Q4 2024 Knowles Corp Earnings Call
Hatch. Welcome.
Thank you and welcome to our fourth quarter and full year 2024 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 the safe Harbor provisions under applicable Federal Securities laws forward looking statements. In this call will include comments about demand for company products anticipated trends in company sales expenses and profits.
The 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 31st 2024.
<unk> 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 in.
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 Dot Com and in our current report on form 8-K filed today with the SEC. This will include 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 on what cast slides, which can be found in the investor Relations section of our website.
With that let me turn the call over to Josh who will provide details on our results Jeff.
Sarah Thanks to all of you for joining us today for the prepared remarks, right. Our normal commentary on Q4 results as well as what you're seeing in our markets for Q1 to be up I will also summarize some highlights from 2024 turn the call over to John to provide financial details on Q4 and guidance for Q1, and then close with <unk>.
Writing things, we have going on which gives us confidence in 2025, another year revenue and EPS growth with continued strong cash flow.
Speaker Change: I think it's also important to note that with the completion of the sale of the consumer Mems microphone business in late 2024, there is a significant amount of historical financial information being released for our continuing operations. Both the 10-K as well as the supplemental slides associated with this call.
Speaker Change: This is the first time, we were providing this information and it demonstrates the revenue and earnings growth of our business.
Speaker Change: Now turning to results.
Speaker Change: For the fourth quarter revenue of $143 million was within the guided range non-GAAP diluted EPS of <unk> 27 was also within the guided range and we delivered cash from operations of $35 million inclusive CMO.
Speaker Change: Revenue at an earnings shortfall.
Speaker Change: The midpoint in Q4 was driven entirely by challenges in a plant consolidation and ramping production of new products within our specialty don't pass through like not from a lack of shippable orders.
Speaker Change: I'll provide more detail on these jumps into my commentary within the precision device section.
Speaker Change: For the full year on a continuing operations basis revenue grew 21% and non-GAAP diluted EPS grew 32% from 2023 level driven by the strength in med Tech, especially audio and traditional film and electrolytic capacitors from Cornell to our product portfolio.
Speaker Change: Now for our segments in Q4 Med Tech and specialty audio revenue grew 9% sequentially. It was flat on a year over year basis.
Speaker Change: 2024 revenues grew by 8% and adjusted EBIT by 13% from 2023 levels.
Speaker Change: By partnering with our customers to create innovative solutions enhancing the performance of their products, we continue to drive growth.
Speaker Change: This coupled with our ability to leverage our fixed overhead drove adjusted EBIT growth.
I continue to be very excited about the opportunities.
Speaker Change: Msa's time ahead of us and expect another year of growth in 2025, because we continue to introduce new innovative customer solutions to our customers and be a world class manufacturer of these products.
Speaker Change: We are also beginning to see new opportunities to accelerate growth beyond 2025 by leveraging our core competencies and medical markets and we will share more on this later this year as we closed nine wins.
Speaker Change: In the precision device segment Q4 revenues grew 4% year over year as I stated earlier challenges with shipments, especially don't capacitor products.
Speaker Change: And a greater than $3 million shortfall in our shipment plans there.
Speaker Change: There were two causes first as part of our synergies from an acquisition from the acquisition of Cornell we were consolidating facilities for specialty don't to improve margins.
Speaker Change: Even though the production transfer was completed in Q4, it took longer than expected and resulted in shipment challenges.
Speaker Change: With delays and production transfers and the order book, especially film consisting of numerous new custom products ramping at once we fell short of our shipment targets.
Speaker Change: Shipments are expected to improve throughout the first half of 2025.
Speaker Change: I have confidence in the team will resolve the production challenges and I'm very excited about the demand we have for these costumes, especially doing pilots.
Speaker Change: We expect this product kindergarten to drive meaningful growth in 2025 Yep.
Speaker Change: Gives me confidence in significant growth of this product line is all the new customers and products that are coming to market and one in particular that will drive significant growth in 2026.
Speaker Change: We received an order this month for more than $75 million with a sizable prepayment for a new customer in the energy sector. We expect at least $25 million of this order to ship in 2026.
Speaker Change: We will provide additional details about this exciting and the rest of the opportunities ahead of us throughout 2025.
Speaker Change: For the rest of the precision device segment revenue was in line with expectation.
Speaker Change: In Q4 P. D demonstrate a noticeable acceleration in orders from Q3, driven by medical and defense with both markets, having the strongest bookings strongest bookings quarter of the year.
Speaker Change: It's noteworthy that our distribution book to Bill trend was positive in Q4 as we're finally seeing signs of abatement of excess channel inventory in the industrial end markets.
Speaker Change: Our precision devices on a full year basis revenue grew 36% compared to 2023 as our capacitor portfolio expanded with the addition of Cornell.
