quarter and full year 2023 earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.
Good afternoon. My name is Andre and I will be your conference operator today at this time I would like to welcome everyone to the fourth quarter and full year 2023 earnings call.
Today's conference is being recorded 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 would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star one again.
Audra: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Sarah Cook. Please do so.
At this time I would like to turn the conference over to Sarah Cook. Please go ahead.
Sarah Cook: Thank you, Audra, and welcome to our Q4 and full year 2023 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me today are Jeffrey Niew, 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 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 companies' 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 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, 2022, periodic reports filed from time to time with the SEC, and 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
Thank you Audra and welcome to our Q4 and full year 2023 earnings call I'm, Darren Cook, Vice President of Investor Relations and presenting with me 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 Knowles, which constitute forward looking statements for purposes of 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 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.
The annual report on Form 10-K for the fiscal year ended December 31, 2022 periodic reports filed from time to time with the SEC and 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.
Jeffrey S. Niew: 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.com and in our current report on Form 8K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measures. All financial references on this call will be on a non-GAAP, continuing operations basis, unless otherwise indicated. We've made selected financial information available on webcast slides, which can be found in the Investor Relations section of our webcast. With that, please let me turn the call over to Jeff, who will provide details on our results. Jeff.
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 and 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, unless otherwise indicated we've made selected financial information available in webcast slides, which can be found in the investor Relations section of our webcast.
With that please let me turn the call over to Jeff who will provide details on our results.
Jeffrey S. Niew: Thanks, Sarah, and thanks to all of you for joining us today. Before I get into the Q4 results and my remarks on the status of our markets and what we are seeing for Q1, I would like to start off with some highlights from the previous year. We again made significant progress in transforming our business to higher-value products, which we believe will drive increased shareholder value in the years to come. In our medtech and specialty audio business, after a large inventory correction in the first half, we delivered 17% sequential revenue growth in the second half of 2023 with strong operating margins. Our operational performance, coupled with the success of our new products, gives us great momentum as we enter 2024. In our Precision Device segment, we successfully completed the acquisition of Cornell Dubliere, which significantly expands our total available market for capacitors in key markets and drives opportunities for future growth.
Thanks, Darren and thanks to all of you for joining us today.
Before I get into the Q4 results in my remarks on the status of our markets and what Youre seeing for Q1, I would like to turn it off with some highlights from the previous year.
We again made significant progress in transforming our business to higher value products, which we believe will drive increased shareholder value in the years to come.
In our med Tech and specialty audio business after a large inventory correction in the first half we delivered 17% sequential revenue growth in the second half of 2023 with strong operating margins.
Our operational performance coupled with the success of our new products gives us great momentum as we enter 2024.
In our precision device segment, we successfully completed the acquisition of Cornell Dubilier, which significantly expands our total available market for capacitors in key markets and drives opportunities for future growth.
Jeffrey S. Niew: Since closing in Q4, we now believe the synergies will be higher than our initial expectations. Lastly, the company closed out 2023 with another strong year of free cash flow of $106 million, or 15% of revenues. This has allowed us to continue to fund organic growth and look at additional acquisition opportunities in our target markets, all while continuing to buy back shares and keeping our debt at very manageable levels. We are very excited about the direction we are heading in and believe we will continue to drive shareholder value in 2024 and beyond. Now on to our Q4 results. We delivered revenue of $215 million and EPS of $0.28 within our guidance range with cash from operations of $60 million, which was above the high end of our guided range train-to-segment results.
Since closing in Q4, we now believe the synergies will be higher than our initial expectations.
Lastly, the company closed out 2023, with another strong year of free cash flow of $106 million or 15% of revenues.
This has allowed us to continue to fund organic growth and looking at additional acquisition opportunities in our target markets.
Well continuing to buyback shares and keeping our debt at very manageable levels.
We are very excited about the direction, we're heading and believe we will continue to drive shareholder value in 2024 and beyond.
Now onto our Q4 results.
We delivered revenue of $215 million and EPS of <unk> 28, within our guidance range with cash from operations of $60 million, which was above the high end of our guided range.
Turning to segment results.
Jeffrey S. Niew: MedTech invested in the audio revenue was up 9% versus the same period a year ago. The hearing health market continues to perform well, and we are expecting strong year-over-year growth in the first half of 2024. The dynamics of aging populations in Western economies, expansion of the middle class globally, and increasing penetration of people with mild to moderate hearing loss all point to positive market dynamics in the mid to long term.
<unk> specialty audio revenue was up 9% versus the same period a year ago.
Hearing health market continues to perform well and we are expecting strong year over year growth in the first half of 2024.
The dynamics of aging populations and western economies expansion of the middle class globally, and increasing penetration of people with mild to moderate hearing loss all point to positive market dynamics in the mid to long term.
