Q1 2024 Knowles Corporation Earnings Call
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Operator: Thank you for standing by, and welcome to the first quarter 2024 Knowles Corporation Earnings Conference call. All lines have been placed on mute to prevent any background noise.
Speaker Change: Thank you for standing by and welcome to the first quarter 'twenty 'twenty Four Knowles Corporation earnings Conference call. 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 star followed by.
Operator: 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 star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Speaker Change: The number one on your telephone keypad, if you would like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over to Sarah Cook. Please go ahead.
Operator: Thank you. I would now like to turn the call over to Sarah Cook. Please go ahead.
Sarah Cook: Thank you, and welcome to our Q1 2024 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 security laws. Forward-looking statements in this call will include comments about demand for company products.
Speaker Change: Thank you and welcome to our Q1 2024 earnings call I'm, Sarah 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 cause.
Sarah Cook: Anticipated Trends in Company Sales, Expenses, and Profits 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, 2023. Periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements except as required by law.
Sarah Cook: 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 made 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 website. With that, I will turn the call over to Jeff, who will provide details on our results. Thanks, Sarah, and thanks to all of you for joining us today.
Speaker Change: Forward looking statements for purposes of the Safe Harbor provisions under applicable Federal Securities Law.
Speaker Change: Forward looking statements in this call will include comments about demand for company products.
Speaker Change: Anticipated trends in company sales expenses and profits.
Speaker Change: And involve a number of risks and uncertainties that could cause actual results to differ materially from current expectation.
Speaker Change: The company urges investors to review the risks and uncertainties in the Companys SEC filings, including but not limited to.
Speaker Change: The annual report on Form 10-K for the fiscal year ended December 31, 2023 periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.
Speaker Change: 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.
Speaker Change: 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 <unk> 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.
Speaker Change: All financial references on this call will be made 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 website.
Speaker Change: With that let me turn the call over to Jeff who will provide details on our results Jeff.
Jeff: Thanks, Darren and thanks to all of you for joining us today.
Jeffrey S. Niew: I'm very pleased with the start of 2024 as our first quarter results showed the potential of our businesses to expand EBIT margins and drive strong free cash flow. We are continuing our transformation to focus on high growth in markets where we have differentiated solutions, and our Q1 financial performance is evidence that our strategy works. In the first quarter, we delivered revenue of $196 million, above the midpoint of our guided range, EPS of 20 cents at the high end of our guided range, and cash from operations of $17 million, which exceeded the high end of our guided range. Returning to segment results.
Jeff: I'm very pleased with the start of 2024 is our first quarter results showed the potential of our businesses.
Jeff: <unk> EBIT margins and drive strong free cash flow, we are continuing our transformation to focus on high growth end markets, where we have differentiated solutions and our Q1 financial performance is evidence that our strategy is working.
Jeff: In the first quarter, we delivered revenue of $196 million above the midpoint of our guided range.
Jeff: So 27 at the high end of our guided range and cash from operations of $17 million, which exceeded the high end of our guided range.
Jeff: Turning to segment results Med Tech and specialty audio revenue was up 26% with over 90% adjusted EBIT growth versus the same period a year ago.
Jeffrey S. Niew: MedTech and specialty audio revenue was up 26% with over 90% adjusted EBIT growth versus the same period a year ago. The end markets for our hearing health products remain robust as market dynamics such as aging populations, expansion of the middle class globally, and Improved Hearing Aid Penetration all remain favorable.
Jeff: The end markets for our hearing health products remain robust as market dynamics, such as aging populations expansion of middle class globally.
Jeff: It improved hearing aid penetration all remain favorable.
Jeffrey S. Niew: Second, our operational excellence continues to produce strong margin performance. This, coupled with our success in new product adoption, is driving revenue growth with expanding EBIT margins and cash flow for 2024. Precision device revenue was up 38% from a year ago, driven by the acquisition of Cornell. However, as we expected, the end market challenges we experienced in the back half of 2023 continue into the first half of 2024, as inventory levels within distribution and the industrial end markets remain high. We remain focused on design activity, which continues to be robust in defense, life sciences, industrial, and EV and positions us well for future growth.
Jeff: Our operational excellence continues to produce strong margin performance.
Jeff: This coupled with our success in new product adoption is driving revenue growth with expanding EBIT margins and cash flow for 2024.
Jeff: Precision device revenue was up 38% from a year ago, driven by the acquisition of Cornell.
Jeff: As we expected and market challenges, we experienced in the back half of 2023 continue into the first half of 2024.
Jeff: The entry levels within distribution and the industrial end markets remained high.
Jeff: We remain focused on design activity, which continues to be robust in defense life Sciences, industrial and <unk> and positions us well for future growth.
Jeffrey S. Niew: We continue to be excited about the performance, synergistic opportunities, and total available market expansion Cornell brings to the PD segment. With the beginning of an anticipated recovery in the second half of the year and the addition of Cornell, we expect to see double-digit revenue and adjusted EBIT growth within the second half of 2024. Before moving to the results for the Consumer Men's Microphone Business, I will provide some brief commentary on the status of the strategic alternatives process that we announced last year. We are taking into consideration all the stakeholders, from customers to suppliers and shareholders to employees, and I believe we are progressing to a conclusion. From an operational standpoint, CMM's financial results in the quarter were solid.