Speaker Change: An additional 2024 highlight which John will go into more detail about our cash from operations.
Speaker Change: Our continued robust cash generation, coupled with our strong balance sheet gives us optionality capitalizing on M&A opportunities and returning capital through share buybacks.
Speaker Change: Board continues to be supportive of our share buyback program authorizing an additional $150 million in capacity to repurchase stock.
Speaker Change: Before moving on I would like to touch on the fluid tariff situation. We're all hearing so much about <unk>.
Speaker Change: First the sale of <unk> significantly reduced many of our manufacturing footprint in China as well as our exposure to the China markets.
Speaker Change: The continuing operation basis in 2020 for approximately 5% of revenue could be subject to tariffs on imported goods from either China or Mexico.
Well the exposure while the exploding as we understand today is limited we will continue to explore alternatives to mitigate the impact of these tariffs.
Speaker Change: Now, let me turn the call over to John to detail, our quarterly calls to provide Q1 guidance.
Speaker Change: After hearing from John I'll share my thoughts on 2025 and beyond.
Speaker Change: Yeah.
Jeff: Thanks, Jeff.
Jeff: Fourth quarter revenues of $143 million up 2% from the year ago period, and within our guidance range EPS was <unk> 27 in the quarter up five cents or 23% from Q4 of 2023 also within our guidance range.
Jeff: In the Med Tech and specialty audio segment Q4 revenue was $70 million flat compared with the year ago period.
Jeff: Full year basis revenue in the Med Tech, especially audio segment increased by 8% over prior year levels, driven by increased shipments into the hearing health market.
Jeff: Q4, gross margins were 51, 4% down 130 basis points versus the year ago period, driven by lower average pricing on mature products and higher factory costs.
Jeff: The precision device segment delivered fourth quarter revenues of $73 million up 4% from the year ago period shipments of high performance capacitors were lower than expected due to a slower than expected ramp up of our specialty film product line.
Jeff: As Jeff noted, we have a strong backlog for this product line and we expect production output to increase throughout the first half of the year driving a return to total company revenue and earnings growth beginning in the second quarter.
Segment gross margins were 38% up 240 basis points from the fourth quarter of 2023 is factory productivity improvements in our legacy precision device business were partially offset by higher scrap costs and production inefficiencies as we ramp up the specialty film product lines.
Jeff: On a total company basis R&D expense in the quarter was $9 million up $1 million from Q4 of 2023, driven by increased investments in both the med tech and specialty audio and precision device segments.
Jeff: SG&A expenses were $26 million up $1 million from prior year levels, driven by higher incentive compensation cost.
Jeff: Interest expense was $3 million in the quarter and flat with the prior year.
Jeff: Now I'll turn to our balance sheet and cash flow.
Jeff: In the fourth quarter, we generated $35 million in cash from operating activities at the midpoint of our guidance for full year 2024, we generated cash from operating activities of $130 million.
Jeff: Note that cash from operations for the three and 12 months ended December 31 includes $2 million and $24 million, respectively generated by the consumer Mems microphone business.
Jeff: Capital spending was $3 million in the quarter.
Jeff: During the fourth quarter, we repurchased one 3 million shares at a total cost of $24 million and reduced our debt balance by $23 million.
We exited the quarter with cash of $130 million and $203 million of debt that includes borrowings under our revolving credit facility and an interest free seller note issued in connection with the Cornell acquisition.
Jeff: Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was six times.
Jeff: For the full year, we repurchased 3 million shares at a total cost of $54 million.
Jeff: In addition, the board of Directors recently authorized $150 million increase to our stock purchase plan.
Jeff: Moving to our guidance for.
Jeff: For the first quarter of 2025 revenues are expected to be between 124 and $134 million.
Jeff: R&D expenses are expected to be between eight to 9 million selling and administrative expenses are expected to be within the range of 23% to $25 million down $2 million year over year on actions taken to reduce our fixed cost base in order to support the needs of our continuing operations.
Jeff: We're projecting adjusted EBIT margin for the quarter to be within a range of 16% to 18%.
Jeff: Interest expense in Q1 is estimated at $2 million to $3 million and includes noncash imputed interest and we expect an effective tax rate of 13% to 17%.
Jeff: We're projecting EPS to be within the range of 16 to 20 per share. This assumes weighted average shares outstanding during the quarter of $91 million on a fully diluted basis.
Jeff: We're projecting cash utilized in operating activities to be within the range of $15 5 million and capital spending is expected to be $4 million.
Jeff: Cash used in operating activities includes $12 million to settle supplier obligations related to the consumer Mems microphone business.
Jeff: We expect an additional payment of $12 million in Q2. These payments represent substantially all remaining supplier obligations related to the CMS business.
