Knowles(KN) - 2023 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported Q1 2023 revenues of $144 million, down 28% from the prior year, primarily due to lower shipment volumes in consumer MEMS microphones and MedTech and Specialty Audio [28][10]. - Gross margins for the first quarter were 37.7%, which is 270 basis points above the high end of the guidance range but down 390 basis points from the same period a year ago [31]. - Adjusted EBIT margin was 5.6%, near the high end of the guidance range, and EPS was$ 0.05, above the midpoint of the guidance range [35]. Business Line Data and Key Metrics Changes - In the Precision Devices segment, revenues were $54 million, down 4% from the prior year, driven by excess channel inventory in the industrial market, partially offset by increased shipments in EV, Defense, and MedTech [30]. - MedTech and Specialty Audio segment revenue was$ 46 million, down 24% year-over-year due to customer inventory adjustments and difficult comparables from the previous year [29]. - Consumer MEMS microphone revenue was $45 million, down 48% from the prior year, driven by weak global demand for consumer electronics and channel inventory adjustments [32]. Market Data and Key Metrics Changes - The EV market grew 50% year-over-year in Q1, with expectations for continued growth throughout 2023 [18]. - The industrial market, which constitutes less than 15% of company revenue, is facing continued weakness due to elevated distribution and customer inventory levels [19]. - The smartphone market has not seen further degradation, but recovery is not yet evident, leading to pricing pressure [23]. Company Strategy and Development Direction - The company is focusing on expanding its presence in high-margin markets such as MedTech, Defense, and EV, which now account for over 55% of its business [48]. - The strategy includes maintaining a strong balance sheet while exploring M&A opportunities, particularly in the Precision Devices space [54]. - The company aims to achieve gross margins of 43% and adjusted EBIT margins of 22% to 24% in the medium term, driven by a mix shift to higher-margin businesses and improved utilization [42]. Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the recovery of the MedTech and Specialty Audio segments, anticipating a more than 27% sequential improvement in revenue driven by major hearing aid retailers [20]. - The company expects total revenue for Q2 to be between$ 165 million and $180 million, reflecting a 20% sequential increase but an 8% decrease year-over-year [37]. - Management noted that while the smartphone market remains challenging, there are signs of recovery in non-mobile shipments, with expectations for a strong sequential improvement starting in Q2 [22][24]. Other Important Information - Cash and cash equivalents totaled$ 52 million at the end of the quarter, with cash from operations of $22 million, above the midpoint of guidance [36]. - The company repurchased approximately 430,000 shares at a total cost of$ 7.5 million during the quarter [36]. - R&D expenses were $17 million, down from the prior year, while SG&A expenses were$ 27 million, slightly higher than the previous year [34][38]. Q&A Session Summary Question: What are the hurdles and outlook for CMM? - Management indicated that progress is being made on mix and utilization, with expectations for strong bookings in Q2 driven by Defense, MedTech, and EV [49][50]. Question: What is the outlook for M&A opportunities? - Management remains interested in M&A, particularly in the Precision Devices space, and expects to pursue opportunities at more reasonable valuations [54][56]. Question: Can you elaborate on the inventory dynamics? - Management noted that most end markets are in decent shape, with inventory challenges primarily in the industrial segment, which is expected to improve in Q3 [64][65]. Question: What is the outlook for the EV market? - The EV segment is expected to grow significantly, with strong bookings and an expanding customer base, contributing to overall revenue growth [71][92]. Question: What is the expected free cash flow for 2023? - Management anticipates free cash flow generation of 15% or more of revenues in 2023, with a shift in CapEx focus towards the MSA and PD segments [91].