Jeff: We continue to be excited about the performance synergistic opportunities and total available market expansion Cornell brings to the PV segment.
Jeff: With the beginning of an anticipated recovery in the second half of the year and the addition of Cornell we expect to see double digit revenue and adjusted EBIT growth within this segment in 2024.
Speaker Change: Before moving to the results for the consumer Mems microphone business I will provide some brief commentary on the status of the strategic alternatives process that we announced last year.
Speaker Change: We are taking into consideration all the stakeholders from customers suppliers and shareholders to employees and I believe we are progressing to a conclusion.
Speaker Change: From an operational standpoint, CMS financial result in the quarter were solid.
Jeffrey S. Niew: Revenue was up 44% from the same period a year ago, as the business has returned to more stabilized levels. We've expanded our mobile and earshare, and we expect to continue to see revenue growth in the second quarter and for the full year 2024 as compared to 2023 levels. In closing, we expect to continue to generate robust cash from operations in Q2 and the remainder of 2024 despite excess channel inventory negatively impacting demand within our PD segment. Our cash generation and strong balance sheet will allow us to explore acquisition opportunities, buyback shares, and keep our debt at manageable levels.
Revenue was up 44% from the same period, a year ago as the business has returned to more stabilized levels.
Speaker Change: We've expanded our mobile and <unk> and expect them to continue to see revenue growth in the second quarter and for the full year of 2024 as compared to 2023 levels.
In closing, we expect to continue to generate robust cash from operations in Q2, and the remainder of 2024, despite excess channel inventory negatively impacting demand within our <unk> segment.
Speaker Change: Our cash generation and strong balance sheet will allow us to explore acquisition opportunity buy back shares and keep our debt at manageable levels.
John S. Anderson: I am pleased with the financial performance to date in 2024, and I am excited about the opportunities we have ahead of us. We are confident in our ability to deliver shareholder value as we continue to drive operational excellence, execute on design wins in all three segments, and expand our share across our business. Now, I will turn the call over to John to detail our quarterly results and provide Q-Q guidance. Thanks, Jeff.
I am pleased with our financial performance to date in 2024, and I am excited about the opportunities we have ahead of us.
Speaker Change: We are confident in our ability to deliver shareholder value as we can do to drive operational excellence and execute on design wins in all three segments and expand our share across our businesses.
Speaker Change: Now, let me turn the call over to John to detail, our quarterly results and provide some guidance.
John S. Anderson: We reported first quarter revenues of $196 million, above the midpoint of guidance and up 36% from the year-ago period, driven by double-digit growth in all three segments. EPS was $0.20 in the quarter, at the high end of our guidance range, and $0.15 above the year-ago period, driven by increased gross profit associated with higher shipment volume, partially offset by higher interest. In the MedTech and Specialty Audio segment, revenue was $57 million, up 26% versus the first quarter of 2023 on increased demand in the hearing health market as customer inventories have returned to normal levels.
Thanks, Jeff we reported first quarter revenues of $196 million above the midpoint of guidance and up 36% from the year ago period, driven by double digit growth in all three segments.
John S. Anderson: <unk> was <unk> 20 in the quarter at the high end of our guidance range and 15 cents above the year ago period, driven by increased gross profit associated with higher shipment volume, partially offset by higher interest expense.
John S. Anderson: In the Med Tech and specialty audio segment revenue was $57 million up 26% versus the first quarter of 2023 and increased demand in the hearing health market as customer inventories have returned to normal levels gross margins were 54, 8% up 1100 30 basis points versus the prior year.
John S. Anderson: Gross margins were 54.8%, up 1130 basis points versus the prior year, driven by improved factory performance and favorable product mix. The precision devices segment delivered revenues of $74 million, up 38% from the year-ago period driven by the acquisition of Cornell, partially offset by lower shipments into the distribution and industrial end markets as channel and customer inventory levels remain elevated. Gross margins were 36.1%, down 1100 basis points from prior year levels due to lower factory capacity utilization and the acquisition of Cornell.
John S. Anderson: <unk> driven by improved factory performance and favorable product mix.
John S. Anderson: The precision devices segment delivered revenues of $74 million up 38% from a year ago period, driven by the acquisition of Cornell, partially offset by lower shipments into the distribution and industrial end markets as channel and customer inventory levels remain elevated.
John S. Anderson: Gross margins were 36, 1% down 1100 basis points from prior year levels due to lower factory capacity utilization and the acquisition of Cornell.
John S. Anderson: Consumer MEMS microphone revenues of $65 million were up 44% versus the year-ago period due to increased consumer demand and share gains in mobile, ear, and compute markets. Gross margins were 26.2%, 450 basis points above Q1 2023 on improved factory capacity utilization, partially offset by lower prices. On a total company basis, R&D expense in the quarter was $16.7 million, flat compared to the prior year.
John S. Anderson: Consumer Mems microphone revenues of $65 million were up 44% versus the year ago period, due to increased consumer demand and share gains in mobile and compute markets gross margins were 26, 2% 450 basis points above Q1 2023.
And improved factory capacity utilization, partially offset by lower pricing.
John S. Anderson: On a total company basis R&D expense in the quarter was $16 7 million flat compared to the prior year.