Jeffrey S. Niew: Precision device revenue was up 10% year over year, including the acquisition of Cornell. While inventory in the channel remains high, specifically in industrial and distribution, and with a number of OEM customers, underlying demand appears to be stable, and design activity across our core markets remains high. With this backdrop, we expect increased earnings for PD in 2024 as we focus on cost controls and capacity utilization and optimization. Arnie's growth will be driven by organic gross margin improvement and the Cornell acquisition and its associated synergies. Channel inventory normalization expected in the second half of 2024 will complement our expected earnings growth. Turning to the consumer-balanced microphone business, we continue to move forward with the exploration of strategic alternatives.
Precision device revenue was up 10% year over year, including the acquisition of Cornell well.
Well inventory in the channel remains high and specifically in industrial and distribution and it was a number of OEM customers underlying demand appears to be stable and design activity across our core markets remains high.
With this backdrop, we expect increased earnings per PD in 2024, as we focus on cost controls and capacity utilization and optimization.
Earnings growth will be driven by organic gross margin improvement and the Cornell acquisition and its associated synergies.
Inventory normalization expected in the second half of 2024 will complement our expected earnings growth.
Turning to the consumer Mems microphone business, we continue to move forward with the exploration of strategic alternatives.
Jeffrey S. Niew: In the quarter, revenue was up 8% from the same period a year ago. We have now seen three-quarters of sequential growth driven by growing demand for non-mobile products, expanded mobile share, and the ongoing recovery in the PC market. We expect to see strong year-over-year revenue and earnings growth in the first quarter of 2024. To summarize, MSA continues to perform well, and the momentum shown in Q4 gives us confidence in 2024 revenue and earnings growth. In PD, we are expecting channel inventory to correct and demand recovery to begin in the back half of 2024. Synergies identified in association with the Cornell acquisition are projected to be higher than initially expected, beginning to materialize in the second half of 2024. For CMM, we expect to achieve modest full-year revenue growth in 2024. While 2023 was a challenging year, we performed well in the second half.
In the quarter revenue was up 8% from the same period a year ago. We have now seen three quarters of sequential growth driven by growing demand in non mobile products expanded mobile share and the ongoing recovery in the PC market.
We expect to see strong year over year revenue and earnings growth in the first quarter of 2024.
To summarize MSA continues to perform well and the momentum shown in Q4. It gives us confidence in 2020 for revenue and earnings growth.
NPD, we're expecting channel inventory to correct and demand recovery to begin in the back half of 2024.
Synergies identified in association with Cornell acquisition are projected to be higher than initially expected beginning to materialize in the second half of 2024.
For <unk>, we expect to achieve modest full year revenue growth in 2024.
While 2023 was a challenging year, we performed well in the second half.
Jeffrey S. Niew: Heading into 2024, I am optimistic we have growth across all three of our business units in revenue and total company earnings, along with continued robust cash flow. We continue to transform our company to higher-value products and markets, and I'm confident the strategic actions we've taken will drive long-term shareholder value. Before I turn it over to John, as a member, we will be providing revenue, EPS, and cash from operations guidance. As I said in Q3, we believe these measures are the best indicators for our business and are aligned to the company's focus. Now, let me turn the call over to John to detail our quarterly and annual results and guidance. John.
Heading into 2024, I'm optimistic we have growth across all three of our business units and revenue and total company earnings along with continued robust cash flow.
We continue to transform our company to higher value products and markets and I'm confident the strategic actions, we've taken will drive long term shareholder value.
Before I turn it over to John is remember, we will be providing revenue EPS and cash from operations guidance.
As I said in Q3, we believe these metrics are the best measures of our business and are aligned to the company's focus.
Now, let me turn the call over to John to detail, our quarterly and annual results and guidance John Thanks.
John S. Anderson: Thanks, Jeff. We reported fourth quarter revenues of $215 million, in line with guidance and up 9% from the year-ago period, driven by the acquisition of Cornell, which we completed on November 1st. EPS was $0.28 in the quarter, within our guidance range, and $0.05 below the prior year level. In the medtech and specialty audio segment, revenue was $67 million, up 9% versus the fourth quarter of 2022 and increased demand in the hearing health market. Gross margins were 54.2%, up 260 basis points versus the prior year, driven by factory productivity improvements, favorable product mix, and foreign currency improvements. The precision device segment delivered revenues of $70 million, up 10% from the prior year, driven by the acquisition of Cornell, partially offset by lower shipments into the distribution and industrial end markets, as we continue to see excess channel inventory. Gross margins were 35.4%, down 13 percentage points versus the prior year due to lower factory capacity utilization and the acquisition of Cornell. Consumer MEMS microphone revenues of $78 million were up 8% versus the prior year, driven by higher shipments into the mobile and compute markets.
