Q1 2025 Knowles Corp Earnings Call
Please standby.
Well good day, everyone and welcome to the Q1 'twenty twenty-five Knowles Corporation earnings call. This call is being recorded at this time I would like to hand things over to MS. Sarah Cook. Please go ahead ma'am.
Derek Cook: Thank you and welcome to our first quarter 2025 earnings call I'm, Derek Cook, Vice President of Investor Relations and presenting with me today are Jeffrey New President and CEO and John Anderson, Our senior Vice President and CFO.
Derek Cook: Our call today will include remarks about their expectations plans and prospects for Knowles, which constitute forward looking statements for purposes of the safe Harbor provisions under applicable Federal Securities Law.
Derek Cook: 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.
Derek Cook: The company urges investors to review the risks and uncertainties in the company's SEC.
Derek Cook: Filings, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31 2024.
Derek Cook: Periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.
Derek Cook: All forward looking statements are made as of this call and Knowles disclaims any duty to update such statements except as required by law.
Derek 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 Dot com and in our current form.
Derek Cook: And our current report on form 8-K filed today with the FTC that will include a reconciliation to the most directly.
Derek Cook: Comparable GAAP measure.
Derek Cook: 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 website with that let me turn the call over to Jeff who will provide details on our results Jeff.
Jeff: Thanks, Sarah Thanks to all of you for joining us today.
Derek Cook: Before I provide our commentary on the Q1 results.
Derek Cook: And what we're seeing in our markets from Q2 and beyond I would like to touch on the tariff situation. We're all hearing so much about.
Derek Cook: Obviously, there's a lot going on in the markets over the last few weeks.
Derek Cook: This has been continues to be fluid and well I'm being cautious about how it could impact our business I believe bolt is well positioned to continue to deliver growth in earnings and revenue. Despite the current tariff environment.
Derek Cook: The tariff situation can be easily explained by breaking into three major areas that could affect malls.
Derek Cook: First and most simply our direct tariff exposure.
Derek Cook: That is a reference that could be subject to tariffs.
Derek Cook: Generally speaking most because of proximity manufacturer, meaning the vast majority of product built in the U S is shipped within the U S and product built in Asia shifts to customers in Asia.
Derek Cook: Based on this proximity manufacturing strategy and our associated footprint, we estimate that less than 5% of revenue are subject to the current tariffs.
Derek Cook: In our markets that tech defense and industrial our expectation is we can pass these terrorists onto our customers without significant loss of business.
Second there is an indirect tariff exposure or impact on our sourcing of raw materials for our different manufacturing locations.
Derek Cook: We have a world class global supply chain team that weren't possible procured material geographically close to our production facilities.
Derek Cook: We believe that less than 3% of our cost of goods sold will be impacted by current tariffs.
Derek Cook: We also anticipate being able to recover substantially all tariff impact through price increases and surcharges.
Derek Cook: Finally, there is the impact on our customers' end market demand. This.
Derek Cook: This is the most difficult to predict at this moment and well no company would be immune to the effects of tariffs I believe the markets, we serve and med Tech defense defense and industrial sectors will be relatively insulated from tariff impacts.
Derek Cook: Let me explain a bit.
Derek Cook: The applications that our products serve in med Tech and the Med Tech market has traditionally been considered essential or.
Derek Cook: Our capacitors are an implantable devices imaging and ventilators to name a few.
Derek Cook: Hearing AIDS have also been considered essential devices are.
Derek Cook: Our historical experience shows economic shocks and subsequent recession could have modest short term impact on these markets.
Derek Cook: Tend to have very little impact over cost of course of the year.
Derek Cook: I also believe that the defense programs, we participate in are secure and.
Derek Cook: In the past the RF filters and capacitors that we sell in the defense space have generally been insulated from economic downturns.
Derek Cook: Lastly in the industrial market. It has it is it has been more sensitive than men tech and defense recessions, but we are not currently seeing any impact on demand.