Jeff: In conclusion based on recent order trends and existing backlog, we expect to resume year over year revenue and earnings growth beginning in the second quarter of this year and expect to deliver operating cash flow of more than 15% of revenues from continuing operations for full year 2025.
Jeff: I'll now turn the call back over to Jeff to share his thoughts on 'twenty five and beyond.
Jeff: Thanks, John now, let me close with some thoughts on the strategic positioning the company.
Jeff: Does it look for design activity has never been higher for the company.
Jeff: The pipeline of new opportunities ramping into production in 2025 across our end markets.
Jeff: Starting with Med Tech the end market for hearing health products remains strong and our MSA business is expanding the product offering to our customer customers positioning them for continued growth.
Jeff: And then defense Margaret High performance catastrophes, seeing orders for new and expanding programs.
Demand for our specialty film capacitors is high with shipments and orders for these products expecting significant growth through 2020.
Jeff: With this new $75 million plus order in the energy sector.
Jeff: But even further acceleration of growth in 2026.
Jeff: As our operation teams increase the output and customer deliveries and specialty film, we expect to see growth in both industrial and energy markets in 2025.
Jeff: Further we believe the industrial end markets have stabilized as inventory levels within our distribution partners has started to decline.
Jeff: Based on all the activity, we are experiencing I'm confident our ability to grow revenue and profitability again in 2025.
Jeff: Sure.
Jeff: We ended 2024 with the sale of the consumer Mems microphone business closing in late December.
Jeff: The sale culminates the strategic transformation, we have been embarking on for a number of years, we strengthened our balance sheet invested in our core businesses, where we have hybrid arms, completing the acquisition and expanded our portfolio and our service and our serviceable market and provided new growth vectors Lastly, we returned capital to shareholders.
Jeff: Stock buybacks.
Jeff: <unk> has been built on several pillars that guide us through this transformation and will guide us as we move forward.
Jeff: Through deep engineering and customer application expertise, our high performance technologies drive us as we create new products that solve difficult problems in the real world.
Jeff: Second after we customize these technologies to create solutions, we leverage our world class manufacturing operations to be a trusted high quality supplier to blue chip set of customers.
Jeff: Finally, we use our expertise to serve niche applications within large growing markets such as Med Tech defense industrial electric communication and energy.
Jeff: These fundamental pillars create value for our organization, our customers and our shareholders.
Jeff: For continued operations, we achieved a revenue CAGR of 12% over the past five years through a combination of organic growth and acquisitions as presented on slide nine in the supplemental materials today, our ability to differentiate our products coupled with our ability to leverage overhead allowed us to achieve adjusted EBITDA.
Jeff: <unk> of 36% over the same period.
Jeff: I am excited about the progress we've made to date in our future.
Jeff: I look forward to our Investor Forum, which we expect to host in Q2 of this year. There will go into further detail on our strategy and plans for future growth now.
Jeff: Now, let me turn the call over the operator for the Q&A session operator.
Speaker Change: We will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: We'll take our first question from Anthony Stoss at Craig Hallum.
Anthony Stoss: Hey, guys just a couple of questions I just wanted to focus in on you you commented about pricing pressure is it in a particular segment or is across kind of all the product lines and then maybe for John in terms of the inventory I know you said, it's starting to come down, but maybe you can give us a sense of how many months. It still is and then I have one or two others.
Speaker Change: Yes, so first on pricing pressure I would sit there and say generally speaking in the precision device segment.
Speaker Change: I'd say pricing that that is a positive I think we talked about the Cornell acquisition, how we've got about $5 million to $6 million pricing increase in 2020.
Speaker Change: Four I would expect that we would probably have maybe a neighborhood of $2 million to $3 million in Cornell and 2025 and in the rest of precision devices I would say net net prices the positive I would sit there and say there had been a little bit more pressure in the MSA business on pricing nothing that gets me overly worried no it's mainly on mature products.
Speaker Change: Not about new products.
Speaker Change: It's really about product mix and so I think we still are very confident that MSA business will be north of 50% gross margin going forward just as it is.
Speaker Change: Been in the past.
Speaker Change: On the inventory.
Speaker Change: Here's what I'd say.
Speaker Change: When we look back last quarter.
Speaker Change: I kind of talked about there being about six months worth of inventory at the end of Q3 and the inventory in the distribution channel, we think that number's come now down at the end of Q4 down to about four to four and a half.
Speaker Change: And what I would say is we had a pretty strong bookings a quarter in Q4, our bookings accelerated quite a bit in Q4 in the precision device segment and looking at our Flash reports already for Q1 January was also very strong in bookings as well and that goes across not.
Speaker Change: Just distribution, but also with the with our Oems our direct OEM customers as well. So that's what it's honestly, giving us quite a bit of confidence in.