Thanks, Jeff we reported fourth quarter revenues of $215 million in line with guidance and up 9% from the year ago period, driven by the acquisition of Cornell, which we completed on November one.
EPS was <unk> 28 in the quarter within our guidance range and five below prior year levels in.
In the Med Tech and specialty audio segment revenue was $67 million up 9% versus the fourth quarter of 2022 and increased demand in the hearing health market.
Gross margins were 54, 2% up 260 basis points versus the prior year, driven by factory productivity improvements favorable product mix and foreign currency impacts.
The precision device segment delivered revenues of $70 million up 10% from the prior year driven by the acquisition of Cornell, partially offset by lower shipments into the distribution and industrial end markets as we continue to see excess channel inventory.
Gross margins were 35, 4% down 13 percentage points versus the prior year due to lower factory capacity utilization and the acquisition of Cornell.
Consumer Mems microphone revenues of $78 million were up 8% versus the prior year driven by higher shipments into the mobile and compute markets.
Although full year revenues were down 12% in 2023, driven by an extremely weak first quarter, we delivered sequential revenue growth over the remainder of the year through a combination of market growth and share gains.
John S. Anderson: Although full-year revenues were down 12% in 2023, driven by an extremely weak first quarter, we delivered sequential revenue growth over the remainder of the year through a combination of market growth and shared. Gross margins were 24.7%, 70 basis points above the same period a year ago on higher factory capacity utilization. On a total company basis, R&D expense in the quarter was $16 million, up slightly compared to the prior year. SG&A expenses were $31 million, $4 million higher than prior levels driven by the acquisition of Cornell and an increase in professional and legal fees associated with the exploration of strategic alternatives, per CML.
<unk> margins were 24, 7% 70 basis points above the same period, a year ago on higher factory capacity utilization.
On a total company basis R&D expense in the quarter was $16 million up slightly compared to the prior year.
SG&A expenses were 31 million $4 million higher than prior year levels, driven by the acquisition of Cornell and an increase in professional and legal fees associated with the exploration of strategic alternatives for CML.
Now I'll turn to our balance sheet and cash flow.
We generated $60 million in cash from operating activities in the quarter and capital spending was $5 million.
We also repurchased approximately one 2 million shares at a total cost of $20 million and ended the year with cash and cash equivalents of $87 million.
John S. Anderson: Now I'll turn to our balance sheet and cash flow. We generated $60 million in cash from operating activities in the quarter, and capital expenditures were $5 million. We also repurchased approximately 1.2 million shares at a total cost of $20 million and ended the year with cash and cash equivalents of $87 million. On a full year basis, free cash flow was $106 million, or 15% of revenues, and we repurchased approximately 2.9 million shares at a cost of $48 million. We exited 2023 with $271 million of debt, which includes $160 million of borrowings under our revolving credit facility and a seller note, which was issued in connection with the Cornell acquisition.
On a full year basis free cash flow was $106 million or 15% of revenues and we repurchased approximately $2 9 million shares at a cost of $48 million.
We exited 2023 with $271 million of debt, which includes $160 million of borrowings under our revolving credit facility and a seller note, which was issued in connection with the Cornell acquisition.
Lastly, our net leverage ratio was one three times 2023 EBITDA.
Now moving to our guidance.
For the first quarter of 2024 revenues are expected to be between $190 and $200 million up 35% versus a year ago period, driven by both organic growth and the acquisition of Cornell.
John S. Anderson: Lastly, our net leverage ratio was 1.3 times 2023 EBITDA. Now, moving to our guidance. For the first quarter of 2024, revenues are expected to be between $190 million and $200 million, up 35% versus the year-ago period, driven by both organic growth and the acquisition of Cornell. R&D expenses are expected to be between $17 million and $18 million, and selling and administrative expenses are expected to be within the range of $30 million to $32 million, up from the prior year due to the acquisition of Cornell.
<unk> expenses are expected to be between 17, and $18 million and selling and administrative expenses are expected to be within the range of $32 million to $32 million up from prior year due to the Cornell acquisition.
We're projecting adjusted EBIT margin for the quarter to be within a range of 12% to 14%.
We're forecasting interest expense in Q1 to be between five and $7 million, which includes approximately 2 million of noncash imputed interest.
For full year 2024, we expect interest expense of $22 million.
John S. Anderson: We're projecting adjusted EBIT margin for the quarter to be within a range of 12 to 14 percent. We're forecasting interest expense in Q1 to be between $5 and $7 million, which includes approximately $2 million of non-cash imputed interest. For full year 2024, we expect interest expense of $22 million, and we expect an effective tax rate of 14-16% for both the quarter and full year 2020. We're projecting EPS to be within a range of $0.16 to $0.20 per share, up $0.13 from the year-ago period. This assumes a weighted average share outstanding during the quarter of $94 million on a fully diluted basis.