Derek Cook: We are obviously monitoring this closely as this could change based on the macro economic environment.
Derek Cook: Now I'll turn to our results.
Derek Cook: We started 2025 on solid footing in Q1, delivering revenue of $132 million at the high end of our guided range.
Derek Cook: EPS of <unk> 18 cents was at the midpoint of the guided range and we delivered cash from operations exceeding the high end of the guided range.
Derek Cook: Turning to our segments in Q1 Med Tech and specialty audio revenue was $60 million up slightly on a year over year basis seasonally down from Q4.
Derek Cook: Hearing health revenue was seasonally down which was offset by strength in our specialty audio business and our supply metal cans in connection with the sale of the consumer Mems microphone business.
Derek Cook: As it relates to the current term tire tariff environment, our historical experience shows that during times of economic uncertainty, there's often a short term decline followed by a rebound in demand in our hearing health business Bye.
Derek Cook: By the way of example in 2000 during the Dot com bubble burst in 2008 during the financial crisis and in 2020 during Covid the market contracted for one or two quarters in response to the economic uncertainty with demand returning quickly to normalized levels. This.
Derek Cook: This is evidenced by hearing health market is growing 2% to 3% annually over the last 20 years.
Derek Cook: That all being said our backlog for the Med Tech, especially audio segment for Q2 is strong.
Derek Cook: Our partnership with our customers is leading to continued innovations so data solutions enhancing the performance of their products.
Derek Cook: This coupled with our strong performance and especially audio business and new opportunities utilizing core companies' competencies and medical markets lead us to can you didn't believe in our ability to grow throughout 2025 with year over year revenue growth accelerating in the second quarter.
Derek Cook: In the precision device segment Q1 revenues was 73 million flat to Q4. This was as expected while we continue to work through production challenges and our specialty film line.
Speaker Change: The address is being made.
Derek Cook: Our new prototype production lines up and running improving the production flow.
Derek Cook: Yields are improving and I have confidence in the team to continue to incrementally improve shipments throughout the first half of the year with a larger ramp up coming in the second half of the year.
Derek Cook: We are well positioned for growth in 2025 as the specialty film line ramps to full production.
Derek Cook: Additionally, we have strong design and quoting activity, especially in med Tech defense and EV markets with our ceramic capacitors.
Derek Cook: In Q1 bookings trends for precision device segment independent of our previously announced $75 million plus energy order was strong for the second consecutive quarter. The bookings strength was broad based across most of our end markets as we believe inventory levels are normalizing.
Derek Cook: It's noteworthy that bookings and shipments to our distribution partners across all our capacitor products were favorable as we continue to see their inventory levels reducing.
Derek Cook: This gives me confidence in the precision device segment expected return to year over year growth in the second quarter of 2025.
Derek Cook: In the first quarter, we purchased $5 million in shares and reduced our debt level by $15 million as our cash generation from operations exceeded the high end of our guided range.
Derek Cook: We expect to generate robust cash from operations throughout 2025.
Derek Cook: This will allow us to continue to explore acquisition opportunities buyback shares and keep our debt at manageable levels.
Derek Cook: As we close out the first quarter of 2025 I'm excited about the opportunities we have in front of US we continue to see strong design wins across our product portfolio with district distribution or increasing inventory levels normalizing in the industrial markets, coupled with increasing backlog and demand for our products I have greater confidence that we will see year over year.
Derek Cook: For 2025.
Derek Cook: On May 13, we will be hosting our investor day, where we will have the opportunity to lay out our plans for future growth in detail.
Speaker Change: I am excited you'll have the opportunity to hear from several members of our senior leadership team and Dave will discuss our competitive advantages and why we win across the markets we serve.
Derek Cook: Now, let me turn the call over to John to detail, our quarterly results and provide our Q2 guidance.
