Q2 2025 Knowles Corp Earnings Call
Good afternoon ladies and gentlemen and thank you for standing by. My name is Kelvin and I will be your conference operator. Today at this time I would like to welcome everyone to the QT 1025 North Corporation earnings conference call Alliance have been placed on me to prevent any background noise. After this speaker, 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 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again, thank you. I would now like to turn the call over to Sarah Cook. Please go ahead.
Thank you and Welcome to our second quarter 2025 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 nulls, which constitute for looking statements. For purposes of the Safe Harbor Provisions under the applicable federal Securities laws.
Forward-looking statements in this call will include comments about demand for Company products.
anticipated Trends, in companies, sales expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations,
The company urges investors to review the risks and uncertainties in the company's FCC. Filings included but not limited to the annual report on form 10K for the fiscal year. Ended December 31st, 2024
Periodic reports filed from time to time with the SEC and the risks and uncertainties identified in today's earnings release.
Are made as of the date of this call and nulls disclaimed any duty to update such statements, except as required by law.
In addition, pursuant to rag G. Any non-gaap Financial measures referenced, during today's conference, call can be found in our press release, posted at our website at nols.com and in our current Form 8K file today with the FCC,
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 with the exception of cash from operations, or unless otherwise noted
We've made selected financial information available in 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. Just
Jeff: Thanks, Sarah. Thanks to all of you for joining us today.
Jeff: As the Tariff situation continues to evolve, I will provide a brief update before my commentary on our second core results, and the Market Outlook.
Although the Tariff situation continues to be fluid, we are further along in our analysis and still believe nols is well positioned as it relates to direct and indirect impacts of terrorists.
Jeff: As I previously previously said, we are generally a proximity manufacturer. Meaning, the vast majority of our products built in the US are shipped within the US and products built in Asia shipped to customers in, Asia and Europe.
Jeff: Couple this with our philosophy of sourcing materials geographically close to our production Fields facilities and our total exposure to terms is less than 5% of Revenue and 3% of cost of goods sold.
In Q2, we have had success in passing these additional costs onto our customers. And our expectation is to continue to do so, without loss of business,
Jeff: Additionally, I believe the primary and markets, we serve and medtec defense, and the industrial sectors will be relatively insulated from the impacts of tariffs.
Jeff: Let me reiterate, what I previously said.
Jeff: The applications that our products serve in Medtech markets such as hearing aids and devices that are capacitors, are in such as implantable Imaging and ventilators. To name a few have traditionally been considered essential.
Jeff: At these products are essential our historical experience shows, economic, shocks, and subsequent recessions can have modest short-term impacts to these markets. But tend to tend to have very little impact over the course of a full year,
Jeff: I also believe that defense programs, we participate in our secure and based on a recent order, activity demand appears to be gaining strength.
Finally, the industrial Market has been more sensitive than Medtech and defense to recessions but we are currently not seeing any impact on demands.
Jeff: We are obviously continuing to monitor this closely.
Jeff: Now, I'll turn to our results.
Jeff: In Q2, we had a strong Corner, delivering revenue of 146, million up 8% year-over-year, and cash from operations of 36 million. Both exceeding. The high-end of our guided range
Jeff: EPS of 24 cents was above the midpoint of the guided range up. 20% year-over-year.
Jeff: To execute to the plan based on the strategy. We laid out at our investor day.
Jeff: Now, turning to our segments in Q2 Medtech and specialy, audio Revenue was 67 million up, 13% sequentially and 10% year-over-year.
We saw strength in both our specialty audio business. And in the hearing Health Market in Q2 very similar to what we have seen historically, there was a brief slowdown in demand for hearing Health Products due to macroeconomic uncertainty in q1, with sequential and year-over-year growth returning in Q2
Jeff: The hearing Health business continues to be resilient as these products are considered essential devices.
Jeff: With customers depending on our ability to develop deliver unique Solutions. I would note that demand for MSA products continues to be strong as we head into Q3 giving me confidence and expected year-over-year growth within our MSA business.
In the Precision device. Segment, Q2 Revenue was 79 million up, 8% sequentially and 6%. Year-over-year Revenue, increased ac across all our markets, for both, OEM and distribution partners.
In Q2 bookings, Trends, building on q1, including to be strong for the Precision device segment.
Jeff: I would note, this is the third consecutive quarter with positive bookings trends.