And we expect an effective tax rate of 14% to 16% for both the quarter and full year 2024.
We're projecting EPS to be within a range of <unk> 16 to <unk> 20 per share up 13 cents from the year ago period. This assumes weighted average shares outstanding during the quarter of $94 million on a fully diluted basis.
Lastly, we are projecting cash from operations to be within a range of zero to $10 million and capital spending is expected to be $5 million.
Now I'll turn the call back over to the operator for questions and answers portion of our call operator.
Thank you 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.
We'll go first to Christopher Rolland of Susquehanna.
Hey, guys. Thanks, so much for the question.
So I guess you talked about.
Audra: Lastly, we're projecting cash from operations to be within a range of $0 to $10 million, and capital spending is expected to be $5 billion. I'll now turn the call back over to the operator for the questions and answers portion of our call. Operator?
Some excess channel inventory.
In some of your end markets I was wondering if you could perhaps flesh that out for us.
And you know maybe discuss how this might affect kind of future revenues.
Christopher Rolland: Thank you. 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. We'll go first to Christopher Rolland on Susquehanna.
Or areas.
As we look through 2024, thank you.
Yes, Thanks, Chris for the question. So what I would tell you is the primary area that we see a lot of inventories will be call. It in the industrial and slash distribution channels and we've listened to some of the big distributors calls and they're seeing a fair amount of channel inventory and it is impacting our business no doubt specifics.
Jeffrey S. Niew: Hey guys, thanks so much for the question. So I guess you talked about some excess channel inventory in some of your end markets. I was wondering if you could perhaps flesh that out for us and maybe discuss how this might affect certain future revenues or areas as we look through 2024. Thank you.
In the PD segment, both in the you know the.
Cornell portion as well as the traditional.
Jeffrey S. Niew: Yeah, thanks, Chris, for the question. You know, so what I would say is, you know, the primary area that we see a lot of inventory is what we call it in the industrial and slash distribution channels. And we've listened to some of the big distributors' calls, and, you know, they're seeing a fair amount of channel inventory. And it is impacting our business, no doubt, specifically in the PD segment, both in the Cornell portion as well as the traditional PD portion. Now, we're hearing, you know, a lot that, you know, there may be, you know, again, people are projecting the recovery in the back half of the year.
D portion now we're hearing a lot that they're maybe again people are projecting a recovery in the back half of the year, but I think what we're focused on in the first half is number one we do have strong organic growth in the first quarter.
And it's being driven primarily by.
Our MSA business as well as our CMS business and of course, the additional revenue we get from Cornell through through the acquisition, that's the inorganic ganic portion.
To that end again, I think we're really focused on cost here in the short term.
Making sure we're optimizing our factory utilization getting value creation in our factories as.
Jeffrey S. Niew: But I think what we're focused on in the first half is, number one, we do have strong organic growth in the first quarter, and it's being driven primarily by our MSA business, as well as our CMM business. And, of course, the additional revenue we get from Cornell through the acquisition, that's the inorganic portion. And to that end, you know, again, I think we're really focused on cost here, you know, in the short term. Making sure we're optimizing our factory utilization, getting value creation out of our factories, as well as cost control and FX. And so those are things that we're going to be focused on until we see the recovery. And, you know, but in the meantime, you know, in a number of our businesses, we are seeing very little channel inventory problems at this point, but primarily in industrial and distribution. Excellent.
As well as cost control and Opex and so those are things that we're going to be focused on until we see the recovery and but in the meantime in a number of our businesses. We are seeing very little channel inventory problem at this point, but primarily industrial and distribution.
Excellent.
And sorry for this all encompassing question, but would love to know for March you, guys gave topline and bottomline, but what kind of love to know the moving parts are on the kind of sequential changes by segment.
And then also to get to your EPS guidance and any clues on the balance between gross margin and Opex.
How those trend and then lastly.
John I had a little bit of a of a.
The question Mark getting to your.
Your cash from operations Ah I assume there's some working capital adjustments, but would love to know what those four.
Christopher Rolland: And sorry for this all-encompassing question, but we'd love to know for March. You guys gave top line and bottom line, but we'd kind of love to know the moving parts on the kind of sequential changes by segment, and then also to get to your EPS guidance and any clues on the balance between gross margin and OPAC, how those trends. And then lastly, John, I had a little bit of a question mark about getting to your cash from operations. I assume there are some working capital adjustments, but I would love to know what those were. Thanks. Sorry
Sorry.