John: Thanks, Jeff we reported fourth quarter revenue of 132 million down 1% from the year ago period and at the high end of our guided range EPS was <unk> 18 in the quarter flat from a year ago period and at the midpoint of our guidance range and.
John: In the Med Tech specialty audio segment Q1 revenue was $60 million up slightly compared with the year ago period.
John: Q1, gross margins were 48, 7% down 450 basis points versus the year ago period.
John: As part of our supply agreement with Cynthia, we produce and supply metal cans on a cost plus basis, which negatively impacted gross margins by nearly 200 basis points in the quarter. The remainder of the year over year decline in gross margin was driven by unfavorable customer mix and the absence of a onetime benefit which was recorded in Q.
John: One 2020.
John: While the supply agreement with Centene is expected to continue through the remainder of 2025, we expect MSA gross margins to improve sequentially driven by mix improvements and higher capacity utilization, resulting in full year gross margins in the low 50% range.
John: The precision device segment delivered first quarter revenues of $73 million down 2% from the year ago period, and slightly above our expectations going into the quarter.
John: Segment gross margins were 35, 7% flat from the first quarter of 2024 as factory productivity improvements in our legacy precision device business were partially offset by factory inefficiencies as we ramp up especially film product line.
John: On a total company basis R&D expense in the quarter was $8 million.
John: Q1, 2024 levels SG&A expenses were $25 million down 2 million from prior year levels, driven by cost reduction actions taken to rightsize spending in connection with the sale of the consumer microphone business intra.
John: Interest expense was $3 million in the quarter and down $2 million from the year ago period, as we continue to reduce our debt levels now.
John: Now I'll turn to our balance sheet and cash flow.
John: In the first quarter, we generated $1 million in cash from operating activities exceeding the high end of our guided range driven by higher than expected customer prepayments. It is important to note that cash from operations for the three months ended March 31.
John: Includes $21 million in cash use to support since to settle supplier obligations related to the consumer Mems microphone business, which was sold last year.
John: Capital spending was $4 million in the quarter.
John: During the first quarter, we repurchased 300000 shares at a total cost of $5 million and reduced outstanding borrowings under our revolving credit facility by $15 million we.
John: We exited the quarter with cash of $102 million and $189 million of debt that includes borrowings under our revolving credit facility and an interest free seller note issued in connection with the Cornell acquisition.
John: Lastly, our net leverage ratio based on trailing 12 months adjusted EBITDA was <unk> seven times, and we have liquidity in excess of $350 million as measured by cash on hand, plus unused capacity under our revolving credit facility.
John: Moving moving to our guidance for the second quarter of 2025 revenues are expected to be between 135 and $145 million.
John: R&D expenses are expected to be between eight and $10 million.
John: Selling and administrative expenses are expected to be within the range of 23% to $25 million.
John: We're projecting adjusted EBIT margin for the quarter to be within a range of 19% to 21%.
John: Interest expense in Q2 is estimated at $3 million and includes noncash imputed interest, we expect an effective tax rate of 13% to 17%.
John: We're projecting EPS to be within a range of 21% to 25 per share.
John: Assumes weighted average shares outstanding during the quarter of $90 1 million on a fully diluted basis were.
John: We're projecting cash generated by operating activities to be within the range of $10 million to $20 million, which includes $9 million to settle supplier obligations related to consumer Mems microphone business.
John: Capital spending is expected to be $7 million, we expect full year capital spending to be 5% of revenues as we increase our investments associated with capacity expansion relating to our specialty film line in.
John: In conclusion based on increasing order activity in our growing backlog, we expect to resume year over year revenue and earnings growth in the second quarter. Additionally, we expect another year of strong cash generation in 2025.
John: With that we'll move to the Q&A portion of the call.
John: Thank you, Sir and everyone. If you would like to ask a question. Please press star one on your telephone keypad again that is star one for questions well take our first question today from Bob Lovick CJS Securities.
Bob Lovick: Good afternoon, Thanks for taking my questions.