John S. Anderson: SG&A expenses were $32 million, $5 million higher than prior year levels driven by the acquisition of Cornell, partially offset by the benefits of prior year restructuring actions taken in both the Precision Devices and CMM segments. Interest expense was up $4 million versus the prior year due to the acquisition of Cornell in the fourth quarter of 2023. Now I'll turn to our balance sheet and cash flow. In the first quarter, we generated $17 million in cash from operating activities, above the high end of our guidance, driven by higher customer collections and lower-than-expected inventory levels. Capital spending was $3 million. We ended the quarter with cash and cash equivalents of $122 million.
John S. Anderson: SG&A expenses were 32 million $5 million higher than prior year levels, driven by the acquisition of Cornell, partially offset by the benefits of prior year restructuring actions taken in both the precision devices and <unk> segments.
John S. Anderson: Interest expense was up $4 million versus the prior year due to the acquisition of Cornell and the fourth quarter of 2023.
Speaker Change: Now I'll turn to our balance sheet and cash flow.
Speaker Change: In the first quarter, we generated $17 million in cash from operating an operating activities above the high end of our guidance driven by higher customer collections and lower than expected inventory levels capital spending was $3 million, we ended the quarter with cash and cash equivalents of $122 million.
John S. Anderson: We exited the first quarter of 2024 with $293 million of debt, which includes $180 million of borrowings under a revolving credit facility and an interest-free seller note, which was issued in connection with the Cornell acquisition. Lastly, our net leverage ratio based on trailing 12-month EBITDA was 1.1 times. Moving to our guidance, revenues for the second quarter of 2024 are expected to be between $199 and $209 million, up 18% versus the year-ago period, driven primarily by the acquisition of Cornell.
Speaker Change: We exited the first quarter of 2024 with $293 million of debt, which includes $180 million of borrowings under our revolving credit facility and an interest free seller note, which was issued in connection with the Cornell acquisition.
Speaker Change: Lastly, our net leverage ratio based on trailing 12 months EBITDA was one one times.
Speaker Change: Moving to our guidance for the second quarter of 2024 revenues are expected to be between 199 and $209 million up 18% versus the year ago period, driven primarily by the acquisition of Cornell.
John S. Anderson: R&D expenses are expected to be between $16 million and $18 million, and selling and administrative expenses are expected to be within the range of $29 million to $31 million, up from the prior year due to the Cornell acquisition. We're projecting adjusted EBIT margin for the quarter to be within a range of 14 to 16 percent. The forecasting interest expense in Q2 could be approximately $5 million, which includes $2 million of non-cash imputed interest.
Speaker Change: R&D expenses are expected to be between 16 and $18 million in selling and administrative expenses are expected to be within the range of 29% to $31 million up from prior year due to the Cornell acquisition.
Speaker Change: We're projecting adjusted EBIT margin for the quarter to be within a range of 14% to 16%.
Speaker Change: We're forecasting interest expense in Q2 to be approximately $5 million, which includes 2 million of noncash imputed interest.
John S. Anderson: And we expect an effective tax rate of 14 to 16% for both the quarter and full year 2020. We're projecting EPF to be within a range of $0.22 to $0.26 per share. This assumes weighted average shares outstanding during the quarter of $93 million on a fully diluted basis.
Speaker Change: And we expect an effective tax rate of 14% to 16% for both the quarter and full year 2024.
Speaker Change: We're projecting EPS to be within a range of 22 to 26.
Per share this assumes weighted average shares outstanding during the quarter of $93 million on a fully diluted basis.
Operator: We're projecting cash from operations to be within a range of $20 to $30 million, and capital spending is expected to be $5 million. I will now turn the call back over to the operator for the questions and answers portion of the call. Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: We're projecting cash from operations to be within a range of $20 million to $30 million and capital spending is expected to be $5 million.
Speaker Change: I will now turn the call back over to the operator for the questions and answer portion of the call.
Operator.
Operator: If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: If you are called upon to ask your question and our listening via loud speaker on your device. Please pick up your handset and ensure that your phone is not on mute when asking your question.
Operator: Again, press star 1 to join the queue. Your first question comes from the line of Christopher Rolland of Susquehanna. Your line is now open. Thanks for the question. I guess for my first one, if you guys could dig into the profile of that back half recovery, like what kind of sequential should we be expecting, you know, the double digit variety or kind of the single digit variety? And yeah, like any other color, you know, by segment would be great for, of course, Q2, but, you know, the profile for the rest of the year would be great as well, if you could give that.
Speaker Change: Press Star one to join the queue.
Speaker Change: First question comes from the line of Christopher Rolland of Susquehanna. Your line is now open.
Christopher Adam Jackson Rolland: Thanks for the question.
Christopher Adam Jackson Rolland: I guess for my first one if you guys could dig into the profile of that back half recovery like what kind of sequential should we be expecting you know the double digit a variety or kind of a single digit variety and yeah like.
Speaker Change: Any other color you know by segment.
Speaker Change: Wood.
Speaker Change: <unk> of course Q2, but.
Speaker Change: You know the profile for the rest of the year would be great as well if you can give that yes.
