Knowles (KN) FY Conference Transcript

Summary of Knowles Corporation FY Conference Call Company Overview - Company: Knowles Corporation (NYSE: KN) - Revenue: $554 million in the previous year, with expectations of approximately $585 million for the current year [3][13] - Gross Margin: Expected to be around 45% [3] - EBITDA Margin: Projected in the mid-20s percentage range [3] Strategic Transformation - Business Segments: - Precision Device Segment: Includes electrolytic, film, and ceramic capacitors, and RF filters - MEVSA Segment: Focuses on med tech and specialty audio, primarily microphones and speakers [4] - Shift from Consumer Electronics: Previously reliant on consumer electronics, particularly Apple, which accounted for 40-50% of revenue. The company has divested from this market [5] - Focus on Higher Margin Products: Since 2017, the company has shifted focus to higher margin products and markets, reducing investment in lower-margin consumer business [9][10] Financial Performance - Historical Performance: - 4% organic growth and 4% growth through acquisitions from 2017 to 2024 [12] - EBITDA has more than doubled during this period [13] - Future Projections: - Expected revenue CAGR of 8-10% over the next five years [16] - Anticipated EBITDA growth to outpace revenue growth, with an expected 400 basis points improvement in EBITDA margins [17][28] Market Insights - Hearing Health Market: - Steady growth of approximately 3% annually, with high gross margins (over 50%) for Knowles and 80% for customers in this market [20][19] - Potential for increased growth due to rising awareness of hearing loss linked to dementia [23] - Precision Device Segment: - Expected organic growth of 6-8%, driven by applications in medical, defense, and industrial sectors [23] Acquisition Strategy - Acquisitions: - Completed four acquisitions since 2017, with the largest being Cornell DuBlier for $260 million [11][26] - Future acquisitions will focus on consolidation, extensions, and adjacencies to expand total addressable market (TAM) [38][40] - Divestitures: - Divested approximately $600 million in revenue from lower-margin businesses, including consumer MEMS microphones and crystal oscillators [36][47] Capital Allocation and Financial Health - Balance Sheet: - Improved significantly, with a leverage ratio below 1 [8][44] - Generated $36 million in free cash flow in the last quarter, with $30 million allocated for stock repurchases [45] - Capital Expenditure: - CapEx is expected to trend towards the higher end of the 8-10% range, focusing on new product development [42] Competitive Advantages - Differentiated Technology: Strong expertise in audio products and customer intimacy, allowing for customized solutions [32][34] - Resilience and Reliability: Proven ability to deliver products consistently, even during supply chain disruptions like COVID-19 [34] Conclusion - Knowles Corporation has successfully transformed its business model, focusing on higher-margin products and markets, while maintaining a strong financial position and growth outlook. The company is well-positioned for future growth through strategic acquisitions and a disciplined capital allocation strategy [47][48]