Okay. So just I'll handle the revenue portion by segment I think you always I kind of said in the microphone business. We do expect strong year over year growth in the CMS business a year over year. It is down sequentially, but probably a little less significantly than we'd normally see.
We're still as being quite good demand in Q1, so it's not as seasonally down as we would normally expect.
Hi.
In a normal year.
And then in our MSA business. It is seasonally down Q4, typically is our strongest quarter in our hearing health market, where we have a big hearing aid show where products are launched in early Q4, a lot of building goes on in Q4. So seasonally Q1 is usually lower.
Jeffrey S. Niew: Okay, so I'll handle the revenue portion of my segment. I think, as I kind of said, in the microphone business, we do expect strong year-over-year growth in the CMM business. It is down sequentially, but probably a little less significantly than we normally see. We're still seeing quite good demand in Q1, so it's not as seasonally down as we would normally expect in a normal year. And then in our MSA business, it is seasonally down. Q4 typically is our strongest quarter in our hearing health market, where we have a big hearing aid show where products are launched in early Q4.
But again, our hearing health business is up pretty significantly year over a year.
And then if you go to the present the precision device segment.
You would sit there and you look in total.
It's up pretty significantly.
Sequentially.
Jeffrey S. Niew: A lot of building goes on in Q4, so seasonally, Q1 is usually lower. But again, our hearing health business is up pretty significantly year-over-year. And then if you go to the precision device segment, you would sit there, and you'd look at it in total.
But it's being sorry, its up marginally sequentially a lot being driven by the Cornell acquisition now I'll turn it over to John to talk more about on the EPS and cash flow numbers, yeah sure. So Chris in my <unk>.
Jeffrey S. Niew: It's up pretty significantly sequentially, but it's being, or sorry, it's up marginally sequentially, a lot being driven by the Cornell acquisition. So I'll turn it over to John to talk more about it on the EPS and the cash flow numbers. Yeah, sure.
Prepared remarks, I provided for Q1 revenue guidance I provided opex, both R&D and SG&A as well as EBIT margins. The only thing I really didn't specifically talk about it as gross margins, but you can kind of think of the gross margins being very similar to Q4 levels in Q1.
John S. Anderson: So, Chris, in my prepared remarks, I provided for Q1 revenue guidance. I provided OPEX, both R&D and SG&A, as well as EBIT margins. The only thing I really didn't specifically talk about was gross margins, but you can kind of think of gross margins being very similar to Q4 levels in Q1. And then we expect sequential increases over the remainder of 2024. I think that was the first piece.
And then we expect sequential increases over the remainder of 2024 I think that was the first piece I also.
Provided the interest expense and taxes so.
I think you have all of the mechanics to get to that EPS guidance. We have I think your other question was on free cash flow.
John S. Anderson: I have also provided the interest expense and taxes. So I think you have all the mechanics to get to that EPS guidance we have. I think your other question was on free cash flow. Yeah, it was Cash From Operations specifically, and I apologize; I joined the call a little late. Yep, cash from operations was very strong in both Q4 and for the full year. And I would say, you know, a lot of this is sustainable.
Yes.
Cash from operations, specifically and I apologize I joined the call little late.
Yes, so cash from operations.
Very strong in both Q4 and for the full year and I would say you know a lot of this is sustainable we did have a benefit in 2023 for a reduction of inventory about $14 million. When you look at the balance sheet. It's a little camouflage because you have the inventory related to the Cornell.
John S. Anderson: We did have a benefit in 2023 for the reduction of inventory, about 14 million. When you look at the balance sheet, it's a little camouflaged because you have the inventory related to the Cornell acquisition. But if you strip that out, the inventory, I'll call the legacy business, was down about 15 million, which created some tailwind. I'd also say from a free cash flow standpoint, CapEx was lower than normal. They were extremely low for the full year 23.
Acquisition, but if you strip that out the inventory I'll call the legacy business down about $15 million, which created some tailwind I would also say from a free cash flow standpoint, capex were lower than normal they were extremely low for full year 'twenty three I think we pushed out some projects.
And really focused on.
Investments with highest ROI, so I would say that could tick up a little bit going into 2024 more to like a 3% to 5% of revenue range.
John S. Anderson: I think we pushed out some projects and really focused on investments with the highest ROI. So I would say that could pick up a little bit going into 2024, more to like a three to five percent revenue range. Okay, I was specifically talking about the guide for cash from operations at one to 10.
Okay I was specifically talking about the guide for cash from operations at one to 10.
I was wondering if if there was some working capital adjustments in there to get there.
For Q1 Q1 is seasonally.
John S. Anderson: I was wondering if there were some working capital adjustments in there to get there. For Q1, Q1 is seasonally, our extreme, our lowest free cash flow, and cash from Ops Quarter. You can go back to Q1 of 22 or 23, and you'll see that we have bonus payouts in Q1, that's a big outflow. But from other components of net working capital, there's not a huge swing.