Speaker Change: Hey, Bob we can barely hear you Bob.
Bob Lovick: Oh, okay.
Bob Lovick: We have a better much better better okay, great sorry about that thank you.
Well first congrats on a nice quarter and obviously, a good outlook as well I think you know.
Speaker Change: No you hit a really important part with the.
Speaker Change: The minimal tariff exposure I appreciate the color of the 5% direct and 3% kind of indirect I'm just.
Speaker Change: Just sticking on the theme for a minute though.
Speaker Change: Maybe talk about your you talked a little bit med tech, but overall end market customer exposure. How are you thinking about that what are you hearing from your customers. In this uncertain time right now around you know their outlooks and how it may impact you in the back half of this year.
Speaker Change: Yeah. So first I would say Bob is that kind of thing.
Speaker Change: <unk>.
Speaker Change: We've not seen any change in demand.
Speaker Change: Obviously, our expectations for Q2 are incrementally higher than they say were a quarter ago.
Speaker Change: Q2, I don't think any of us. So we've been kind of debating we talked to a number of customers as pull forward I don't think it is a lot of our product is custom lot of new designs, especially in med Tech and in defense. So I think in the Med Tech space. Let me take that first I think if you think about most of the devices we sell to.
Speaker Change: <unk> Central devices, and you know maybe you can like with Covid.
Speaker Change: Put off a medical device for a quarter, but ultimately if you need a pacemaker Guinea, the pacemaker rate and I think this falls in the same category a large percentage of hearing AIDS are sold are actually customers are already have them and they they need new ones because they are either very old or they're not working anymore and you become.
Speaker Change: <unk> you know you need hearing AIDS either a moderate.
Speaker Change: Severe hearing loss Youre going to go buy your hearing AIDS. So generally speaking I don't think we see that there is a lot of exposure.
Speaker Change: Defense I think most of the programs. We're on are very insulated we're.
Speaker Change: We're not seeing any change in our defense now that being said I think the one area that we do probably have a little bit more exposure like generally is industrial now here's I would say about that.
Speaker Change: <unk> talked over the last few quarters about the inventory levels at our distributors, which service the majority of our industrial customers.
Speaker Change: Two quarters ago, I talked about there was six months of inventory that I said, there was four to five that I've said for four and a half.
Speaker Change: We're seeing that inventory now level get to that three to three and a half months level, which is normalized inventory and we're starting to see that because of that and increase in order activity because as they see the demand they're going to start falling into a dangerously low position on inventory. So I think from our perspective.
Speaker Change: Right now as we look through the rest of the year, we feel pretty good right now about the rest of the year now all things being said.
Speaker Change: Suddenly can wake up tomorrow, and there can be something new but the way the tariffs are today and how it's impacting our business. It feels like there is like very minimal impact to us right now.
Speaker Change: Okay.
Speaker Change: Okay, Great I appreciate the extra color. That's that's wonderful and then in terms of the they are the growth drivers for the business. Obviously you have this you talked about last quarter, the 75 million plus.
Speaker Change: Capacity order starting next year into an energy end market.
Speaker Change: You know how any any updates here any changes and any impact from that since it's a little bit vague to the US you know from the macro environment or is that still you know.
Speaker Change: Strong and you're confident in that as well.
Speaker Change: I mean, you know we received a pretty substantial prepayment in the first quarter, which drove our cash flow to be above the high end of our guided range. So those customers fully committed and we don't see any impact on delivery starting in 2026, and I think we said in the past expect something in the neighborhood of about $25 million.
Speaker Change: <unk> of shipments on this that order in 2026.
Speaker Change: Super Alright, I will jump back in queue. Thank you.
Anthony Stoss: The next question is from Anthony Stoss, Craig Hallum Capital Group.
Speaker Change: Hey, guys nice results let.
Speaker Change: Let me just get a housekeeping one out of the way John can you.