Jeff: The bookings Trends was blocked, broad-based across most of our end markets and the distribution demand has returned. As we believe. Inventory levels have normalized
Jeff: Continue to choose our Innovative and differentiated Solutions across all the markets. We serve.
Overall renewals, as we noted at the investor day with the acceleration of design wins and Order activity. We are positioned well for organic growth in 2025.
Jeff: Beyond 2025, we expect an increase of organic growth rates from historical levels as new initiatives such as the expansion of our specialty Film Production line line comes online. Additionally new products such as our inductor line, which we just announced last week test the potential to expand our Tam and drive future growth.
Jeff: We are executing on the strategy of leveraging, our unique Technologies, creating custom products through our customer application intimacy, and then scaling into production with a world-class operational capability for end, markets with strong secular growth trends.
Jeff: It is proving to be a winning combination leading to the beaten revenue and EPS this quarter and I believe it will allow us to continue to expand our margin profile.
In the second quarter, we purchased 30 million in shares, which was funded by robust, cash generation from operations.
Jeff: We believe our strong cash generation will allow us to pursue synergistic Acquisitions and buy back. Shares will continue to keep our debt at a very manageable levels.
Jeff: In summary, as we enter the third quarter of 2025, I excited by the momentum and strength, the business demonstrated, and the growth opportunities that we have in front of us, both in the near and longer term.
Jeff: as I think about our growth potential in 2025 distribution immaterial inventory, appears to have normalized
Jeff: and as orders are increasing and are designed, winds continue to be strong across our product portfolio,
Jeff: This is driving increased demand for our products which gives me confidence. We have entered a period of accelerated, organic growth.
We are laser focused on what we do. Best designing Custom Engineered products and delivering them at scale for customers and markets that value. Our Solutions positioning us, well for growth Beyond 2025.
Jeff: Now, let me talk. Turn the call over to John to detail. Our quarterly results and provide our Q3 guidance.
Thanks, Jeff. We reported second quarter of revenues of 146 million up. 8% from the year ago period and above the high end of our guidance range.
EPS was 24 cents in the quarter up, 4 cents or 20% from the year ago period and above the midpoint of our guidance range.
Jeff: Cash generated by operating activities, was 36 million exceeding. The high end of our guidance range driven by timing of collection activities, lower than anticipated, inventory, and payments received in connection with settlement of foreign currency hedges.
Jeff: In the Medtech and Specialty audio segment, Q2 Revenue was 67 million up. 10% compared with the year ago, period driven by increased demand and hearing health and Specialty audio
Q2 gross margins were 50.6% down, 280 basis points versus the year ago, period driven by unfavorable product mix and higher Factory cost.
Jeff: As expected gross margins. In the second quarter improved 200 basis points sequentially and we expect gross margins to remain in the low 50% range in the second half of the year.
Jeff: The Precision devices segment delivered second quarter revenues of 79 million up 6% from the year ago period.
Segment. Gross. Margins were 38.7% up 150 basis points from the second quarter of 2024 as improved pricing and higher production volumes resulted in increased Factory capacity utilization in our Legacy Precision devices business,
Jeff: These improvements were partially offset by higher scrap cost and Factory inefficiencies as we continue to ramp up the specialty film product line.
Jeff: On a total company basis R&D expense in the quarter was 9 million up slightly from Q2 2024 levels. Sgna expenses were 28 million up, 2 million from prior year levels driven, primarily by annual, Merit increases and higher incentive compensation cost.
Jeff: 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.
Jeff: Now, I'll turn to our balance sheet and cash flow.
Jeff: In the second quarter, we generated 36 million in cash from operating activities. It's important to note that cash from operations for the 3 months. Ended June, 30 includes 8 million in cash, utilized to settle supplier obligations related to the consumer mems microphone business which was sold last year.
Jeff: Capital spending was 5 million in the quarter.
Jeff: We continue to expect to generate operating cash flow of 16 to 20% of revenues for full year 2025.
The second quarter. We repurchased 1.9 million shares at a total cost of 30 billion.
Jeff: We exited the quarter with cash of 103 million, and 190 million of debt that includes borrowings under our revolving credit facility and an interest. Free seller note. That was issued in connection with the Cornell acquisition.
lastly, our net leverage ratio based on trailing 12 months, adjusted, Eva was 7 times and we have liquidity of more than 350 million as measured by Cash Plus, unused capacity, under our revolving credit facility
Jeff: Moving to our guidance for the third quarter of 2025 Raveis are expected to be between 144 and 154 million.