Operator: Yeah, Chris, thanks for the question; a good question. So, let me just kind of break it out by segment and then I'll kind of summarize at the end. But first, in the PD segment, I think what we're expecting now is, you know, we had Q1 to Q2, we are seeing sequential growth in the PD segment. We expect to see sequential growth again in Q3 and in Q4 right now.
Yes, Chris Thanks for the question good question.
Speaker Change: So let me just kind of break it out by segment and then I'll kind of summarize it again, but first in the PD segment.
Speaker Change: What we're expecting now is we had.
Chris: Q1 to Q2, we are seeing sequential growth in the PD segment, we expect to see sequential growth again in Q3.
Chris: And in Q4 right now.
Operator: And just to put a little color around that, you know, I think we're probably a little bit more, I would say, cautious now on industrial distribution in the rate of rising; it's still going up sequentially, but not quite as much.
Speaker Change: And just to put a little color around that.
Speaker Change: I think we're probably a little bit more I would say cautious now on industrial and distribution and the rate of a rising it's still going up.
Speaker Change: Sequentially, but not quite as much.
Jeffrey S. Niew: And I would say more of our OEM customers, you know, bigger OEM customers, Med and defense, we see more growth there. And so, you know, overall for PD, again, we're gonna see, you know, I would say pretty decent sequential growth in the back half of the year, but probably more heavily weighted towards the fourth quarter. Second, in MSA, you know, I think they're hitting on all cylinders; they're doing very well.
Speaker Change: And I would say more of our OEM customers bigger OEM customers Madden defense, we see more growth there and so overall for PD again, we're going to see I would say pretty decent sequential growth in the back half of the year.
Speaker Change: But probably more heavily weighted towards the fourth quarter.
Speaker Change: Second in an MSA I think they're they're hitting on all cylinders there doing very well the market is very strong our execution, our new products are doing very well in this market.
Jeffrey S. Niew: The market's very strong, our execution, our new products, you know, we're doing very well in this market. And, you know, I just would remind you that Q4 is typically our largest quarter. There's a, you know, big hearing aid launch of products in Q3, which kind of drives revenue in Q4. So we would expect that, you know, while we'll see, you know, some sequential growth going forward in this, it's really gonna come in Q4. And then, you know, lastly, you know, I say CMM, you know, normally it's seasonally higher in the back half than in the front half.
Speaker Change: And I just would remind you is Q4 is typically our largest quarter theres a big hearing a launch of products in Q3, which kind of drives our revenue in Q4. So we would expect that well we'll see yes.
Speaker Change: Some sequential growth going forward, it's really going to come in in Q4, and then lastly, I'd say no.
Speaker Change: We really are seasonally higher in the back half than the front half I would say, we're cautiously more optimistic about the back half when we say we're three months ago.
Jeffrey S. Niew: I would say we're, you know, cautiously more optimistic about the back half than we were three months ago. And so, you know, overall, you know, I think, you know, when I look at this, you know, I say, you know, again, probably a little bit more heavily weighted towards the fourth quarter, but we do expect to have, you know, nice sequential growth from Q2 to Q3, and then, you know, even a little bit more from Q3 to Q4.
Speaker Change: And so I think overall I think when I look at that.
Speaker Change: I think you know again, probably a little bit more heavily weighted towards the fourth quarter, but we do expect to have nice sequential growth from Q2 to Q3, and then you'll even a little bit more from Q3 to Q4.
Jeffrey S. Niew: Thank you so much, Jeff. That's so helpful. The second one is around the appetite for the CMM business or progress there, and then any update more broadly you might have on M&M. Sure, let me take the second question first.
Speaker Change: Thank you so much of that that's so helpful.
Speaker Change: The second one is around the appetite for the CMS business or progress there and then any update more broadly you might have on M&A.
Sure Let me take the first the second question first.
Jeffrey S. Niew: You know, I think, you know, if you look at our leverage ratio, John mentioned one, just a touch over one. You know, if you look out the full year with the cash we're expecting to generate, you know, I think we'll probably be, you know, something south of 0.8 leverage ratio by the end of the year. And so, you know, with that kind of leverage ratio, we're looking in the marketplace. Of course, we're going to be super disciplined in what we do, kind of like how we, you know, again, I bring up Cornell.
Speaker Change: If you look at our leverage ratio.
Jon mentioned as one of the ones just a touch over one if.
Speaker Change: If you look out for the full year with the cash we expect to generate I think we will probably be something south of eight leverage ratio by the end of the year.
Speaker Change: And so.
Speaker Change: With that kind of leverage ratio.
Speaker Change: We're looking in the marketplace of course, we are going to be super disciplined in what we do kind of like how we again I bring a cornell we are very pleased with this acquisition I continue to feel very good that.
Jeffrey S. Niew: We are very pleased with this acquisition. I continue to feel very good that, despite some of the challenges in industrial and distribution, it's still performing at the levels that we kind of announced when the deal was announced. And so, you know, I think we're very excited to look for other acquisition opportunities.
Speaker Change: Despite some of the challenges in industrial and distribution is still performing to the levels that we kind of announced when the deal was announced.
Speaker Change: And so I think we're very excited to look for other acquisition opportunities and hopefully they'll build global ones will come along that makes sense relative to.