Speaker Change: Maybe I missed it can you talk about kind of gross margin trajectory, starting with Q2, and where you think it ends up in Q4.
Speaker Change: Yeah, Tony you were talking about for the total business total company total company, yes, yes. So if you think about the results that we just issued just above just slightly above 41% and our gross margins, we're going to see pretty significant sequential improvement in that.
Speaker Change: You really have to look business by business, but the main drivers are going to be again with demand moving up our capacity utilization is going to improve both in the PD business as well as the MSA business both are increasing capacity.
Speaker Change: In addition, there are some mix improvement that is going to benefit.
Speaker Change: Thus going into beginning in Q2.
Speaker Change: And really we expect sequential improvement that Jeff mentioned is we expect a stronger given the uncertainty out there we still expected a stronger back half than front half and again, that's going to drive sequential expected to drive sequential gross margin improvement throughout 2025, Yeah. I just would add one piece is I think we've.
Speaker Change: Talking about this in the past Tony about how capacity utilization has been really a hold back on especially in the precision device area in terms of gross margin over the last year year, and a half and we're starting to see that start to dissipate as the demand is coming back I didn't mentioned this in the prepared remarks, but the book to bill for precision devices.
Speaker Change: <unk> was above 115 in Q1 I mean it was it was strong we had very very strong orders for precision devices and that that is not of course, not counting the $75 million energy order.
Speaker Change: Right.
Speaker Change: Can you give us like a range exit.
Speaker Change: Yeah, great margin to accompany and Hewitt, Craig 45% to 47% as we exited the year and gross margin perfect.
Speaker Change: Effect in it.
Speaker Change: For you Jeff.
Speaker Change: I mean, it's it's awesome that most of your production at <unk> in the U S. Do you think you might be able to pick up share from.
Speaker Change: Some of your competitors that don't produce much in the U S. I'm just curious your thoughts how you think the rest of the year plays out and are you seeing inbound calls anything would be helpful.
Anthony Stoss: Tony I would say that for the next call, but I'll give you a little color here.
Anthony Stoss: Here's the situation I think with the dynamic and volatile nature of what's going on I'm, a little hesitant to start putting that out there to say yet, but we are definitely getting calls that says okay with these tariffs.
Anthony Stoss: Normally we had said we had walked away from some of these lower margin businesses like <unk> and now with our site.
Anthony Stoss: Maybe we should consider buying with you and it's also security of supply and so it would primarily really Indians bike and born in the industrial space than Med Tech or defense I mean, I don't think were seeing anything like that but in the industrial space. We're definitely seeing a number of customers initiate conversations with us and it's more than a handful.
Anthony Stoss: And I was saying, okay, we should start having some discussions I want to see how this all plays out over the next quarter, but that definitely could be an upside in the back half of the year, that's not factored into what we're saying today.
Anthony Stoss: That's that's really good news I would lock them into long term supply agreements get them down quick.
Anthony Stoss: Thanks, Great execution, guys I'll jump back in queue.
Tony: Okay. Thanks, Tony.
Tony: And just to reminder, everyone that is star one if you have a question.
Speaker Change: We will go next to Christopher Rolland Susquehanna.
Tony: Yeah.
Tony: Hey, guys congrats on the results.
Tony: So.
Tony: My question is.
Tony: If you could perhaps add.
Tony: Some commentary around bookings.
Tony: The book to Bill above one five days.
Tony: Pretty incredible.
Speaker Change: P D. So what what are we seeing for the back half or are these really starting to fill out now and then perhaps associated with that I saw receivables or does that kind of speak to the linearity in the quarter or would you just describe things as kind of accelerating.
Tony:
Tony: Yeah.
Tony: I'll, let John Doolittle checking out the receivables so.
Tony: Peripheral permit just to be clear the bookings were above 1.151 0.15, Okay I thought I heard one five okay, Yeah 121 times.