Jeff: R&D expenses are expected to be between 8 and 10 million.
Selling and administrative expenses, are expected to be within a range of 25 to 27 million.
Jeff: We're projecting adjusted ebit margin for the quarter to be within a range of 22 to 24%.
Interest expense in Q3 is estimated at 2 million and includes non-cash imputed interest. And we expect an effective tax rate of 13 to 17%
Jeff: We're projecting EPS to be within a range of 29 to 33 cents per share. This assumes weighted average shares outstanding during the quarter of 88.5 million on a fully diluted basis.
We're projecting cash generated by operating activities to be within the range of 20 to 30 million Capital spending is expected to be 11 million.
We expect full year Capital spending to be approximately 5% of revenues as we increase Investments associated with capacity, expansion related to our specialty film line.
Jeff: In conclusion, we resumed year-over-year, revenue and earnings growth in both segments in the second quarter and with the strong backlog and increased order activity. We expect to continue to sustain both sequential and year-over-year, revenue and earnings growth for the remainder of 2025.
I will now turn the call back over to the operator, for the questions and answers portion of our call operator.
Jeff: Thank you, ladies and gentlemen, we will now begin the question and answer session at this time, I would like to remind everyone to ask a question, please press the star button, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1. Again 1 moment, please for your first question.
The first question comes from the line of Christopher Rowland of susanoo, please go ahead.
Christopher Rowland: Hey guys, thanks for the question and congrats on these results. Um,
Uh so the guide was nicely ahead of what we were thinking uh and perhaps what you guys were thinking earlier in the year.
Christopher Rowland: Um, if you could speak to, maybe the Delta uh, what is providing that upside, uh and then also uh, any update on demand for the thin film opportunity as well.
Speaker Change: Yeah. So first I would sit there and say, you know, I think Chris as I mentioned on the call, uh, this is the third with Q2 the third successive quarter within the PD segment, where we've had a book to Bill over 1. I would note um our our book to bill in Q2 for PD was above 1.15. So we have a very strong bookings quarter again and it was it was pretty broad broad-based, you know? I'd say, you know in in the PD segment it was you know medical Defence industrial. It's with our distribution Partners uh as as well as with our direct customers. So you know we're seeing quite a bit of Demand on the PD side. You know, I would sit there and say uh on the MSA side on the hearing Health side, you know, obviously, you know, we saw q1 be a little bit weaker In the End Market but it bounced right back in Q2 um, you know, kind of like we've said in the past, you know, with with these essential devices
Chris: Maybe somebody stays home for a month and delays getting a hearing aid, by, by a month. But um, uh, uh it it, it bounces back very nicely. And we're expecting both segments to have, uh, year-over-year growth for full year 2025. So, it's really pretty broad-based. Uh, Chris across most markets and I think, you know, it kind of its a I would say a little bit of a testament kind of what we laid out investor day, which is, you know, around these 3, markets Medtech, uh uh uh uh industrial and defense, you know, and I would add 1 last piece I would add. Um you know I I was just looking at our bookings for July um you know, July to date. Um we are already having another strong month of bookings. Uh in July already
Speaker Change: Um, but without the mems business, uh, I think, you know, that was maybe, uh, it could create some volatility for Q4. Um, did you have any, uh, early thoughts on how we should be thinking about Q4 and then, secondly, uh, just gross margin expansion? Like it with these higher volumes. Um, what should we expect from higher utilizations? Uh,
Chris: um,
Chris: Uh moving forward here. Thank you. Yeah. I I'll let John cover the gross margin in a second. Um, just from a revenue basis. Obviously, you're correct. We're not guiding Q4, um, but I did would say this, you know, we are expecting year-over-year growth again in Q4. Um, and you know, we expect sequential growth to get in Q4. That's what I would sit there and say, um, at this point, you know, I mean, I I think we're pretty fully booked already for Q3, um, uh, uh, you know, with our lead times, you know and our our you know, we've got dead strong intimacy with our customers. We have a pretty good view of Q3. We're starting to get a pretty good view in the Q4, but we're still expecting based on the order activity that we'll see year-over-year growth in Q4, as well as sequential growth in Q4.