John S. Anderson: And hopefully, you know, the ones will come along that make sense, you know, relative to, you know, advancing kind of our strategic positioning. If I could just add, as Jeff mentioned, yeah, we do expect our leverage to come down a bit over 2024. In addition, we expect to continue to repurchase shares. You know, we think our stock price is undervalued. So it'll be a combination of share buybacks and the pay down of debt.
Speaker Change: Advancing kind of our strategic positioning.
Speaker Change: Chris if I could just add too I mean, Jeff mentioned, yeah, we do expect our leverage to come down a bit over $20 24. In addition, we expect to continue to repurchase shares we think our stock price is undervalued. So it'll be a combination of share buybacks and paid out of that yet.
Speaker Change: As far as that differently.
John S. Anderson: As far as CMM is concerned, I don't have too much more to say, maybe I'll just say it in my own non-scripted words, but there are a lot of stakeholders in place here and I think we've been very clear that, obviously, whatever happens with CMM, we do still have our MSA business, which will be selling MEMS microphones. And so I think I kind of said to our employees, I said to our shareholders, I said to our suppliers, I think we're taking a little bit more time than probably people would have thought, but I think we're being very thoughtful about what we do. But I do think we're getting closer to a conclusion.
Speaker Change: So as far as CMS.
I don't have too much more to say, maybe I'll, just kind of like I say it in my own non scripted words, but yes. There is.
Speaker Change: There's a lot of stakeholders and play at place here and I think we've kind of been very clear that that obviously post whatever happens with CFM.
Speaker Change: We do still have our MSA business, which will be selling in Mems microphones, and so I think it's kind of <unk>.
Speaker Change: And our employees are our I'm, saying to our shareholders I say to our suppliers.
Speaker Change: We're taking a little bit more time than probably people would've thought, but I think we're being very thoughtful about what we do and but I do think we're getting closer to a conclusion, we are progressing towards a conclusion and so I think you could take for that what that means, but but I think we're kind of narrowing in on the direction, we're going to go.
Jeffrey S. Niew: We are progressing towards a conclusion. And so I think you can take for what that means, but I think we're kind of narrowing in on the direction we're going to go. A great update.
Operator: Thanks, guys. Your next question comes from the line of Bob Labick, of CJS Securities. Your line is open. Yes, hi. It's Pete Lukas on behalf of Bob.
Speaker Change: Great update thanks, guys.
Speaker Change: Your next question comes from the line of Bob Lebesgue.
Robert James Labick: Of CJS Securities. Your line is open.
Operator: You covered a lot and answered a lot of my questions. Just one here for you. Just an update on the integration and synergies of CD and how pricing power is, and do you still think margins can be increased? Yeah, that's a good question. A very good question.
Robert James Labick: Yes, Hi, it's Pete Lucas for Bob.
Pete Lucas: You covered a lot and answered a lot of my questions. Just one here for you.
Pete Lucas: Just an update on the integration and synergies of CD and how is pricing power and do you still think margins can be increased.
Jeffrey S. Niew: I think when we announced the deal, we really focused on the cost synergies that we were going to do, and we're on track to deliver those cost synergies that we had kind of laid out at the beginning. You said four million annual cost synergies by the end of year three. Yes, and we're on track to deliver those.
Speaker Change: Yes, that's a good question very good question I think when we.
Pete Lucas: Once the deal.
Speaker Change: We really focused in on cost synergies that we were going to do and we're on track to deliver those cost synergies that we had kind of laid out at the beginning of that $4 million annual cost synergies by the end of <unk>.
Speaker Change: On track.
Speaker Change: We're on track to deliver those.
Jeffrey S. Niew: I would sit there and say, beyond that, there are going to be what we call revenue synergies, but not revenue synergies, just going out and getting more sales, but we did think there was a pricing opportunity. I would say we are running ahead of what we expected, with it really just starting to take hold more in the back half of the year than in the front half with contracts and inventory. Some of these times you give price increases, and it takes a quarter or two to actually start delivering a product at those new price levels, but we are expecting that we have quite nice price increases.
Speaker Change: I would sit there and say you know beyond that there are going to be what we called revenue synergies, but not revenue synergies just going out and getting more sales, but we did think there was a pricing opportunity.
Speaker Change: I would say we are running ahead of what we expected.
Speaker Change: With really the starting to take hold more in the back half of the year than in the front half.
Speaker Change: With contracts and inventory because some of these times you give price increases and it takes a quarter or two to actually start delivering.
Speaker Change: Product at those new price levels.
Speaker Change: We are expecting that that we have.
Speaker Change: Quite nice pricing increases and our expectations is that when we bought this business. We are pretty clear. It was in the low thirties in terms of gross margin that we think that that will be approaching like over 35, probably approaching 40% exiting the year.
Jeffrey S. Niew: Our expectation is that when we bought this business, we were pretty clear that it was in the low 30s in terms of gross margin, and we think that we'll be approaching over 35, probably approaching 40%, exiting the year. It's a combination of cost synergies as well as pricing. As we looked at 25, obviously, we didn't get all the pricing in this year because it rolled through the year.
Speaker Change: So it's a combination of cost synergies as well as our pricing and I think as we looked at 25, obviously, we didn't get all the pricing in this year, because obviously it rolled through the year.
Jeffrey S. Niew: Even without doing another price increase, some of this will roll over into future price increases in the first two, three quarters of next year. I think we're pretty excited about the opportunities in terms of synergy. Lastly, just one more piece on Cornell.