Tony: Not counting the $75 million order, we received from energy right. So if you could kind of that the book to Bill would be crazy number. So we tried to but it was pretty broad based and PD across our capacitor products up builders and both.
Tony: Legacy <unk> business as well as.
Formerly the Cornell business, so it's been pretty broad based.
Tony: As I kind of said what was most encouraging in the quarter is to see another step down.
Tony: Inventory at the distributors.
Tony: It's now getting we're starting to see that demand is going up inventories coming down. So we're getting very close to what I would sit there and say is like there's risks and that's why we're seeing more orders from distributors because they're starting to say that our inventories are going to start falling below where they feel comfortable and hence.
Tony: While we are getting strong bookings there.
Tony: I would also add beyond the distributors.
Tony: And we'll talk more about some of the applications at the Investor day, but we have a lot of new products from specialty film.
Tony: A lot of new products go into production.
Tony: So very good that's very all positive PD. The second piece I would just talk about <unk>.
Tony: MSA Med tech and specialty audio.
Tony: We expect.
Tony: Pretty strong sequential and year over year growth in Q2.
Speaker Change: And it's driven by and the customer mix should be a little bit better in Q2, John talked about it until kind of impacting the gross margins a little bit but.
Speaker Change: It should be better than the customer mix in Q2, so so I think.
Speaker Change: I wanted to be cautious here.
Speaker Change: But Chris but right now as I look through the year and a lot of the orders, we're getting especially in med Tech and defense Theyre not orders are these are not turns orders like we get an order deliberate and they were done. These are orders that are being booked for the rest of the year and so we feel pretty good about the full year.
Speaker Change: Yeah I understand your question.
Speaker Change: Question on receivables nothing unusual here, it's just timing of customer collections. Our receivables were at Q end of Q1 flat with 12 31, but youre right. They were up a fair amount from March 31 of 2024 and again nothing special it is not like rubbing collection issues or anything it's just time.
Speaker Change: In payments, we have some customers larger customers that have 331 year ends sometimes they pay before either ear and sometimes that slips into Q2, but nothing alarming there.
Excellent and I do not want to steal any thunder from the analyst day.
Speaker Change: But it seems like the business is solidifying so I was wondering kind of what's next for Knowles.
Speaker Change: How much focus is there on inorganic growth opportunities like in it and new product segments.
And then how much opportunity or how much of your focus is spent on inorganic opportunities outside of the company.
Speaker Change: Yeah, and I think that's really Greg Good question, Chris first let me talk about the organic opportunities. Each one of our business unit leaders will be presenting are going to go into these opportunities that they have over the next.
Speaker Change: 123 years of where growth could come from so they're all going to do that on the inorganic side and we are going to have I don't know if we've announced the officially the the presenters list, but our head of corporate development is going to be presenting at the investor day and to talk about.
Speaker Change: Our inorganic opportunities I would sit there and say and he would probably our guy who does this set a pretty significant portion of his time during the Cornell acquisition was also dedicated towards the divestiture of the consumer Mems microphone business. He's free freed up now to spend more time with his team on.
Speaker Change: Inorganic opportunities.
Speaker Change: I want to caution right now like with the market. The way. It is I think things are like a lot of people are pausing on M&A right now I'm glad to our balance sheet looks great. We're in a great position.
Speaker Change: But I think were ready when the right opportunity comes along.
Speaker Change: To move that forward and we're going to go into more detail about what we're looking for.
Speaker Change: The kind of metrics, we're looking for the type of products will go into more detail on that.
Speaker Change: At the Investor day.
Speaker Change: Fantastic, Thanks, Jeff and congrats.
Speaker Change: <unk>.
Speaker Change: At this time no one else does take note that I will give a final reminder, star one if you have a question we'll pause for just a moment.
Speaker Change: And at this time there are no further.
Speaker Change: That does conclude our question and answer session as well as our conference for today, we would like to thank you all for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].