Our extreme our lowest free cash flow and cash from ops quarter. You can go back to Q1 of 22 or 23, and you'll see that we have bonus payouts in Q1, that's a big outflow.
But from our other components of net working capital there is not a huge swing there'll be some increases in inventory as we're building taking in raw materials and building for our ramp ups later in the year. So there may be a little headwind in the quarter, but again Q1 is historically.
John S. Anderson: There'll be some increases in inventory as we're building, taking in raw materials, and building for ramp-ups later in the year. So there may be a little headwind in the quarter, but again, Q1 is historically low cash flows. Even though Q1 is historically low, we're still expecting the full year to have a very robust year again in terms of free cash flows. Similar, maybe a touch lower than 2023, but again, pretty strong cash flow for the full year. So I caution you against just looking at one quarter off. Thank you guys.
What I would add at Ash flows, even though Q1 is historically low we're still expecting for the full year to have a very robust year again in terms of free cash flow similar maybe a touch lower than 2023, but again pretty strong cash flow for the full year. So you're I caution just looking at one quarter.
Awesome.
Thank you guys.
Yes, Thanks, Chris.
Okay.
Well move next to Bob <unk> CJS Securities.
Hi, its actually lead you go to for Bob Today, how are you.
Got it.
Bob Labick: Yep, thanks. We'll move next to Bob Labick at CJS Security. Hi, it's actually Lee Jagoda here for Bob today.
I'm, just starting with the CRM business and the strategic alternatives process can you give us any kind of time frame for a decision one way or the other whether it be first half second half is it.
Jeffrey S. Niew: Good. Starting with the CMM business and the strategic alternatives process, can you give us any kind of time frame for a decision one way or the other, whether it be first half, second half, is it a 2025 event, and then I've got, obviously, we're trying to move this process along as quickly as we can, but you know, there's no definitive timeline, you know, at all, to complete this. So, you know, that's what I'd say for now, and the process is progressing. And then, I guess, in your prepared remarks, it sounds like the business is faring relatively well at the moment. What do you see as sort of the key drivers or variables for the 2024 results? And, um, and how that might impact the process that's going on? Well, I mean, what I would say, you're right, 2023, especially the back half, after a very difficult front half, specifically Q1 of 23, the back half shaped up pretty well. And Q1 is looking very, very good as well.
2025 event.
And then I've got some follow ups.
Obviously, we're trying to move this process along as quickly as we can but you know there is no definitive timeline.
You know it all to the completeness. So that's what I'd say for now.
And the process is progressing.
And then I guess in your prepared remarks, it sounds like the business is fairing relatively well at the moment.
What do you see as sort of the key drivers are variables to 'twenty 'twenty four results and.
And how that might impact the process that's going on.
Well I mean, what I would say, you're right 2023, especially the back half.
After a very difficult front half specifically Q1 of 'twenty three the back half shaped up pretty well and Q1 is looking very very well as well and so those are the dynamics here really are we've got a number of new product introductions on our side that are in some of our customers do products.
Coupled with some share gains that we've seen so we think we feel pretty against some market recovery. So I think overall I mean, we're expecting modest growth on revenue side year over year Ah I wouldn't expect some kind of crazy growth number this year, but but but can we expect modest growth and I think it's in line with our.
Jeffrey S. Niew: And so, you know, the dynamics here really are, you know, we got a number of new product introductions on our side there, and some of our customers have products, coupled with some share gains that we've seen. So we think we feel pretty good about it, and some market recovery. So I think, you know, overall, we're expecting modest growth on the revenue side, year over year. I wouldn't expect, you know, some kind of crazy growth number this year.
Our expectations that we had three months ago.
And then just one last one for me so.
You had you not had such strong free cash flow in Q4.
Yeah. It sounds like you would have hit your goal of sort of returning 50% of free cash flow to shareholders through.
Good cash good catch yeah, we came in at just under 50% and it's because December free cash flow was really was stronger than we anticipated, but I think that's weird.
Jeffrey S. Niew: But we expect modest growth, and I think it's in line with our, you know, our expectations that we had, you know, three months ago. And then just one last one for me.
It's close it's probably 45% versus a 50% return.
John S. Anderson: So, had you not had such strong free cash flow in Q4, it sounds like you would have hit your goal of sort of returning 50% of free cash flow to shareholders to repay. Yeah, good catch.
And as we look out to 2024, you know even if we don't have a sales to pay back some of the.
Phone.
Is that how we should think about cash deployment.
John S. Anderson: Yeah, we came in at just under 50%, and that's because December's free cash flow was really stronger than we anticipated. But I think, you know, I think it's close. It's probably 45% versus the 50% rate.