Speaker Change: Even with not doing another price increase some of this will roll over into future price increases during the first two to three quarters of next year or so so I think we're pretty excited about the opportunities in terms of synergy.
Speaker Change: Lastly, I just want to one more piece on Cornell I think we're really starting to understand a little bit better about some of the things that they do their very unique in terms of products. So theres going to be some opportunities I think we will probably talk about it at Investor Day later this year and some of the new markets that we probably will go after.
Jeffrey S. Niew: I think we're really starting to understand a little bit better some of the things that they do that are very unique in terms of products. There are going to be some opportunities. I think we'll probably talk about an investor day later this year in some of the new markets that we probably will go after. What I would also say is the strength that they have in distribution with our distribution partners like Arrow and TTI is a great opportunity for our legacy PD business to start getting more business in distribution.
Speaker Change: But I would but it would also I'll say is the strength that they havent distribution.
Speaker Change: With our distributed distribution partners like Arrow and <unk>.
Speaker Change: It is a great opportunity.
Speaker Change: For our legacy <unk> business to start getting more business and distribution. So you know obviously, that's not a short term thing like this year, but I think overall I think you know I think we couldnt be quite frankly more pleased with this save the kind of industrial distribution inventory issues that most people who have been dealing with.
Jeffrey S. Niew: Obviously, that's not a short-term thing like this year, but overall, I think we couldn't be, quite frankly, more pleased with this, save the industrial distribution inventory issues that most people have been dealing with. Very helpful, thanks.
Speaker Change: Yeah.
Speaker Change: Very helpful. Thanks.
Speaker Change: Yeah.
Speaker Change: Yeah.
Operator: Your next question comes from the line of Anthony Stoss from Craig Hallam Capital Group. Your line is open. Good afternoon, guys and gals.
Speaker Change: Your next question comes from the line of Anthony Stoss from Craig Hallum Capital Group. Your line is open.
Jeffrey S. Niew: I'm curious if you wouldn't mind sharing your view on either changes in your competitors in terms of their approach to the market or pricing within each of the segments. Also, it's nice to see PD up, expected to be up each quarter sequentially. Can the same be said for MedTech? Well, again, you know, I would sit there and say for the full year, MSA will be up for the full year, and growing at kind of that rate that we've kind of talked about in that, you know, 3 to 5% range. And so it does tend to be, you know, as I kind of said in an earlier question, a little bit more heavily weighted in terms of seasonality to Q4. But, you know, I don't have any, you know, big issues with this because, you know, we see this every year.
Anthony Joseph Stoss: Good afternoon, guys and gals nice execution Jeff.
Anthony Joseph Stoss: I'm curious if you wouldn't mind sharing your view on either changes in your competitors in terms of.
Anthony Joseph Stoss: Their go to market or pricing.
Anthony Joseph Stoss: Within each of the segments and also it's nice to see PD up expected to be up each quarter sequentially can the same you said for the Med Tech group.
Anthony Joseph Stoss: Well again, I would sit there and say for the full year our MSA.
Anthony Joseph Stoss: MSA will be up for the full year and growing in kind of that raised that we've kind of talked about in that.
Anthony Joseph Stoss: 3% to 5% range and so it does tend to be as I kind of said.
Anthony Joseph Stoss: Earlier question, a little bit more heavily weighted in terms of seasonally to Q4.
Anthony Joseph Stoss: But yeah I don't have any big issues on this because we see this every year you can see Q4 always being the heaviest year within the MSA segment, driven by the product launches of our customers.
Jeffrey S. Niew: You can see Q4 always being the heaviest year within the MSA segment driven by the product launches of our customers. So that's what I'd say about MSA. As far as the competitive environment goes, you know, in the PD segment, no big changes really. I think, you know, we have a lot of sole source positions.
Anthony Joseph Stoss: So that's what I'd say about I would say as far as the competitive environment.
Speaker Change: Let me cover by segment.
Speaker Change: In the PD segment, no big changes really.
Speaker Change: We have a lot of sole source positions.
Speaker Change: I would just say the one thing obviously people are hearing is.
Speaker Change: <unk> is slower than probably we would hope for but as we kind of see a recovery I think the one thing I'm very encouraged about the PD is that we're seeing increasing gross margins throughout the year, which is showing that that we don't have to get back to.
Jeffrey S. Niew: You know, I would just say the one thing obviously people are hearing is, you know, EV is slower than probably we'd hope for. But as we kind of see a recovery, I think the one thing I'm very encouraged about in the PD is that we're seeing increasing gross margins throughout the year, which is, you know, showing that, you know, that we don't have to get back to 2022 levels in order to really, like, get back to gross margins we saw back then. And so, you know, I think there's some pricing in there. There's some productivity.
Speaker Change: 2022 levels in order to really get back to gross margins. We saw a back then and so you know I think there is some pricing in there. There is some productivity there was absolutely revenue growth and where we get the revenue growth helps us with.