Speaker Change: Yeah. Chris in terms of gross margins and specifically capacity, uh, utilization. You know, we delivered gross margins of 44.3% in Q2. We expect sequential to be at least up a 100 basis points, or more in Q3 and kind of, similar levels in, in Q4. And again, those improvements over the current 444.3%. As you said, it's primarily driven by capacity utilization in our high performance caps business and also a little bit in our MSA segment.
Chris: Thank you guys.
Speaker Change: Your next question comes from the line of Bob. Le from CJs Securities. Your line is open.
Good afternoon. Congratulations on continued. Strong performance and thanks for taking our questions.
Speaker Change: Hey, Bob, you're a little faint. I don't know if you can speak up a little. Okay, let's see. Is that any better? No.
Speaker Change: Is that any better?
Better. Maybe.
Yeah, that's better. Much better.
Okay great uh well congrats on uh strong performance. Um let's see you you touched on organic growth. Accelerating you know
5, you mentioned, you know, the film expansion and inductor lines. I was hoping you could just expand on that a little bit and the film is for the energy order. You talked about on previous calls or how should we think about that.
Speaker Change: Well, the the film will be yes, the energy or but that, you know, won't really start hitting, uh, Revenue line till you'll probably. Mid-year next year when we'll start delivering that order. So the growth in especially film line, is actually going to be other customers, mainly Medtech, uh, defense and Industrial, you know, shorter term. Um, but I think here's, I kind of would frame it. You know, if you look historically we gave quite a bit of information at the investor day. And historically, these businesses that we have owned today, continuing us have grown, you know, over a cycle, they grew at we showed 4% organically. Um, we kind of committed that on an organic basis. We think that, you know, over a cycle 4 to 6%. Now is kind of the, the growth rate for these businesses and I would say we're trending toward the higher end of that range right now. And so it it's going to be driven by first. You know, a lot of new design wins in our core. So you think we got, you know, good design wins in our core products. But then there's these other expansionary opportunities
You know I would sit there and say specially film is going to really start you know delivering you know significant growth in the in in the background for this year as well as in in a 2026. Um the inductor line is going to take a little longer. We just introduced that product category um last week you know it builds off of our ceramic uh capacitor capabilities. Our ceramic conductors. And we would open, you know, starting in about 24 months from now. We'd start to see some more significant Revenue so I think, you know, I would sit there and say we got a lot of design ones in the core. Plus we've got some other opportunities that are expanding our Tam and and allowing us to grow. So, you know, in the, you know, over the next I would say, you know, year to 2 years, I would sit there and say our growth price is going to be probably towards the higher end of that organic range that we laid out at the investor day.
Speaker Change: Okay, that sounds great. And then um, you touched on this too, obviously, you had strong uh cash flow in the quarter. You brought back stock but you still mentioned
To look. Now has your pipeline. What are your opportunities? How do you feel about it?
Speaker Change: Pipeline's, good. Um, I, you know, it's obviously hard to predict, you know exactly when this is all going to come to fruition, we we want to be disciplined around this, of course, uh, as we've kind of done in the past. Um, we want to make sure that, you know, we're thinking about thoughtful, what we do. You know, we sat at the investor day, there's kind of 3 types of Acquisitions. There's consolidation, uh, there's extensions and there's adjacencies, I'd say, you know, again, q1 in the Q2, the market kind of froze up a little bit on doing that, uh, doing m&a. Um, it seems like, it's, it's starting to reopen again. So, you know, well, I don't have anything to announce here today. Um, obviously, um, and it's hard to predict when things will happen, you know, I think we're, we're being aggressive here in in areas where we think we can drive value for the corporation. And, and so, we'll be looking at this, you know, obviously, you know, we have our metrics. I know John, you want to cover how how we we look at this. But but, but we're going to be very disciplined about what we do.
Speaker Change: Yeah, I mean, Bob, we have a lot of optionality. I would say with our low leverage and our strong cash flow generation. Uh, we continue to have a lot of optionality with respect to Capital allocation, as you mentioned, you know, we we repurchased 30 million share in shares, uh, 30 million dollars in shares in Q2 at an average price of just under $16. I would say likely that we'll continue to buy back shares in the back half of 25.
Okay. Super, I'll jump back in queue. Thank you.
Speaker Change: again, if you'd like to ask a question, press star 1 on your telephone keypad,
And there are no further questions. This concludes today's conference call, thank you for your participation. You may now disconnect