Yes, I think I think.
There's not a huge change in our capital allocation, given where interest rates are and given the fact, we do have debt borrowings under our revolver. Now we are evaluating is it more advantageous to pay down debt versus repurchasing shares I think it'll be a combination of some combination of.
John S. Anderson: And as we look out to 2024, you know, even if we don't have a sale, you know, to pay back some of the loan. Is that how we should think about cash deployment? Yeah, I think, you know, there's not a huge change in our capital allocation, given where interest rates are and given the fact we do have debt borrowings under a revolver. Now we are evaluating whether it is more advantageous to pay down debt versus repurchasing shares. I think it'll be a combination of some combination of that, but we are evaluating it given, you know, when we set that 50% of free cash flow return, interest rates were significantly lower. So we'll evaluate; we're evaluating. That's fair.
Of that but we are evaluating it given when we set that 50%.
A free cash flow return interest rates were significantly lower so will the value we are evaluating.
That's fair thanks very much.
Yeah.
Well move next to trusting here at Baird.
Hi, good afternoon could you.
Breaking down the revenue contribution from Cornell in Q4, and what's embedded in the Q1 guidance.
And then also if you could expand on the accretion a higher than expected that you expect some co now what's driving that now that you have some visibility on the business post the close.
John S. Anderson: Thanks very much. We'll move next to Tristan Gerra at Baird. Hi, good afternoon.
Breakfast.
Asking about the revenue from specifically from Cornell in Q4 week Q4, Q1, if possible yeah yeah.
Tristan Gerra: Could you break down the revenue contribution from Cornell in Q4 and what's embedded in the Q1 guide? And then, also, if you could expand on the accretion, higher than expected, that you expect from Cornell, you know, what's driving that now that you have, you know, some visibility on the business post the close of the purchase? So you're asking about the revenue from, specifically from, Cornell in Q4. Correct. Q4 and Q1 if possible. Yeah Yeah,
Yes, it was roughly in line with our expectations for Q4.
For two months at about $20 million in revenue.
And EPS neutral EPS neutral.
And I would say that the monthly run rate, probably slightly higher than that in Q1, starting to be a little bit higher in Q1, and then the $10 million a month.
Jeffrey S. Niew: It was roughly in line with, you know, our expectations for Q4 at, you know, for two months at about $20 million in revenue. And EPS neutral, EPS neutral, and I would say that, you know, the monthly run rates, probably slightly higher than that in Q1, started to be a little bit higher in Q1 than the $10 million a month in Q1. You know, I would say, you know, if you remember on November 1st when we announced the closing of the deal, we kind of laid out some metrics. You know, I think, on the revenue side, what we said is, you know, pretty aligned. I think the EBITDA is in, it's pretty close to line, maybe a tad higher.
In Q1, I would say if you remember on November one when we announced the closing the deal we kind of laid out some metrics.
We're on the revenue side, what we said.
Pretty line I think the EBITDA is and it's pretty close in line, maybe a tad higher.
But I think the biggest thing.
Talk about here is is on the synergies we had I think committed to around $4 million of costs on the cost side.
The closing date within 36 months of the close I think we're on target maybe slightly ahead on that the $4 million, but I think the biggest thing that we've come to bring to the table is that we think there is an opportunity for what I call.
Product management or pricing to actually.
<unk> raised prices with this business.
I think if you know what will be the lead times with distribution inventory. It may it may take a little bit of time for this to kind of really come in and show show up in our actual results. So we probably won't see a lot of it start coming until the back half starting in the back half of 'twenty four but I think what I'd say is beyond the 4 million of cost savings we see.
Jeffrey S. Niew: But I think the biggest thing we talked about here is synergies. You know, we had, I think, committed to around $4 million on the cost side at the closing day within, you know, 36 months of the close. You know, I think we're on target, maybe slightly ahead of that, the 4 million. But I think the biggest thing that, you know, we've come to bring to the table is that we think there's an opportunity for what I call product management or pricing to actually raise prices with this business. Which, you know, I think, with the lead times with distribution inventory, it may take a little bit of time for this to kind of really come in and show up in our actual results.
Now I would say a reasonably significant especially going into 'twenty five.
<unk> in margins from this business just purely based on pricing.
Chris just to add a little bit on the accretion.
We expect it to be neutral again in Q1, we expect it to be accretive to earnings beginning in the back half of 2024.
And I think one thing to point out is in the calculation of accretion. We do include both the cash interest and then I mentioned this in his script. There is what we call them Puget interest, we had a $123 million interest free loan.