Jeffrey S. Niew: There's obviously revenue growth. And where we get the revenue growth helps us with capacity utilization. MSA, you know, I'd say the pricing environment is stable. That's what I would just say, you know, there really isn't any change in the competitive environment, you know, over the last year or so, you know, and I think, you know, in the CMM business, I think, you know, the thing that we just keep saying, which is kind of what I said the last couple quarters, which is, you know, mobile is a tough business, you know, and we are trying to kind of reduce our exposure over time to mobile, you know, I think, you know, over the years, at one point, our company was 35% mobile, last year was around 15%, you know, I would say, you know, we would expect it to be, you know, you know, sub 15% this year, as we, you know, continue to try to diversify the total company revenue, you know, kind of away from the mobile environment. Got it. Thanks for that, Jeff.
Speaker Change: With capacity utilization.
Speaker Change: I'd say the pricing environment is stable, that's what I would just say.
Speaker Change: There really isn't any change in the competitive environment over the last year or so.
Speaker Change: And I think in the CRM business I think the thing that we just keep saying, which is kind of like the last couple of quarters, which is mobile is a tough business and we are trying to kind of reduce our exposure over time to mobile I think over the years at one point our company was 35% mobile last year was around 15% I would say.
Speaker Change: We would expect it to be sub.
Speaker Change: Sub 15% this year.
Speaker Change: As we continue to try and diversify the total company revenue.
Speaker Change: Kind of away from the mobile environment.
Operator: And you guys are definitely outperforming your other mobile peers in chip land, so congrats on that. That's all my questions.
Speaker Change: Got it thanks for that Jeff and you guys are definitely outperforming your other mobile peers and chip land. So congrats on that that's all my questions. Thank you. Thanks. Thanks Tony.
Speaker Change: Okay.
Operator: Thank you. Thank you. Thank you, Tony. Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from Tristan Gerra of Byrd. Your line is now open. Hi, good afternoon.
Speaker Change: Again, if you would like to ask a question press Star one on your telephone Keypad. Your next question comes from Tristan <unk> of Baird. Your line is now open.
Operator: You've mentioned that most of the year of your growth embedded in your Q2 guidance would be coming from Cornell. I'm guessing in the high 20s, maybe $30 million in revenue in the quarter. Can you remind us of the seasonality of that business? How does this tie to a full-year revenue number? I'm guessing that we're probably going to be below the $140 million plus that you've talked about before, given the macro headwinds for Cornell, but just wanted to get an update on that. Yeah, I wouldn't say there's a tremendous amount of seasonality, Tristan, in this business.
Tristan: Hi, good afternoon.
Tristan: You mentioned that most of the year over year growth embedded in your Q2 guidance would be coming from call now so.
Tristan: We're seeing a high <unk>, maybe $30 million in new revenue in the quarter.
Tristan: Can you remind us of the seasonality of that business.
Tristan: Does this tie to a full year number and I'm guessing that we're probably going to be below the $140 million.
Tristan: Plus that you've talked about before given the macro headwinds will call now, but just wanted to kind of get an update on that on that yes.
Speaker Change: Yes, I Wouldnt say there is a tremendous amount of seasonality interest in in this business, but we are based on bookings we are expecting to see sequential growth in Q3, and then sequential growth in Q4 again.
Jeffrey S. Niew: But we are, you know, based on bookings, we are expecting to see sequential growth in Q3 and then sequential growth in Q4 again. You know, and so, you know, what I would say is, you know, we had said $140 million in revenue and $26 million in EBITDA. We're probably going to be a touch short of the $140. I would say, you know, right now, if you asked me, between $135 and $140, probably for the year.
Speaker Change: And so what I would say as we had said.
Speaker Change: $140 million revenue and $26 billion of EBITDA, we're probably going to be a touch short of the 140 I would say right now if you would.
Speaker Change: Ask me between $1 35, and $1 40, probably for the year, but I think we're at that level lower revenue will still hit the EBITDA number based on the synergies we recognize so I think we feel pretty good about that the other thing I'd add just in terms of the Cornell we really are excited about the cash flow generation upward.
Jeffrey S. Niew: But I think at that level, lower revenue will still hit the EBITDA number based on the synergies we've recognized. So, you know, I think we feel pretty good about that. The other thing I'd add, Tristan, in terms of Cornell, we really are excited about the cash flow generation ability of that business, where it's even at, as Jeff says. The business is going to generate more cash flow than we envisioned in our model. That's great.
Speaker Change: Ability of that business, where it's even if as Jeff said slightly lower revenue plan for 2024.
Speaker Change: This is going to generate more cash flow than we envisioned in our intermodal.
Speaker Change: That's great and then.
Jeffrey S. Niew: You talked about the positive pricing that you see in Precision Devices. Help us reconcile this with, you know, the overall environment that we're seeing, you know, pricing stabilizing, meaning kind of returning to kind of low single-digit declines. We see that in analog, you know; we're seeing more pressure in MCUs.
Speaker Change: You talked about.
Speaker Change: Positive pricing that you see.
Speaker Change: In precision devices.
Speaker Change: Help us reconcile this with the overall environment.
Speaker Change: That we're seeing.
Speaker Change: Seeing stabilizing in meeting Kenneth returning to kind of low single digit declines we see that Gina.
Speaker Change: We're seeing more pressure in <unk>.
Jeffrey S. Niew: So what's driving the pricing that you're able to implement, you know, in PD? And then if you could talk about, you know, lead times and supply-demand dynamics that you see in that space, industry-wide, actually, so we kind of get a sense of what the landscape is like. Yeah, so I kind of describe it like this. If you think about the markets that we really are focused on in precision devices, you know, med techs, defense, industrial, and distribution. Let me break those out.