Speaker Change: Full year 2025, being another year of growth yeah, Tony in terms of inventory just to clarify jeffs Ross I think in the inventory at our customers either distributors or Oems versus our inventory our inventories pretty normalized levels.
Speaker Change: What I'd say is again six months at the end of Q.
Speaker Change: Three.
Speaker Change: Four to four five months at the end of Q4, we need to be below three months is where it needs to be and so we'll see where it ends at the end of this quarter, but I guess, what gives me optimism, we're seeing a lot more orders from distribution that we werent seen in Q3 came in Q4 and actually already into January we're seeing some pretty strong orders.
Speaker Change: Okay, and then just two follow ups.
Speaker Change: Jeff you made a comment that on the specialty film that you have confidence that they will they'll get this fixed is it it's still ongoing.
Speaker Change: In another month or two or how long do you think before that's fixed and then maybe John can you just remind us what the consumer business stayed at an annual revenue basis.
Speaker Change: Sure. So on specialty built up a business youll, we're definitely going to see sequential improvement in output, but it is not yet in Q1, where we want it to be I think it's probably going to take us.
Speaker Change: The fully into the second quarter near the end of the first half in order to really start catching up I mean, that's I think where we're at but I think what the real positive here is telling us.
Speaker Change: Yeah, we have a big backlog of orders for shipment already in 2025. This is a really exciting area for us in terms of applications and specialty film area and I think it would also gives us really excited about is and we called it out in the press release is we got a 75 plus million dollars of order.
Speaker Change: In Q1, I know it doesn't start shipments still till 2026, but this is a real water, we got a pretty significant and millions of dollars prepayment to start ramping this up and this is going to be a very big product line for us going forward and we will talk more about as we get closer to the shipment dates, yes, Tony and interest in <unk>.
Sponsor your question on the CFM revenues for the period January 24 through December 27, when we closed roughly $260 million.
Speaker Change: Got it thanks, guys I appreciate it.
Bob: And once again, if you have a question press Star one we will go next to Bob <unk> CJS Securities.
Speaker Change: Yeah.
Speaker Change: Hi, good afternoon, thanks for taking our questions.
Speaker Change: Hey, Bob.
Speaker Change: Okay. So looking at you know we'll call. It a nose 2.0, we estimate maybe you know 40% of revenues going to come from Med Tech 40, industrial in 'twenty defense, but the industrial's the harder one to break down could you give us a sense of the biggest end markets there and the trends you know kind of across those.
Bob: Bob I think you kind of see.
Bob: See this is as kind of like the story of it's a lot of the distribution business right and where we go we estimate that we ship it on an annual basis to north of 30000 customers I think one of the beauties of this market is we don't really have reliance and areas, where we think because we have so many smaller customer.
Bob: We have a pretty unique opportunity here to continue to look at strategic pricing in this area.
Bob: What I would say again kind of what I said earlier is.
Bob: We are starting to see stabilization and if I look at our industrial slash distribution business I think.
Bob: We believe Youll break down what we see is is we've kind of hit the bottom on that and we're starting to rise sequentially in Q1.
Bob: Not to the extent, yet where we want to be yet, but but the bookings trend is in the right direction and I think that's what we're kind of looking at Bob and so it's really hard I think youll kind of lay out a lot of these different markets, but theres no. One market that really like is very very large for us in the industrial sector I'd say a couple of areas that we play in.
Bob: Our automation areas HVAC areas downhole pumps, and the energy, but yes.
Bob: Equipment for semiconductor equipment, I mean, theres a lot of markets and here I mean like like not just like two or three there's quite a few markets. We're in.
Bob: Yeah.
Bob: Okay, Great and then obviously you mentioned the new specialty film products.
Bob: And the impact on the quarter and whatnot, maybe give us a little more colour on that product what areas that is going to be sold in and and then R&D investments in general obviously, if you're rolling out new products, we should see some acceleration in growth going forward as you've talked about so give us a sense of what the R&D and innovation is being spent on.
Yeah. So I mean, I think what we have of course, and especially film area, we have a core capability and.
Bob: The applications that were.
Bob: Selling into.
Bob: What we call pulse power applications.
Applications that require a significant amount of energy.
Bob: A very very short period of time and what they're doing is.
Bob: This application is buying a lot of capacitors.
Bob: Fully charging them and then releasing the energy all at once it's a very unique capability that we have and we're ramping this up.
Bob: Again, I feel very confident about the shipments from this order starting in 2026, we'll be wrapping this up but you can kind of see.
Bob: Right now we're ramping up for a whole bunch of smaller customers and then we have this one big customer was going to drive a lot of growth in 2026.
Bob: Got it okay, great. Thank you very much.
Bob: Okay.
Speaker Change: And that concludes the question and answer session. Thank you for your participation in today's conference you may now disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: [music].