Jeffrey S. Niew: So we probably won't see a lot of this start coming till the back half, starting in the back half of 24. But, you know, I think what I'd say is, beyond the 4 million cost savings we see now, I would say, you know, a reasonably significant improvement in margins from this business, just purely based on pricing. Tristan, just to add a little bit on the accretion.
In connection with that acquisition, so we calculate using a market rate of about 7.25%. We impute interest. So that's included in that.
I'd say overall, we feel pretty good about where we are three months into this three four months into this that this acquisition is really a nice fit for us and you'll have the opportunity to be a nice grower on the margin side.
On the EBITDA side.
Really in the back half of the year.
John S. Anderson: We expect it to be neutral again in Q1. We expect it to be accretive to earnings, kind of, beginning in the back half of 2024. And I think one thing to point out is in the calculation of accretion, we do include both the cash interest and, as I mentioned in the script, there's what we call imputed interest. We had a 123 million interest-free loan in connection with that acquisition. So we calculate using a market rate of about 7.25%; we impute interest, so that's included in that.
Great and then for my follow up.
Within the precision device business, if you could give us in.
The details on that.
How did various segments are moving.
I'm guessing that industrial would have you see getting to be the weakest given the inventory deleveraging that's going on.
But any commentary as well on the ultimate is defense and also.
How is the pricing looking like.
Sure.
The capacitor, which is most of that business and and also if you can remind us whether you have pricing agreements.
Jeffrey S. Niew: I mean, I guess what I'm saying, Tristan, overall, we feel pretty good about where we are three months into this, three, four months into this, that this acquisition is really a nice fit for us, and we have the opportunity to be a nice grower on the margin side and the EBITDA side, you know, starting really in the back half of the year. Great, and then for my follow-up question, within the precision device business, could you give us some details on how the various segments are moving? I'm guessing. Distee, Telecom, Industrial, obviously going to be the weakest given the inventory delivery that's going on, but any commentary as well on automotive defense and also how is the pricing looking like, transcribed by https://otter.ai. And also, if you can remind us whether you have pricing agreements, the LTA type of agreements, or is it all separate?
This agreement so is it on spot.
Scott.
Yes, so first on the pricing and you want I think we talked about pricing in the Cornell portion of the acquisition I think we've gone through a lot of the pricing work you know obviously in.
The traditional PD business over the years, but we expect modest price increases in 2024 or 2023, I think the biggest thing that we see.
In terms of the markets is still this industrial slash distribution business.
Still is very very weak at this moment.
And we kind of see it in the corner out, but we see this in the Cornell business as well, but that was factored into kind of what we said by the debt that the November 1st time line, when we announced the closure or the closing on the business. So it's really about industrial and telecom. There are a few I would say large Oems, which shall remain nameless that you'll have some.
Their own but I think.
Jeffrey S. Niew: Yeah, so first on the pricing, and you know, I think we talked about pricing in the Cornell portion of the acquisition. You know, I think we've gone through a lot of the pricing work, you know, obviously in the traditional PD business over the years, but we expect, you know, modest price increases in 2024 over 2023. I think the biggest thing that we see, you know, in terms of the markets is still this, you know, the industrial slash distribution business is still very, very weak at this moment, you know, and I, and we kind of see this in the Cornell business as well, but that was factored into kind of what we said by, you know, the November 1st timeline when we announced the closure or the closing on the business. So it's really There are a few, I would say, large OEMs, which shall remain nameless, that you'll have some inventory of their own.
That should clear up relatively quickly it's still really about this industrial slash distribution business and when we believe that that's going to recover but in the meantime, we are.
We are really working hard in the factories to optimize capacity utilization get value creation in the factories and control Opex.
What we're focused on right now.
In this interim period, probably through the first half.
Great. Thank you very much.
And there are no further questions at this time I would like to turn the conference over to Sarah Cook for closing remarks.
Thank you for joining us today as always we appreciate your interest in Knowles and look forward to speaking with you on our next earnings call. Thank you and goodbye.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Please wait the conference will begin shortly.
Jeffrey S. Niew: But I think, you know, that should clear up relatively quickly. It's still, you know, really about this industrial slash distribution business and when we believe that that's going to recover. But in the meantime, you know, we are really working hard in the factories to optimize capacity utilization, get value creation in the factories, and control OPEX.
Sure.
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Jeffrey S. Niew: That's what we're focused on right now in this interim period, probably, you know, through the first half. Great. Thank you very much, and there are no further questions at this time. I would like to turn the conference over to Sarah Cook for her closing remarks. Thank you for joining us today. As always, we appreciate your interest in Knowles and look forward to speaking with you on our next earnings call. Thank you, and goodbye. This concludes today's conference call. Thank you for your participation. You may now disconnect.
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Operator: Please wait. The conference will begin shortly. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly. Please wait. The conference will begin shortly.
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