Speaker Change: So what's driving the pricing that you're able to implement in PD.
Speaker Change: And then if you could talk about lead times and supply demand dynamics that you see in that space.
Speaker Change: Street wide actually so we can get a sense of what the landscape is with pricing going forward.
So here's I kind of describe it if you think about the markets that we really in precision devices are focused on.
Speaker Change: Bed tax.
Speaker Change: Defense.
Speaker Change: Industrial and distribution, let me break those out in Med Tech and defense, we have a lot of sole source positions, where we have unique offering and this is kind of in the strategy all along where we're trying to move in a direction, where we can provide differentiated products into these spaces and then half.
Jeffrey S. Niew: In MedTech, though, in defense, we have a lot of sole source positions where we have unique offerings. And this has kind of been the strategy all along where we're trying to move in a direction where we can provide differentiated products into these places and then have, you know, some amount of pricing power going forward. And so, you know, we feel pretty good about those end markets. Now distribution's a little bit different of an animal, as I've described.
Speaker Change: Some amount of pricing power going going forward and so we feel pretty good about those end markets now distributions are little bit different of an animal as I, just described but but here's what I'd say I think we brought the stubhub Cornell Cornell shipped in 2000 and prior to the 12 months prior to.
Jeffrey S. Niew: But here's what I'd say, you know, I think we brought this stuff up at Cornell. Cornell shipped in 12 months prior to us owning it, they shipped to 30,000 unique customers. And a lot of those are through distribution. A lot of them are customers that are sub-50K.
Speaker Change: US owning it they shift to 30000 unique customers and a lot of those are through distribution.
Speaker Change: Lot of them are customers that are sub 50 K.
Jeffrey S. Niew: We kind of see that as an opportunity when we bought the business to say, you know, I'm just making these numbers up now, but if you raise prices by 5% on a $50,000 a year customer, you're raising prices by $2,500. And so we see the value of that distribution market because, typically, what I've seen in distribution is that if we raise prices to these smaller customers through distribution, the distributor just passes those on. And so the underlying demand is going to be what it's going to be, right? Obviously, there are some challenges with underlying demand. But when it comes back, you know, we'll be better for it.
Speaker Change: We kind of see that as an opportunity when we bought the business to say.
Speaker Change: Just thinking that these numbers up now, but if you raise prices by 5% on a $50000 year customer youre raising prices by 2500 Bucks.
Speaker Change: And so we see that the value of that distribution market because what happens typically is I've seen in distribution as if we raise prices.
Speaker Change: Smaller customers through distribution the distributor just passes those out.
Speaker Change: No.
Speaker Change: Underlying demand is going to be what it's going to be right. Obviously, there were some challenges underlying demand and when it comes back.
Speaker Change: It will be better for it and so overall when I see this as the pricing environment for us because of our position in med Tech and defense coupled with distribution, we're not facing quite the kind of things that some of the things people are more commoditized.
Jeffrey S. Niew: And so, you know, overall, when I see this, the pricing environment for us, because of our position in MedTech and Defense, coupled with distribution, we're not facing quite the kind of things that some of the things people are more commoditized products are. Okay, that's great. So it sounds like the pricing optimization opportunity is really on the Cornell side. Outside of that, would you say that pricing is stable in the rest of your precision device business?
Speaker Change: Our products are.
Speaker Change: Okay, that's great. So it sounds like the pricing.
Speaker Change: The Asian opportunity is really on the call know side.
Speaker Change: Outside of that would you say that pricing is stable in the rest of your precision device business.
Jeffrey S. Niew: No, I would say that prices are probably still going to be up for the rest of precision devices. But here's the difference is what we did in Cornell in terms of pricing this year under ownership; we went through the same thing 3, 4 years ago in overall precision devices. So the amount we're getting in any given year with the legacy PD is not going to be as large as the first amount we saw with the Cornell opportunity. So I think from our perspective, we're still getting some price this year in the legacy PD, but Cornell was an untapped opportunity that we have figured out and we're taking advantage of.
Speaker Change: No I would say that prices are probably still going to be up in the rest of the precision devices, but here's the differences what we've done in Cornell in terms of pricing.
Speaker Change: This year under the ownership.
Speaker Change: We went through the same I think three or four years ago and overall precision devices. So the amount we're getting in any given year with the legacy PD is not going to be as large as the first what we saw in <unk> and the Cornell opportunity. So I think from our perspective is we're still getting some price this year on the legacy PD.
Speaker Change: But the Cornell it was an untapped opportunity that we have figured out and we're taking advantage of them.
Operator: Great. Thank you very much. Once again, if you'd like to ask a question, press star 1 on your telephone keypad. There are no further questions at this time. This concludes today's call. Thank you all for joining us. You may now disconnect.
Speaker Change: Great. Thank you very much.
Speaker Change: Yeah.
Speaker Change: Once again, if you'd like to ask a question press bar one on your telephone keypad.
Speaker Change: There are no further questions at this time. This concludes today's call. Thank you all for joining you may now disconnect.
Okay.
Speaker Change: Okay.
Speaker Change:
Speaker Change: Yeah.